HeartSciences Inc S-1/A, filed Jun 10, 2022
HeartSciences Inc. (HSCS)
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As filed with the Securities and Exchange Commission on June 10, 2022
Registration No. 333-265024
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO.2
TO
FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
Heart Test Laboratories, Inc.
(Exact name of registrant as specified in its charter)
| Texas | 334510 | 26-1344466 | ||
| (State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
| 550 Reserve St, Suite 360 Southlake, Texas 76092 682-237-7781 |
Mark Hilz 550 Reserve St, Suite 360 Southlake, Texas 76092 682-237-7781 | |
| (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) | (Name, address, including zip code, and telephone number, including area code, of agent for service) |
Copies to:
| Richard F. Dahlson Jackson Walker L.L.P. 2323 Ross Avenue Suite 600 Dallas, Texas 75201-2725 214-953-6000 |
Steven R. Jacobs Jackson Walker L.L.P. 112 East Pecan Street Suite 2400 San Antonio, Texas 78205 210-978-7700 |
Andrea Cataneo Mitchell Silberberg & Knupp LLP 437 Madison Avenue 25th Floor New York, New York 10022 212-509-3900 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ☐
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☒ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted
SUBJECT TO COMPLETION, DATED JUNE 10, 2022
PRELIMINARY PROSPECTUS
1,750,000 Units Consisting of Shares of Common Stock and Warrants
Heart Test Laboratories, Inc.
This is the initial public offering of Heart Test Laboratories, Inc. We are offering units of securities (the “Units”), with each Unit consisting of (a) one share of our common stock, par value $0.001 per share (“Common Stock”), and (b) a warrant (the “Warrants”) to purchase one share of our Common Stock. The shares of our Common Stock and the Warrants are immediately separable and will be issued separately but will be purchased together in this offering. We are offering 1,750,000 Units. Prior to this offering, there has been no public market for shares of our Common Stock or the Warrants. We anticipate that the initial public offering price will be between $4.50 and $5.50 per Unit. We will not issue fractional shares in connection with the exercise of Warrants. The Warrants included in the Units are immediately exercisable following the consummation of this offering, have an exercise price equal to the initial public offering price per Unit, and expire five (5) years from the date of issuance. We are offering all of the Units offered by this prospectus.
We have applied to list our Common Stock and Warrants on the Nasdaq Stock Market, or Nasdaq, under the symbol “HSCS” and “HSCSW,” respectively. No assurance can be given that our application will be approved or that a trading market will develop. In the event our listing application is not approved, we will not consummate this offering.
We are an “emerging growth company” and a “smaller reporting company,” as defined under the U.S. federal securities laws, and, as such, have elected to comply with certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an ‘Emerging Growth Company’ and a ‘Smaller Reporting Company’.”
Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 20.
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| Public offering price(1) |
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| Underwriting discounts and commissions(2) |
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| Proceeds to us (before expenses) |
$ | $ | ||||||
| (1) | The assumed public offering price and underwriting discount and commissions in respect of each Unit correspond to the assumed public offering price per share of Common Stock of $4.99 and the assumed public offering price per accompanying Warrant of $0.01. |
| (2) | We have agreed to reimburse the underwriters for certain expenses and the underwriters will receive compensation in addition to underwriting discounts and commissions. In addition, we have agreed to issue to the underwriters’ representative warrants to purchase up to a total of 140,875 shares of Common Stock (7% of the shares of Common Stock underlying the Units sold in this offering, including shares sold to cover over-allotments, if any). The warrants are exercisable at $5.00 per share (100% of the assumed public offering price per Unit based on the midpoint of the price range set forth on the cover page of this prospectus) commencing on a date which is six months from the effective date of this offering and expiring on a date which is no more than five (5) years from the effective date of this offering. See the section titled “Underwriting” beginning on page 138 of this prospectus for additional disclosure regarding underwriter compensation and offering expenses. |
We have granted the representative of the underwriters an option to purchase from us, at the public offering price, less the underwriting discounts and commissions, up to an additional 262,500 shares of Common Stock and/or additional Warrants to purchase 262,500 shares of Common Stock, in any combination thereof, within 30 days from the date of this prospectus to cover over-allotments, if any. If the representative of the underwriters exercises the option in full, the total underwriting discounts and commissions and management fees payable will be $[ ] and the total proceeds to us, before expenses, will be $[ ].
Neither the Securities and Exchange Commission nor any state or other foreign securities commission has approved nor disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the Common Stock and the Warrants on or about [ ], 2022.
Book Running Manager
The Benchmark Company
The date of this prospectus is [ ], 2022
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ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell the Units, and seeking offers to buy the Units, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the Units.
For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
In this prospectus, “we,” “us,” “our,” the “Company” and “HeartSciences” refer to Heart Test Laboratories, Inc., a Texas corporation. References to “Fiscal 2022” refer to the 12-months ended April 30, 2022, references to “Fiscal 2021” refer to the 12-months ended April 30, 2021 and references to “Fiscal 2020” refer to the 12-months ended April 30, 2020.
Unless defined elsewhere, capitalized terms used in this prospectus are defined in the “Glossary of Terms” appearing directly before the Index to Financial Statements.
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TRADEMARKS AND TRADE NAMES
Our trademarks are the subject of trademark registrations in the United States as well as various other countries. Other brand names, names and trademarks contained in this prospectus are the property of their respective owners. Solely for convenience, trademarks, service marks and tradenames are referred to in this prospectus without the SM, TM and/or ® symbols or any typographical emphasis (such as italicized or underlined text), but such references are not intended to indicate, in any way, that the owner thereof will not assert, to the fullest extent under applicable law, such owner’s rights to their service marks, trade names and trademarks.
MyoVista®, wavECG TM, HEARTSCIENCES, and Heart Test Laboratories are trademarks and/or service marks of the Company registered with the United States Patent and Trademark Office, or USPTO. Other trademarks, service marks and trade names in this prospectus are the property of their respective owners.
INDUSTRY AND MARKET DATA
This prospectus includes statistical, market and industry data and forecasts which we obtained from publicly available information and independent industry publications and reports that we believe to be reliable sources. These publicly available industry publications and reports generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy or completeness of the information. Although we believe that these sources are reliable, we have not independently verified the information contained in such publications. We are liable for all information in this prospectus and the registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission, or the SEC, of which this prospectus constitutes a part.
REVERSE STOCK SPLIT AND CONVERTIBLE BRIDGE NOTE PRIVATE PLACEMENT
On January 31, 2022, our shareholders granted our Board of Directors the discretion to effect a consolidation, which we refer to as the reverse stock split, of our Common Stock at a rate to be determined by our Board of Directors at a later date. The Board of Directors approved a one (1)-for-thirty-three (33) reverse stock split on June 1, 2022. In addition, since October 2021, we have sold an aggregate of $4.7 million principal amount of secured subordinated convertible notes, which we refer to as the Bridge Notes, and warrants, which we refer to as the Bridge Warrants, to purchase a total of 1,155,812 shares of Common Stock in a private placement, which we refer to as the 2021 Bridge Financing. Upon consummation of this offering, the Bridge Notes will convert into a total of 1,409,789 shares of Common Stock (including accrued and unpaid interest through April 30, 2022), assuming the conversion of each holder’s Bridge Notes up to the Maximum Percentage, as defined in the Glossary of Terms, at a conversion price of $3.41. In the event any holder of Bridge Notes would beneficially own in excess of the Maximum Percentage, such holder shall receive Pre-Funded Warrants, as defined in the Glossary of Terms, in lieu of shares of Common Stock. Unless the context otherwise expressly dictates or as otherwise set forth in this prospectus, we have assumed an offering price of $5.00 per Unit (which is the midpoint of the price range set forth on the cover page of this prospectus) and all references to share and per share amounts referred to herein reflect the reverse stock split, the conversion of the Bridge Notes up to the Maximum Percentage by each holder of Bridge Notes, the conversion of all of the $1.5M Notes, as defined in the Glossary of Terms, into 909,071 shares of Common Stock at a conversion price of $1.65, and the conversion of all shares of Series A Preferred Stock into 719,397 shares of Common Stock at a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock and the cancellation of all shares of Series B Preferred Stock, which occurred prior to, or as a result of, this offering in June 2022. For more information, please refer to the “Prospectus Summary—Recent Developments.”
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements made under “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and
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elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “intends,” or “continue,” or the negative of these terms or other comparable terminology.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition, expected capital needs and expenses, statements relating to the research, development, completion and use of our device, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:
| • | our expectation regarding the sufficiency of our existing cash and cash equivalents to fund our current operations; |
| • | our ability to receive regulatory clearance for the MyoVista wavECG, or the MyoVista, from the U.S. Food and Drug Administration, or FDA, state regulators, if any, or other similar foreign regulatory agencies, including approval to conduct clinical trials, the timing and scope of those trials and the prospects for regulatory approval or clearance of, or other regulatory action with respect to the MyoVista; |
| • | our ability to advance the development of the MyoVista, our full function conventional 12-lead electrocardiograph, or ECG, device that incorporates an additional proprietary artificial intelligence-based algorithm that has been designed with the expectation of detecting cardiac dysfunction caused by heart disease or age-related cardiac dysfunction, and future potential products; |
| • | our ability to launch sales of the MyoVista into the U.S. and any future potential products; |
| • | our assessment of the potential of the MyoVista and future potential products to diagnose certain indications; |
| • | our planned level of capital expenditures and liquidity; |
| • | our plans to continue to invest in research and development to develop technology for new products; |
| • | the regulatory environment and changes in the health policies and regimes in the countries in which we intend to operate, including the impact of any changes in regulation and legislation that could affect the medical device industry; |
| • | our ability to meet our expectations regarding the commercial supply of the MyoVista and any future products; |
| • | our ability to retain key executives; |
| • | our ability to internally develop new inventions and intellectual property; |
| • | the overall global economic environment; |
| • | the impact of COVID-19 and resulting government actions on us; |
| • | the impact of competition and new technologies; |
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| • | general market, political and economic conditions in the countries in which we operate; |
| • | our ability to internally develop new devices and intellectual property; |
| • | our expectations regarding the use of proceeds from this offering; |
| • | changes in our strategy; and |
| • | litigation. |
These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. You should not rely upon forward-looking statements as predictions of future events.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.
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This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our securities. Before you decide to invest in our securities, you should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and related notes appearing at the end of this prospectus. In this prospectus, “we,” “us,” “our,” the “Company” and “HeartSciences” refer to Heart Test Laboratories, Inc., a Texas corporation. Unless the context otherwise expressly dictates or as otherwise set forth in this prospectus, all references to share and per share amounts referred to herein reflect the reverse stock split, the conversion of the Maximum Percentage of the Bridge Notes by each holder, the conversion of all of the $1.5M Notes, the conversion of the Series A Preferred Stock and the cancellation of the Series B Preferred Stock.
Company 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.
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 and raising sufficient funds to finish our pivotal clinical validation study and device testing and development to submit for, and achieve, FDA De Novo clearance. Additional funding 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.
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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 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.
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 current fiscal year ending April 30, 2023. For additional information regarding the FDA regulatory process, see “Business—FDA and Other Government Regulation”.
We require the funding from this offering to continue our work towards FDA resubmission and clearance. Although the net proceeds of this offering are anticipated to be sufficient to achieve FDA clearance, which would allow us to market the MyoVista in the U.S., there is no assurance that this would be the case. Additional funding would be required to support the sales launch of the MyoVista into the U.S., provide working capital and support further R&D. Our auditors’ report on our audited financial statements for Fiscal 2021 contains an explanatory paragraph regarding substantial doubts about our ability to continue as a going concern because we have experienced recurring losses, negative cash flows from operations, limited capital resources, a net shareholders’ deficit, as well as significant debt obligations. These events and conditions, along with other matters, 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.
Heart Disease Facts and Current ECG Testing Limitations
Heart disease refers to a variety of conditions that affect the heart—including heart rhythm problems, heart valve problems, genetic defects and blood-vessel diseases such as coronary artery disease. It is often referred to as the “silent killer” and, according to the American Heart Association, one in three patients are not properly
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diagnosed until after a heart attack occurs and 50% of men and 64% of women who died suddenly of coronary heart disease had no previous symptoms. Statistics published by the U.S. Centers for Disease Control and Prevention, or CDC, show that in the United States heart disease is the leading cause of death for men, women, and people of most racial and ethnic groups. According to the CDC, one person dies from cardiovascular disease every 36 seconds and heart disease accounts for approximately one in four deaths. In 2018, 30.3 million U.S. adults were diagnosed with heart disease including 18.2 million adults with CAD. Approximately 605,000 patients in the U.S. have a heart attack each year with approximately 20% of deaths from CAD occurring in adults less than 65 years old. The scale of the problem is similar worldwide. In 2020, the World Health Organization confirmed that heart disease has remained the leading cause of death at the global level for the last 20 years. Ischemic heart disease now represents 16% of global deaths and an estimated 17.9 million people died from cardiovascular diseases in 2019, representing 32% of all global deaths.
As heart disease progresses to more acute stages, the cost to treat patients increases significantly. Cardiovascular disease is the leading cost to the healthcare system and is estimated to be responsible for one in every six healthcare dollars spent in the United States. Heart disease costs in the United States were approximately $363 billion in each of 2016 and 2017, including the cost of health care services, medicines, and lost productivity due to death. Governments, healthcare providers and payors are motivated to shift the diagnosis and management of these conditions to earlier stages where better patient outcomes can be delivered at lower costs.
We believe that there is currently no low-cost, front-line, medical device that is effective at screening for heart disease. As a result, frontline physicians face a significant challenge in determining if a patient has heart disease. The conventional ECG is thought of by many to be the front-line tool in cardiac testing, but it has poor sensitivity in detecting CAD or structural heart disease.
Overuse of Expensive Cardiology-Based Diagnostic Testing
We believe that the absence of cost-effective front-line or primary-care-based testing has resulted in the over-use of costly cardiology-based diagnostic tests. Noninvasive cardiac tests are significant contributors to healthcare costs, accounting for greater than 40% of Medicare Part B spending on medical imaging, or over $17 billion annually according to the U.S. Centers for Medicare & Medicaid Services, or CMS. There are a variety of effective, though expensive, diagnostic tests for patients used to detect heart disease. These are typically performed in a specialist cardiology or hospital setting and include:
| • | Stress ECG testing, a non-invasive diagnostic test with a cost of approximately $200 with, according to the American College of Cardiology, or ACC, a sensitivity of 68% in the detection of CAD. |
| • | Echocardiogram, or echo, a non-invasive diagnostic imaging test, similar to an ultrasound, that is effective in the detection of heart disease; however, the Medicare cost of an echo in a hospital is approximately $600 and can be as much as $3,000 if performed privately. |
| • | Cardiac imaging tests, such as nuclear stress tests and coronary CT angiograms, or CCTA, alternatively can be conducted noninvasively, but typically cost $1,000 or more. |
| • | Coronary angiogram, an invasive test in which dye that is visible by X-ray is injected into the blood vessels of the heart. A coronary angiogram can cost in excess of $5,000. |
For additional information see “Business—Heart Disease Facts and Current ECG Testing Limitations.”
Diastolic Dysfunction, an Early Indicator of Heart Disease
The symptoms and causes of cardiac dysfunction have been researched for many years. The causes of cardiac dysfunction during the contraction (systolic) phase, also called reduced left ventricular ejection fraction, have been
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well understood for many years. However, according to the American Heart Association Statistics Committee report in 2013, approximately 50% of patients with heart failure symptoms have ejection fraction measures that are not markedly abnormal. In addition, multiple articles published by the National Institutes of Health, or NIH, state that approximately 50% of heart failure, or HF, cases are due to severe diastolic dysfunction, also called heart failure with preserved ejection fraction, or HFpEF. As a result, understanding the causes and progression of diastolic dysfunction has become a key area of scientific and clinical interest. This research has led to the understanding that almost all patients with systolic dysfunction also have diastolic dysfunction and almost all types of heart disease including CAD, valvular disease, cardiomyopathy, hypertension, congenital heart disease, and pericardial disease induce diastolic dysfunction.
According to an article by Dr. Dalane W. Kitzman, MD and Dr. William C. Little, MD published in the February 14, 2012 issue of the Journal of the American Heart Association, diastolic performance is sensitive to nearly all of the common disease processes that affect cardiovascular function. The article indicates that left ventricular, or LV, diastolic function is impaired by all of the common disease processes that affect LV function or produce LV hypertrophy or fibrosis, including hypertension, diabetes, ischemia, myocarditis, toxins, and infiltrative cardiomyopathies. LV diastolic dysfunction, or LVDD, begins early in the heart disease process and continues to increase in severity as heart disease progresses. LVDD is now recognized as one of the earliest signs of heart disease and typical onset occurs when a patient is still asymptomatic. We believe that the early detection of diastolic dysfunction can be a valuable marker for almost all forms of heart disease and age-related cardiac abnormalities that may otherwise be missed by current conventional ECG devices.
For additional information see “Business—Diastolic Dysfunction, an Early Indicator of Heart Disease.”
Product and Technology
The MyoVista device has been developed in response to the relatively recent understanding in cardiology that most forms of heart disease are associated with LV relaxation abnormalities and diastolic dysfunction. The MyoVista is a 12-lead resting ECG device that features our proprietary algorithm developed to detect cardiac dysfunction in the diastolic phase, specifically slower than normal left ventricular relaxation rates as defined by the American Society of Echocardiology Guidelines.
The MyoVista also includes the capabilities of a full-featured conventional 12-lead resting ECG including analysis using the Glasgow Algorithm, also known as the Glasgow ECG Interpretation Algorithm. Developed by the University of Glasgow in the UK, the 12-lead ECG Analysis Algorithm has been relied upon for more than 35 years and is a widely respected resting ECG interpretive algorithm. The Glasgow Algorithm was developed and has been continuously improved over the years by a team of world-renowned ECG researchers. The Glasgow Algorithm is licensed to the Company pursuant to the Glasgow Licensing Agreement. For additional information regarding the Glasgow Algorithm and our license, see “Business—Intellectual Property—Glasgow Licensing Agreement.”
In the MyoVista, the conventional ECG (including the Glasgow Algorithm) and our proprietary algorithm which has been designed to detect diastolic abnormalities are combined as a single test with results presented separately. The MyoVista has a high-resolution touchscreen display and incorporates many easy and intuitive to use features commonly associated with a tablet device. For additional information see “Business—Product and Technology.”
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MyoVista device with 1 lead view of signal processed waveform
Market Opportunity
Diagnostic Gap
We believe that the significant diagnostic gap in heart disease is early identification. Heart disease often remains asymptomatic for many years as disease progresses until it reaches an acute stage, at which point many patients have a heart attack or die without prior diagnosis of disease. For this reason, heart disease is often referred to as the “silent killer.” In 2012, the United States Preventative Services Task Force stated that 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 smoking, blood pressure and cholesterol levels, acknowledging the diagnostic gap that currently exists.
According to the CDC, cardiovascular disease remains the biggest cost for the US healthcare system at approximately $216 billion per year. The cost of treating acute cardiac events and heart failure is especially high in comparison to preventative treatment. Governments, healthcare providers and third-party payors are focused on shifting the diagnosis and management of heart disease to earlier stages where better patient outcomes can be delivered at lower cost; however, to make substantial progress the existing diagnostic gap needs to be closed.
We believe that the scale of cardiac disease as well as changing demographics, growing ECG market, impetus to identify risks earlier through low-cost testing which is better able to detect heart disease at an early stage, along with the increasing number and type of health care settings creates a significant opportunity for a device such as the MyoVista.
Changing Demographics
Heart disease is most commonly found in individuals age 65 and older with incidences of heart disease increasing at 65 years for men and 71.8 years for women. According to the Organization for Economic Co-operation and Development, advances in the field of medicine have led to an increase in life expectancy which, as of 2019, was estimated to average 78.9 years for a person in the U.S., up from 75.4 years in 1990. As life expectancy increases, the average age of the population is expected to increase. According to the U.S. Health and Human Services—Office of the Inspector General, or the HHS, the population age 65 and older increased from 38.8 million in 2008 to 52.4 million in 2018 (a 35% increase) and is projected to reach 94.7 million in 2060. By 2030, more than 20 percent of U.S. residents are projected to be age 65 and over. Since heart disease is most commonly found in individuals age 65 years and older, and that population pool is increasing, we believe there is a significant opportunity for a device such as the MyoVista.
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Growing ECG Market
The demand for electrocardiograph devices and related supplies known as electrodes is on the rise worldwide. Despite the limitations of the conventional ECG and healthcare guidance around the world that recommends against its use for screening, in the absence of a better alternative, the ECG remains a ubiquitous and widely-used test throughout healthcare including non-cardiology settings. It is estimated that 1.5 million to 3 million ECGs are performed worldwide every day, making it one of the most commonly used cardiovascular diagnostic tests in healthcare and a fundamental tool in clinical practice. It is estimated that more than 100 million ECGs are performed each year in the United States. The 2018 National Ambulatory Medical Care Survey indicated that office-based patient care physicians, excluding anesthesiologists and federal facilities such as VA clinics, ordered or provided 27 million ECG tests and four million stress ECGs during office visits, and the 2017 National Hospital Ambulatory Medical Care Survey showed that during ambulatory care visits to hospital emergency departments, an additional 28 million ECG tests were ordered or performed by hospital emergency departments.
Impetus to Identify Risks Earlier for More Effective Low-Cost Testing
A key goal of the HHS is reducing healthcare costs. This places pressure on physicians and healthcare institutions to contain healthcare costs. Additionally, one of the key objectives of HHS’s Healthy People 2030, is to increase preventive care for people of all ages. We believe that efforts towards preventive care and maintenance will lead to more testing for high-risk individuals and patients who have existing cardiac conditions. This trend, we believe, in tandem with the push to shorten hospital stays, has created an impetus to identify pre-symptomatic patients at risk more effectively at the front-line physician or clinic level and to treat recovering cardiac patients through outpatient care and rehabilitation.
It is our belief that the MyoVista is positioned to respond to the global need for more effective, low-cost ECG testing alternative for heart disease.
Changing Nature of Healthcare Providers
The delivery of healthcare in the U.S. is evolving. Alternative treatment sites, such as retail clinics, concierge medicine, urgent care clinics and ambulatory surgical centers, deliver care from qualified providers in settings outside of emergency departments, hospitals or traditional physician offices. We expect this trend to accelerate the drive to provide more effective preventative care and represents a significant opportunity for the introduction of the MyoVista as a new medical device that offers an enhanced ability to screen for heart disease.
Capitation Provides an Incentive to Identify Medicare Advantage Patients
Healthcare providers are paid either through fee-for-service or capitation. Fee-for-service is a payment model where services are unbundled and paid for separately. In health care, the fee-for-service payment model incentivizes physicians to provide more treatments because payment is dependent on the quantity, rather than quality, of care. Capitation is a payment arrangement that pays a physician or group of physicians a set amount for each enrolled person assigned to them, per period of time, whether or not that person seeks care. Under capitation, the amount of remuneration is based on the average expected healthcare utilization of that patient, with greater payment for patients with significant history of medical problems.
Approximately 42% (approximately 26 million people) of those covered by Medicare according to CMS are enrolled in a Medicare Advantage plan. With respect to these patients, CMS pays capitation to healthcare providers. CMS uses risk adjustment to adjust capitation payments to health plans, either higher or lower, to account for the differences in the health costs of individuals with ailments such as heart failure, CAD, angina and
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valvular heart disease. Accordingly, under CMS guidelines, risk factor adjustments per patient will provide payment that is higher for sicker patients who have conditions where diagnosis codes are documented in the medical record as a result of a face-to-face visit. Therefore, there is a financial incentive to identify those Medicare Advantage patients who are sicker, including those who have undiagnosed ailments such as heart disease. We believe that undiagnosed heart disease represents a significant problem, and we believe insurance plans that have a high number of Medicare Advantage patients could be a target market for the MyoVista.
Market Strategy
General
Our objective is to make the MyoVista wavECG a standard-of-care, as an affordable and valuable medical test. Our business model, which involves the capital sale of the MyoVista device and the use of proprietary supplies (electrodes) for each test, is “razor-razorblade.” The electrode connection system is patented which, together with our proprietary high quality electrodes, facilitate high quality, stable ECG signal capture, which, we believe is important as the MyoVista analyzes frequency data as well as conventional ECG information. Because new electrodes are needed for each test, our proprietary electrodes, if purchased, would provide recurring per-test revenue for each MyoVista device sold. In short, unlike many new healthcare products, we do not expect to primarily rely on high device pricing and instead will seek to encourage adoption and to rely on recurring revenue as an important aspect of our business model.
Territories
Our initial sales focus will primarily be within the U.S. We intend to market the MyoVista in the U.S. using a direct sales force following FDA clearance. Outside of the U.S., for markets such as Europe and Latin America, we intend to utilize medical device distributors that have existing healthcare provider relationships and experience selling ECG devices, which will be supported by a small number of local field personnel.
Potential Markets
We believe that there is a large variety of potential markets for the MyoVista. Conventional ECGs are used throughout healthcare in almost every clinical setting including clinics, doctor’s offices, urgent care centers, and hospitals. We believe that, in many of those settings, the additional information on cardiac dysfunction which the MyoVista is designed to provide, in addition to the conventional ECG information provided, could be extremely valuable.
The MyoVista’s range of applications and potential uses are vast, and include providing:
| • | Primary care—front-line cardiac testing/referral tool, heart disease screening. |
| • | Retail Healthcare—access to ECG testing at retail sites such as CVS, Walmart and Walgreens. |
| • | Emergency Departments—enhanced ECG testing for emergency room patients. |
| • | Cardiologists—prescreening cardiology patients. |
| • | Hospitals—in-patient testing or testing prior to discharge, particularly cardiac wards. |
| • | Surgery—pre-anesthesia testing, pre/post intervention. |
| • | Life Insurance testing—ECGs when required in connection with the issuance of life insurance policies. |
| • | Specialty Environments—screening for conditions such as, cardiomyopathy, cardiac oncology, drug trials, heart failure, and diabetes. |
| • | Athlete testing—cardiac screening programs for athletes. |
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Early Target Markets
Initially, our focus markets will be on: cardiology; primary care providers that serve upper to middle income regions including concierge medicine providers; retail clinics; and insurers with high levels of Medicare Advantage patients.
Reimbursement
In addition to penetrating the health care settings described above, a key element of our strategy is to qualify for third-party payor reimbursement. This strategy has two stages. During the first stage, we intend to seek the support of the American College of Cardiology, or ACC, to use existing Current Procedural Terminology, or CPT, codes for the standard ECG functionality of the MyoVista. CPT codes are numbers assigned to each task or service provided by a healthcare provider including medical, surgical and diagnostic services. Insurers use the numbers to determine the amount to pay a provider. While we cannot assure you that we will receive such approval by ACC, this would provide physicians with the ability to use existing 12-lead ECG reimbursement codes. Medicare reimbursement for existing ECG testing procedures with interpretation and report ranges from approximately $17 to $55 depending on the type of healthcare facility. These charges would go directly to the healthcare facility/physician.
After this initial stage, our longer-term reimbursement strategy is to obtain additional reimbursement for the MyoVista capabilities related to detecting cardiac dysfunction. While we cannot assure you that we will be successful in obtaining additional reimbursement codes, if we are successful, this could potentially provide total reimbursement that is larger than reimbursement for conventional ECG devices, which, in turn, could place the MyoVista at a competitive advantage as compared to conventional ECG devices. Any additional CPT codes that are issued and recognized by payors for the MyoVista related to our longer-term reimbursement strategy could provide a revenue advantage as compared to CPT codes for conventional ECG devices.
Competition
The medical device industry is characterized by rapidly advancing technologies, intense competition, and a strong emphasis on proprietary products. There are many medical device companies, biotechnology companies, public and private universities and research organizations actively engaged in the research and development of products that may be similar to the MyoVista. Competitors could include traditional ECG manufacturers such as General Electric Company, or GE, Koninklijke Philips N.V., or Philips, and Nihon Kohden Corporation that may seek to innovate due to competition from HeartSciences, and new competitors that also see the opportunity to finally innovate in a market that, we believe, has significant need for improved products and technology change.
Intellectual Property
Our technology is protected by a patent portfolio as well as trade secrets, which together comprise an important part of technology protection for our existing and any future proprietary algorithms (especially when developing proprietary algorithms). We believe that the combination of patents and trade secrets create valuable competitive barriers in favor of HeartSciences.
The USPTO has issued six utility patents and one design patent to us, and has allowed a seventh utility patent application. We have one utility patent application under the USPTO’s review. These patents expire from March 5, 2029 to August 27, 2040. We also have seven utility patents (which expire from September 20, 2036 to March 9, 2037) and fourteen design registrations granted by international jurisdictions such as China, Japan, South Korea, the United Kingdom, France, Germany and Australia, and have received allowances of further applications by the European Patent Office and in Israel. We also have several pending patent applications in several international jurisdictions including Brazil, Canada, India, South Korea, Mexico and the United Arab Emirates.
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In addition, we have entered into two agreements that are material to our rights to the intellectual property utilized in the MyoVista:
| • | In January 2014, we entered into an invention assignment agreement, which we refer to as the MyoVista Technology Agreement, under which certain specified MyoVista technology and proprietary and intellectual property rights thereto (including patents, copyright, trademarks, trade secrets and know-how) were transferred and assigned to us by the inventor; and |
| • | In December 2015, we entered into a licensing agreement, which we refer to as the Glasgow Licensing Agreement, with The University Court of the University of Glasgow, under which we obtained a non-exclusive, worldwide license, renewing automatically every five years, to software modules for an Android platform for analysis of resting 12-lead electrocardiograms and all intellectual property rights (including patents, copyright, trademarks, trade secrets and know-how) relating to the software modules to be used in the MyoVista. |
For additional information, including a listing of the patents and trademarks that have been registered with the USPTO, see “Business—Intellectual Property”.
Research and Development
The Company’s research and development, or R&D, staff designs our hardware, software and AI-based algorithms. Hardware development assistance is provided by outside consulting firms. The Company internally develops the signal processing software elements along with outside assistance. The user interface elements of the software are designed by the Company along with the assistance of outside consultants. The data science work necessary to build the AI-based algorithms is performed both internally and externally using outside consultants. Incorporation of all software elements into the MyoVista hardware is performed internally. We currently employ five full-time R&D staff.
We believe our research demonstrates the potential to develop further algorithms for a range of additional clinical indications. Studies involving use of the MyoVista have already been published demonstrating alternative clinical indications. We believe that in the future the ECG will have significantly greater clinical value and will facilitate far more effective heart disease screening and referral.
Recent Developments
2021 Bridge Financing
In October 2021, we conducted an initial closing of a private placement with accredited investors of secured subordinated convertible notes, or notes, in the principal amount of $0.7 million, plus warrants, or warrants, to purchase one share of Common Stock for each share of Common Stock issuable upon conversion of the principal amount of the notes. At the time of this initial closing, we informed the investors that we were negotiating the terms of a possible investment by a lead investor and if that investment was concluded then the investors in the initial closing would be offered the right to exchange the notes and warrants issued in the initial closing for the securities issued to the lead investor. Following closing with the lead investor of the Securities Purchase Agreement referenced in the 2021 Bridge Financing described below, all investors in the initial closing exchanged their notes and warrants for the securities issued in the 2021 Bridge Financing.
In December 2021, we entered into a Securities Purchase Agreement, which we refer to as the Securities Purchase Agreement, with the lead investor and additional accredited investors, or the Purchasers, which we refer to as our 2021 Bridge Financing. From December 2021 to February 2022, we issued and sold (i) Bridge Notes in
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an aggregate principal amount of $4.7 million (which included the exchange of the $0.7 million from the initial closing described above) and (ii) Bridge Warrants to purchase 1,155,812 shares of Common Stock in the 2021 Bridge Financing. The Company received net proceeds (net of the original issue discount, or OID) of $4.2 million in the 2021 Bridge Financing. The 2021 Bridge Financing concluded on February 28, 2022.
Each Bridge Note was issued with a 10% original issue discount and is convertible into a number of shares of Common Stock equal to the principal amount of the Bridge Note divided by an initial conversion price of the lower of (i) $6.06 per share or (ii) a 30% discount to the price allocated to each share of Common Stock in this offering (for purposes of this prospectus, we have assumed that this offering will be a qualified offering, as defined below), which is referred to as the Conversion Price. Pursuant to the terms of the Bridge Notes, the amount allocated to each share of Common Stock in this offering is $4.875 (based on an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus) and the conversion price is $3.41. For two years after the issuance date of the Bridge Notes until conversion occurs, the Conversion Price of the Bridge Notes is subject to adjustment for certain events such as stock dividends and splits and issuances of shares of Common Stock or securities convertible into or exercisable for shares of Common Stock at a price less than the Conversion Price, in which event the Conversion Price will be subject to a full ratchet downward to the price at which such newly-issued shares of Common Stock or securities convertible into or exercisable for shares of Common Stock were issued.
The Bridge Notes bear interest at 8% per annum payable on the maturity date of the Bridge Notes of December 22, 2024 and are secured by a subordinated security interest in substantially all of the assets, including patents and other intellectual property, of the Company. From and after the one-year anniversary of the issuance of the Bridge Notes, the Company may prepay the principal of the Bridge Notes and all accrued and unpaid interest thereon at a price of 115% of the principal amount to be prepaid (plus accrued and unpaid interest). In addition, upon the occurrence of an event of default or a change of control of the Company (as defined in the Bridge Notes), the holders of the Bridge Notes may redeem their Bridge Notes in an amount equal to 125% of the principal amount (plus accrued and unpaid interest).
Assuming this offering constitutes a qualified offering, the Bridge Notes will convert into shares of Common Stock at the Conversion Price automatically upon the consummation of this offering. A qualified offering is defined as a public offering in the U.S. pursuant to a registration statement declared effective by the SEC, pursuant to which the Common Stock is listed for trading on a securities exchange, such as the Nasdaq, with (i) minimum gross proceeds of $6.0 million and (ii) minimum net proceeds of $5.0 million after deducting all fees and expenses in connection with such offering. With respect to the conversion of the Bridge Notes, in the event any Purchaser, together with its affiliates and any other person acting as a group as defined under Section 13(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, whom we refer to as the Attribution Parties, would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the conversion of all or any portion of the Bridge Notes, or the Maximum Percentage, shall receive Pre-Funded Warrants in lieu of shares of Common Stock. Any such Purchaser may adjust the Maximum Percentage at any time, upon 61 days’ notice, provided that the Maximum Percentage may not be adjusted above 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the conversion of all or any portion of the Bridge Notes. The exercise of the Pre-Funded Warrants is also subject to the Maximum Percentage, except that any exercise of the Pre-Funded Warrants resulting in a number of shares in excess of the Maximum Percentage shall be deemed null and void and shall be cancelled ab initio. A description of the Pre-Funded Warrants is set forth in “Description of Securities—Warrants.”
In connection with the 2021 Bridge Financing, we also issued warrants to initially purchase 1,155,812 shares of Common Stock, subject to adjustment, which we refer to as the Bridge Warrants. The Bridge Warrants expire in five years from the date of issuance, beginning on December 22, 2026, with an initial Exercise Price of $9.08 per share, subject to certain adjustments. No holder of a Bridge Warrant may exercise any portion of a Bridge Warrant if after giving effect to such exercise such holder (together with its Attribution Parties) would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the
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issuance of shares of Common Stock but not including shares of Common Stock issuable upon exercise of such holder’s Bridge Warrants or Pre-Funded Warrants. This limitation may be waived by a holder, at its election, upon not less than 61 days’ prior notice to the Company, to change the limitation to 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of such holder’s warrant. Any exercise of the Bridge Warrants resulting in a number of shares in excess of 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the exercise shall be deemed null and void and shall be cancelled ab initio.
The exercise price of the Bridge Warrants is subject to adjustment for certain events such as stock dividends and splits and, if and whenever on or prior to the later of (i) the second anniversary of December 22, 2021 or (ii) the 18-month anniversary of the effective date of this offering, there are issuances of shares of Common Stock or securities convertible into or exercisable for shares of Common Stock at a price less than the exercise price of the Bridge Warrants, in which event the Exercise Price will be reduced to the price at which such newly issued shares of Common Stock or securities convertible into or exercisable for shares of Common Stock were issued. In addition, if the per share price in this offering is less than 125% of the Exercise Price, then the Exercise Price would be decreased to 125% of the issuance price of the shares of Common Stock sold in this offering. Pursuant to the terms of the Bridge Warrants, the amount allocated to each share of Common Stock in this offering is $4.875 (based on an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus) and as a result, the exercise price of the Bridge Warrants will be reduced to $6.09 per share upon completion of this offering. Upon a decrease in the Exercise Price, the number of shares of Common Stock that would be received shall be adjusted such that the total consideration to be received by the Company upon exercise in full of the Bridge Warrants would equal 150% of the principal amount of the Bridge Notes purchased by such holder.
In connection with the 2021 Bridge Financing, we also entered into a registration rights agreement, or the Registration Rights Agreement, with the Purchasers pursuant to which we agreed to file a resale registration statement, no later than [ ], 2022, with respect to the shares of Common Stock issuable upon conversion of the Bridge Notes, exercise of the Bridge Warrants or resulting from anti-dilution provisions in the Bridge Notes, the Bridge Warrants and the Pre-Funded Warrants (if any) or any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event. In the event that the registration statement relating to the resale of Common Stock issued pursuant to a conversion of the Bridge Notes or exercise of the Bridge Warrants and any Pre-Funded Warrants, or Registrable Securities, is not declared effective by the SEC on or prior to [ ], 2022, we are required to pay to each holder of Registrable Securities an amount in cash equal to two percent of the principal amount of such holder’s Bridge Notes. For additional information with respect to the Registration Rights Agreement, see “Description of Securities—Registration Rights”.
Conversion of Series A Preferred Stock and Cancellation of Series B Preferred Stock
In June 2022, as a result of this offering, all outstanding shares of Series A Preferred Stock will converted into 719,397 shares of Common Stock (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock) and all outstanding shares of Series B Preferred Stock will be cancelled.
Implications of Being an “Emerging Growth Company” and a “Smaller Reporting Company”
We qualify as an “emerging growth company” under the Jumpstart our Business Startups Act of 2012, or the JOBS Act. For so long as we remain an emerging growth company, we may take advantage of relief from certain reporting requirements and other burdens generally applicable to public companies. In particular, as an emerging growth company we:
| • | are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act; |
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| • | are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion and analysis”); |
| • | are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute” votes); |
| • | are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure; |
| • | may present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis of Financial Condition and Results of Operations, or MD&A; and |
| • | are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. |
We intend to take advantage of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act. Please see “Risk Factors—We are an ‘emerging growth company,’ and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make the Common Stock less attractive to investors.”
Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, or the Securities Act, or such earlier time that we no longer meet the definition of an emerging growth company. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our Common Stock held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period. Further, under current SEC rules we will continue to qualify as a “smaller reporting company” for so long as we have a public float (i.e., the market value of common equity held by non-affiliates) of less than $250 million as of the last business day of our most recently completed second fiscal quarter.
Certain of the reduced reporting requirements and exemptions available to us as an “emerging growth company” are also available to us due to the fact that we also qualify as a “smaller reporting company” under the SEC rules which means that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or CEO pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.
If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies and we may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million as of the last business day of the second fiscal quarter or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million as of the last business day of the second fiscal
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quarter. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Corporate Information
We are a Texas corporation based in Southlake, Texas and were incorporated in Texas in August 2007. Our principal executive offices are located at 550 Reserve Street, Suite 360, Southlake TX 76092. Our telephone number is 682-237-7781. We are doing business under an assumed name, HeartSciences. Our website address is www.heartsciences.com. The information contained on, or that can be accessed through, our website is not part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.
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| Common Stock currently issued and outstanding |
3,323,942 shares (which excludes 3,038,257 shares issuable upon the conversion of the Bridge Notes, the $1.5M Notes and the Series A Preferred Stock and the cancellation of the Series B Preferred Stock) |
| Securities offered by us |
1,750,000 Units at 5.00 per Unit (which is the midpoint of the price range set forth on the cover page of this prospectus), each Unit consisting of: |
| • | One share of Common Stock; and |
| • | One Warrant to purchase one share of Common Stock. The Warrants may only be exercised at an exercise price of $5.00 per whole share of Common Stock (which is the midpoint of the price range per Unit set forth on the cover page of this prospectus), subject to adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications or similar events affecting our Common Stock. The Warrants are exercisable upon completion of this offering and will expire five (5) years from the date of issuance. The Common Stock and the Warrants comprising the Units are immediately separable upon issuance and will be issued separately but will be purchased together in this offering. The terms of the Warrants will be governed by a Warrant Agreement between us and American Stock Transfer & Trust Company, as the Warrant Agent. For more information, please see “Description of Securities—Warrants”. |
| Common Stock to be outstanding after this offering |
8,112,199 shares (assuming that none of the Warrants are exercised) or 9,862,199 shares if the Warrants offered hereby are exercised in full. If the underwriters exercise in full the over-allotment option to purchase an additional 262,500 shares of Common Stock and/or Warrants to purchase an additional 262,500 shares of Common Stock, the total number of shares of Common Stock immediately after this offering would be 8,374,699 shares (assuming that none of the Warrants are exercised) or 10,124,699 shares if the Warrants offered hereby are exercised in full, subject to the assumptions set forth below. |
| Over-allotment option |
We have granted the underwriters an option for a period of up to 30 days to purchase, at the public offering price, less underwriting discounts and commissions, up to 262,500 shares of additional Common Stock and/or Warrants to purchase an additional 262,500 shares of Common Stock to cover over-allotments, if any. |
| Representative’s Warrants |
We will issue to The Benchmark Company LLC, the representative of the underwriters, or its designees, warrants to purchase up to 7.0% of the aggregate number of shares of Common Stock sold in this offering (or up to 140,875 shares). The representative’s warrants will have a term of five years from the effective date of the offering, will have an exercise price equal to 100% of the public offering price per |
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| Unit set forth on the cover page of this prospectus (or $5.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus), will provide for a “cashless” exercise, and will contain certain antidilution adjustments (but excluding any price based antidilution). The representatives’ warrants will contain provisions for unlimited “piggyback” registration rights for a period of no greater than three (3) years from the effective date of the offering in compliance with FINRA Rule 5110(g)(8)(D). For additional information regarding the representative’s warrants, see “Underwriting—Representative’s Warrants”. |
| Use of proceeds |
We expect to receive net proceeds from this offering of approximately $7.2 million (based on the assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses, or approximately $8.4 million if the underwriters exercise the over-allotment option in full. |
| We intend to use the net proceeds from this offering (i) for estimated costs of approximately $3 million directly related to achieving FDA clearance for the MyoVista device, including costs for relevant Company personnel, associated device testing, validation and R&D, and completing the pivotal clinical validation study, (ii) for working capital and general corporate purposes until we can obtain FDA approval, (iii) to pay accrued and unpaid interest to one lender (John Q. Adams, Sr., a former director of the Company) under the $1M Loan and Security Agreement (as defined in the Glossary of Terms), which was $0.1 million as of January 31, 2022, and (iv) with respect to the remainder, if any, for working capital and general corporate purposes needed for the sales launch of the MyoVista into the U.S., which may include the hiring of additional personnel, capital expenditures and the costs of operating as a public company. The $1M Loan and Security Agreement, as amended, matures on September 30, 2023, assuming completion of this offering. |
| Risk factors |
Investing in our securities involves a high degree of risk. You should read the “Risk Factors” section starting on page 19 of this prospectus for a discussion of factors to consider carefully before deciding to invest in our Common Stock. |
| Proposed Listing: |
We have applied to list our Common Stock and Warrants to be issued in this offering on the Nasdaq Stock Market under the symbol “HSCS” and “HSCSW,” respectively. No assurance can be given that our application will be approved or that a trading market will develop. In the event our listing application is not approved, we will not consummate this offering. |
| The number of shares of Common Stock to be outstanding immediately after this offering as shown above assumes that all of the Units offered hereby are sold, and is based on 3,323,942 shares of Common Stock outstanding as of January 31, 2022, plus 1,409,789 shares of Common Stock to be issued upon the conversion of up to |
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| the Maximum Percentage by each holder of the Bridge Notes (including accrued and unpaid interest through April 30, 2022) at a conversion price of $3.41 pursuant to their terms, plus 909,071 shares of Common Stock to be issued upon conversion of the $1.5M Notes at a conversion price of $1.65 pursuant to their terms, plus 719,397 shares issued upon conversion of the Series A Preferred Stock (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus) at a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock pursuant to the terms of the Series A Preferred Stock and the cancellation of the Series B Preferred Stock. |
| This number of shares of the Common Stock excludes: |
| • | 1,755,139 shares of Common Stock issuable upon conversion of Series C Preferred Stock (including 19,482 shares issuable upon conversion of the shares of Series C Preferred Stock issuable upon conversion of the $130K Note). See “Description of Securities—Preferred Stock” for additional information; |
| • | 842,590 shares of Common Stock issuable upon the exercise of stock options issued to directors, employees and consultants of the Company, of which 400,394 will be vested as of completion of this offering; |
| • | 1,232,252 shares of Common Stock to be issued upon exercise of the Investor Warrants, the $1M Lender Warrants, the $1.5M Lender Warrants, the Bridge Warrants, and the Pre-Funded Warrants, each as defined in the Glossary of Terms. See “Description of Securities—Warrants” for more information; |
| • | 1,750,000 shares of Common Stock to be issued upon exercise of the Warrants; and |
| • | 140,875 shares of Common Stock to be issued upon exercise of the underwriters’ representative’s warrants. |
| This number of shares of Common Stock also excludes shares issuable pursuant to antidilution provisions set forth in the Bridge Warrants and the Series C Preferred Stock, which are each dependent on the market price of our Common Stock at the time of conversion. For additional information, see “Description of Securities—Antidilution Provisions”. |
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The following table summarizes our financial data. We have derived the following statements of operations data for Fiscal 2021 and Fiscal 2020 from our audited financial statements included elsewhere in this prospectus. We have derived the following statements of operations data for the nine months ended January 31, 2022 and 2021, and the balance sheet data as of January 31, 2022, from our unaudited interim condensed financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our financial statements and related notes included elsewhere in this prospectus. Share numbers are based on the number of shares outstanding prior to the reverse stock split.
| Nine months ended January 31, | Year ended April 30, | |||||||||||||||
| 2022 | 2021 | 2021 | 2020 | |||||||||||||
| (unaudited) | ||||||||||||||||
| Revenue |
$ | 10,224 | $ | 10,654 | $ | 25,604 | $ | 64,182 | ||||||||
| Cost of sales |
6,610 | 4,444 | 10,665 | 46,460 | ||||||||||||
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|
|
|
|
|
|
|
|
|||||||||
| Gross margin |
3,614 | 6,210 | 14,939 | 17,722 | ||||||||||||
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|
|
|
|
|
|
|
|
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| Operating expenses: |
||||||||||||||||
| Research and development |
1,645,902 | 1,114,459 | 1,708,447 | 2,040,227 | ||||||||||||
| Selling, general and administrative |
1,089,301 | 672,551 | 874,620 | 1,795,679 | ||||||||||||
| (Gain) loss on disposal of property and equipment |
— | (573 | ) | (1,663 | ) | 10,016 | ||||||||||
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|
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
2,735,203 | 1,786,437 | 2,581,404 | 3,845,922 | ||||||||||||
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|
|
|
|
|
|
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| Loss from operations |
(2,731,589 | ) | (1,780,227 | ) | (2,566,465 | ) | (3,828,200 | ) | ||||||||
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|
|
|
|
|
|
|
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| Other income (expense) |
||||||||||||||||
| Interest expense |
(294,586 | ) | (68,338 | ) | (132,454 | ) | (2,811 | ) | ||||||||
| Gain on extinguishment of debt |
250,200 | 250,200 | 250,200 | — | ||||||||||||
| Gain on settlement of payables |
— | — | — | 21,790 | ||||||||||||
| Other income |
851 | — | — | — | ||||||||||||
| Other expense |
— | (2,232 | ) | (3,451 | ) | (1,897 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total other income (expense) |
(43,535 | ) | 179,630 | 114,295 | 17,082 | |||||||||||
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|
|
|
|
|
|
|
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| Net loss |
$ | (2,775,124 | ) | $ | (1,600,597 | ) | $ | (2,452,170 | ) | $ | (3,811,118 | ) | ||||
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|
|
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|
|
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| Net loss per share, basic and diluted |
$ | (0.84 | ) | $ | (0.48 | ) | $ | (0.74 | ) | $ | (1.15 | ) | ||||
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|
|
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|
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| Weighted average common shares outstanding, basic and diluted |
3,317,208 | 3,313,841 | 3,313,841 | 3,313,803 | ||||||||||||
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|
|
|
|
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|
|
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| As of January 31, 2022 (unaudited) |
As of April 30, | |||||||||||
| Balance Sheet Data: |
2021 | 2020 | ||||||||||
| Cash and equivalents |
$ | 1,328,208 | $ | 723,481 | $ | 496,853 | ||||||
| Working capital (deficit)(1) |
$ | (1,665,232 | ) | $ | 392,048 | $ | 396,103 | |||||
| Total assets |
$ | 2,589,833 | $ | 1,927,371 | $ | 1,955,856 | ||||||
| Total notes payable |
$ | 5,259,377 | $ | 2,880,200 | $ | 650,766 | ||||||
| Total liabilities |
$ | 6,691,631 | $ | 3,836,961 | $ | 1,640,305 | ||||||
| Accumulated deficit |
$ | (52,349,772 | ) | $ | (49,574,648 | ) | $ | (47,122,478 | ) | |||
| Total stockholders’ (deficit) equity |
$ | (4,101,798 | ) | $ | (1,909,590 | ) | $ | 315,551 | ||||
| (1) | We define working capital as current assets less current liabilities. See our audited financial statements and the related notes include elsewhere in this prospectus for further details regarding our assets and liabilities as of April 30, 2020 and 2021 and unaudited interim financial statements as of January 31, 2022. |
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Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following the prospectus summary. The following is a summary of the most significant risks and uncertainties that we believe could adversely affect our business, financial condition, and results of operations. In addition to the following summary, you should read the other information set forth in “Risk Factors” before you invest in our securities. In particular, our risks include, but are not limited to, the following:
Risks Related to Our Financial Condition and Capital Requirements:
| • | We have a limited operating history and we have incurred significant operating losses since our inception, and anticipate that we will incur continued losses for the foreseeable future; |
| • | Our future operating results are dependent on regulatory approval for the MyoVista, which we have not received as of the date of this prospectus; |
| • | Even if this offering is successful, we will need to raise substantial additional funding, which may not be available on acceptable terms, or at all. Failure to obtain funding on acceptable terms and on a timely basis may require us to curtail, delay or discontinue our development efforts and other operations; |
| • | All of our assets are subject to security interests; and |
| • | Our independent registered public accounting firm has expressed 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. |
Risks Related to Our Business and Industry:
| • | Our future success depends on our ability to develop, receive regulatory clearance or approval for, and introduce the MyoVista to the market in a timely manner. If we do not obtain and maintain the regulatory registrations and clearances for our device, we will be unable to market and sell the MyoVista in the United States, Europe or other regions; |
| • | Our success will be dependent upon physician acceptance; and |
| • | If third-party payors do not provide adequate coverage and reimbursement for the use of the MyoVista, our revenue will be negatively impacted. |
Risks Related to Product Development and Regulatory Approval:
| • | Our device and operations are subject to extensive government regulation and oversight both in the U.S. and abroad, and our failure to comply with applicable requirements could harm our business; |
| • | If and when our products are ready for sales launch into the U.S., modifications to our marketed products may require new 510(k) clearances, or may require us to cease marketing or recall the modified products until clearances or approvals are obtained; |
| • | Clinical studies may be necessary to support future product submissions to the FDA. The clinical trial process is lengthy and expensive with uncertain outcomes, and often requires the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical studies will prevent us from launching sales of modified or new products into the U.S. and will adversely affect our business, operating results and prospects; and |
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| • | Medical device development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies may not be predictive of future study results. |
Risks Related to Our Intellectual Property:
| • | If we are unable to obtain and maintain effective patent rights for our device, we may not be able to compete effectively in our markets. If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us; |
| • | Intellectual property rights of third parties could adversely affect our ability to market our device, and we might be required to litigate or obtain licenses from third parties in order to develop or market our device. Such litigation or licenses could be costly or not available on commercially reasonable terms; and |
| • | We may be subject to claims challenging the inventorship of our intellectual property. |
Risks Related to this Offering and the Ownership of our Securities:
| • | We do not know whether a market for our Common Stock or Warrants will develop or, if developed, be sustained, what the trading price of our Common Stock or Warrants will be, or whether there will be an active, liquid, trading market for our Common Stock or Warrants, which may trade at a discount from the initial public offering price and make it difficult for you to sell the Common Stock or Warrants you purchase; |
| • | The market price of our Common Stock and Warrants may be highly volatile, and you could lose all or part of your investment; |
| • | Future sales of a substantial number of shares of our Common Stock by our existing shareholders could cause our stock price to decline; and |
| • | If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they publish negative reports regarding our business or our securities, our share price and trading volume could decline. |
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Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the financial statements and related notes, before deciding whether to purchase our securities. If any of the following risks are realized, our business, operating results, financial condition and prospects could be materially and adversely affected. In that event, the price of our Common Stock or Warrants could decline, and you could lose part or all of your investment.
Risks Related to Our Financial Condition and Capital Requirements
We have a limited operating history and we have incurred significant operating losses since our inception, and anticipate that we will incur continued losses for the foreseeable future.
We are a development-stage medical device company with a limited operating history. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the medical device industry. To date, we have generated limited revenue from the sale of the MyoVista during its development stage. We have incurred losses in each year since our inception, including net losses of approximately $2.4 million and $3.8 million for Fiscal 2021 and Fiscal 2020, respectively, and approximately $2.8 million and $1.6 million for the nine months ended January 31, 2022 and January 31, 2021, respectively. As of January 31, 2022, we had an accumulated deficit of approximately $52.3 million and stockholder’s deficit of approximately $4.1 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” for additional information.
Even if we obtain regulatory approval for sales launch of the MyoVista into the U.S., our future revenue will depend upon the size of the market in which the device or any future product receives approval as well as our ability to achieve sufficient market acceptance, pricing, and reimbursement from third-party payors, which we may never achieve.
We also anticipate that our expenses will increase substantially if and as we:
| • | continue research and development; |
| • | are granted regulatory and marketing approvals; |
| • | establish a sales, marketing, and distribution infrastructure; |
| • | seek to identify, assess, acquire, license, and/or develop subsequent generations of the MyoVista and any new products; |
| • | seek to maintain, protect, and expand our intellectual property portfolio; |
| • | seek to attract and retain skilled personnel; |
| • | create additional infrastructure to support our operations as a public company as well as our device development and planned future marketing efforts; and |
| • | experience any delays or encounter issues with respect to any of the above, including, but not limited to, failed studies, complex results, safety issues or other regulatory challenges that require longer follow-up of existing studies or additional supportive studies in order to pursue marketing approval. |
We expect to continue to incur significant operating losses for the foreseeable future. As a result of the numerous risks and uncertainties associated with developing a medical device, we are unable to predict the extent of any future losses or whether we will ever achieve and maintain profitability. Further, the operating losses that we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. Other unanticipated costs may also arise.
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Our future operating results are dependent on regulatory approval for the MyoVista, which we have not received as of the date of this prospectus.
The MyoVista is our only current product candidate. As a result, the success of our business plan is entirely dependent on our ability to obtain regulatory approval and to subsequently develop, manufacture and launch sales of the MyoVista into the U.S. Our failure to do so would likely cause our business to fail. Successful marketing of medical devices is a complex, lengthy, costly and uncertain process, dependent on the efforts of management, manufacturers, local operators, integrators, medical professionals, third-party payors, as well as general economic conditions, among other factors. For more information, see “—Risks Related to Our Business and Industry—Our future success depends on our ability to develop, receive regulatory clearance or approval for, and introduce the MyoVista to the market in a timely manner. If we do not obtain and maintain the regulatory registrations and clearances for our device, we will be unable to market and sell the MyoVista in the United States, Europe or other regions.” Any factor that adversely impacts the approval, development and sales launch of the MyoVista into the U.S. will have a negative impact on our business, financial condition and results of operations. We may face several challenges with respect to launching sales of the MyoVisto into the U.S. including, among others, that:
| • | we may fail to obtain regulatory clearance or approvals or, even if regulatory approval is obtained, we may face adverse regulatory and/or legal actions; |
| • | we may not have adequate financial or other resources to properly market the MyoVista or sell it in economically viable quantities; |
| • | we may not be able to manufacture in commercial quantities, at an adequate quality or at an acceptable cost; |
| • | we may not be able to establish adequate sales, marketing and distribution channels; |
| • | healthcare professionals and patients may not accept the MyoVista; |
| • | we may not be able to compete with existing solutions for cardiac screening; |
| • | technological breakthroughs in heart disease screening solutions may reduce the potential demand for the MyoVista; |
| • | third-party payors may not agree to reimburse patients for any or all of the charges related to testing the MyoVista, which may adversely affect physicians’ adoption and use of the device; and |
| • | we may face third-party claims of intellectual property infringement. |
If we are unable to obtain regulatory approval and accomplish any one or more of the challenges listed above, our ability to effectively launch sales of the MyoVista into the U.S. could be limited, which in turn could have a material adverse effect on our business, financial condition and results of operations. For additional information regarding risks related to our ability to successfully develop, market and sell the MyoVista, see “—Risks Related to Our Business and Industry—Our future success depends on our ability to develop, receive regulatory clearance or approval for, and introduce the MyoVista to the market in a timely manner. If we do not obtain and maintain the regulatory registrations and clearances for our device, we will be unable to market and sell the MyoVista in the United States, Europe or other regions” and “—Risks Related to Our Business and Industry—Our success will be dependent upon physician acceptance.”
Even if this offering is successful, we will need to raise substantial additional funding, which may not be available on acceptable terms, or at all. Failure to obtain funding on acceptable terms and on a timely basis may require us to curtail, delay or discontinue our development efforts and other operations.
We estimate the costs directly related to achieving FDA clearance for the MyoVista device, including costs for relevant Company personnel, associated device testing, validation and R&D, and completing the pivotal clinical validation study, would be approximately $3 million. If we are unable to obtain funding on a timely basis, we may (i) not be able to complete the process of FDA clearance if funding beyond this offering is required, (ii) need to significantly curtail, delay or discontinue our efforts to launch sales of the MyoVista into the U.S. if FDA clearance is achieved or (iii) be unable to continue operations or otherwise capitalize on our
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business opportunities, as desired, which could materially affect our business, financial condition and results of operations. Even if we achieve FDA clearance with the proceeds of this offering, we expect that we will require substantial additional capital for sales launch and marketing of the MyoVista. In addition, our planned expenses and operations may change as a result of many factors that could be currently unknown to us and we may need to seek additional funds sooner than planned. Our future funding requirements will depend on many factors including:
| • | the progress, results and costs of our ongoing and planned studies and, if applicable, clinical trials of the MyoVista as well as any future products and services; |
| • | the cost, timing and outcomes of regulatory review of current and any future products and services; |
| • | the scope, progress, results and costs of product development, testing, manufacturing, pre-clinical development and, if applicable, clinical trials for any other product that we may develop or otherwise obtain in the future; |
| • | the cost of our future activities, including establishing sales, marketing and distribution capabilities for the MyoVista, in any particular geography, where we receive marketing and/or regulatory approval; |
| • | the terms and timing of any collaborative, licensing, payment plan and/or other arrangements that we may establish; |
| • | the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and |
| • | the level of revenue, if any, received from commercial sales of the MyoVista if we receive approval for sales launch of the MyoVista into the U.S. |
We could also be required to seek additional funds at an earlier stage than would otherwise be desirable and, as a result, we may be required to relinquish rights to some of our intellectual property, our device, or otherwise agree to terms unfavorable to us or our shareholders, any of which may have a material adverse effect on our business. Even if we believe that we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic objectives such as acquiring IP, partnering with a vendor or other worthwhile business endeavors.
Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and launch sales of the MyoVista and any future product into the U.S. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.
All of our assets are subject to security interests.
At January 31, 2022, we had a total of $5.2 million of indebtedness. For more information, see “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Indebtedness.”
Our ability to service our indebtedness will depend upon, among other things, the receipt of regulatory approvals for the MyoVista and thereafter our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying the development and sales and marketing of the MyoVista, restructuring or refinancing our indebtedness or seeking additional debt or equity capital or bankruptcy protection. We may not be able to affect any of these remedies on satisfactory terms or at all.
A breach of the terms and conditions of our indebtedness would likely result in an event of default. If an event of default occurs (after any applicable notice and cure periods), the lenders would be entitled to accelerate the repayment of amounts outstanding (including accrued and unpaid interest and fees). Upon such a default, the lenders could also foreclose against any collateral securing such obligations, which consists of all of our assets. In addition to the assets securing our indebtedness, our obligation to pay certain royalties to the inventor of certain specified MyoVista technology and proprietary and intellectual property rights thereto (including
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patents, copyright, trademarks, trade secrets and know-how) is secured by a first lien security interest. If we fail to pay those royalties, the inventor could foreclose on the technology. For more information, please see “Business—Intellectual Property.” If any such foreclosure occurred, we would likely not be able to continue to operate as a going concern.
Our independent registered public accounting firm has expressed 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.
Our auditors’ report on our audited financial statements for Fiscal 2021 contains an explanatory paragraph regarding substantial doubts about our ability to continue as a going concern because we have experienced recurring losses, negative cash flows from operations, limited capital resources, a net shareholders’ deficit, as well as significant debt obligations. These events and conditions, along with other matters, indicate that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern. The perception that we may not be able to continue as a going concern may have a material adverse effect on our share price and our ability to raise new capital (whether it is through the issuance of equity or debt securities or otherwise), enter into critical contractual relations with third parties and otherwise execute our business objectives. 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. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.
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.
Risks Related to Our Business and Industry
Our future success depends on our ability to develop, receive regulatory clearance or approval for, and introduce the MyoVista to the market in a timely manner. If we do not obtain and maintain the regulatory registrations and clearances for our device, we will be unable to market and sell the MyoVista in the United States, Europe or other regions.
In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to, an existing product, we must first receive either approval of a Premarket Approval Application, or PMA, clearance under Section 510(k), or be granted a De Novo classification, in accordance with the Federal Food, Drug, and Cosmetic Act, or the FDCA. For additional information on the PMA or the De Novo classification processes, see “Business—FDA and Other Government Regulation.”
The FDA can delay, limit or deny clearance or approval of a medical device for many reasons, including:
| • | we may not be able to demonstrate to the FDA’s satisfaction that the MyoVista is safe and effective for its intended use; |
| • | the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required; |
| • | the manufacturing process or facilities we use or contract to use may not meet applicable requirements; and |
| • | disruptions at the FDA caused by funding shortages or global health concerns, including the COVID-19 pandemic. |
We previously submitted a De Novo application in late 2019. The FDA determined that the Company would need to undertake a new algorithm validation clinical study using patients gathered from institutions that were
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not part of the studies used for algorithm development. Due to the time of completion of the study, submission of the new validation study results requires a new De Novo submission. The new validation study is currently underway and we intend to submit a new De Novo application for the MyoVista later in the current fiscal year ending April 30, 2023. Additional clinical studies are being conducted as part of the outcome of the previous application process. The De Novo process can be expensive, lengthy and unpredictable. De Novo classification requests require the performance of at least one clinical trial. Despite the time, effort and cost, we may not ultimately be successful in completing the review process and our De Novo application may not be granted by the FDA in a timely manner or at all. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the MyoVista, which may limit the market for the device in the United States.
In order to sell the device in member countries of the European Economic Area, or EEA, our device must comply with the essential requirements of the EU Medical Device Regulation (EU) 2017/745, or EU MDR. Compliance with these requirements is a prerequisite to be able to affix the Conformité Européene, or CE, mark to our device, without which it cannot be sold or marketed in the EEA. For additional information on the PMA or the De Novo classification processes, see “Business—FDA and Other Government Regulation.”
The Company previously achieved a CE Mark under the EU Medical Devices Directive or MDD in February 2017. The Medical Device Directive was established on June 14, 1993 but the EU Medical Devices Directive, or MDD regulatory framework, has since been replaced by EU MDR. In order to sell in member countries of the European Economic Area, or EEA, our device must now comply with the essential requirements of the newer, updated regulatory framework or EU MDR. In October 2021, the Company submitted the documentation required to establish compliance with EU MDR. The submission of the technical file is currently under review and our CE Mark issued under MDD lapsed in February 2022. If the technical file submission is found to comply with the new requirements, a certificate of conformity will be issued to verify the Company’s compliance with EU MDR. An updated CE mark certificate under EU MDR will entitle the Company to market the MyoVista in the European Economic Area as well as other countries for which CE Mark represents an appropriate regulatory standard.
Sales of our device outside of the United States and the EEA are also subject to foreign regulatory requirements that vary widely from country to country. Approval procedures vary among countries and can involve additional testing. Complying with foreign regulatory requirements, including obtaining registrations, clearances or approvals, can be expensive and time-consuming, and we may not receive regulatory clearances or approvals in each country in which we plan to market our device or we may be unable to do so on a timely basis. If we modify our device, we may need to apply for additional regulatory clearances or approvals before we are permitted to sell the modified device. In addition, we may not continue to meet the quality and safety standards required to maintain the authorizations that we have received. If we are unable to maintain our authorizations in a particular country, we will no longer be able to sell the applicable device in that country.
Regulatory clearance or approval by the FDA does not ensure registration, clearance or approval by regulatory authorities in other countries, and registration, clearance or approval by one or more foreign regulatory authorities does not ensure registration, clearance or approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining registration or regulatory clearance or approval in one country may have a negative effect on the regulatory process in others.
Our success will be dependent upon physician acceptance.
Our future growth and profitability largely depend on our ability to increase physician awareness of the MyoVista and on the willingness of hospitals, physicians, patients and/or third-party payors to use it. These parties may not use our device unless they are able to determine, based on experience, clinical data, medical society recommendations and other analyses, that our device is safe, effective and cost-effective, on a stand-alone
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basis and relative to our competitors’ products. If we fail to deliver a device that physicians want to use, our revenue potential, financial results and business may be significantly harmed. Even if we are able to deliver a superior device and are able to raise physician awareness of our device through effective marketing, physicians tend to be slow in making changes to their medical treatment practices and may be hesitant to select our device as their preferred diagnostic device for a variety of reasons, including:
| • | long-standing relationships with competing companies and distributors that sell competing devices; |
| • | lack of experience with the MyoVista and concerns that we are new to market; |
| • | lack or perceived lack of sufficient clinical evidence, including long-term data, supporting safety or clinical benefits; and |
| • | time commitment and skill development that may be required to gain familiarity and proficiency with the MyoVista. |
Physicians play a significant role in determining the course of a patient’s treatment and, as a result, the type of treatment that will be utilized and provided to a patient. We intend to focus our sales, marketing and education efforts on educating cardiologists and any other potential referring physicians. However, if physicians do not perceive the MyoVista to be useful and reliable, we may not be able to attract or retain customers.
If third-party payors do not provide adequate coverage and reimbursement for the use of the MyoVista, our revenue will be negatively impacted.
The MyoVista does not currently have coverage and reimbursement approved for third-party payor coverage or reimbursement. Such reimbursement, if and when approved, will vary based on the identity of the third-party.
Our ability to successfully launch sales of the MyoVista into the U.S. and achieve market acceptance of the MyoVista depends, in significant part, on the availability of adequate financial coverage and reimbursement from third-party payors, including governmental payors (such as the Medicare and Medicaid programs in the U.S.), managed care organizations and private health insurers. Third-party payors decide which treatments they will cover and then establish reimbursement rates for those treatments. If approved and successfully marketed, we expect that the MyoVista may be purchased by hospitals and other providers who will then seek reimbursement from third-party payors for the use of the MyoVista and, in many cases, the decision whether or not to purchase the MyoVista will be dependent upon whether or not such purchaser will be able to seek reimbursement.
Increasingly, third-party payors are also examining the cost effectiveness of products, in addition to their safety and efficacy, when making coverage and payment decisions. Third-party payors have also instituted initiatives to limit the growth of healthcare costs using, for example, price regulation or controls and competitive pricing programs. Some third-party payors also require demonstrated superiority, on the basis of randomized clinical trials, or pre-approval of coverage, for new or innovative devices before they will reimburse healthcare providers who use such devices. Additionally, there is no uniform policy for coverage and reimbursement in the U.S., and coverage and reimbursement can differ significantly from payor to payor. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, but also have their own methods and approval process apart from the Medicare coverage determination process. It is uncertain whether the MyoVista will be viewed as sufficiently cost effective to warrant coverage and adequate reimbursement levels for use in any given jurisdiction.
We expect to engage with the American Medical Association, or AMA, and American College of Cardiology to gain approval for use of the standard ECG reimbursement coding for the conventional ECG functions of the MyoVista. We will also seek to have private third-party payors provide reimbursement for the wavECG proprietary algorithm, or the MyoVista Algorithm. We cannot assure you that these efforts will be successful to our obtaining third-party payor reimbursement. The lack of reimbursement from third-party payors
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would have an adverse effect on our revenues, which could have an adverse effect on our business, financial condition and results of operations.
Reimbursement systems in international markets vary significantly by country and, within some countries, by region and reimbursement approvals must be obtained on a country-by-country or a region-by-region basis. In certain international markets, a product must be approved for reimbursement before it can be approved for sale in that country. Furthermore, many international markets have government-managed healthcare systems that control reimbursement for new devices. In most markets, there are private insurance systems as well as government-managed systems. For more information regarding the process of receiving reimbursement approval, please see “Business—Market Strategy—Reimbursement.”
We will be dependent upon third-party manufacturers and suppliers, making us vulnerable to supply shortages and problems, increased costs and quality or compliance issues, any of which could harm our business.
The MyoVista consists mostly of off-the-shelf components and once we are able to sell the MyoVista, we will need to rely on third parties to supply components and assemble the components into a completed device. Any third-party supplier that we work with, and may eventually depend on, could encounter problems during sourcing and manufacturing that could delay or impede such supplier’s ability to meet our requirements. Any reliance on these third-party suppliers will also subjects us to other risks that could harm our business, including:
| • | we are not currently a major customer of any of our suppliers, and these suppliers may therefore give other customers’ needs higher priority than ours; |
| • | we may not be able to obtain an adequate supply in a timely manner or on commercially reasonable terms; |
| • | our suppliers may make errors in manufacturing that could negatively affect the efficacy or safety of our device or cause delays in shipment; |
| • | we may have difficulty locating and qualifying alternative suppliers; |
| • | switching components or suppliers may require product redesign and possibly additional future submission(s) to the FDA or other similar foreign regulatory agencies, which could impede or delay our commercial activities; |
| • | one or more of our suppliers may be unwilling or unable to supply components of our device; |
| • | the occurrence of a fire, natural disaster or other catastrophe impacting one or more of our suppliers may affect their ability to deliver products to us in a timely manner; and |
| • | our suppliers may encounter financial or other business hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements. |
We may not be able to quickly establish additional or alternative suppliers if necessary, in part because we may need to undertake additional activities and incur additional expenses to establish such suppliers as required by the regulatory approval process. Any interruption or delay in obtaining products from our third-party suppliers, or our inability to obtain products from qualified alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to switch to competing products. Given our reliance on certain suppliers, we may be susceptible to supply shortages while looking for alternate suppliers.
Medical device development is costly and involves continual technological change in order to remain competitive which may render the MyoVista obsolete.
Even if we are successful in obtaining regulatory clearance or approval for the MyoVista and are able to launch sales of the MyoVista into the U.S., our future success will depend on our ability to enhance the
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MyoVista as well as develop or acquire new technologies to keep pace with technological developments, evolving industry standards, as well as responses to changes in customer needs and expectations. The market for medical devices is unique due to factors such as: rapid technological change, medical advances, short device lifecycles, changing regulatory requirements and evolving industry standards.
Any one of these factors could either reduce potential demand for the MyoVista or require substantial resources and expenditures for, among other things, research, design and development, to avoid technological or market obsolescence. A failure to adequately develop enhancements and improvements to the MyoVista or acquire new devices that will address changing technologies and customer requirements adequately, or to introduce such devices on a timely basis, may have a material adverse effect on our business, financial condition and results of operations. We might have insufficient financial resources to improve the MyoVista at a competitive rate, if at all. Technological advances by one or more competitors or future entrants into the field may result in the MyoVista becoming non-competitive or obsolete, which may adversely affect our business and results of operations.
We face intense competition in the market and, as a result, we may be unable to effectively compete in our industry.
Many of our competitors, such as General Electric Company, or GE, Koninklijke Philips N.V., or Philips, and Hill-Rom Holdings, Inc., or Hill-Rom, have long histories and strong reputations within the industry. These competitors have significantly greater brand recognition, and financial and human resources than we do. They also have more experience and capabilities in researching and developing diagnostic devices, obtaining and maintaining regulatory clearances and other requirements, manufacturing and marketing those products than we do. There is a significant risk that we may be unable to overcome the advantages held by our competition, and our inability to do so could lead to the failure of our business and the loss of your investment. In addition, we may be unable to develop additional products in the future or to keep pace with developments and innovations in the market and lose market share to our competitors.
Medical device markets, and more specifically ECG technologies and solutions markets, are competitive, which can lead to, among other things, price reductions, longer selling cycles, lower product margins, loss of market share and additional working capital requirements. To succeed, we must, among other critical matters, gain consumer acceptance for our device as compared to other solutions currently available in the cardiac screening market or advanced cardiac screening offering. For more information regarding risks related to our dependence on physician acceptance, see “—Our success will be dependent upon physician acceptance.”
If our competitors offer significant discounts on certain products and solutions, we may need to lower our prices or offer other favorable terms in order to compete successfully. Any broad-based changes to our prices and pricing policies could make it difficult to generate revenues or cause our revenues to decline. Moreover, if our competitors develop and market products and solutions that are more effective or desirable than products and solutions than we may develop, we may not convince our customers to use our products and solutions. Any such changes would likely reduce our commercial opportunity and revenue potential and could materially adversely impact our operating results.
If we are not able to attract and retain highly skilled managerial, scientific, technical and marketing personnel, we may not be able to implement our business model successfully.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management as well as clinical and scientific personnel to implement our business strategy. We are highly dependent upon our senior management, our employees, consultants and scientific and medical collaborators. Our management team must be able to act decisively to apply and adapt our business model in the rapidly changing markets in which we will compete. In addition, we rely upon technical and scientific employees or third-party contractors to effectively establish, manage and grow our business. In order to attract and retain
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highly skilled managerial, sales, scientific and technical personnel, we may need to pay them higher compensation or fees than currently expected and such higher compensation may have a negative effect on our operating results. Competition for experienced, high-quality personnel in the medical device field is intense. Our failure to hire and retain quality personnel on acceptable terms could impair our ability to develop new products and services and manage our business effectively.
We may need to expand our organization and we may experience difficulties in recruiting additional employees and consultants, which could disrupt our operations.
As our development and marketing plans and strategies develop, we will likely need additional managerial, operational, sales, marketing, financial, legal and other resources. The competition for qualified personnel in the medical device industry is intense. Due to this intense competition, we may be unable to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel.
Our management may need to divert its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require capital expenditures and may divert financial resources from other projects, such as the development of additional medical device products. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to market and sell medical device products and compete effectively will depend, in part, on our ability to effectively manage any future growth.
Our management team has limited experience managing a public company.
Some members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies in the United States. Our management team may not successfully or efficiently manage our transition to being a public company due to significant regulatory oversight and reporting obligations under the U.S. federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, any committees of our Board of Directors, or as executive officers and/or adversely affect our business, financial condition, results of operations and prospects.
We manage our business through a small number of employees and key consultants.
As of June 1, 2022, we had 13 full-time employees and several independent consultants. Our future growth and success depend, to a large extent, on the continued service of members of our current management. Any of our employees and contractors may leave our Company or discontinue services at any time. Our operational success will substantially depend on the continued employment of our management, including our executive officers, technical staff and other key personnel. We do not currently maintain key person life insurance policies on any of our employees. The loss of key personnel may have an adverse effect on our operations and financial performance and adversely affect our ability to execute our business plan.
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We expect to conduct business outside of the U.S. and doing so exposes us to additional business, regulatory, political, operational, financial and economic risks.
We plan to conduct business outside of the U.S. which will therefore subject us to a number of risks, including, but not limited to, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses.
Since we anticipate conducting business outside of the U.S., we anticipate that we will be subject to rules and regulations in non-U.S. jurisdictions. In some countries, pricing may be subject to governmental control under certain circumstances. In these countries, pricing negotiations with governmental agencies can take considerable time after the receipt of marketing approval for a medical device. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of the MyoVista to other available products. If reimbursement of our device is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
We are subject to certain U.S. and foreign anticorruption, anti-money laundering, export control, sanctions and other trade laws and regulations. We could face serious consequences for any violations of such laws and regulations.
Among other matters, U.S. and foreign anticorruption, anti-money laundering, export control, sanctions and other trade laws and regulations, which are collectively referred to as Trade Laws, prohibit companies and their employees, agents, clinical research organizations, legal counsel, accountants, consultants, contractors and other partners from authorizing, promising, offering, providing, soliciting or receiving, directly or indirectly, corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities and other organizations. We also expect our non-U.S. activities to increase over time. We plan to engage third parties for clinical trials and/or to obtain necessary permits, licenses, patent registrations and other regulatory approvals, and we can be held liable for the corrupt or other illegal activities of our personnel, agents or partners, even if we do not explicitly authorize or have prior knowledge of such activities.
We could become subject to product liability, warranty or similar claims and product recalls that could be expensive, divert management’s attention and harm our business reputation and financial results.
Our business exposes us to an inherent risk of potential product liability, warranty or similar claims and product recalls. The medical device industry has historically been litigious, and we face financial exposure to product liability, warranty or similar claims if the use of the MyoVista were to cause or contribute to injury or death. There is also the possibility that defects in the design or manufacture of the MyoVista may necessitate a product recall. Although we plan to maintain product liability insurance, the coverage limits of these policies may not be adequate to cover future claims. In the future, we may be unable to maintain product liability insurance on acceptable terms or at reasonable costs and such insurance may not provide us with adequate coverage against potential liabilities. A product liability claim, regardless of merit or ultimate outcome, or any product recall could result in substantial costs to us, damage to our reputation, customer dissatisfaction and frustration and a substantial diversion of management attention. A successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
Our business and operations would suffer in the event of computer system failures, cyber-attacks or a deficiency in our cybersecurity.
Despite the implementation of security measures and safeguards intended to secure our data against impermissible access and to preserve the integrity and confidentiality of our data, our internal computer systems,
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and those of third parties on which we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur material legal claims and liability, including under data privacy and protection laws, damage to our reputation, disruption to our operations, and the further development of the MyoVista. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology, or IT, and infrastructure, we may be vulnerable to cyber-attacks by hackers or viruses or breached due to employee error, malfeasance or other disruptions. We rely extensively on IT systems, networks and services, including internet sites, data hosting and processing facilities and tools, physical security systems and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third parties or their vendors, to assist in conducting our business. A significant breakdown, invasion, corruption, destruction or interruption of critical information technology systems or infrastructure, by our workforce, others with authorized access to our systems or unauthorized persons could negatively impact operations. The ever-increasing use and evolution of technology, including cloud-based computing, creates opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our or our third-party providers’ systems, portable media or storage devices. We could also experience a business interruption, theft of confidential information or reputational damage from industrial espionage attacks, malware or other cyber-attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers. Although the aggregate impact on our operations and financial condition has not been material to date, we may become the target of events of this nature and expect them to continue as cybersecurity threats have been rapidly evolving in sophistication and becoming more prevalent in the industry. There can be no assurance, however, that our efforts will prevent breakdowns or breaches to our or our third-party providers’ databases or systems that could materially and adversely affect our business, financial condition and results of operations.
Our business may be impacted by changes in general economic conditions.
Our business is subject to risks arising from changes in domestic and global economic conditions, including adverse economic conditions in markets in which we operate, which may harm our business. If our future customers significantly reduce spending in areas in which our technology and products are utilized, or prioritize other expenditures over our technology and products, our business, financial condition, results of operations and prospects would be materially adversely affected.
Disruption to the global economy could also result in a number of follow-on effects on our business, including a possible slow-down resulting from lower customer expenditures; inability of customers to pay for products on time, if at all; more restrictive export regulations which could limit our potential customer base; negative impact on our liquidity, financial condition and share price, which may impact our ability to raise capital in the market, obtain financing and secure other sources of funding in the future on terms favorable to us.
In addition, the occurrence of catastrophic events, such as hurricanes, storms, earthquakes, tsunamis, floods, medical epidemics and other catastrophes that adversely affect the business climate in any of our markets could have a material adverse effect on our business, financial condition and results of operations. Some of our operations are located in areas that may be in the future, susceptible to such occurrences.
We face business disruption and related risks resulting from the outbreak of the COVID-19 pandemic, which could have a material adverse effect on our business and results of operations.
COVID-19 continues to mutate which may reduce the efficacy of treatments currently available and the final implications of the pandemic are difficult to estimate at this stage; however, it is clear that it has affected the
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lives of a large portion of the global population. At this time, the pandemic has caused states of emergency to be declared in various countries, travel restrictions to be imposed globally and quarantines established in certain jurisdictions.
COVID-19 infection of our workforce could result in a temporary disruption in our business activities. The spread of an infectious disease, including COVID-19, may also result in the inability of our manufacturers to deliver components or finished products on a timely basis and may also result in the inability of our suppliers to deliver the parts required by our manufacturers to complete manufacturing of components or finished products. In addition, governments may divert spending from other budgeted resources as they seek to reduce and/or stop the spread of COVID-19. Such events may result in a period of business and manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
Risks Related to Product Development and Regulatory Approval
Our device and operations are subject to extensive government regulation and oversight both in the U.S. and abroad, and our failure to comply with applicable requirements could harm our business.
The MyoVista is subject to extensive regulation in the U.S. and elsewhere, including by the FDA and its foreign counterparts, the U.S. Department of Justice, or the DOJ, and the HHS. The FDA and foreign regulatory agencies regulate, among other things, with respect to our device: design, development and manufacturing; non-clinical and clinical testing, safety, efficacy, labeling, content and language of instructions for use and storage; clinical trials; product safety; establishment registration and device listing; marketing, sales and distribution; pre-market clearance and approval; conformity assessment procedures; record keeping procedures; advertising and promotion; recalls and field safety corrective actions; post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to occur, could lead to death or serious injury; post-market approval studies; and product import and export.
The regulations our product is subject to are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales for any approved, cleared or authorized product. FDA enforces these regulatory requirements through, among other means, periodic unannounced inspections. We do not know whether we will be found compliant in connection with any future regulatory inspections. Moreover, the FDA and state authorities have broad enforcement powers. Failure to comply with applicable regulations could jeopardize our ability to sell our future products, if cleared or approved, and result in enforcement actions such as: adverse publicity; warning, untitled letters, or it has come to our attention letters; fines; injunctions; consent decrees; civil penalties; customer notifications; repair, replacement, or refunds; termination of distribution; recalls or seizures of products; administrative detention of medical devices believed to be adulterated or misbranded; delays in the introduction of products into the market; operating restrictions; total or partial suspension of production; refusal to grant future clearances or approvals for new products, new intended uses or modifications to our device; withdrawals or suspensions of regulatory clearances or approvals in place, resulting in prohibitions on sales of our device; and in the most serious cases, criminal prosecution or penalties. The occurrence of any of these events would have a material adverse effect on our business, financial condition and results of operations and could result in shareholders losing their entire investment.
If and when our products are ready for sales launch into the U.S., modifications to our marketed products may require new 510(k) clearances, or may require us to cease marketing or recall the modified products until clearances or approvals are obtained.
If a De Novo classification is granted, any future modifications to the device may require us to submit a 510(k) premarket notification or obtain FDA approval prior to implementing the change. The FDA requires every
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manufacturer to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new clearance or approval is necessary. The FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We may make modifications or add additional features in the future that we believe, based on FDA’s regulatory framework, do not require a new 510(k) clearance or PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or even a PMA for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant enforcement actions. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or cancelled, which could adversely affect our ability to grow our business.
Clinical studies may be necessary to support future product submissions to the FDA. The clinical trial process is lengthy and expensive with uncertain outcomes, and often requires the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical studies will prevent us from launching sales of modified or new products into the U.S. and will adversely affect our business, operating results and prospects.
Initiating and completing clinical studies necessary to support any future PMA or De Novo applications, and additional safety and efficacy data beyond that typically required for a 510(k) clearance, for our possible future product candidates, will be time-consuming and expensive and the outcome uncertain. Moreover, the results of early clinical studies are not necessarily predictive of future results, and any product we advance into clinical studies may not have favorable results in later clinical studies. The results of preclinical studies and clinical studies of our device conducted to date and ongoing or future studies and studies of our current, planned or future products may not be predictive of the results of later clinical studies, and interim results of a clinical trial do not necessarily predict final results. Our interpretation of data and results from our clinical studies do not ensure that we will achieve similar results in future clinical studies. In addition, preclinical and clinical data are often susceptible to various interpretations and analyses, and many companies that have believed their products performed satisfactorily in preclinical studies and earlier clinical studies have nonetheless failed to replicate results in later clinical studies. Products in later stages of clinical studies may fail to show the desired safety and efficacy despite having progressed through nonclinical studies and earlier clinical studies. Failure can occur at any stage of clinical testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical testing in addition to those we have planned.
The initiation and completion of any of clinical studies may be prevented, delayed, or halted for numerous reasons. We may experience delays in our ongoing clinical studies for a number of reasons, which could adversely affect the costs, timing or successful completion of our clinical studies, including related to the following:
| • | we may be required to submit an IDE application to the FDA, which must become effective prior to commencing certain human clinical studies of medical devices, and the FDA may reject our IDE application and notify us that we may not begin clinical studies; |
| • | regulators and other comparable foreign regulatory authorities may disagree as to the design or implementation of our clinical studies; |
| • | regulators and/or an Institutional Review Board, or IRB, or other reviewing bodies may not authorize us or our investigators to commence a clinical trial, or to conduct or continue a clinical trial at a prospective or specific trial site; |
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| • | we may not reach agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
| • | clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical studies or abandon product development programs; |
| • | the number of subjects or patients required for clinical studies may be larger than we anticipate, enrollment in these clinical studies may be insufficient or slower than we anticipate, and the number of clinical studies being conducted at any given time may be high and result in fewer available patients for any given clinical trial, or patients may drop out of these clinical studies at a higher rate than we anticipate; |
| • | our third-party contractors, including those manufacturing products or conducting clinical studies on our behalf, may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; |
| • | we might have to suspend or terminate clinical studies for various reasons, including a finding that the subjects are being exposed to unacceptable health risks; |
| • | we may have to amend clinical trial protocols or conduct additional studies to reflect changes in regulatory requirements or guidance, which we may be required to submit to an IRB and/or regulatory authorities for re-examination; |
| • | regulators, IRBs, or other parties may require or recommend that we or our investigators suspend or terminate clinical research for various reasons, including safety signals or noncompliance with regulatory requirements; |
| • | the cost of clinical studies may be greater than we anticipate; |
| • | clinical sites may not adhere to the clinical protocol or may drop out of a clinical trial; |
| • | we may be unable to recruit a sufficient number of clinical trial sites; |
| • | regulators, IRBs, or other reviewing bodies may fail to approve or subsequently find fault with our manufacturing processes or facilities of third-party manufacturers with which we enter into agreement for clinical and commercial supplies, the supply of devices or other materials necessary to conduct clinical studies may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; |
| • | approval policies or regulations of the FDA or applicable foreign regulatory agencies may change in a manner rendering our clinical data insufficient for approval; and |
| • | our current or future products may have undesirable side effects or other unexpected characteristics. |
Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical studies may also ultimately lead to the denial of regulatory approval of our product candidates.
Clinical studies must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and IRBs at the medical institutions where the clinical studies are conducted. Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical studies and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and able to comply with the eligibility and exclusion criteria for participation in the
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clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical studies if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our device or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts.
We depend on our collaborators and on medical institutions and CROs to conduct our clinical studies in compliance with good clinical practice, or GCP, requirements. To the extent our collaborators or the CROs fail to enroll participants for our clinical studies, fail to conduct the study to GCP standards or are delayed for a significant time in the execution of studies, including achieving full enrollment, we may be affected by increased costs, program delays or both. In addition, clinical studies that are conducted in countries outside the United States may subject us to further delays and expenses as a result of increased shipment costs, additional regulatory requirements and the engagement of non-U.S. CROs, as well as expose us to risks associated with clinical investigators who are unknown to the FDA, and different standards of diagnosis, screening and medical care.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical studies. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted sales launch of our device in the U.S. or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical studies, the FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
Medical device development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies may not be predictive of future study results.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical study process. The results of preclinical studies and early clinical studies of our product candidates may not be predictive of the results of later-stage clinical studies. Product candidates that have shown promising results in early-stage clinical studies may still suffer significant setbacks in subsequent advanced clinical studies. There is a high failure rate for medical devices proceeding through clinical studies, and product candidates in later stages of clinical studies may fail to show the desired sensitivity and specificity parameters despite having progressed satisfactorily through preclinical studies and initial clinical studies. A number of companies in the medical device industry have suffered significant setbacks in advanced clinical studies due to insufficient sensitivity and specificity or adverse safety profiles, notwithstanding promising results in earlier studies. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses. We do not know whether any pivotal studies we may conduct will demonstrate consistent or adequate sensitivity and specificity sufficient to obtain regulatory approval to market our product candidates.
If the third parties on which we rely to conduct our clinical studies and to assist us with pre-clinical development do not perform as required or expected, we may be delayed or unable to obtain regulatory clearance or approval for sales launch of our device in the U.S.
We may not have the ability to independently conduct our pre-clinical and clinical studies for our future products and we may need to rely on third parties, such as CROs, medical institutions, clinical investigators and contract laboratories to conduct such studies. We would depend on our collaborators and on medical institutions and CROs to conduct our clinical studies in compliance with GCP requirements and other regulatory requirements. To the extent our collaborators or the CROs fail to enroll participants for our clinical studies, fail to conduct the study to GCP standards or are delayed for a significant time in the execution of studies, including achieving full enrollment, including on account of the outbreak of infectious disease, such as the COVID-19
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pandemic, or otherwise, we may be affected by increased costs, program delays or both, any resulting data may be unreliable or unusable for regulatory purposes, and we may be subject to enforcement action.
If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical studies may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully launch sales of, our device on a timely basis, if at all, and our business, operating results and prospects may be adversely affected.
We may encounter substantial delays in our clinical studies, or we may fail to demonstrate specificity and sensitivity to the satisfaction of applicable regulatory authorities.
Before obtaining marketing approval from regulatory authorities for sales launch of the MyoVista into the U.S., we must conduct extensive clinical studies to demonstrate its specificity and sensitivity. Clinical testing is expensive, time consuming and uncertain as to outcome. We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. Our clinical studies involve adults and, before we are permitted to enroll them in clinical studies, we must demonstrate that although the research may pose a risk to the subjects, there is a prospect of direct benefit to each patient. We must do so to the satisfaction of each research site’s IRB. If we fail to adequately demonstrate this to the satisfaction of the relevant IRB, it will decline to approve the research, which could have significant adverse consequences for us.
A failure of one or more clinical studies can occur at any stage of testing, and our future clinical studies may not be successful. Events that may prevent successful or timely completion of clinical development include but are not limited to:
| • | delays in reaching a consensus with regulatory agencies on study design; |
| • | delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical study sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical study sites; |
| • | delays in obtaining required IRB approval at each clinical study site; |
| • | imposition of a clinical hold by regulatory agencies, after review of an IDE application, or equivalent application, or an inspection of our clinical study operations or study sites; |
| • | delays in recruiting suitable patients to participate in our clinical studies; |
| • | difficulty collaborating with patient groups and investigators; |
| • | failure by our CROs, other third parties or us to adhere to clinical study requirements; |
| • | failure to perform in accordance with the FDA’s GCP requirements, or applicable regulatory guidelines in other countries; |
| • | delays in having patients complete participation in a study; |
| • | patients dropping out of a study; |
| • | occurrence of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits; |
| • | changes in regulatory requirements and guidance that require amending or submitting new clinical protocols; |
| • | the cost of clinical studies of our product candidates being greater than we anticipate; |
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| • | clinical studies of our product candidates producing negative or inconclusive results, which may result in us deciding, or regulators requiring us, to conduct additional clinical studies or abandon product development programs; and |
| • | delays in manufacturing, testing, releasing, validating or importing/exporting sufficient stable quantities of our product for use in clinical studies or the inability to do any of the foregoing. |
Any inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our ability to generate revenue. We may also be required to conduct additional safety, efficacy and comparability studies before we will be allowed to start clinical studies. Clinical study delays could also shorten any periods during which our device has patent protection and may allow our competitors to market products in the U.S. before we do, which could impair our ability to successfully launch sales of and market our product candidates and may harm our business and results of operations.
The results of future clinical studies may not support additional or new claims for future products or may result in the discovery of adverse side effects.
We cannot be certain that the results of our future clinical studies will support our claims for the MyoVista or any future product claims or that the FDA will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical studies does not ensure that later clinical studies will be successful, and we cannot be sure that the later studies will replicate the results of prior studies and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical studies will delay the filing of our product submissions and, ultimately, our ability to launch sales of our product candidates and generate revenues. It is also possible that patients enrolled in clinical studies will experience adverse side effects that are not currently part of the future product’s profile.
Failure to comply with post-marketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw a product from the market.
If and when we receive regulatory clearance or approval of our product, we will remain subject to ongoing and pervasive regulatory requirements governing, among other things:
| • | the manufacture—as set forth in the FDA’s Quality System Regulation, or QSR, requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process; |
| • | labeling and marketing regulations, which require that promotion is truthful, not misleading, fairly balanced and provides adequate directions for use and that all claims are substantiated, and also prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; FDA guidance on off-label dissemination of information and responding to unsolicited requests for information;; |
| • | medical device reporting, sale, promotion, import, export, registration, and listing of devices. |
| • | clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of one of our cleared devices; |
| • | medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur; |
| • | correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health; |
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| • | complying with the new federal law and regulations requiring Unique Device Identifiers, or UDI, on devices and also requiring the submission of certain information about each device to the FDA’s Global Unique Device Identification Database, or GUDID; |
| • | the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and |
| • | post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device. |
The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. Even after we have obtained the proper regulatory clearance or approval to market a device, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the following sanctions:
| • | adverse publicity; |
| • | “it has come to our attention” letters, untitled letters or warning letters; |
| • | fines, injunctions, consent decrees and civil penalties; |
| • | recalls, termination of distribution, administrative detention, or seizure of our device; |
| • | customer notifications or repair, replacement or refunds; |
| • | operating restrictions or partial suspension or total shutdown of production; |
| • | delays in or refusal to grant our requests for future clearances or approvals or foreign marketing authorizations of new products, new intended uses, or modifications to existing products; |
| • | withdrawals or suspensions of product clearances or approvals, resulting in prohibitions on sales of our device; |
| • | FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and |
| • | criminal prosecution. |
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and results of operations.
In addition, the FDA or state or foreign authorities may change their clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may require, prevent or delay clearance or approval of our future products under development on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain new clearances or approvals, increase the costs of compliance or restrict our ability to maintain any approvals we are able to obtain.
The MyoVista must be manufactured in accordance with federal, state and foreign regulations, and we could be forced to recall our devices or terminate production if we fail to comply with these regulations.
The methods used in, and the facilities used for, the manufacture of our device must comply with the FDA’s Quality System Regulation, or QSR, which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices. As manufacturers of electron radiation-emitting products, we are also responsible for compliance with the radiological health regulations and certain radiation safety performance standards.
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Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which include the facilities of subcontractors. Our device is also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.
Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our device. In addition, failure to comply with applicable FDA or state or foreign requirements or later discovery of previously unknown problems with our device or manufacturing processes could result in, among other things: warning letters or untitled letters; fines, injunctions or civil penalties; suspension or withdrawal of approvals; seizures or recalls of our device; total or partial suspension of production or distribution; administrative or judicially imposed sanctions; the FDA’s refusal to grant pending or future clearances or approvals for our device; clinical holds; refusal to permit the import or export of our device; and criminal prosecution of us, our suppliers or our employees.
Any of these actions could significantly and negatively affect supply of our device. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and experience reduced sales and increased costs.
The misuse or off-label use of our device may harm our reputation in the marketplace, could potentially cause harm to the patient and that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
Advertising and promotion of our future products that obtains approval in the United States may be heavily scrutinized by the FDA, the DOJ, HHS, state attorneys general, members of Congress, and the public. In addition, advertising and promotion of any future product that obtains approval outside of the United States will be heavily scrutinized by comparable foreign regulatory authorities.
We expect that, if cleared or approved, the MyoVista will also be cleared by the requisite regulatory authorities for specific indications. We expect to train our marketing personnel and direct sales force to not promote our devices for uses outside of the FDA-approved indications for use, known as “off-label uses.” Physicians may use our devices off-label, when in the physician’s independent professional medical judgment, he or she deems it appropriate as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. There may be increased risk of injury to patients if physicians attempt to use our devices off-label. Furthermore, the use of our devices for indications other than those approved by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among healthcare providers and patients.
If the FDA or any state or foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of a warning letter, an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties, which could have an adverse impact on our reputation and financial results. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations. We may become subject to such actions and, if we are not successful in defending against such actions, those actions may have a material adverse effect on our business, financial condition and results of operations. Equivalent laws and potential consequences exist in foreign jurisdictions.
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In addition, if our device is cleared or approved, healthcare providers may misuse our device or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our devices are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.
Our device may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our device, or a recall of our device either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.
If the MyoVista receives clearance, authorization, or approval, we will be subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our device may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA or other regulatory bodies could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance or approval, seizure of our device or delay in clearance or approval of future products.
The FDA and foreign regulatory bodies have the authority to require the recall of marketed products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new clearances or approvals for the device before we may market or distribute the corrected device. Seeking such clearances or approvals may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections for our device in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.
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The MyoVista may in the future be subject to product recalls that could harm our reputation, business and financial results.
Medical devices can experience performance problems in the field that require review and possible corrective action. The occurrence of component failures, manufacturing errors, software errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary recall by the device manufacturer, in particular when such deficiencies may endanger health. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our device in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. Product recalls may divert management attention and financial resources, expose us to product liability or other claims, harm our reputation with customers and adversely impact our business, financial condition and results of operations.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
Many federal, state and foreign healthcare laws and regulations apply to medical devices. We may be subject to certain federal and state regulations, including the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, offering, receiving, or paying any remuneration, directly or indirectly, in cash or in kind, to induce or reward purchasing, ordering or arranging for or recommending the purchase or order of any item or service for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid; the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of, or payment for, healthcare benefits, items or services; the federal Civil Monetary Penalties Law, which authorizes the imposition of substantial civil monetary penalties against an entity that engages in activities including, among others (1) knowingly presenting, or causing to be presented, a claim for services not provided as claimed or that is otherwise false or fraudulent in any way; (2) arranging for or contracting with an individual or entity that is excluded from participation in federal healthcare programs to provide items or services reimbursable by a federal healthcare program; (3) violations of the federal Anti-Kickback Statute; or (4) failing to report and return a known overpayment; the federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry, in connection with the delivery of or payment for healthcare benefits, items, or services; the federal civil False Claims Act, or the FCA, which prohibits, among other things, knowingly presenting, or causing to be presented claims for payment of government funds that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government; and other federal and state false claims laws. The FCA prohibits anyone from knowingly presenting, conspiring to present, making a false statement in order to present, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. This law also prohibits anyone from knowingly underpaying an obligation owed to a federal program. Increasingly, U.S. federal agencies are requiring nonmonetary remedial measures, such as corporate integrity agreements in FCA settlements. The DOJ announced in 2016 its intent to follow the “Yates Memo,” taking a far more aggressive approach in pursuing individuals as FCA defendants in addition to corporations.
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The majority of states also have statutes similar to the federal Anti-Kickback Statute and false claims laws that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, that apply regardless of whether the payor is a government entity or a private commercial entity. The Federal Open Payments, or Physician Payments Sunshine Act, program requires manufacturers of drugs, medical devices, and biologics for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program, to track and report annually to the federal government (for disclosure to the public) certain payments and other transfers of value made to physicians and teaching hospitals as well as disclosure of payments and other transfers of value provided to physicians and teaching hospitals, and ownership and investment interests in the manufacturer held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations. Our failure to appropriately track and report Sunshine Act covered payments to the government could result in civil fines and penalties, which could adversely affect the results of our operations. In addition, several U.S. states and localities have enacted legislation requiring medical device companies to establish marketing compliance programs, file periodic reports with the state, and/or make periodic public disclosures on sales, marketing, pricing, clinical trials, and other activities. Other state laws prohibit certain marketing-related activities including the provision of gifts, meals or other items to certain healthcare providers. Many of these laws and regulations contain ambiguous requirements that government officials have not yet clarified. Given the lack of clarity in the laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent federal and state laws and regulations.
The medical device industry has been under heightened scrutiny as the subject of government investigations and enforcement actions involving manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business, including arrangements with physician consultants. If our operations or arrangements are found to be in violation of such governmental regulations, we may be subject to civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment of our operations. All of these penalties could adversely affect our ability to operate our business and our financial results.
Legislative or regulatory reforms in the United States or the European Union may make it more difficult and costly for us to obtain regulatory clearances or approvals for our device or to manufacture, market or distribute our device after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices. In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared products on a timely basis. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of planned or future products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our device. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to obtain clearance for or approval of, manufacture, market or distribute our device. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require: additional testing prior to obtaining clearance or approval; changes to manufacturing methods; recall, replacement or discontinuance of our device; or additional record keeping.
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be promulgated that could prevent, limit or delay regulatory clearance or approval of our future products. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation
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or administrative action, either in the United States or abroad. For example, certain forthcoming policies of the Biden administration could impact our business and industry. It is difficult to predict what policies may be implemented or how any such executive actions will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If executive actions or new policies impose restrictions on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval or clearance that we may have obtained and we may not achieve or sustain profitability.
The European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the EU Medical Devices Directive. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation. Among other things, the Medical Devices Regulation:
| • | strengthen the rules on placing devices on the market and reinforce surveillance once they are available; |
| • | establish explicit provisions on manufacturers’ responsibilities for follow-up regarding the quality, performance and safety of devices placed on the market; |
| • | improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number; |
| • | set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and |
| • | strengthened rules for the assessment of certain high-risk devices, which may have to undergo an additional check by experts before they are placed on the market. |
These modifications may have an effect on the way we conduct our business in the EEA.
Healthcare legislative and regulatory reform measures may have a material adverse effect on our business and results of operations.
Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. In the United States and some foreign jurisdictions, there have been, and continue to be, legislative and regulatory changes and proposed changes regarding the healthcare system and how its costs should be controlled or managed. Certain of these proposals could limit the prices we are able to charge for our device or the coverage and reimbursement available for our device and could limit the acceptance and availability of our device. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that are directed at containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future or their full impact. Additionally, it remains unclear how any new legislation or regulation might affect the prices we may obtain for any of our product for which regulatory approval is obtained. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or market our device.
Recently, there has been heightened governmental scrutiny over the manner in which companies set prices for their marketed products, which has resulted in several U.S. Congressional inquiries and proposed and enacted federal legislation designed to bring transparency to product pricing and reduce the cost of products and services under government healthcare programs. Additionally, individual states in the United States have also increasingly passed legislation and implemented regulations designed to control product pricing, including price
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or reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures. Moreover, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what products to purchase and which suppliers will be included in their healthcare programs. Adoption of price controls and other measures designed to restrict spending or purchasing power may prevent or limit our ability to generate revenue and attain profitability.
In addition, the delivery of healthcare in the European Union, including the establishment and operation of health services, is almost exclusively a matter for national, rather than EU, law and policy. National governments and health service providers have different priorities and approaches to the delivery of health care and the pricing and reimbursement of products in that context. Coupled with ever-increasing EU and national regulatory burdens on those wishing to develop and market products, this could prevent or delay marketing approval, restrict or regulate post-approval activities and affect our ability to launch sales of any products for which we obtain marketing approval.
We are currently unable to predict what additional legislation or regulation, if any, relating to the health care industry may be enacted in the future or what effect recently enacted federal legislation or any such additional legislation or regulation would have on our business. The pendency or approval of such proposals or reforms could result in a decrease in the price of our Common Stock or limit our ability to raise capital or to enter into collaboration agreements for the further development and potential marketing of our device.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, cleared or approved or launched for sale into the U.S. in a timely manner or at all, or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.
The ability of the FDA to review and clear or approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the FDA have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new medical devices or modifications to cleared or approved medical devices to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, in response to the COVID-19 pandemic, in March of 2020 the FDA postponed most inspections of foreign manufacturing and domestic facilities. Although limited inspections were again initiated in 2021, FDA also utilized alternative methods for inspections and could continue to exercise discretion on a case-by-case basis to approve products based on a desk review, particularly for foreign inspections. If a prolonged government shutdown occurs, or if global health concerns continue to prevent or temporarily restrict the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
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Changes in laws or regulations relating to data protection, or any actual or perceived failure by us to comply with such laws and regulations or our privacy policies, could materially and adversely affect our business or could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results.
In the normal course of business, we will receive health information and other highly sensitive or confidential information and data of patients and other third parties, which we compile and analyze. Our collection and use of this data, including that of our vendors, might raise privacy and data protection concerns, which could negatively impact our business. There are numerous federal, state and international laws and regulations regarding privacy, data protection, information security, and the collection, storing, sharing, use, processing, transfer, disclosure, and protection of personal information and other data, and the scope of such laws and regulations may change, be subject to differing interpretations, and may be inconsistent among countries and regions we intend to operate in (e.g., the United States and the European Union), or conflict with other laws and regulations. The regulatory framework for privacy and data protection worldwide is, and is likely to remain for the foreseeable future, uncertain and complex, and this or other actual or alleged obligations may be interpreted and applied in a manner that we may not anticipate or that is inconsistent from one jurisdiction to another. Further, any significant change to applicable laws, regulations, or industry practices regarding the collection, use, retention, security, or disclosure of data, or any changes regarding the manner in which the consent of relevant users for the collection, use, retention, or disclosure of such data must be obtained, could increase our costs and require us to modify our services and products, possibly in a material manner, which we may be unable to complete, and may limit our ability to store and process patients’ data or develop new services and features.
In particular, we are subject to U.S. data protection laws and regulations (i.e., laws and regulations that address privacy and data security of personal information) at both the federal and state levels. The legislative and regulatory landscape for data protection continues to evolve, and in recent years there has been an increasing focus on privacy and data security issues. Numerous federal and state laws, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws, govern the collection, use, and disclosure of health-related and other personal information. Failure to comply with such laws and regulations could result in government enforcement actions and create liability for us (including the imposition of significant civil or criminal penalties), private litigation and/or adverse publicity that could negatively affect our business.
In addition, we expect to obtain health information that is subject to privacy and security requirements under HIPAA and its implementing regulations. The Privacy Standards and Security Standards under HIPAA establish a set of standards for the protection of individually identifiable health information by health plans, health care clearinghouses and certain health care providers, referred to as Covered Entities, and the business associates with whom Covered Entities enter into service relationships pursuant to which individually identifiable health information may be exchanged. Notably, whereas HIPAA previously directly regulated only Covered Entities, HITECH makes certain of HIPAA’s privacy and security standards also directly applicable to Covered Entities’ business associates. As a result, both Covered Entities and business associates are now subject to significant civil and criminal penalties for failure to comply with Privacy Standards and Security Standards. As part of our normal operations, we expect to collect, process and retain personal identifying information regarding patients, including as a business associate of Covered Entities, so we expect to be subject to HIPAA, including changes implemented through HITECH, and we could be subject to criminal penalties if we improperly handle or knowingly obtain or disclose individually identifiable health information in a manner that is not authorized or permitted by HIPAA. A data breach affecting sensitive personal information, including health information, also could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.
HIPAA requires Covered Entities (like many of our potential customers) and business associates (like us) to develop and maintain policies and procedures with respect to protected health information that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such
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information. HITECH expands the notification requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information, and provides for civil monetary penalties for HIPAA violations. HITECH also increased the civil and criminal penalties that may be imposed against Covered Entities and business associates and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and its implementing regulations and seek attorney’s fees and costs associated with pursuing federal civil actions. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.
In addition, certain state laws govern the privacy and security of health-related and other personal information in certain circumstances, some of which may be more stringent, broader in scope or offer greater individual rights with respect to protected health information than HIPAA, many of which may differ from each other, thus, complicating compliance efforts. Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. For example, California enacted the California Consumer Privacy Act, or CCPA, which creates individual privacy rights for California consumers (as defined in the law), including the right to opt out of certain disclosures of their information, and places increased privacy and security obligations on entities handling certain personal data of consumers or households and may apply to us in the future. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach. Further, the California Privacy Rights Act, or CPRA, was recently passed in California. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for sensitive data such as health information, and opt outs for certain uses of sensitive data. It will also create a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes may be required. The CCPA and CPRA are reflective of a trend toward more stringent privacy legislation in the United States, as other states or the federal government have followed or may follow California’s lead and increase protections for U.S. residents. For example, on March 2, 2021, the Virginia Consumer Data Protection Act, which will take effect on January 1, 2023, was signed into law, and the on July 8, 2021 the Colorado Privacy Act, which will take effect on July 1, 2023, was also signed into law. The CCPA has already prompted a number of proposals for new federal and state privacy legislation that, if passed, could increase our potential liability, add layers of complexity to compliance in the U.S. market, increase our compliance costs and adversely affect our business.
Internationally, many jurisdictions have or are considering enacting privacy or data protection laws or regulations relating to the collection, use, storage, transfer, disclosure and/or other processing of personal data, as well as certification requirements for the hosting of health data specifically. Such laws and regulations may include data hosting, data residency or data localization requirements (which generally require that certain types of data collected within a certain country be stored and processed within that country), data export restrictions, international transfer laws (which prohibit or impose conditions upon the transfer of such data from one country to another), or may require companies to implement privacy or data protection and security policies, enable users to access, correct and delete personal data stored or maintained by such companies, inform individuals of security breaches that affect their personal data or obtain individuals’ consent to use their personal data.
The General Data Protection Regulation, or GDPR, which went into effect in May 2018, imposes stringent requirements for controllers and processors of personal data of individuals within the European Economic Area, or EEA. As Switzerland and the United Kingdom are not part of the European Union they enforce separate laws governing personal data, which are derived from or directly based on the GDPR. The GDPR applies to any company established in the EEA as well as to those outside the EEA if they collect, process, and use personal data in connection with the offering of goods or services to individuals in the EEA or the monitoring of their
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behavior. The GDPR, together with national legislation, regulations and guidelines of the EEA countries governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting. In particular, these obligations and restrictions involve the consent of the individuals to whom the personal data relates, the information provided to the individuals, the transfer of personal data out of the EEA to jurisdictions deemed to have inadequate data protection laws, security breach notifications, security and confidentiality of the personal data and imposition of substantial potential fines for breaches of the data protection obligations. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater.
Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States, and the efficacy and longevity of current transfer mechanisms between the European Union, or EU, and the United States remains uncertain. In 2016, the EU and United States agreed to a transfer framework for data transferred from the EU to the United States, called the Privacy Shield, but the Privacy Shield was invalidated in July 2020 by the Court of Justice of the European Union, or CJEU. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to be put in place, however, the nature of these additional measures is currently uncertain. The CJEU went on to state that if a competent supervisory authority believes that the standard contractual clauses cannot be complied with in the destination country and the required level of protection cannot be secured by other means, such supervisory authority is under an obligation to suspend or prohibit that transfer. The European Commission has published revised standard contractual clauses for data transfers from the EEA: the revised clauses must be used for relevant new data transfers from September 27, 2021; existing standard contractual clauses arrangements must be migrated to the revised clauses by December 27, 2022. If applicable, we would be required to implement the revised standard contractual clauses, in relation to relevant existing contracts and certain additional contracts and arrangements, within the relevant time frames. There is some uncertainty around whether the revised clauses can be used for all types of data transfers, particularly whether they can be relied on for data transfers to non-EEA entities subject to the GDPR.
While we implement various measures intended to enable us to comply with applicable privacy or data protection laws, regulations and contractual obligations, these measures may not always be effective and do not guarantee compliance. Any failure or perceived failure by us to comply with our contractual or legal obligations or regulatory requirements relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions, litigation, claims, or public statements against us by consumer advocacy groups or others and could result in significant liability, cause our customers, partners or patients to lose trust in us, and otherwise materially and adversely affect our reputation and business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers or partners may limit the adoption and use of, and reduce the overall demand for, our device. Additionally, if third parties we work with violate applicable laws, regulations, or agreements or suffer data breaches such violations or data breaches may put the data we have received at risk, could result in governmental investigations or enforcement actions, fines, litigation, claims, or public statements against us by consumer advocacy groups or others and could result in significant liability, cause our customers, partners or patients to lose trust in us, and otherwise materially and adversely affect our reputation and business. Further, public scrutiny of, or complaints about, technology companies or their data handling or data protection practices, even if unrelated to our business, industry or operations, may lead to increased scrutiny of technology companies, including us, and may cause government agencies to enact additional regulatory requirements, or to modify their enforcement or investigation activities, which may increase our costs and risks.
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Risks Related to Our Intellectual Property
If we are unable to obtain and maintain effective patent rights for our device, we may not be able to compete effectively in our markets. If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.
Our success and future revenue growth will depend, in part, on our ability to protect our patent rights. In addition to the protection afforded by any patents that may be granted, historically, we have relied on trade secret protection and confidentiality agreements with our employees, consultants, and contractors to protect proprietary know-how that is not patentable or that we elect not to patent, processes that are not easily known, knowable, or easily ascertainable, and for which patent infringement is difficult to monitor and enforce and any other elements of our product discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, agreements may be breached, trade secrets may be difficult to protect, and we may not receive adequate remedies for any breach. In addition, our trade secrets and intellectual property may otherwise become known or be independently discovered by competitors or other unauthorized third parties.
There is no guarantee that the patent applications that we submitted with regards to our technologies will result in patent grants. In the event of failure to obtain patent registration, our developments will not be proprietary, which might allow other entities to manufacture our device and compete with them.
Further, there is no assurance that all potentially relevant prior art relating to our patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if such patents cover our device, third parties may challenge their validity, enforceability, or scope, which may result in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, our patent applications and any future patents may not adequately protect our intellectual property, products and provide exclusivity for our new products or future services or prevent others from designing around our claims. Furthermore, there is no guarantee that third parties will not infringe or misappropriate our patents or similar proprietary rights. In addition, there can be no assurance that we will not have to pursue litigation against other parties to assert its rights.
Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.
If we cannot obtain and maintain effective patent rights for our device, we may not be able to compete effectively, and our business and results of operations would be harmed.
We cannot provide any assurances that our trade secrets and other confidential proprietary information will not be disclosed in violation of our confidentiality agreements or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Also, misappropriation or unauthorized and unavoidable disclosure of our trade secrets and intellectual property could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets and intellectual property are deemed inadequate, we may have insufficient recourse against third parties for misappropriating any trade secret.
The patent position of medical device companies generally is highly uncertain and involves complex legal and factual questions for which many legal principles remain unresolved. In recent years, patent rights have been the subject of significant litigation within our industry. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Further, the issuance of a patent is not conclusive as to its scope, validity or enforceability, and our owned and in-licensed patents may be challenged, invalidated or legally circumvented by third parties, or may expire. We cannot be certain that our patents will be upheld as valid and enforceable or will prevent the development of competitive products by third parties. For example, we
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may become involved in opposition, interference, derivation, inter partes review or other proceedings challenging our patent rights, and the outcome of any proceedings are highly uncertain. Such challenges may result in the patent claims of our owned or in-licensed patents being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or marketing similar or identical technology and products, or limit the duration of the patent protection of our products and technology. Consequently, competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and affect our ability to compete. In addition, competitors could attempt to reverse engineer our device to replicate some or all of the competitive advantages we derive from our development efforts, design around our protected technology, or develop their own competitive technologies that fall outside the scope of our patents. If our intellectual property does not adequately protect us from our competitors’ products and methods, our business and competitive position could be adversely affected. We may in the future become involved in litigation to protect the patents associated with our products, which could result in substantial costs and distraction to management and other employees.
Intellectual property rights of third-parties could adversely affect our ability to market our device, and we might be required to litigate or obtain licenses from third parties in order to develop or market our device. Such litigation or licenses could be costly or not available on commercially reasonable terms.
It is inherently difficult to conclusively assess our freedom to operate without infringing on third-party rights. Our competitive position may be adversely affected if existing patents or patents resulting from patent applications issued to third parties in the future or other third-party intellectual property rights are held to cover our device or elements thereof, or our manufacturing or uses relevant to our development plans. In such cases, we may not be in a position to develop or market products or services unless we successfully pursue litigation to nullify or invalidate the third-party intellectual property right concerned or enter into a license agreement with the intellectual property right holder, if available on commercially reasonable terms. There may also be pending patent applications that if they result in issued patents, could be alleged to be infringed by our new products or services. If such an infringement claim should be brought and be successful, we may be required to pay substantial damages, be forced to abandon our new products or services or seek a license from any patent holders. No assurances can be given that a license will be available on commercially reasonable terms, if at all.
It is also possible that we have failed to identify relevant third-party patents or applications. For example, U.S. patent applications filed before November 29, 2000 and certain U.S. patent applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Patent applications in the United States and elsewhere are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore, patent applications covering our new products could have been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a
manner that could cover our services, our new products or the use of our new products. Third-party intellectual property right holders may also actively bring infringement claims against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we are unable to successfully settle future claims on terms acceptable to us, we may be required to engage in or continue costly, unpredictable and time-consuming litigation and may be prevented from or experience substantial delays in pursuing the development of and/or marketing our new products or services. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently prohibited from selling or marketing our new products or services that are held to be infringing. We might, if possible, also be forced to redesign our new products so that we no longer infringe the third-party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.
We may be subject to claims challenging the inventorship of our intellectual property.
We may be subject to claims that former employees, collaborators or other third parties have an interest in, or right to compensation, with respect to our current patent and patent applications, future patents or other
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intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing our device. Litigation may be necessary to defend against these and other claims challenging inventorship or claiming the right to compensation. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Such litigation or proceedings could increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Some of our competitors may be able to devote significantly more resources to intellectual property proceedings, and may have significantly broader intellectual property portfolios to assert against us if we assert our rights against them. Further, because of the substantial discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be disclosed or otherwise compromised leading to others making, using, importing or selling products that are the same or substantially the same as ours, which could adversely affect our ability to compete in the market.
We may be involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming, and unsuccessful.
Competitors may infringe our intellectual property. If we were to initiate legal proceedings against a third-party to enforce a patent covering one of our new products or services, the defendant could counterclaim that the patent covering our product is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the United States Patent and Trademark Office, or USPTO, or made a misleading statement, during prosecution. Under the Leahy-Smith Act, the validity of U.S. patents may also be challenged in post-grant proceedings before the USPTO. The outcome following legal assertions of invalidity and unenforceability is unpredictable.
Derivation proceedings initiated by third parties or brought by us may be necessary to determine the priority of inventions and/or their scope with respect to our patent or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships that would help us launch sales of new products or services into the U.S.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Common Stock.
Third-party claims of intellectual property infringement may prevent or delay our development and marketing efforts.
Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing new products and services. As our
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industries expand and more patents are issued, the risk increases that our device may be subject to claims of infringement of the patent rights of third parties.
Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, designs or methods of manufacture related to the use or manufacture of our device. There may be currently pending patent applications or continued patent applications that may later result in issued patents that our device may infringe. In addition, third parties may obtain patents or services in the future and claim that use of our technologies infringes upon these patents.
If any third-party patents were held by a court of competent jurisdiction to cover aspects of our processes for designs, or methods of use, the holders of any such patents may be able to block our ability to develop and market the applicable product unless we obtain a license or until such patent expires or is finally determined to be invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and market our device. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or services, or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.
Patent policy and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents.
Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of any patents that may issue from our patent applications or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we were the first to file the invention claimed in our owned and licensed patent or pending applications, or that we or our licensor were the first to file for patent protection of such inventions. Assuming all other requirements for patentability are met, in the United States prior to March 15, 2013, the first to make the claimed invention without undue delay in filing, is entitled to the patent, while generally outside the United States, the first to file a patent application is entitled to the patent. After March 15, 2013, under the Leahy-Smith America Invents Act (the “Leahy-Smith Act”), enacted on September 16, 2011, the United States has moved to a first to file system. The Leahy-Smith Act also includes a number of significant changes that affect the way patent applications will be prosecuted and may also affect patent litigation. In general, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents, all of which could have a material adverse effect on our business and financial condition.
The America Invents Act also includes a number of significant changes that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of the patents. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. Further, because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a
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third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations.
In addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, and defending patents on products and services, as well as monitoring their infringement in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.
Competitors may use our technologies develop their own products or services in jurisdictions where we have not obtained patent protection to and may export infringing products or services to territories where we have patent protection, but where patents are not enforced as strictly as they are in the United States. These products or services may compete with our device or services. Future patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, which could make it difficult for us to stop the marketing of competing products or services in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our future patents at risk of being invalidated or interpreted narrowly, put the issuance of our patent applications at risk, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and any damages or other remedies that we may be awarded, may not be commercially meaningful. Accordingly, our efforts to monitor and enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Risks Related to this Offering and the Ownership of our Securities
We do not know whether a market for our Common Stock or Warrants will develop or, if developed, be sustained, what the trading price of our Common Stock or Warrants will be, or whether there will be an active, liquid, trading market for our Common Stock or Warrants, which may trade at a discount from the initial public offering price and make it difficult for you to sell the Common Stock or Warrants you purchase.
Although we intend to apply to list our Common Stock and Warrants on Nasdaq, an active trading market for our Common Stock or Warrants may not be achieved or sustained. It may be difficult for you to sell your Common Stock or Warrants without depressing the market price for the Common Stock or Warrants or at all. Consequently, you may not be able to sell your Common Stock or Warrants at or above the offering price or at all. Further, an inactive market may also impair our ability to raise capital by selling additional shares of Common Stock and it also may impair our ability to enter into strategic partnerships or acquire companies, products, or services by using our equity securities as consideration.
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Prior to this offering, there has not been a public trading market for shares of our Common Stock or Warrants. We cannot predict the extent to which investor interest in us will lead to the development of a trading market or how active and liquid that market may become. If an active and liquid trading market does not develop or continue, you may have difficulty selling your Common Stock or Warrants at an attractive price or at all. The initial public offering price per share of Common Stock and per Warrants will be determined by agreement between us and the representative of the underwriters, and may not be indicative of the price at which shares of our Common Stock or Warrants will trade in the public market after this offering. The market price of our Common Stock or Warrants may decline below the initial offering price and you may not be able to sell your Common Stock or Warrants at or above the price you paid in this offering, or at all.
The market price of our Common Stock and Warrants may be highly volatile, and you could lose all or part of your investment.
The market price of our Common Stock and Warrants is likely to be volatile, which may prevent you from being able to sell your Common Stock or Warrants at or above the price you paid for your securities. This volatility could be the result of a variety of factors, which include:
| • | whether we achieve our anticipated corporate objectives; |
| • | actual or anticipated fluctuations in our quarterly or annual operating results; |
| • | changes in our financial or operational estimates or projections; |
| • | our ability to implement our operational plans; |
| • | termination of lock-up agreements or other restrictions on the ability of our shareholders to sell shares after this offering; |
| • | changes in the economic performance or market valuations of companies similar to ours; |
| • | general economic or political conditions in the U.S. or elsewhere; and |
| • | other events or factors, including those resulting from war, incidents of terrorism or responses to these events. |
In addition, the stock market in general, and the stock of publicly-traded medical device companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. Broad market and industry factors may negatively affect the market price of our Common Stock and Warrants, regardless of our actual operating performance, and we have little or no control over these factors.
Future sales of a substantial number of shares of our Common Stock by our existing shareholders could cause our stock price to decline.
We have a significant number of shares of restricted Common Stock that will become eligible for sale after this offering. Prior to the consummation of this offering, on a pro forma basis, we had 6,362,199 shares of our Common Stock outstanding, including $6.2 million principal amount of convertible notes outstanding that are convertible into 2,318,860 shares of our Common Stock (based on interest calculated through April 30, 2022), 463,265 shares of Series C Preferred Stock outstanding that, as of the date of this prospectus, are convertible into 1,735,657 shares of Common Stock, warrants exercisable for 1,232,252 shares of our Common Stock and, upon consummation of this offering, we have agreed to issue 1,750,000 shares of our Common Stock and Warrants to purchase 1,750,000 shares of our Common Stock based on an assumed initial public offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus. All of the shares and Warrants sold in this offering will be eligible for sale immediately upon effectiveness of this registration statement. All of the remaining shares will be eligible for sale in the public market upon (i) the effectiveness of a registration statement we are required to file relating to (a) the shares of our Common Stock issuable upon conversion of the Bridge Notes and the exercise of the Bridge Warrants and the Pre-Funded Warrants, subject to
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the lock-up agreements applicable to such shares, and (b) the shares of our Common Stock issuable upon the conversion of the Series C Preferred Stock and (ii) the expiration of the lock-up agreements entered into in connection with this offering. In addition to the shares of Common Stock sold in the offering, in connection with the completion of this offering, 1,698,280 shares of our Common Stock will become unrestricted shares pursuant to Rule 144 under the Securities Act as in effect on the date hereof, or Rule 144, and will not be subject to lock-up restrictions. For additional information regarding the lock-up agreements and the timing of their expiration, see “Shares Eligible for Future Sale–Lock-up Agreements” and “Underwriting–Lock-up Agreements”. In addition, and subject to any applicable lock-up agreements, under Rule 144, beginning 90 days after the date hereof, a person who holds restricted shares of Common Stock (assuming there are any restricted shares) and is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned these restricted shares for at least six months, would be entitled to sell an unlimited number of shares of our Common Stock, provided current public information about us is available. In addition, under Rule 144, a person who holds restricted shares in us and is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned these restricted shares for at least one year, would be entitled to sell an unlimited number of shares immediately upon the closing of this offering without regard to whether current public information about us is available. It is conceivable that following the holding period, many shareholders may wish to sell some or all of their shares. If our shareholders sell substantial amounts of our Common Stock in the public market at the same time, the market price of our Common Stock could decrease significantly due to an imbalance in the supply and demand of our Common Stock. Even if they do not actually sell the Common Stock, the perception in the public market that our shareholders might sell significant Common Stock could also depress the market price of our Common Stock.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they publish negative reports regarding our business or our securities, our share price and trading volume could decline.
The trading market for the Common Stock and the Warrants will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding the Common Stock or Warrants, or provide more favorable relative recommendations about our competitors, the price of our Common Stock and Warrants would likely decline. If any analyst who may cover us were to cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price of our Common Stock and Warrants or trading volume to decline.
Management will have broad discretion as to the use of the proceeds from this offering.
Our management will have broad discretion in the allocation of the net proceeds and could use them for purposes other than those contemplated at the time of this offering. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. For additional information regarding our anticipated uses of proceeds, see “Use of Proceeds”.
We will need additional capital beyond the capital raised in this offering, and the sale of additional shares of the Common Stock or equity or debt securities could result in additional dilution to our shareholders.
Although the net proceeds of this offering are anticipated to be sufficient to achieve FDA clearance, which would allow us to market the MyoVista in the U.S., there is no assurance that this would be the case and further funding may be required. We will need to raise additional capital beyond the capital raised in this offering in order to support the sales launch of the MyoVista into the U.S., provide working capital and support further R&D. Such additional capital may be raised through a combination of private and public equity offerings, debt financings and collaborations, and strategic and licensing arrangements. To the extent that we raise additional capital through the issuance of equity (such as this offering) or convertible debt securities, your ownership
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interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of our Common Stock or Warrants. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring debt, without prior approval, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development, sales launch or marketing efforts or grant rights to develop and market product that we would otherwise prefer to develop and market ourselves.
We have identified weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future.
Prior to the completion of this offering, we have been a private company with limited accounting personnel to adequately execute our accounting processes and limited supervisory resources with which to address our internal control over financial reporting. As a private company, we have not designed or maintained an effective control environment as required of public companies under the rules and regulations of the SEC. Although we are not yet subject to the certification or attestation requirements of Section 404 of the Sarbanes-Oxley Act, management and our independent registered public accounting firm, Haskell & White LLP, identified several material weaknesses in our internal control over financial reporting in connection with our preparation and the audits of our financial statements for Fiscal 2021 and 2020.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financing reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses we and our independent registered public accounting firms identified are listed below:
| • | we did not maintain sufficient GAAP and SEC accounting resources commensurate with those required of a public company; |
| • | our financial reporting closing process did not effectively determine all period-end adjustments with a sufficient level of precision; |
| • | we did not employ a sufficient number of staff to maintain optimal segregation of duties and to provide optimal levels of oversight; |
| • | we did not employ month-end financial reporting controls that prevented timely production of accurate monthly financial reports; |
| • | we did not employ proper independent review of monthly financial reports to verify that such reports are accurate and reconciled properly to the supporting documentation schedules; and |
| • | we did not have strong accounting consideration and analysis over equity accounts, accruals, and inventory valuation. |
These material weaknesses resulted in adjustments to our current and prior year financial statements primarily related to equity accounts, accruals, and inventory and could result in a misstatement of any account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.
We have begun implementation of a plan to remediate these material weaknesses. These remediation measures are ongoing and include hiring additional accounting and financial reporting personnel and implementing additional policies, procedures and controls. We cannot assure you that these measures will significantly improve or remediate the material weaknesses described above. The implementation of these remediation measures is in the early stages and will require validation and testing of the design and operating
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effectiveness of internal controls over a sustained period of financial reporting cycles. As a result, the timing of when we will be able to fully remediate the material weaknesses is uncertain, and we may not fully remediate these material weaknesses until later in the current fiscal year ending April 30, 2023. If the steps we take do not remediate the material weaknesses in a timely manner, there could continue to be a reasonable possibility that these control deficiencies or others would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. This, in turn, could jeopardize our ability to comply with our reporting obligations, limit our ability to access the capital markets and adversely impact our stock price.
We and our independent registered public accounting firm were not required to perform an evaluation of our internal control over financial reporting as of either April 30, 2021 or April 30, 2020 in accordance with the provisions of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting as required by reporting requirements under Section 404 after the completion of this offering.
If we are unable to successfully remediate the existing material weakness in our internal control over financial reporting, the accuracy and timing of our financial reporting, and our stock price, may be adversely affected and we may be unable to maintain compliance with the applicable stock exchange listing requirements. Implementing any appropriate changes to our internal controls may divert the attention of our officers and employees, entail substantial costs to modify our existing processes and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are adequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult for us to effectively market and sell our services to new and existing customers.
Our Board of Directors is authorized to issue and designate shares of our preferred stock in additional series without shareholder approval.
Our amended and restated certificate of formation authorizes our Board of Directors, without the approval of our shareholders, to issue shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of formation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences, privileges and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our Common Stock, which may reduce its value.
Our principal shareholders, officers and directors currently beneficially own approximately [ ]% of our Common Stock. They will therefore be able to exert significant control over matters submitted to our shareholders for approval.
As of the date of this prospectus, our principal shareholders, officers and directors beneficially own approximately [ ]% of the outstanding shares of our Common Stock. This significant concentration of share ownership may adversely affect the trading price for our Common Stock because investors often perceive disadvantages in owning shares in companies with controlling shareholders. As a result, these shareholders, if they acted together, could significantly influence or even unilaterally approve matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of these shareholders may not always coincide with our interests or the interests of other shareholders. For more information regarding the beneficial ownership of such principal shareholders, officers and directors, see “Beneficial Ownership of Principal Shareholders and Management.”
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If you purchase Common Stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.
The offering price of the Common Stock is substantially higher than the net tangible book value per share of our Common Stock (attributing no value to the Warrants). Therefore, if you purchase Common Stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent outstanding options or warrants are exercised, you will incur further dilution. Based on an assumed offering price of $5.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $4.08 per share, representing the difference between our pro forma net tangible book value per share of Common Stock after giving effect to this offering and the offering price. See “Dilution” for further information.
The Warrants are speculative in nature.
The Warrants do not confer any rights of Common Stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of Common Stock at a fixed price. Specifically, commencing on the date of issuance, holders of the Warrants may exercise their right to acquire the shares of Common Stock and pay an exercise price of $5.00 per Unit, which is the midpoint of the range set forth on the cover page of this prospectus. Moreover, following this offering, the market value of the Warrants is uncertain and there can be no assurance that the market value of the Warrants will equal or exceed their exercise price. Furthermore, each Warrant will expire five years from the original issuance date. In the event our Common Stock price does not exceed the exercise price of the Warrants during the period when the Warrants are exercisable, the Warrants may not have any value.
Holders of the Warrants will have no rights as a holder of our Common Stock until they acquire our Common Stock.
Until you acquire our Common Stock upon exercise of your Warrants, you will have no rights with respect to Common Stock issuable upon exercise of your Warrants. Upon exercise of your Warrants, you will be entitled to exercise the rights of a holder of our Common Stock as to the security exercised only as to matters for which the record date occurs after the exercise.
Provisions of the Warrants could discourage an acquisition of us by a third party.
In addition to the provisions of our amended and restated certificate of formation and amended and restated bylaws, certain provisions of the Warrants could make it more difficult or expensive for a third party to acquire us. The Warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the Warrants. These and other provisions of the Warrants could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to you.
We will incur significant increased costs as a result of the listing of our securities for trading on Nasdaq. By becoming a public company in the U.S., our management will be required to devote substantial time to new compliance initiatives as well as compliance with ongoing U.S. requirements.
Upon the listing of securities on Nasdaq, we will become a publicly traded company in the United States and as such, we will incur additional significant accounting, legal and other expenses that we did not incur before the offering. We also anticipate that we will incur costs associated with corporate governance requirements of the SEC, as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal and financial compliance costs, introduce new costs such as investor relations, stock exchange listing fees and shareholder reporting, and to make some activities more time consuming and costly. The implementation and testing of such processes and systems may require us to hire
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outside consultants and incur other significant costs. Any future changes in the laws and regulations affecting public companies in the United States, including Section 404 and other provisions of the Sarbanes-Oxley Act, and the rules and regulations adopted by the SEC, for so long as they apply to us, will result in increased costs to us as we respond to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, any committees of our Board of Directors, or as executive officers.
We may be subject to securities litigation, which is expensive and could divert management attention.
In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.
We have never paid cash dividends on our Common Stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have neither declared nor paid cash dividends, and we do not anticipate paying cash dividends in the foreseeable future. Therefore, you should not rely on an investment in Common Stock as a source for any future dividend income. Our Board of Directors has complete discretion as to when or whether to distribute dividends. Even if our Board of Directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our Board of Directors.
We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make the Common Stock and Warrants less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, not being required to comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, not being required to comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could remain an emerging growth company until the earlier of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer. We cannot predict if investors will find our Common Stock or Warrants less attractive if we choose to rely on these exemptions. If some investors find our Common Stock or Warrants less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our Common Stock or Warrants and our stock price may be more volatile. Further, as a result of these scaled regulatory
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requirements, our disclosure may be more limited than that of other public companies and you may not have the same protections afforded to shareholders of such companies.
Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. We have opted for taking advantage of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the Jobs Act.
Anti-takeover provisions could make a third party acquisition of us difficult.
Our amended and restated certificate of formation and amended and restated bylaws eliminate the ability of shareholders to take action by less than unanimous written consent. This provision could make it more difficult for a third party to acquire us without the approval of our board. In addition, the Texas Business Organizations Code, or the TBOC, also contains certain provisions that could make an acquisition by a third party more difficult.
If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on Nasdaq and if the price of our Common Stock is less than $5.00, our Common Stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our Common Stock or Warrants, and therefore shareholders may have difficulty selling their shares of Common Stock or Warrants.
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We expect to receive net proceeds from this offering of approximately $7.2 million, after deducting underwriting discounts and commissions and estimated offering expenses (assuming a per Unit price of $5.00, which is the midpoint of the price range set forth on the cover page of this prospectus), or approximately $8.4 million if the underwriters’ representative exercises the over-allotment option, with respect to both shares of Common Stock and Warrants, in full.
A $1.00 increase or decrease in the assumed public offering price of $5.00 (which is the midpoint of the range set forth on the cover page of this prospectus) per Unit would increase or decrease the net proceeds from this offering by approximately $1.6 million, assuming that the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of 1,000,000 Units offered would increase or decrease our net proceeds by approximately $4.6 million, assuming the assumed public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This information is illustrative only and will depend on the actual initial public offering price and other terms of this offering determined at pricing. We do not expect that a change in the initial public offering price or the number of Units by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although a decrease in the initial offering price without a corresponding increase in the number of Units offered may accelerate the time at which we will need to seek additional capital.
We intend to use the net proceeds from this offering (i) for estimated costs of approximately $3 million directly related to achieving FDA clearance for the MyoVista device, including costs for relevant Company personnel, associated device testing, validation and R&D, and completing the pivotal clinical validation study, (ii) for working capital and general corporate purposes until we can obtain FDA approval, (iii) to pay accrued and unpaid interest to one lender (John Q. Adams, Sr., a former director of the Company) under the $1M Loan and Security Agreement, which was $0.1 million at January 31, 2022, and (iv) with respect to the remainder, if any, for working capital and general corporate purposes needed for sales launch of the MyoVista into the U.S., which may include the hiring of additional personnel, capital expenditures and the costs of operating as a public company. The $1M Loan and Security Agreement, as amended, matures on September 30, 2023, assuming completion of this offering. At January 31, 2022, the principal balance outstanding under the $1M Loan and Security Agreement was $1.0 million and the interest rate was 12% per annum. It is payable to Front Range Ventures, LLC, which is a beneficial owner of more than five percent (5%) of the combined voting power of our outstanding capital stock, and John Q. Adams, Sr. (a former director of the Company).
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 proceeds from this offering. We may ultimately use the proceeds for different purposes than what we currently intend. Pending any ultimate use of any portion of the proceeds from this offering, 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 proceeds, as well as the amount and sources of other funds needed. We believe that the funds raised in this offering will be sufficient to finance the purposes described above, and we do not think that material amounts of other funds will be necessary to finance such purposes.
Pending our use of the net proceeds from this offering, we may invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.
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We have never declared or paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our Board of Directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors may deem relevant.
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The following table sets forth our cash and cash equivalents and our capitalization as of January 31, 2022:
| • | on an actual basis, after giving effect to the reverse stock split; |
| • | on a pro forma basis to give effect to: (i) the reverse stock split; (ii) the conversion of up to the Maximum Percentage of the Bridge Notes by each holder thereof at a conversion price of $3.41 pursuant to their terms; (iii) the conversion of all of the $1.5M Notes at a conversion price of $1.65 pursuant to their terms; and (iv) the conversion of the Series A Preferred Stock at a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock pursuant to the terms of the Series A Preferred Stock and the cancellation of the Series B Preferred Stock; and |
| • | on a pro forma as adjusted basis to give effect to: (i) the reverse stock split; (ii) the conversion of up to the Maximum Percentage of the Bridge Notes by each holder thereof; (iii) the conversion of all of the $1.5M Notes; (iv) the conversion of the Series A Preferred Stock and the cancellation of the Series B Preferred Stock; and (v) the issuance of Units in this offering (excluding the underwriters’ representative’s warrants), at an assumed public offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses, assuming no exercise of the underwriters’ over-allotment option to purchase additional shares of Common Shares, as if the sale of the Units had occurred on January 31, 2022. |
The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
You should read this table in conjunction with the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.
| As of January 31, 2022 | ||||||||||||
| Actual | Pro Forma(1) |
Pro Forma as Adjusted |
||||||||||
| (U.S. dollars in thousands) | ||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
| Cash and cash equivalents |
$ | 1,328 | $ | 1,328 | $ | 8,528 | ||||||
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|
|
|
|
|
|
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| Indebtedness: |
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| Bridge Notes |
$ | 2,629 | — | — | ||||||||
| $130K Note |
130 | 130 | 130 | |||||||||
| $1.5M Notes |
1,500 | — | — | |||||||||
| $1M Notes |
1,000 | 1,000 | 1,000 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Indebtedness |
5,259 | 1,130 | 1,130 | |||||||||
| Shareholders’ equity (deficit): |
||||||||||||
| Series A Preferred Stock, $0.001 par value per share, 10,000 issued and outstanding as of January 31, 2022 |
— | — | — | |||||||||
| Series B Preferred Stock, $0.001 par value per share, 10,000 issued and outstanding as of January 31, 2022 |
— | — | — | |||||||||
| Series C Preferred Stock, $0.001 par value per share, 463,265 issued and outstanding |
— | — | — | |||||||||
| Common Stock, $0.001 par value per share, 3,323,942 issued and outstanding, actual; 6,079,122 shares issued and outstanding, pro forma; and 7,829,122 shares issued and outstanding pro forma as adjusted |
3 | 6 | 8 | |||||||||
| Additional paid-in capital |
48,244 | 52,370 | 59,568 | |||||||||
| Accumulated deficit |
(52,350 | ) | (52,350 | ) | (52,350 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total shareholders’ (deficit) equity |
(4,103 | ) | 26 | 7,226 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total capitalization |
$ | 1,156 | $ | 1,156 | $ | 8,356 | ||||||
|
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|
|
|
|
|
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| (1) | If the underwriters’ option to purchase up to an additional 262,500 Units (including 262,500 shares of Common Stock) is exercised in full, (i) an additional 262,500 Units (including 262,500 shares of Common Stock) would be issued and we would receive approximately $1.2 million in additional net proceeds, based on the assumed initial public offering price of $5.00 per Unit, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (ii) cash and cash equivalents, total shareholders’ equity and total capitalization would each also increase by approximately $1.2 million. |
The number of shares of Common Stock owned by existing shareholders is based on 3,323,942 shares of Common Stock issued and outstanding as of January 31, 2022 (on an actual basis), assumes no exercise of the underwriters’ over-allotment option and excludes the following as of such date:
| • | 1,755,139 shares of Common Stock issuable upon conversion of the Series C Preferred Stock (including 19,482 shares issuable upon conversion of the shares of Series C Preferred Stock issuable upon conversion of the $130K Note). See “Description of Securities—Preferred Stock” for additional information; |
| • | 675,393 shares of Common Stock issuable upon the exercise of stock options issued to directors, employees and consultants of the Company, of which 334,092 were vested as of such date; |
| • | 1,016,187 shares of Common Stock to be issued upon exercise of the Investor Warrants, the $1M Lender Warrants, the $1.5M Lender Warrants, the Bridge Warrants, and the Pre-Funded Warrants. See “Description of Securities—Warrants” for more information; |
| • | 719,397 shares of Common Stock issuable upon conversion of the Series A Preferred Stock (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus) and the cancellation of the Series B Preferred Stock; |
| • | 1,750,000 shares of Common Stock to be issued upon exercise of the Warrants; and |
| • | 122,500 shares of Common Stock to be issued upon exercise of the underwriters’ representative’s warrants. |
This number of shares of Common Stock also excludes shares issuable pursuant to antidilution provisions set forth in the Bridge Warrants and the Series C Preferred Stock, which are each dependent on the market price of our Common Stock at the time of conversion. For additional information, see “Description of Securities—Antidilution Provisions.”
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If you invest in this offering, your interest will be diluted immediately to the extent of the difference between the public offering price per share of Common Stock you will pay in this offering (attributing no value to the Warrants) and the as adjusted net tangible book value per share after this offering. Historical net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding effected for the reverse stock split.
The historical net tangible book value (deficit) of our Common Stock was approximately $(4.1 million), or $(1.23) per share. Historical net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by 3,323,942, the total number of shares of Common Stock issued and outstanding on January 31, 2022.
The pro forma historical net tangible book value was $27,579 at January 31, 2022. Pro forma historical net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the total number of shares of Common Stock outstanding at January 31, 2022, after giving effect to (i) the reverse stock split; (ii) the conversion of the Bridge Notes into 1,126,712 shares of Common Stock at a conversion price of $3.41; (ii) the conversion of the $1.5M Notes into 909,071 shares of Common Stock at a conversion price of $1.65; and (iii) the conversion of the Series A Preferred Stock into 719,397 shares of Common Stock (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock) and the cancellation of the Series B Preferred Stock.
After giving effect to the sale of all of the 1,750,000 shares of Common Stock offered by us in this offering (attributing no value to the Warrants), assuming no exercise of the underwriters’ representative’s warrants or the option to purchase additional shares of Common Stock or Warrants and after deducting the estimated underwriting discounts and commissions and management fees and estimated offering expenses payable by us, the Company’s pro forma as adjusted historical net tangible book value as of January 31, 2022 would have been approximately $7.2 million or $0.92 per share. At the assumed public offering price for this offering of $5.00 per share (attributing no value to the Warrants), which is the midpoint of the price range set forth on the cover page of this prospectus, this represents an immediate increase in net tangible book value of $2.15 per share to existing shareholders and an immediate dilution in net tangible book value of $4.08 per share to purchasers of Common Stock that is part of the Units in this offering. Dilution for this purpose represents the difference between the price per share paid by these purchasers and pro forma net tangible book value per share of Common Stock immediately after the completion of this offering.
The following table illustrates this dilution on a per share basis to purchasers of Common Stock in this offering:
| Assumed public offering price per share (attributing no value to the Warrants) |
$ | 5.00 | ||||||
| Historical net tangible book deficit per share as of January 31, 2022 |
$ | (1.23 | ) | |||||
| Increase in historical pro forma net tangible book value (deficit) per share as of January 31, 2022 attributable to the pro forma transactions described above |
$ | 1.24 | ||||||
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|
|
|||||||
| Pro forma net tangible book value per share after this offering |
$ | 0.92 | ||||||
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|
|
|||||||
| Dilution per share to new investors in this offering |
$ | 4.08 | ||||||
|
|
|
The dilution information set forth in the table above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
A $1.00 increase or decrease in the assumed initial public offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease our pro forma net tangible book value per share after this offering by $0.21 and the dilution per share to new investors by $0.79, assuming the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of Units we are offering.
An increase or decrease of 1 million Units in the number of Units offered by us would increase or decrease our pro forma net tangible book value after this offering by approximately $4.6 million, would increase or
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decrease pro forma net tangible book value per share after this offering by $0.42 per share and would increase or decrease the dilution per share to new investors by $0.42, after deducting estimated underwriting discounts and estimated offering expenses payable by us.
The following table summarizes, on a pro forma basis as of January 31, 2022, the differences between the number of shares of Common Stock acquired from us, the total amount paid and the average price per share paid by the existing holders of our Common Stock and by investors in this offering, based upon an assumed public offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus.
| Shares | Total Consideration | Average Price Per Share |
||||||||||||||||||
| Number | Percent | Amount | Percent | |||||||||||||||||
| Existing shareholders |
6,079,122 | 78 | % | $ | 39,396,878 | 82 | % | $ | 6.48 | |||||||||||
| New investors |
1,750,000 | 22 | 8,750,000 | 18 | 5.00 | |||||||||||||||
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|
|
|
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|
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|
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| Total |
7,829,122 | 100 | % | $ | 48,146,878 | 100 | % | |||||||||||||
The number of shares of Common Stock owned by existing shareholders is based on 3,323,942 shares of Common Stock issued and outstanding as of January 31, 2022, plus 1,126,712 shares of Common Stock to be issued upon the conversion of up to the Maximum Percentage by each purchaser of the Bridge Notes at a conversion price of $3.41 pursuant to their terms, plus 909,071 shares of Common Stock to be issued upon conversion of the $1.5M Notes at a conversion price of $1.65 pursuant to their terms, plus 719,397 shares of Common Stock issued upon the conversion of all outstanding shares of Series A Preferred Stock (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock pursuant to the terms of the Series A Preferred Stock) and the cancellation of the Series B Preferred Stock in June 2022. This number of shares of the Common Stock assumes no exercise of the underwriters’ over-allotment option and excludes:
| • | 1,755,139 shares of Common Stock issuable upon conversion of the Series C Preferred Stock (including 19,482 shares issuable upon conversion of the shares of Series C Preferred Stock issuable upon conversion of the $130K Note). See “Description of Securities—Preferred Stock” for additional information; |
| • | 675,393 shares of Common Stock issuable upon the exercise of stock options issued to directors, employees and consultants of the Company, of which 334,092 were vested as of such date; |
| • | 1,016,187 shares of Common Stock to be issued upon exercise of the Investor Warrants, the $1M Lender Warrants, the $1.5M Lender Warrants, the Bridge Warrants, and the Pre-Funded Warrants. See “Description of Securities—Warrants” for more information; and |
| • | 1,750,000 shares of Common Stock to be issued upon exercise of the Warrants; and |
| • | 122,500 shares of Common Stock to be issued upon exercise of the underwriters’ representative’s warrants. |
This number of shares of Common Stock also excludes shares issuable pursuant to antidilution provisions set forth in the Bridge Warrants and the Series C Preferred Stock, which are each dependent on the market price of our Common Stock at the time of conversion. For additional information, see “Description of Securities—Antidilution Provisions.”
If all of our issued and outstanding options, convertible securities and warrants had been exercised as of January 31, 2022, the number of shares of Common Stock held by existing shareholders would increase to $9,525,841 or 84% of the total number of shares of Common Stock outstanding after this offering, and the average price per share paid by the existing shareholders would be $4.14.
If the underwriters’ representative exercises its over-allotment option to purchase an additional 262,500 shares of Common Stock, the number of shares of Common Stock held by new investors will increase to 2,012,500 or 25% of the total number of shares of Common Stock issued and outstanding after this offering and the percentage of shares of Common Stock held by existing shareholders will decrease to 75% of the total number of shares of Common Stock issued and outstanding.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 prospectus. 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 prospectus.
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.
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 and raising sufficient funds to finish our pivotal clinical validation study and device testing and development to submit for, and achieve, FDA De Novo clearance. Additional funding would then be required to support the sales launch of the MyoVista into the U.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, 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.
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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 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 current fiscal year ending April 30, 2023.
For additional information regarding the FDA regulatory process, see “Business—FDA and Other Government Regulation.”
We require the funding from this offering to continue our work towards FDA resubmission and clearance. Although the net proceeds of this offering are anticipated to be sufficient to achieve FDA clearance, which would allow us to market the MyoVista in the U.S., there is no assurance that this would be the case. Additional funding would be required to support the sales launch of the MyoVista into the U.S., provide working capital and support further R&D. Our auditors’ report on our audited financial statements for Fiscal 2021 contains an explanatory paragraph regarding substantial doubts about our ability to continue as a going concern because we have experienced recurring losses, negative cash flows from operations, limited capital resources, a net shareholders’ deficit, as well as significant debt obligations. These events and conditions, along with other matters, 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.
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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 engineering and research programs 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 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. For more information, see “—Description of Indebtedness.”
Other Income (Expense), Net
Other income (expense), net primarily consists of forgiveness of loans issued under the CARES Act.
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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 Statements of Operations for the nine months ended January 31, 2022 compared with the nine months ended January 31, 2021:
| For the nine months ended January 31, |
||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| (In thousands, except percentages, unaudited) | ||||||||||||||||
| Revenue |
$ | 10 | $ | 11 | $ | (1 | ) | -9 | % | |||||||
| Cost of sales |
6 | 5 | 1 | 20 | % | |||||||||||
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|
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| Gross margin |
4 | 6 | (2 | ) | -33 | % | ||||||||||
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|
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| Operating expenses: |
||||||||||||||||
| Research and development |
1,646 | 1,114 | 532 | 48 | % | |||||||||||
| Selling, general and administrative |
1,089 | 673 | 416 | 62 | % | |||||||||||
| (Gain) loss on disposal of property and equipment |
— | — | — | — | ||||||||||||
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|
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| Total operating expenses |
2,735 | 1,787 | 948 | 53 | % | |||||||||||
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| Loss from operations |
(2,731 | ) | (1,781 | ) | (950 | ) | 53 | % | ||||||||
| Interest expense |
(295 | ) | (68 | ) | (227 | ) | 334 | % | ||||||||
| Gain on extinguishment of debt |
250 | 250 | — | 0 | % | |||||||||||
| Other income |
1 | — | 1 | — | ||||||||||||
| Other expense |
— | (2 | ) | 2 | -100 | % | ||||||||||
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| Other income (expense), net |
(44 | ) | 180 | (224 | ) | -124 | % | |||||||||
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| Net loss |
$ | (2,775 | ) | $ | (1,601 | ) | $ | (1,174 | ) | 73 | % | |||||
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Revenues decreased by $1,000, or 9%, to $10,000 during the nine months ended January 31, 2022, compared to $11,000 during the nine months ended January 31, 2021. Our revenues to date have been in relation to establishing distributor relationships outside the United States during product development and improvement.
Cost of sales increased by $1,000, or 20%, to $6,000 during the nine months ended January 31, 2022, compared to $5,000 during the nine months ended January 31, 2021. The increase offset with decline in revenue above is due to applied sales discounts.
Research and development expenses increased $532,000 during the nine months ended January 31, 2022 when compared to the nine months ended January 31, 2021, an increase of 48%, primarily resulting from increase of $220,000 related to clinical trial studies, $220,000 in software consulting and hardware development, and $87,000 in payroll expenditures which is consistent with work being performed for algorithm development and ongoing clinical validation studies in preparation for a new De Novo submission.
For the nine months ended January 31, 2022, selling, general, and administrative expenses increased $416,000, or 62%, when compared to the nine months ended January 31, 2021. The increase is due to additional accounting and contract labor, audit, and recruiting fees in preparation for the offering.
Interest expense increased $227,000 during the nine months ended January 31, 2022 when compared to the nine months ended January 31, 2021, an increase of 334%, primarily due to interest from the $1.5M Notes issued in January 2021, interest related to the Bridge Notes and debt service amortization. For more information, see “—Description of Indebtedness.”
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Summary of Statements of Operations for Fiscal 2021 compared with Fiscal 2020:
| For the years ended April 30 | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Revenue |
$ | 26 | $ | 64 | $ | (38 | ) | -59 | % | |||||||
| Cost of sales |
11 | 46 | (35 | ) | -76 | % | ||||||||||
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| Gross margin |
15 | 18 | (3 | ) | -17 | % | ||||||||||
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| Operating expenses: |
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| Research and development |
1,708 | 2,040 | (332 | ) | -16 | % | ||||||||||
| Selling, general and administrative |
875 | 1,796 | (921 | ) | -51 | % | ||||||||||
| (Gain) loss on disposal of property and equipment |
(2 | ) | 10 | (12 | ) | -120 | % | |||||||||
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| Total operating expenses |
2,581 | 3,846 | (1,265 | ) | -33 | % | ||||||||||
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| Loss from operations |
(2,566 | ) | (3,828 | ) | 1,262 | -33 | % | |||||||||
| Interest expense |
(132 | ) | (3 | ) | (129 | ) | 4300 | % | ||||||||
| Gain on extinguishment of debt |
250 | — | 250 | — | ||||||||||||
| Gain on settlement of payables |
— | 22 | (22 | ) | -100 | % | ||||||||||
| Other expense |
(4 | ) | (2 | ) | (2 | ) | 100 | % | ||||||||
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| Other income (expense), net |
114 | 17 | 97 | 571 | % | |||||||||||
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| Net loss |
$ | (2,452 | ) | $ | (3,811 | ) | $ | 1,359 | -36 | % | ||||||
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Revenues declined from $64,000 to $26,000 in 2021 when compared to 2020, a decrease of approximately 59%. Our revenues to date have been in relation to establishing distributor relationships outside the United States during product development and improvement. The decrease in revenue is due to the timing of engaging new distributors and declines resulting from the COVID-19 pandemic which impacted engagement with medical institutions and distributors.
The cost of sales decreased $35,000, or 76%, to $11,000 during Fiscal 2021 compared to $46,000 as of Fiscal 2020 and the decline is consistent with the decrease noted in revenue.
During Fiscal 2021, research and development expenses decreased $332,000 when compared to Fiscal 2020, a decrease of 16%, primarily resulting from decreases of $35,000 in premises costs, $133,000 in software consulting and $81,000 in payroll expenditures, which is consistent with work associated with the first De Novo submission that took place during Fiscal 2020 and cost reduction measures implemented by management at the outset of the COVID-19 pandemic.
During Fiscal 2021, selling, general, and administrative expenses decreased $921,000, or 51%, when compared to Fiscal 2020. The primary decreases were in payroll related expenditures and reductions in consulting and travel expenditures, which is consistent with cost reduction measures implemented by management at the outset of the COVID-19 pandemic.
Interest expense increased $129,000 during Fiscal 2021 when compared to Fiscal 2020, primarily due to interest under the $1M Loan and Security Agreement entered into in April 2020. For more information, see “—Description of Indebtedness.”
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
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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 January 31, 2022, we had approximately $1.3 million of cash, an increase of $0.6 million from $0.7 million as of April 31, 2021.
During the nine months ended January 31, 2022, we raised an additional $3.4 million in gross proceeds, offset by $377,000 in deferred financing costs, in connection with the 2021 Bridge Financing to support our on-going business plan.
Since our inception through January 31, 2022, we have funded our operations principally from sales of equity and debt securities.
The auditors’ report on our financial statements for Fiscal 2021 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. 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:
| Nine months ended January 31, 2022 (Unaudited) |
Years Ended April 30, |
|||||||||||
| U.S. dollars, in thousands |
2021 | 2020 | ||||||||||
| Net cash used in operating activities |
$ | (2,452 | ) | $ | (2,452 | ) | $ | (3,840 | ) | |||
| Net cash (used in) provided by investing activities |
$ | (2 | ) | $ | (1 | ) | $ | 8 | ||||
| Net cash provided by financing activities |
$ | 3,058 | $ | 2,680 | $ | 1,810 | ||||||
| Net change in cash and cash equivalents during the period |
$ | 605 | $ | 227 | $ | (2,022 | ) | |||||
Operating Activities
Net cash used by our operating activities of $2.5 million during the nine months ended January 31, 2022 was primarily due to our net loss of $2.8 million less net non-cash items of $78,000, offset by $401,000 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 of $2.5 million. Net cash used by our operating activities of $3.8 million during Fiscal 2020 was primarily due to our net loss of $3.8 million plus net non-cash items of $167,000, offset by $196,000 of net changes in operating assets and liabilities.
We believe that our primary sources of capital will be the proceeds of this offering and the net proceeds of the 2021 Bridge Financing, cash and cash equivalents and, if an opportunity presents itself, the sale of debt or
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equity securities, although we may not be able to complete financing on terms acceptable to us, if 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—Our independent registered public accounting firm has expressed 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.”
Financing Activities
Net cash provided by financing activities in the nine months ended January 31, 2022 of $3.0 million primarily relates to proceeds from the Bridge Notes of $3.4 million offset by deferred financing costs of $377,000.
During Fiscal 2021, net cash provided by financing activities was $2.68 million and was primarily from the issuance of convertible promissory notes, Series C Preferred Stock, and shareholder notes. During Fiscal 2020, net cash provided by financing activities was $1.81 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 Needs
Although we expect that the proceeds of this offering would be sufficient to achieve FDA clearance, which would allow us to market the MyoVista in the U.S., there is no assurance this would be case. Additional funding would be required to support the sales launch of the MyoVista into the U.S., provide working capital and support further R&D.
Description of Indebtedness
As of January 31, 2022, we had a total of $5.3 million of indebtedness, excluding accrued and unpaid interest, outstanding as follows:
| As of January 31, 2022 (unaudited) |
As of April 30, | |||||||||||
| 2021 | 2020 | |||||||||||
| (U.S. dollars in thousands) | ||||||||||||
| Bridge Notes |
$ | 2,629 | $ | — | $ | — | ||||||
| $130K Note |
130 | 130 | 101 | |||||||||
| $1.5M Notes |
1,500 | 1,500 | — | |||||||||
| $1M Loan and Security Agreement |
1,000 | 1,000 | 300 | |||||||||
| PPP Loan |
— | 250 | 250 | |||||||||
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| Total: |
$ | 5,259 | $ | 2,880 | $ | 651 | ||||||
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Bridge Notes
Pursuant to the 2021 Bridge Financing, the Company issued Bridge Notes in an aggregate principal amount of $4.7 million. The Bridge Notes bear interest at 8% per annum payable on the maturity date of the Bridge Notes of December 22, 2024 and are secured by a subordinated security interest in substantially all of the assets, including patents and other intellectual property, of the Company. From and after the one-year anniversary of the issuance of the Bridge Notes, the Company may prepay the principal of the Bridge Notes and all accrued and unpaid interest thereon at a price of 115% of the principal amount to be prepaid (plus accrued and unpaid interest). In addition, upon the occurrence of an event of default or a change of control of the Company (as defined in the Bridge Notes), the holders of the Bridge Notes may redeem their Bridge Notes in an amount equal to 125% of the principal amount (plus accrued and unpaid interest). The Company received net proceeds (net of the OID) of $4.2 million in connection with the 2021 Bridge Financing. For more information regarding the 2021 Bridge Financing, see “Prospectus Summary—Recent Developments—2021 Bridge Financing”.
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Each Bridge Note was issued with a 10% original issue discount and is convertible into a number of shares of Common Stock equal to an initial conversion price of the lower of (i) $6.06 per share or (ii) a 30% discount to the price allocated to each share of Common Stock in this offering (for purposes of this prospectus, we have assumed that this offering will be a qualified offering), which is referred to as the Conversion Price. Pursuant to the terms of the Bridge Notes, the amount allocated to each share of Common Stock in this offering is $4.875 (based on an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus). Pursuant to their terms, the Bridge Notes will convert into shares of Common Stock at the Conversion Price of $3.41 automatically upon the consummation of this offering. Any holder (including its Attribution Parties) who would beneficially own in excess of the Maximum Percentage of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the conversion of all or any portion of the Bridge Notes, may elect to receive a Pre-Funded Warrant for all shares in excess of the Maximum Percentage. The Pre-Funded Warrants have substantially the same terms as the Bridge Warrants issued in the 2021 Bridge Financing. See “Description of Securities—Warrants” for more information. The exercise price of the Pre-Funded Warrants is $0.0001 per share. Any such Purchaser may adjust the Maximum Percentage at any time, upon 61 days’ notice, provided that the Maximum Percentage may not be adjusted above 9.99% of the number of shares of Common Stock outstanding immediately prior to, and immediately after giving effect to, the conversion of all or any portion of the Bridge Notes. The exercise of the Pre-Funded Warrants is also subject to the Maximum Percentage except that any exercise of the Pre-Funded Warrants resulting in a number of shares in excess of the Maximum Percentage shall be deemed null and void and shall be cancelled ab initio.
For two years after the issuance date of the Bridge Notes until conversion, the Conversion Price of the Bridge Notes is subject to adjustment for certain events such as stock dividends and splits and issuances of shares of Common Stock or securities convertible into or exercisable for shares of Common Stock at a price less than the Conversion Price, in which event the Conversion Price will be subject to a full ratchet downward to the price at which such newly issued shares of Common Stock or securities convertible into or exercisable for shares of Common Stock were issued.
The Bridge Notes contain covenants that, among other things, restrict our ability to:
| • | incur or guarantee additional indebtedness; |
| • | grant certain liens; |
| • | redeem or repay certain other indebtedness; |
| • | transfer or sell assets; |
| • | repurchase any equity securities; |
| • | pay dividends or make other distributions on capital stock or make other restricted payments; |
| • | engage in transactions with affiliates other than on an “arm’s length” basis; and |
| • | make any change in the principal nature of our business. |
The Bridge Notes contain numerous events of default, including:
| • | the failure to file a registration statement relating to the shares of Common Stock to be received upon conversion of the Bridge Notes as required by the Registration Rights Agreement; |
| • | the failure to keep any such registration statement in effect as required under the Registration Rights Agreement; |
| • | the suspension of our Common Stock from trading; |
| • | the failure to keep, as authorized shares reserved for issuance, 200% of the number of shares of Common Stock as shall be necessary to effect a conversion of the Bridge Notes; |
| • | nonpayment of principal or interest; |
| • | violations of covenants; |
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| • | the breach of any representation or warranty set forth in any of the documents and instruments executed and delivered in connection with the 2021 Bridge Financing; |
| • | cross default and cross acceleration to certain other indebtedness; |
| • | bankruptcy and judgments; and |
| • | the failure to pay any indebtedness greater than $250,000 when due. |
$130K Note
On August 12, 2019, the Company entered into an unsecured drawdown convertible promissory note with Front 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, available.
$1.5M Notes
In December 2020, the Board of Directors approved the private offering to accredited investors of a series of secured convertible promissory notes in the aggregate principal amount of $1.5 million, which we refer to as the $1.5M Notes. The $1.5M Notes had an original maturity of July 31, 2022 and were subsequently amended on November 2, 2021, extending maturity to October 31, 2022, and further amended in June 2022. As consideration for the extension in 2021, we issued the $1.5M Lender Warrants to the noteholders. For more information, see “Description of Securities—Warrants—$1.5M Lender Warrants.”
In the event the $1.5M Notes are converted into Common Stock on or prior to the maturity date, no interest shall accrue or be payable. Interest is only payable if the notes are not converted on or prior to the maturity date, in which event interest shall accrue and be payable on the outstanding principal balance of the notes at a simple interest rate of 12% per annum.
The $1.5M Notes are secured by substantially all of the Company’s assets and intellectual property. This security interest is subordinate to the security interests granted pursuant to the MyoVista Technology Agreement and the $1M Loan and Security Agreement described below.
The Company is entitled to either repay the principal and all accrued but unpaid interest on the $1.5M Notes upon giving 10 days written notice to the holders at any time; or the outstanding principal amount, and accrued but unpaid interest, is convertible into Common Stock at an exercise price of $1.65 per share, adjusted for any splits, recapitalizations, combinations or other similar transactions affecting the Company’s Common Stock upon or after any of the following events: (i) 30 days following FDA clearance of the MyoVista; (ii) the closing of further funding of $5 million or more which values the entire equity capital of the Company at $50 million or more; (iii) a public offering of Common Stock; or (iv) the sale or merger of a majority of the voting stock of the Company. Each holder of a note may elect for conversion at any time upon written notice to the Company. As of January 31, 2022, accrued and unpaid interest was approximately $170,000.
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The $1.5M Notes contain numerous events of default, including:
| • | nonpayment of principal or interest; |
| • | violations or nonperformance of covenants |
| • | commencement of liquidation, reorganization, or dissolution; and |
| • | bankruptcy and judgments. |
The $1.5M Notes do not contain any covenants, other than those that are defined as events of default listed above, that restrict our ability to conduct business.
We have assumed that all of the $1.5M Notes will convert into shares of Common Stock upon the consummation of this offering at a conversion price of $1.65.
$1M Loan and Security Agreement
In April 2020, the Company entered into a loan and security agreement, which we refer to as the $1M Loan and Security Agreement, with FRV, which is a beneficial owner of more than five percent (5%) of the combined voting power of our outstanding capital stock, and John Q. Adams, Sr. (a former director of the Company). Each of FRV and Mr. Adams committed to lend a principal amount of $500,000, totaling $1 million, evidenced by secured, non-convertible promissory notes that we refer to as the $1M Notes. The loan was drawn in three installments of $300,000 upon execution of the $1M Loan and Security Agreement, $350,000 in July 2020 and $350,000 in September 2020. 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 secured by substantially all of the Company’s assets and intellectual property.
The loan had an original maturity date of September 30, 2021, which was amended on September 30, 2021, making the note repayable on demand. The loan was amended again on November 3, 2021, extending the maturity to September 30, 2022, and further amended in May 2022, extending the maturity to September 30, 2023, subject to completion of this offering. As consideration for the extension in November 2021, we issued the $1M Lender Warrants to FRV and Mr. Adams. For more information, see “Description of Securities—Warrants—$1M Lender Warrants.” In connection with the amendment in May 2022, we agreed to pay Mr. Adams all accrued and unpaid interest on his note prior to September 30, 2022. The extension in May 2022 is subject to the completion of this offering. As of January 31, 2022, accrued and unpaid interest totaled $196,000, of which approximately $98,000 was owed to Mr. Adams.
The $1M Notes contain numerous events of default, including:
| • | nonpayment of principal or interest; |
| • | the breach of any representation or warranty set forth in any of the documents and instruments executed and delivered in connection with the $1M Loan and Security Agreement, as amended; |
| • | cross default and cross acceleration to certain other indebtedness; |
| • | bankruptcy and judgments; |
| • | a final judgment or order for payment of money in excess of $10,000 rendered against the Company; |
| • | cessation of our operations; 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 $1M Notes do not contain any covenants, other than those that are defined as events of default and therefore listed above, that restrict our ability to conduct business.
We intend to use the net proceeds from this offering to repay this loan.
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Paycheck Protection Program Loans
On April 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 in November 2020.
On January 25, 2021, the Company received a second PPP loan in the amount of $250,200. Following the PPP guidelines, the loan was forgiven in June 2021.
Current Outlook
We have financed our operations to date primarily through the issuance of Common Stock, Preferred Stock 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 the U.S. during the development of the MyoVista. We require FDA clearance to market the MyoVista in the U.S. and do not expect to generate significant revenues from the sale of our device in the near future or prior to FDA clearance.
As of January 31, 2022, our cash and cash equivalents were $1.3 million. We expect that our existing cash and cash equivalents as of the date of this prospectus will be sufficient to fund our current operations until August 2022, without using the net proceeds from this offering and/or the net proceeds from exercise of existing warrants. In addition, our operating plans may change as a result of many factors that may currently be unknown to us, and we may need to seek additional funds sooner than planned. 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; |
| • | the costs of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights; |
| • | the potential costs of contracting with third parties to provide marketing and distribution services for us or for building such capacities 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 would be required to support the sales launch of the MyoVista into the U.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.
Critical 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 in the United States, or U.S. GAAP. The preparation of these financial statements in accordance with U.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
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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 Fair Value of Common Stock
Given the absence of a public trading market of our Common Stock, and in accordance with the guidance as outlined in the American 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 devices industry and trends within the industry; |
| • | actual operating and financial performance; |
| • | current business conditions and projections; |
| • | the rights, preferences and privileges of our preferred stock relative to those of our common stock; |
| • | our financial condition and operating results, including our levels of available capital resources; |
| • | the progress of our research and development efforts; |
| • | equity market conditions affecting comparable public companies; and |
| • | general U.S. 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 has not been a public market for the Company’s common stock, 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 the US 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.
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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.
Debt
For additional information regarding our indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Indebtedness.”
Pricing and Valuation of Inventories
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 the U.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 current fiscal year ending April 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 the U.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 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
In accordance with Accounting Standards Codification, or ASC, 205-40, Going Concern, management has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued. As of January 31, 2022, the Company had an accumulated deficit of $52.3 million and stockholder’s deficit of approximately $4.1 million. In addition, the Company has generated recurring losses and negative cash flows from operations since its inception. Based on its current business plan assumptions and expected cash burn rate, management believes that it has insufficient cash to fund its current operations without additional financing for the next 12 months. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
Management evaluated the significance of these conditions in relation to its ability to meet its obligations. The Company’s continued operations will depend on its ability to raise additional capital through various potential sources such as an initial public offering, or IPO, equity and/or debt financings, or strategic relationships. The Company has
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implemented cost reduction measures and has continued its fundraising efforts as discussed in Note 4 to the financial statements. If the Company does not complete this offering, the Company plans to continue to fund its operations and capital funding needs through a combination of private equity offerings, debt financings, and other sources. While a number of the Company’s investors have participated in multiple rounds of funding, management can provide no assurance that such financing or strategic relationships will be available, which would likely have a material adverse effect on the Company and its financial statements. Additionally, the Company’s ability to continue as a going concern is dependent upon receiving FDA clearance and achieving profitable operations by marketing and selling its medical devices.
Therefore, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period.
The JOBS Act and Smaller Reporting Company Status
We are an “emerging growth company,” or EGC, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.
We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
We will remain an EGC until the earliest of (i) the last day of our fiscal year (a) following the fifth anniversary of the completion of this offering or (b) in which we have total annual gross revenues of at least $1.07 billion, (ii) the date on which we are deemed to be a large accelerated filer, which means the market value of our Common Stock that is held by non-affiliates exceeds $700.0 million as of the prior October 31st and (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities over a three-year period.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements.
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Company 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.
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 and raising sufficient funds to finish our pivotal clinical validation study and device testing and development to submit for, and achieve, FDA De Novo clearance. Additional funding would then be required to support the sales launch of the MyoVista into the U.S., provide working capital and support further R&D. See “—Previous FDA De Novo Submission” and “—Proposed FDA De Novo Resubmission”.
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.”
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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 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 current fiscal year ending April 30, 2023. For additional information regarding the FDA regulatory process, see “Business—FDA and Other Government Regulation.”
We require the funding from this offering to continue our work towards FDA resubmission and clearance. Although the net proceeds of this offering are anticipated to be sufficient to achieve FDA clearance, which would allow us to market the MyoVista in the U.S., there is no assurance that this would be the case. Additional funding would then be required to support the sales launch of the MyoVista into the U.S., provide working capital and support further R&D. Our auditors’ report on our audited financial statements for Fiscal 2021 contains an explanatory paragraph regarding substantial doubts about our ability to continue as a going concern because we have experienced recurring losses, negative cash flows from operations, limited capital resources, a net shareholders’ deficit, as well as significant debt obligations. These events and conditions, along with other matters, 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.
Heart Disease Facts and Current ECG Testing Limitations
Heart disease refers to a variety of conditions that affect the heart—including heart rhythm problems, heart valve problems, genetic defects and blood-vessel diseases such as coronary artery disease. It is often referred to as the “silent killer” and, according to the American Heart Association, one in three patients are not properly diagnosed until after a heart attack occurs and 50% of men and 64% of women who died suddenly of coronary heart disease had no previous symptoms. Statistics published by the CDC show that in the United States heart disease is the leading cause of death for men, women, and people of most racial and ethnic groups. According to the CDC, one person dies from cardiovascular disease every 36 seconds and heart disease accounts for approximately one in four deaths. In 2018, 30.3 million U.S. adults were diagnosed with heart disease including 18.2 million adults with CAD. Approximately 605,000 patients in the U.S. have a heart attack each year with
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approximately 20% of deaths from CAD occurring in adults less than 65 years old. The scale of the problem is similar worldwide. In 2020, the World Health Organization confirmed that heart disease has remained the leading cause of death at the global level for the last 20 years. Ischemic heart disease now represents 16% of global deaths and an estimated 17.9 million people died from cardiovascular diseases in 2019, representing 32% of all global deaths.
As heart disease progresses to more acute stages, the cost to treat patients increases significantly. Cardiovascular disease is the leading cost to the healthcare system and is estimated to be responsible for one in every six healthcare dollars spent in the United States. Heart disease costs in the United States were approximately $363 billion in each of 2016 and 2017, including the cost of health care services, medicines, and lost productivity due to death. Governments, healthcare providers and payors are motivated to shift the diagnosis and management of these conditions to earlier stages where better patient outcomes can be delivered at lower costs.
We believe that there is currently no low-cost, front-line, medical device that is effective at screening for heart disease. As a result, frontline physicians face a significant challenge in determining if a patient has heart disease. The conventional ECG is thought of by many to be the front-line tool in cardiac testing, but it has poor sensitivity in detecting CAD or structural heart disease. According to Appropriate Use of Non-Invasive Testing for Diagnosis of Stable Coronary Artery Disease, an article published in the April 2014 issue of the Journal of European Society of Cardiology, current, conventional, resting 12-lead ECG devices have a 50% or less sensitivity in identifying CAD. In 2012, the 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.” In 2018, the USPSTF reconfirmed (i) its recommendation not to screen with resting or exercise ECG testing for adults at low risk of cardiovascular disease, or CVD, events and (ii) that it had found that there is also insufficient evidence to recommend screening with resting or exercise ECG tests for adults at intermediate or even high risk of CVD.
Despite the limitations of the conventional ECG and healthcare guidance around the world that recommends against its use for heart disease screening, in the absence of a better alternative, the ECG remains a ubiquitous and widely-used test throughout healthcare including non-cardiology settings. It is estimated that 1.5 to 3 million ECGs are performed worldwide every day, making it one of the most commonly used cardiac diagnostic tests and a fundamental tool in clinical practice. It is estimated that more than 100 million ECGs are performed each year in the United States. The 2018 National Ambulatory Medical Care Survey indicated that patient care physicians, excluding anesthesiologists and federal facilities such as VA clinics, ordered or provided 27 million ECG tests and 4 million stress ECGs at office visits, and the 2017 National Hospital Ambulatory Medical Care Survey showed that on ambulatory care visits to hospital emergency departments, an additional 28 million ECG tests were ordered or performed by hospital emergency departments.
Overuse of Expensive Cardiology-Based Diagnostic Testing
We believe that the absence of cost-effective front-line or primary-care-based testing has resulted in the over-use of costly cardiology-based diagnostic tests. Noninvasive cardiac tests are significant contributors to healthcare costs, accounting for greater than 40% of Medicare Part B spending on medical imaging, or over $17 billion annually according to the CMS. There are a variety of effective, though expensive, diagnostic tests for patients used to detect heart disease. These are typically performed in a specialist cardiology or hospital setting and include:
| • | Stress ECG testing, a non-invasive diagnostic test with a cost of approximately $200 with, according to the American College of Cardiology, a sensitivity of 68% in the detection of CAD; typically performed in a cardiologist setting and requires the patient to run on a treadmill, which can be difficult for many patients. A study published in March 2018 by the American Heart Association, or AHA, demonstrated that among 553,027 patients that were younger than 65 that underwent stress testing, only 5.1% were |
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| hospitalized for a heart attack, required a stent, revascularization procedure or were referred for a coronary angiogram. |
| • | Echocardiogram, a non-invasive diagnostic imaging test, similar to an ultrasound, that is effective in the detection of heart disease; however, the Medicare cost of an echo in a hospital is approximately $600 and can be as much as $2,000 if performed privately. The echo is frequently ordered by primary care physicians and is the most common cardiac imaging test upon referral. According to the 2018 National Ambulatory Medical Care Survey, office-based patient care physicians, excluding anesthesiologists and federal facilities such as VA clinics, ordered or provided 10 million echos. However, according to a December 2017 study in Clinical Cardiology that examined the appropriateness versus the value of echocardiograms ordered by primary care physicians, only 22% of patients had abnormalities and only 2.5% experienced a change in patient management that corresponded with the initial suspected diagnosis and echocardiographic findings. |
| • | Cardiac imaging tests, such as nuclear stress tests and coronary CT angiograms, or CCTAs, alternatively can be conducted noninvasively, but typically cost $1,000 or more. There are more than 10 million cardiac imaging tests conducted in the United States each year. According to a study published by the AHA in September 2020 that reviewed previous CT test results of nearly 40,000 patients who underwent coronary CCTAs from January 2007 to December 2013, only 15.3% of patients had obstructive CAD. Despite the high negative outcome rates, costs and patient exposure to radiation, these tests remain commonplace. |
| • | Coronary angiogram, an invasive test in which dye that is visible by X-ray is injected into the blood vessels of the heart. The X-ray machine rapidly takes a series of images (angiograms), offering a look at the patient’s blood vessels. Coronary angiogram is considered the “gold standard” for diagnosing coronary arterial disease and can cost in excess of $5,000. According to an article in the New England Journal of Medicine, in a large 2010 study which reviewed angiogram results of 400,000 patients, only 38% of patients (without known CAD) actually had obstructive CAD. |
We believe that the referral process for cardiology testing is inefficient and costly for health systems due to the absence of a gateway test which detects early heart disease at a high rate, particularly for primary care. Not only are many patients with heart disease missed, but most cardiology testing has a negative test result that requires no further treatment or testing.
Diastolic Dysfunction, an Early Indicator of Heart Disease
The symptoms and causes of cardiac dysfunction have been researched for many years. The causes of cardiac dysfunction during the contraction (systolic) phase, also called reduced left ventricular ejection fraction, have been well understood for many years. However, according to the American Heart Association Statistics Committee report in 2013, approximately 50% of patients with heart failure symptoms have ejection fraction measures that are not markedly abnormal. In addition, multiple articles published by the NIH state that approximately 50% of HF cases are due to severe diastolic dysfunction, also called heart failure with preserved ejection fraction or HFpEF. As a result, understanding the causes and progression of diastolic dysfunction has become a key area of scientific and clinical interest. This research has led to the understanding that almost all patients with systolic dysfunction also have diastolic dysfunction and almost all types of heart disease including CAD, valvular disease, cardiomyopathy, hypertension, congenital heart disease, and pericardial disease induce diastolic dysfunction.
According to an article by Dr. Dalane W. Kitzman, MD and Dr. William C. Little, MD published in the February 14, 2012 issue of the Journal of the American Heart Association, diastolic performance is sensitive to nearly all of the common disease processes that affect cardiovascular function. The article indicates that LV diastolic function is impaired by all of the common disease processes that affect LV function or produce LV hypertrophy or fibrosis, including hypertension, diabetes, ischemia, myocarditis, toxins, and infiltrative
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cardiomyopathies. LV diastolic dysfunction, or LVDD, begins early in the heart disease process and continues to increase in severity as heart disease progresses. LVDD is now recognized as one of the earliest signs of heart disease and typical onset occurs when a patient is still asymptomatic. We believe that the early detection of diastolic dysfunction can be a valuable marker for almost all forms of heart disease and age-related cardiac abnormalities that may otherwise be missed by current conventional ECG devices.
The myocardial ischemic cascade diagram below is a standard diagram in cardiology that illustrates the sequence of events that take place as ischemia (lack of blood supply to the heart) increases in severity. As noted below, the first detectable changes during the early stages of heart disease are in the diastolic phase. Conventional ECG changes, if seen at all, occur much later in the disease process. However, diastolic dysfunction continues to act as a reliable marker as heart disease progresses since the severity of dysfunction also increases.
The proprietary MyoVista wavECG algorithm, or the MyoVista Algorithm, is designed to detect abnormally slow cardiac relaxation rates during the early diastolic phase of the cardiac cycle, an early indicator for diastolic dysfunction. The algorithm was designed based on e-prime, which is a key echocardiographic measure of left ventricular diastolic function. The echo measure e-prime, or e’, calculates the maximum left ventricle longitudinal tissue velocities during the early diastolic phase. E-prime is measured at each of the septal and lateral side of the mitral valve annulus to provide septal e’ and lateral e’. An abnormal left ventricular relaxation rate, as defined in the 2016 guidelines from the American Society of Echocardiography, is either septal e’ <7cm/sec or lateral e’ <10 cm/sec.
Product and Technology
The MyoVista device has been developed in response to the relatively recent understanding in cardiology that most forms of heart disease are associated with LV relaxation abnormalities and diastolic dysfunction. The MyoVista is a 12-lead resting ECG device that features our proprietary algorithm developed to detect cardiac dysfunction in the diastolic phase, specifically slower than normal left ventricular relaxation rates as defined by the American Society of Echocardiology Guidelines.
The MyoVista is also designed to include the capabilities of a full-featured conventional 12-lead resting ECG including analysis using the Glasgow Algorithm, also known as the Glasgow ECG Interpretation Algorithm. Developed by the University of Glasgow in the UK, the 12-lead ECG Analysis Algorithm has been relied upon for more than 35 years and is a widely respected resting ECG interpretive algorithms. The Glasgow Algorithm was developed and has been continuously improved over the years by a team of world-renowned ECG researchers. The Glasgow Algorithm is licensed to the Company pursuant to the Glasgow Licensing Agreement.
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For additional information regarding the Glasgow Algorithm and our license, see “—Intellectual Property—Glasgow Licensing Agreement.”
In the MyoVista, the conventional ECG (including the Glasgow Algorithm) and our proprietary algorithm are designed to detect diastolic abnormalities and are combined as a single test with results presented separately. The MyoVista has a high-resolution touchscreen display and incorporates many easy and intuitive to use features commonly associated with a tablet device. The MyoVista’s design focuses on ease of use and features include:
| • | Wall mount and cart mount capabilities as well as tabletop. |
| • | Locking capability to a cart or table to prevent theft. |
| • | A backup lithium-ion battery to provide power if moving from location to location within an environment or if power has been lost. |
| • | A large 15.6” touch screen with very high resolution and contrast providing a quality color image on which to view a patient’s results, which is easily wiped clean for infection control purposes. |
| • | Gesture feature capabilities have been added for ease of use. |
| • | A touch screen that is designed to function even when the clinician is wearing latex gloves. |
| • | A touchscreen keyboard as well as the ability to connect a traditional keyboard. |
| • | An available HDMI display port to provide an oversized screen as a viewing option. |
| • | Electronic medical records integration capabilities that is critical for large hospitals. |
| • | Interpretive analysis software of the Glasgow Algorithm. |
MyoVista device with 1 lead view of signal processed waveform
The MyoVista is intended for use in a clinical setting, by a clinician or other trained personnel who are acting on the orders of a licensed physician. It is not intended for use as a sole means of diagnosis and the information provided is only significant when used in conjunction with a physician review and consideration of all other relevant patient data.
The MyoVista uses electrical information from the heart captured during a standard resting 12-lead ECG test as inputs to a proprietary AI-based algorithm. The device then extracts additional frequency content from the electrical signal once captured using wavelet transform based signal processing to provide additional valuable
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inputs to the AI-based algorithm. A wavelet is a mathematical function used to divide a continuous-time signal into its different frequency components. A wavelet transform is the representation of the converted signal by wavelets. Wavelet transform mathematics has emerged over recent years as a valuable time–frequency analysis tool. It has been particularly useful in applications related to bio-signal processing such as ECG electrical signals. Our signal processing patents relate to the extraction and use of certain frequency related data from the signal processed ECG which are used to produce more accurate and effective algorithms. For more information about our patents, please refer to “—Intellectual Property.”
We have conducted multiple comparisons related to the additional algorithm performance benefits using the frequency information gathered through signal processing by comparing the number of frequency variables used in any given algorithm as compared to conventional ECG inputs and their related statistical significance. The frequency variables generated by the MyoVista consistently rank in the top-tier of statistically significant input variables to our AI algorithm and make up a significant overall percentage of the selected input variables as compared to the conventional ECG variables. During a 20-second test, more than 1,000 pieces of extracted data points may be obtained. The software on the device preselects which of the data variables represent the most valuable inputs for the cardiac dysfunction algorithm and uses those to perform an assessment. The output results of the test are provided as indicators and associated statements.
MyoVista Proprietary Algorithm Indications and Statements
The MyoVista Algorithm is designed to detect whether a patient is negative or positive for abnormally slow left ventricular diastolic relaxation rates as defined by the American Society of Echocardiography. For patients whose results are highly positive or highly negative, the probability that the test is accurate is especially high. For patients whose results are borderline, the results mean that it is likely that the patient is close to the guideline thresholds and therefore the test produces borderline results.
The MyoVista has multiple reporting options which can be configured in the settings menu and includes an option for a clinical interpretation report. The clinical interpretation report includes clinical performance information observed in a reference clinical study population to provide context to a patient’s wavECG test results and assists interpretation by a physician. The device also performs all conventional ECG assessments including software-based automated ECG interpretation through incorporation of the Glasgow Algorithm.
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MyoVista Device screen image with descriptions
MyoVista Patented Center Post Electrode Systems
Electrodes are the sticky patches that are applied to the skin to capture the ECG signal. The MyoVista Center Post Electrodes pictured below are high-quality, single-use disposable ECG electrodes that are designed to be used exclusively with the MyoVista. A new set of electrodes is required for each test.
Unlike a conventional ECG, the MyoVista is designed to analyze frequency content from the heart’s electrical signal. The MyoVista requires high-quality, low impedance signal capture to aid in obtaining the test results that the MyoVista is designed to provide. Accordingly, we have developed a patented cable connection and high-quality electrode system that is unique to us. The design of the electrodes includes a hollow center post connector (pictured below) that aligns firmly to the complementing post design on the cable grabber, allowing for a secure connection to help overcome the challenges of stable signal capture and induced signal noise that are common in other style electrodes.
Our proprietary electrodes are applied to the skin using high-quality electrode hydrogel. The hydrogel is designed to provide improved conductivity of electrical signals and optimize consistent high-quality signal
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capture. Electrical tests per the Association for the Advancement of Medical Instrumentation, or AAMI, standards were performed and demonstrated improved performance over multiple major brands of electrodes. The hydrogel adhesive, while easily repositionable, provides a comfortable and firm adhesion that provides positive contact with the skin surface and ensures optimal signal transmission and minimal signal noise. The electrodes also provide optimal skin contact while accommodating easy, painless removal after single use. The electrodes have passed the International Organization for Standardization, standard ISO 10993-1 for biocompatibility testing for skin sensitivity and irritations.
Previous FDA De Novo Submission
The results from the prior clinical validation study will not be considered by the FDA and should not be used to predict the results from our ongoing new validation study. See “Business—Proposed FDA De Novo Resubmission”.
We previously submitted an FDA De Novo classification request in December 2019 on which we interacted with FDA during 2020. As part of this submission, we provided clinical validation study data for 343 patients which was obtained as part of a larger data collection effort of over a thousand patients at multiple North American institutions and was used to build and subsequently validate our diastolic LV relaxation abnormalities algorithm. The 343-patient clinical validation dataset was created using proportional random splitting of the larger data set.
Although this data was held separate, the FDA stated that random splitting of data into the two datasets is inappropriate and ideally the algorithm development and clinical validation data should be obtained from independent sites with possibly different medical practices and locations in different geographic areas from those of the wider data collection. We also undertook software modifications to address other FDA comments which caused the FDA to raise concerns over the potential introduction of algorithm bias and the FDA ultimately determined that the 343- patient data set was insufficient to establish the probable benefit of the algorithm without a new validation dataset.
The FDA therefore stated, “please evaluate the performance of the device using a new validation dataset to validate the algorithm.”
Prior to finalizing the new validation study the results of the 343-patient clinical validation dataset represents the Company’s data on device performance, accordingly we believe it is material information. However, the results from the prior clinical validation study will not be considered by the FDA and should not be used to predict the results from our ongoing new validation study, which could be materially different.
The MyoVista output indicates a patient as either “highly negative,” “negative,” “borderline,” “positive” and/or “highly positive” for left ventricular relaxation abnormalities. See “Business—Product and Technology”. In the previous De Novo submission we provided statistical results of sensitivity and specificity for two clinical endpoints depending on the interpretation by a physician of a borderline test result as either a positive or negative test result. Borderline is a standard classification used in a conventional ECG interpretive analysis and 16.9% of patients in the 343-patient clinical validation dataset were classified as borderline.
The statistical results of sensitivity, specificity and accuracy for the 343-patient clinical validation dataset are below. However, this information will not be considered by the FDA and should not be used to predict the results from our ongoing new validation study, which could be materially different, and it should be noted that the FDA determined this data was insufficient to establish the probable benefit of the algorithm.
| SENSITIVITY | SPECIFICITY | ACCURACY | ||||||||||
| Borderline test result classified as positive |
94 | % | 70 | % | 84 | % | ||||||
| Borderline test result classified as negative |
82 | % | 92 | % | 86 | % | ||||||
For additional information regarding government regulations and the regulatory authorization process, including the FDA’s authorization or clearance, see “—FDA and Other Government Regulation.”
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Proposed FDA De Novo Resubmission
Based on feedback from the previous De Novo submission and subsequent interaction with the FDA, multiple changes have already been incorporated into the device and associated documentation, including software, user interface changes, documentation, and test report information, layout, style and language.
We are partially through patient recruitment for a new, pivotal clinical validation study for our proposed FDA De Novo resubmission. We submitted the design of the new study to the FDA for review prior to its commencement. The study is a minimum 575-patient clinical validation study. The FDA agreed that the study design should be acceptable and would be expected to provide statistical information on which the FDA can effectively evaluate the performance results of the MyoVista. The study is at the following institutions: Rutgers University (New Jersey), which is acting as the core lab, Beth Israel Hospital (Massachusetts), which is conducting patient recruitment, Scripps Health (California), Einstein Health (Pennsylvania), Montefiore Medical Center (New York) and UT Southwestern (Texas).
Since the prior De Novo submission, we have continued to explore algorithm improvements, through extraction of additional data points from the ECG signal and implementation of the latest AI techniques, which may be incorporated into the algorithm used for final clinical validation.
Additionally, we have been updating compliance standard and verification and validation testing, including electromagnetic compatibility or EMC testing due to testing guideline changes. Such testing is required for all FDA electronic medical devices.
We currently expect to resubmit for FDA De Novo clearance in the current fiscal year ending April 30, 2023, and the FDA’s De Novo classification authorization process generally takes from five to twelve months from the date the application is submitted, but can take significantly longer. For additional information regarding the FDA regulatory process, see “—FDA and Other Government Regulation”.
Market Opportunity
Diagnostic Gap
The significant diagnostic gap in heart disease is early identification. Heart disease often remains asymptomatic for many years as disease progresses until it reaches an acute stage, at which point many patients have a heart attack or die without prior diagnosis of disease. For this reason, heart disease is often referred to as the “silent killer.”
Frontline physicians face a significant challenge in identifying cardiac disease early. We believe that there is currently no low-cost, front-line, medical device that is effective at screening for heart disease. According to the 2018 National Ambulatory Medical Care Survey, 72% of office visits involved patients having one or more of the main cardiac risk factors of hypertension, hyperlipidemia, diabetes, or obesity. In the absence of a low-cost, front-line, medical device that is effective at screening for heart disease, frontline healthcare providers rely predominantly on a patient’s risk factors. Despite its poor sensitivity and limited ability to identify cardiac dysfunction associated with structural and ischemic disease, the conventional ECG test still remains widely used by frontline physicians. As a result of its current limitations, many patients with heart disease go undiagnosed, and many patients referred to cardiology for subsequent testing do not have heart disease.
In 2012, the USPSTF stated that 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 smoking, blood pressure and cholesterol levels, acknowledging the diagnostic gap that currently exists.
In addition, according to the CDC, cardiovascular disease remains the biggest cost for the US healthcare system at approximately $216 billion per year. The cost of treating acute cardiac events and heart failure is especially high in comparison to preventative treatment. Governments, healthcare providers and third-party
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payors are focused on shifting the diagnosis and management of heart disease to earlier stages where better patient outcomes can be delivered at lower cost; however, to make substantial progress in improving patient outcomes at lower costs, the existing diagnostic gap needs to be closed.
Changing Demographics
Heart disease is most commonly found in individuals age 65 and older with incidences of heart disease increasing at 65 years for men and 71.8 years for women. According to the Organization for Economic Co-operation and Development, advances in the field of medicine have led to an increase in life expectancy which, as of 2019, was estimated to average 78.9 years for a person in the U.S., up from 75.4 years in 1990. As life expectancy increases, the average age of the population is expected to increase. According to the HHS, the population age 65 and older increased from 38.8 million in 2008 to 52.4 million in 2018 (a 35% increase) and is projected to reach 94.7 million in 2060. By 2030, more than 20 percent of U.S. residents are projected to be age 65 and over. Since heart disease is most common in elderly individuals, and that population pool is increasing, we believe there is a significant opportunity for a device such as the MyoVista.
Growing ECG Market
The demand for electrocardiograph devices and related supplies known as electrodes is on the rise worldwide. Despite the limitations of the conventional ECG and healthcare guidance around the world that recommends against its use for screening, in the absence of a better alternative, the ECG remains a ubiquitous and widely-used test throughout healthcare including non-cardiology settings. It is estimated that 1.5 million to 3.0 million ECGs are performed worldwide every day, making it one of the most commonly used diagnostic tests in healthcare and a fundamental tool in clinical practice. It is estimated that more than 100 million ECGs are performed each year in the United States. The 2018 National Ambulatory Medical Care Survey reflected that office-based patient care physicians, excluding anesthesiologists and federal facilities such as VA clinics, ordered or provided 27 million ECG tests and four million stress ECGs during office visits and the 2017 National Hospital Ambulatory Medical Care Survey showed that during ambulatory care visits to hospital emergency departments an additional 28 million ECG tests were ordered or performed by hospital emergency departments.
According to Markets and Markets Global Diagnostic ECG, approximately 770,000 ECG devices were estimated to have been sold worldwide in 2015. We expect changing demographics, such as the aging population and increasing rates of obesity, to contribute to even greater numbers of cardio-related testing, and therefore ECG devices and supply usage, over the coming years. According to Markets and Markets Diagnostic ECG Market (2019-2024), the global diagnostic ECG device market excluding supplies is approximately $7.5 billion per year and projected to be valued at $10.3 billion in 2024 with an expected 6.4% compounded annual growth rate, or CAGR.
Impetus to Identify Risks Earlier for More Effective Low-Cost Testing
A key goal of the HHS is reducing healthcare costs. This places pressure on physicians and healthcare institutions to contain healthcare costs. Additionally, one of the key objectives of HHS’s Healthy People 2030, is to increase preventive care for people of all ages. We believe that efforts towards preventive care and maintenance will lead to more testing for high-risk individuals and patients who have existing cardiac conditions. This trend, we believe, in tandem with the push to shorten hospital stays, has created an impetus to identify pre-symptomatic patients at risk more effectively at the front-line physician or clinic level and to treat recovering cardiac patients through outpatient care and rehabilitation.
Changing Nature of Healthcare Providers
The delivery of healthcare in the U.S. is evolving. Alternative treatment sites, such as retail clinics, concierge medicine, urgent care clinics and ambulatory surgical centers deliver care from qualified providers in settings outside of emergency departments, hospitals or traditional physician offices. We expect this trend to
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accelerate the drive to provide more effective preventative care and represents a significant opportunity for the introduction of MyoVista as a new medical device that offers an enhanced ability to screen for heart disease.
Retail Clinics. Retail clinics have seen significant growth and, according to a report by The Insight Partners titled, “Retail Clinics Market to 2027,” the global retail clinics market is expected to reach $8.1 billion in 2027 and increase from $3.4 billion in 2018. In the U.S., major players operating retail clinics include The Kroger Co., CVS Health, Rite Aid Corp, Walmart Inc., and Walgreens Co. Walmart alone has announced that it intends to have 4,000 primary care “supercenters” in stores by 2029 having opened its first one in 2019. Walmart and other retail clinic providers are seeking to radically change frontline health delivery by offering access to convenient, low-cost medical testing and treatment either with or without traditional insurance.
Concierge Medicine. Concierge medicine is increasing rapidly in the U.S. According to a 2021 report by Research and Markets, the U.S. concierge medicine market is expected to reach $10.0 billion by 2028 and is expected to expand at a CAGR of 9.39% from 2021 to 2028. Increased waiting time for physician appointments, shortage of physicians and rising prevalence of chronic diseases are driving patients from conventional settings to non-traditional care settings. This, along with increased face time with physicians and a focus on preventive care, is driving the growth of the market.
Urgent Care Clinics. Urgent Care Clinics market sector has exhibited strong growth. According to IBIS World market research, shifting consumer preference to the convenience and timesaving of urgent care, coupled with rising hospital emergency care costs and a shortage of primary care physicians, has stimulated demand for industry services. In response, industry revenue is anticipated to grow at an annualized rate of 4.6% to $40.3 billion during 2022. An increase in the number of insured Americans has benefited industry operators due to the Affordable Care Act, or ACA. There are currently over 9,500 urgent care centers in the U.S.
Ambulatory Surgical Centers. According to a 2018 Research and Markets report on ambulatory surgical centers, the number of freestanding surgical centers has been expanding over the last decade, experiencing strong growth. As a result of this growth, the number of outpatient surgical procedures performed in ambulatory surgery centers increased by 32% from 2005 to 2017.
We believe that the scale of cardiac disease as well as changing demographics, growing ECG market, impetus to identify risks earlier for more effective low-cost testing, along with the increasing number and type of health care settings creates a significant opportunity for a device such as the MyoVista.
Capitation Provides an Incentive to Identify Medicare Advantage Patients
Healthcare providers are paid either through fee-for-service or capitation. Fee-for-service is a payment model where services are unbundled and paid for separately. In health care, the fee-for-service payment model incentivizes physicians to provide more treatments because payment is dependent on the quantity, rather than quality of care. Capitation is a payment arrangement that pays a physician or group of physicians a set amount for each enrolled person assigned to them, per period of time, whether or not that person seeks care. Under capitation, the amount of remuneration is based on the average expected healthcare utilization of that patient, with greater payment for patients with significant history of medical problems.
Approximately 42% (approximately 26 million people) of those covered by Medicare, according to CMS, are enrolled in a Medicare Advantage plan. With respect to these patients, CMS pays capitation to healthcare providers. CMS uses risk adjustment to adjust capitation payments to health plans, either higher or lower, to account for the differences in health costs of individuals such as heart failure, CAD, angina and valvular heart disease. Accordingly, under CMS guidelines, risk factor adjustments per patient will provide payment that is higher for sicker patients who have conditions where diagnosis codes are documented in the medical record as a result of a face-to-face visit. Therefore, there is a financial incentive to identify those Medicare Advantage patients that are sicker, including those that have undiagnosed ailments such as heart disease. We believe that undiagnosed heart disease represents a significant problem, and we believe insurance plans that have a high number of Medicare Advantage patients could be a target market for MyoVista testing.
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Market Strategy
General
Our objective is to make the MyoVista wavECG a standard-of-care, as an affordable, and valuable medical test.
Our business model, which involves the capital sale of the MyoVista device and the use of proprietary supplies (electrodes) for each test, is “razor-razorblade.” The electrode connection system is patented, and we believe the electrodes are superior quality and facilitate high quality, stable ECG signal capture. The MyoVista is also designed to analyze frequency data along with conventional ECG information. Because new electrodes are needed for each test, our proprietary electrodes, if purchased, would provide recurring per-test revenue for each MyoVista device sold.
Our go-to market strategy focuses on device adoption rather than price maximization and we aim to ensure that the purchase price of the MyoVista is affordable. A major brand full-featured, resting 12-lead ECG, such as GE and Phillips, typically costs between $5,000 to $10,000 and we anticipate pricing our device competitively by setting the price for the MyoVista at the lower end of that range. As conventional ECGs are typically used multiple times per day (in a high use environment this could be as much as thirty times per day), the annual revenue from electrodes per device-in-use could exceed that of the upfront sale of the unit.
We intend to develop a direct sales force and to target hospitals, physicians’ offices as well as large retail healthcare organizations. We also intend to use technical presentations, peer reviewed clinical data, and reference sites to achieve penetration of these markets. Finally, we expect to expand our medical advisory board, conduct clinical trials with key opinion leaders, or KOLs, to generate the necessary clinical evidence in various healthcare settings, as well as establish reference sites among these customers.
Communicating the benefits and value to the medical community, while at the same time creating brand awareness, is fundamental to our marketing strategy. We anticipate that we will participate in a number of healthcare industry tradeshow events such as the American Heart Association and regional primary care events. Participating in these events will be in addition to limited advertising in key medical publications and targeted social media campaigns to increase awareness of MyoVista and its benefits.
We will also consider offering potential purchasers different financing options or models to assist them with certain costs related to the MyoVista such as, up-front costs related to purchasing the device or a licensing model charging a monthly fee, as is fairly common practice in healthcare.
Territories
Our initial sales focus will primarily be within the U.S. We intend to market the MyoVista in the U.S. using a direct sales force following FDA clearance. Outside of the U.S., for markets such as Europe and Latin America, we intend to utilize medical device distributors that have existing healthcare provider relationships and experience selling ECG devices, which will be supported by a small number of local field personnel.
The Company previously achieved regulatory compliance in Europe under the EU Medical Devices Directive, or MDD, in February 2017. With EU compliance, the Company is permitted to affix a certificate of conformity called a CE Mark denoting that the device is allowed to be marketed. This provided the Company with a limited number of distributor relationships in Europe including Neovitalis Aps, whose territory covers Denmark, Sweden, Norway and Finland, and also a relationship with Heart Medical Europe BV, whose territory covers Belgium, Netherlands and Luxembourg. These prior relationships aided the Company in development of the final version of the MyoVista device and its related proprietary software by eliciting feedback from KOLs in Europe. The MDD regulatory framework was established on June 14, 1993 but has since been replaced by EU MDR which became effective in May 2021. In order to sell medical devices in member countries of the European Economic Area, or EEA, our device must now comply with the requirements of the newer, updated regulatory framework or EU MDR. In October 2021, the Company submitted the documentation required to establish
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compliance with EU MDR. The submission of the technical file is currently under review. If the submission is found to comply with the new requirements, a new certificate of conformity will be issued to verify the Company’s compliance with EU MDR. An updated CE mark certificate under EU MDR will entitle the Company to market the MyoVista in the European Economic Area. The Company intends to pursue limited efforts in Europe though these distributor relationships as well as a limited number of additional distributor relationships outside the U.S. See “—FDA and other Government Regulation” for additional information.
Potential Markets
We believe that there is a large variety of potential markets for the MyoVista. Conventional ECGs are used throughout healthcare in almost every clinical setting including clinics, doctor’s offices, urgent care centers, and hospitals. In many of those settings, the additional information on cardiac dysfunction which the MyoVista is designed to provide, in addition to the conventional ECG information provided, could be extremely valuable. The MyoVista’s range of applications and potential uses are vast, and include providing:
| • | Primary care—front-line cardiac testing/referral tool, heart disease screening. |
| • | Retail Healthcare—access to ECG testing at retail sites such as CVS, Walmart and Walgreens. |
| • | Emergency Departments—enhanced ECG testing for emergency room patients. |
| • | Cardiologists—prescreening cardiology patients |
| • | Hospitals —in-patient testing or testing prior to discharge, particularly cardiac wards. |
| • | Surgery—pre-anesthesia testing, pre/post intervention |
| • | Life Insurance testing—ECGs are sometimes required in connection with the issuance of life insurance policies. |
| • | Specialty Environments—screening for conditions such as, cardiomyopathy, cardiac oncology, drug trials, heart failure, and diabetes. |
| • | Athlete testing—cardiac screening programs for athletes. |
Early Target Markets
Initially, our focus markets will be in the U.S. and will include: (i) cardiology; (ii) primary care providers that serve upper to middle income regions including concierge medicine providers; (iii) retail clinics and cardiac screening providers; and (iv) insurers with significant numbers of Medicare Advantage patients.
Cardiology. According to the American College of Cardiology, there are approximately 23,000 cardiologists in the U.S. We do not believe that cardiology will be the principal market for MyoVista as cardiologists diagnose specific heart disease conditions rather than screen for heart disease. Nonetheless, we intend to have an early focus on leading cardiologists or KOLs. We have experience internationally with KOL engagement and believe that building advocacy through KOLs and other respected cardiologists will be important as we seek to establish our new technology.
The Company intends to hire sales representatives that have experience presenting new medical devices to cardiologists. The initial focus will be on cardiology centers of excellence and working to generate sales and daily use at these institutions. The field team will also act as a liaison with HeartSciences clinical staff as clinical study opportunities present themselves. We believe that building clinical evidence, particularly for specific clinical indications for use, such as hypertensive patients, will be a key pillar not only in our discussions with payors, but also as a driver for competitive differentiation and adoption.
Primary Care and Concierge Medicine. According to the HHS, there are approximately 209,000 primary care physicians in the U.S., not including pediatricians. The 2018 National Ambulatory Medical Care Survey showed that there were 860 million visits to nonfederal office-based patient care physicians of which approximately 50% were to primary care physicians. According to a 2021 report by Research and Markets, the
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U.S. concierge medicine market size is expected to reach $10.0 billion by 2028 and is expected to expand at a CAGR of 9.39% from 2021 to 2028. In 2016, there were approximately 12,000 physicians that provide some level of concierge services with over half being either family medicine 32% or internal medicine 23%.
Informal feedback to date from concierge physicians and primary care physicians that serve upper to middle income regions indicates that a patient pay charge for utilizing the MyoVista would be generally accepted, which creates revenue potential and value for the physician. This would be in addition to reimbursement for the conventional ECG test provided by the MyoVista. The Company intends to initially hire sales representatives that will focus on these physicians in densely populated middle income to affluent regions of the U.S.
Additionally, primary care and concierge medicine clinics that are not hospital-based usually have flexible procurement processes and physicians have greater autonomy related to purchasing decisions for lower cost capital equipment. Concierge medicine is increasing rapidly in the U.S.
In order to take advantage of the market opportunity of selling to primary care physicians and concierge physicians:
| • | We intend to create specialized marketing, sales, education and training materials focused on the primary care market. |
| • | The sales team will focus on demonstrating ease of use and clinical advantages as well as present the financial advantages of using the MyoVista device. |
| • | We will focus on practices in higher income areas initially. We believe that these practices tend to have more financial flexibility to purchase new devices. There are approximately 209,000 primary care physicians excluding pediatricians as well as 24,000 cardiologists. Sales efforts on specialized clinical areas will increase over time as the salesforce expands. |
With initial reimbursement codes being the same as a conventional resting 12-lead ECG, the Company believes a MyoVista test should be profitable in cardiology and hospital environments as well as for primary care providers whose patient populations are not fundamentally reliant on Medicare. Moreover, the Company believes there is a significant opportunity in additional specialty areas but the sales process will take longer since there would need to be a body of clinical evidence that the MyoVista is effective in these additional clinical use areas, although no assurance can be given that evidence of such effectiveness will be able to be produced.
Competitive Advantages
Assuming FDA clearance of the MyoVista and that we have sufficient funds to launch sales of the MyoVista in the U.S., we believe that HeartSciences could have several competitive advantages:
| • | Price comparability. A major brand, full-feature, resting 12-lead ECG typically costs between $5,000 to $10,000. We anticipate pricing our device competitively by setting the price for the MyoVista at the lower end of the range for a good-quality conventional ECG from a mainstream manufacturer. We believe that competitive pricing will help us to increase adoption of the MyoVista. |
| • | Familiarity of use and protocol. The conventional ECG is the most common cardiac test, is used in almost all areas of healthcare and is often performed by a physician assistant or a nurse, rather than a physician. The MyoVista is designed to provide both conventional ECG information and proprietary cardiac dysfunction information in a single test, using standard 12-lead ECG testing protocols with standard lead placement. We believe that this should enable the MyoVista to fit into existing testing pathways, make it easy to use, and, consequently, easy to train people to use, which can be barriers to adoption for some new healthcare technologies. |
| • | Positioned at the forefront of electrocardiography. There have been very few significant changes in the efficacy and indications for use of an ECG for many decades. We intend to position MyoVista at the forefront of electrocardiography science, which we believe could attract healthcare providers. |
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| • | Health system savings. We believe that the MyoVista could potentially generate significant cost savings to healthcare systems by improving earlier diagnosis of heart disease before it reaches an acute stage and reducing unnecessary referrals to cardiology that lead to unnecessary testing. |
| • | Physician Profitability. We believe that the MyoVista could offer primary care physicians a significant advance in their ability to assess patient heart health. Several primary care physicians have informed us that they would expect to be able to charge additional out-of-pocket patient fees of $25 to $100 for the additional diagnostic information provided by a MyoVista test until additional reimbursement can be obtained. Even based on low usage and competitive pricing, the payback on the capital cost of the MyoVista could potentially be realized quickly. We also expect to provide financing options (through third parties) which would avoid upfront capital costs to acquire the device. In high use environments such as a cardiac screening clinic, hospital or family practice office, we expect the financial returns to be significant especially if additional reimbursement is obtained. We intend to develop financial models demonstrating the potential profitability and to establish reference sites. |
| • | Razor-Razorblade Business Model. In addition to the MyoVista device sales, we expect to generate recurring supplies revenue from the sale of our proprietary electrodes, which are disposable and single use for each test. Unlike a conventional ECG, the MyoVista is designed to analyze frequency content from the heart’s electrical signal and we have developed a patented cable connection and high-quality electrode system that is unique to us and must be used when performing a MyoVista test. We expect the supply revenues from each test to provide recurring revenue and believe this will assist us in avoiding the need for high device pricing, which, in turn, should lower barriers to adoption. |
Reimbursement
In addition to penetrating the health care settings described above, a key element of our strategy is to qualify for third-party payor reimbursement. This strategy has two stages. During the first stage, upon FDA approval, we intend to seek the support of the American College of Cardiology, or ACC, to use existing Current Procedural Terminology, or CPT, codes for the standard ECG functionality of the MyoVista. CPT codes are numbers assigned to each task or service provided by a healthcare provider including medical, surgical and diagnostic services. Insurers use the numbers to determine the amount to pay a provider. While we cannot assure you that we will receive such approval by ACC, this would provide physicians with the ability to use existing 12-lead ECG reimbursement codes. Medicare reimbursement for existing ECG testing procedures with interpretation and report ranges from approximately $17 to $55 depending on the type of healthcare facility. These charges would go directly to the healthcare facility/physician.
The existing procedure codes are:
| • | CPT 93799: Unlisted cardiovascular procedure (not otherwise classified) |
| • | CPT 93000: Electrocardiogram, routine ECG with at least 12 leads; includes running test, interpretation and report |
| • | CPT 93005: Electrocardiogram, routine ECG with at least 12 leads; testing only, without interpretation and report |
| • | CPT 93010: Electrocardiogram, routine ECG with at least 12 leads, interpretation and report only |
After this initial stage, our longer-term strategy is to obtain additional reimbursement for the MyoVista capabilities related to detecting cardiac dysfunction. While we cannot assure you that we will be successful in obtaining additional reimbursement codes, if we are successful, this could potentially provide total reimbursement that is greater than reimbursement for conventional ECG devices, which, in turn, could place the MyoVista at a competitive advantage. Any additional CPT codes or modifiers that are issued and recognized for the MyoVista related to our longer-term reimbursement strategy could provide a revenue advantage as compared to reimbursement for conventional ECG devices.
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Category III code. New technologies must meet AMA’s Level of Evidence and the Use Requirement, so a Category III code will be issued as a precursor to a final Category I code. Category III codes are generally temporary codes requiring additional studies and individual payor efforts to obtain coverage from each payor. Individual payors do not initially provide reimbursement for Category III codes so each payor will need clinical evidence that demonstrates the benefits of the MyoVista based cardiac dysfunction testing.
Category I code. Category I codes are long term codes that are expected to be in use for many years. Generally, to obtain this code, five peer-reviewed publications from at least two different patient populations are required. All third-party payors typically pay CAT I coded diagnostic testing procedures. Approval by the AMA CPT Editorial Panel of new or expanded CPT codes for the MyoVista ultimately could provide a revenue advantage as compared to reimbursement for conventional ECG devices.
New Tech Ambulatory Payment Classification (or APC) code. The new tech APC code is utilized for new and significant technologies which warrant having a unique code under the Healthcare Common Procedure Coding System, or HCPCS. An HCPCS is a payment code issued by the Centers for Medicare and Medicaid Services, or CMS, for use in ambulatory outpatient hospital environments and certain integrated practices. Once the device receives FDA clearance, the Company intends to quickly file an application for a cardiac dysfunction APC code for the MyoVista. If the application is successful, it would provide enhanced revenue over existing conventional ECG devices in a hospital integrated practice such as a cardiology practice.
Competition
The medical device industry is characterized by rapidly advancing technologies, intense competition, and a strong emphasis on proprietary products. There are many medical device companies, biotechnology companies, public and private universities and research organizations actively engaged in the research and development of products that may be similar to the MyoVista. Competitors could include traditional ECG manufacturers such as GE, Philips, and Nihon Kohden Corporation that may seek to innovate due to competition from HeartSciences, and new competitors that also see the opportunity to finally innovate in a market that, we believe, has significant need for improved products and technology change. The current ECG device manufacturers with the greatest market share are GE, Philips, and Hill-Rom Holdings, Inc., or Hill-Rom. The leading competitors in the ECG market have substantially greater name recognition and financial, technical, manufacturing, marketing, research and development resources, and experience obtaining the FDA and other regulatory clearances of those devices and marketing and selling those devices around the world.
There are additional competitors that are using AI to innovate in electrocardiography including:
| • | AliveCor Inc., a commercial stage developer of cardiac monitoring devices and applications for heart health monitoring. AliveCor’s ECG recorder has received FDA clearance. |
| • | Heart Output Input, Inc., or Heartio, a development stage, digital diagnostic utilizing AI in a cloud-based software tool used in conjunction with electrocardiograms to help emergency providers more effectively stratify patient risk and make admit/discharge decisions. Heartio currently does not have any FDA clearance or authorization. |
| • | Corvista Health Inc., a development stage ECG device company with a proprietary platform focused on diagnosing heart failure, coronary artery disease, and pulmonary hypertension. Corvista currently does not have any FDA clearance or authorization. |
| • | Anumana Inc., a development stage company funded by the MayoClinic focused on developing AI-enabled ECG algorithms for physician use, integrating point-of-care applications into existing workflows. Anumana currently does not have any FDA clearance or authorization. |
Clinical Studies
We have participated in and/or conducted multiple studies at various sites including at Mount Sinai Health System, West Virginia University, University of California, Los Angeles, and The Baker Heart and Diabetes
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Institute in Australia. The purpose of conducting the studies was threefold: (i): to collect patient data using the MyoVista to build an effective proprietary algorithm designed to provide early detection of cardiac dysfunction and heart disease, (ii) to create proof-of-concept algorithms for determination by HeartSciences of the viability of an FDA version of the algorithm, and (iii) to use the collected data to conduct research for potential development of additional future algorithms. The peer review article summaries highlighted below used the proof-of-concept algorithms developed by the institutions from the MyoVista data collected. MyoVista devices were used in each study for the collection of patient ECG information. Data was extracted from these ECG readings to develop separate AI-based proof-of-concept algorithms in each individual study.
Following are summaries of the peer- reviewed articles:
Journal of the American College of Cardiology (JACC) April 2018, Volume 71 Number 15 (2018) Partho P. Sengupta, MD DM, Hemant Kulkarni, MD, Jagat Narula, MD PHD, et al.
The study was conducted at Mount Sinai NY. The article is titled, “Prediction of Abnormal Myocardial Relaxation from Signal Processed Surface ECG” and presents the results from the investigator-initiated clinical study that focused on evaluating the feasibility of the MyoVista as a diagnostic tool for predicting the presence of abnormal cardiac muscle relaxation associated with Left Ventricular Diastolic Dysfunction, or LVDD. All patients underwent a complete 2D doppler-based echocardiogram and a MyoVista wavECG test. Monte Carlo cross validation was performed using the average of 20 iterations for determining performance.
The study results demonstrated 80% sensitivity and 84% specificity (p-value 0.05) with an area under the curve, or AUC, of 91% for the prediction of low e’, an echocardiographic parameter widely used in determination of LVDD (95% confidence interval: 86%-95%). An incremental value comparison of the low e’ prediction algorithm as compared to using three clinical features associated with high risk, age, obesity and hypertension, along with conventional ECG risk categorization information resulted in demonstrating that the low e’ prediction algorithm alone provided an increase in AUC performance of 0.19% (p-value<0.0001) over the clinical features and conventional ECG risk information.
The Area Under a Receiver Operating Characteristics, or ROC, Curve is a widely used statistical performance evaluator that provides a measure of the accuracy of a diagnostic test typically calculated using data from a specific clinical study as a measure of performance. ROC is a probability curve and AUC represents the degree or measure of separability – the higher the AUC, the better the model is at distinguishing between patients with the disease and no disease. A test with no better accuracy than chance has an AUC of 0.5, while a test with perfect accuracy has an AUC of 1.
P-value is the probability of obtaining test results at least as extreme as the result actually observed, under the assumption that the null hypothesis is correct. When a statistical test is performed, a p-value helps determine the statistical significance of the results in relation to the null hypothesis. A null hypothesis is a type of statistical hypothesis that proposes that no statistical significance exists in a set of given observations. Hypothesis testing is used to assess the credibility of a hypothesis by using sample data. A low p-value indicates that observed data does not match the null hypothesis, and when the p-value is lower than the specified significance level (usually 5% or 0.05), the null hypothesis is rejected, and the finding is considered statistically significant.
Journal of the American College of Cardiology (JACC) August 2020, Volume 76 Number 8 (2020) Nobuyuki Kagiyama, MD, PHD, Marco Piccirilli, PHD, Naveena Yanamala, PHD et al.
The participating centers were The Icahn School of Medicine, Mount Sinai Hospital, New York, The West Virginia University Heart and Vascular Institute, The Windsor Cardiac Centre, Windsor, Ontario, Canada and the David Geffen School of Medicine at UCLA.
The article titled “Machine Learning Assessment of Left Ventricular Diastolic Function Based on Electrocardiographic Features” presents the results from evaluating the feasibility of MyoVista wavECG technology to provide actual quantitative estimates of the echocardiographic parameter of e’
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related to myocardial relaxation that can be used to identify LVDD. Diastolic dysfunction is recognized as playing a major role in the pathophysiology of heart failure. All subjects underwent a full echocardiographic examination and a MyoVista wavECG test.
The multicenter study enrolled a total of 1,202 subjects with data from one of the institutions used as an external test set n-388 for determining algorithm performance. Results from the estimated e’ values provided by the proof-of-concept algorithm discriminated the guideline-recommended thresholds for low e’ for determining abnormal myocardial relaxation, LVDD and systolic dysfunction (LV ejection fraction) with an AUC of 0.84, 0.80, and 0.81, respectively, in the external test set. Sensitivity and specificity in the external test set for predicting low e’ using the algorithm’s estimated e’ value provided a sensitivity of 90%, specificity of 61% (p-value<0.05), negative predictive value of 81% and positive predictive value of 77%. Moreover, the estimated e-prime values allowed prediction of LV diastolic dysfunction based on multiple age and sex-adjusted reference limits with an AUC of 0.94 in the external test set with sensitivity 89% and specificity 96% (p-value<0.05).
JACC Cardiovascular Imaging Oct 2021, Volume 14 Number 10
Elizabeth L. Potter, MBBS, Thomas H. Marwick, MBBS, PHD, MPH et al.
The participating centers were Baker Heart and Diabetes Institute, Melbourne, Australia, Baker Heart and Diabetes Institute, Monash University, Melbourne, Australia, Melbourne University, Melbourne, Australian National University, Canberra, and the West Virginia University Heart and Vascular Institute.
The article titled “Machine Learning of ECG Waveforms to Improve Selection for Testing for Asymptomatic Left Ventricular Dysfunction Prompt” focused on developing a screening algorithm using the MyoVista for detection of Left Ventricular Dysfunction, or LVD. References to ewECG mean energy waveform ECG and are an alternative name for the MyoVista device and the included wavelet transform signal processing. The study that was the subject of this article consisted of 398 participants with n=287 for development of the feasibility algorithm and n=111 for use as an external test set for determining performance of the algorithm. All subjects received a full echocardiographic examination and a MyoVista wavECG test. Left Ventricular Dysfunction for this study is defined as a subject having (1) LVH or left ventricular hypertrophy, (2) abnormal global longitudinal strain or borderline GLS with left atrial enlargement or (3) abnormal LV filling pressure measures of E/e’ratios >15 or < 10 with left atrial enlargement or low e’ with LAE.
The study results in the external test set demonstrated 85% sensitivity and 72% specificity (p-value<0.05) with an of AUC 0.83, 95% confidence interval: 0.74 to 0.92.
The study below presents the results of a proof-of-concept algorithm developed using the data gathered from previous studies in which MyoVista ECGs were collected from study subjects. This research was conducted for the purpose of potential development of additional future algorithms for detection of additional heart disease conditions.
European Heart Journal—Digital Health November 2020, Volume 1 Issue 1
Peter D. Farjo MD, Naveena Yanamala PHD et al.
The participating centers were West Virginia University Heart and Vascular Institute, Carnegie Mellon University, Juntendo University, Japan and Harbor-UCLA Medical Center. Five hundred thirty-four subjects were included in this multicenter study with n=428 for the training set and n=106 for the test set.
The study article titled “Prediction of coronary artery calcium scoring from surface electrocardiogram in atherosclerotic cardiovascular disease: a pilot study” aimed to determine whether machine learning (ML) approaches can aid cardiovascular risk stratification by predicting guideline recommended Coronary Artery Calcium, or CAC, score categories from clinical features and surface electrocardiograms using the MyoVista. CAC scoring is an established tool for cardiovascular risk stratification.
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The study results included two machine learning models that were developed for prediction of CAC scores equal to 0 and CAC >_400. The performance was evaluated using an independent data set, the CAC= 0 algorithm performance provided sensitivity 92%, specificity 70%, AUC 84% (p-value<0.05) and the CAC >_400 algorithm provided sensitivity 91%, specificity 75% and AUC 87% (p-value<0.05). The CAC >_400 model was further tested to risk stratify a cohort of 87 subjects referred for invasive coronary angiography. Using an intermediate or higher pretest probability (>_15%) which coincides with the European Society of Cardiography pretest probability guidelines, the model predicted the presence of significant coronary artery stenosis, the need for revascularization, notably bypass surgery, and major adverse cardiovascular events during a median follow-up period of two years.
FDA and Other Government Regulation
General
Our proposed products are subject to regulation by the FDA and various other federal and state agencies, as well as by foreign governmental agencies. These agencies enforce laws and regulations that govern the development, testing, manufacturing, labeling, advertising, marketing and distribution, and market surveillance of our medical device products.
In addition to those indicated below, the only other regulations we encounter are regulations that are common to all businesses, such as employment legislation, implied warranty laws, and environmental, health and safety standards, to the extent applicable. We will also encounter in the future industry-specific government regulations that would govern our device, if and when developed for commercial use. It may become the case that other regulatory approvals will be required for the design and manufacture of our device. In previous communications with the FDA, the Company determined that the submission would need to use the De Novo classification process for the MyoVista device.
FDA Requirements and Other Regulatory Approval Requirements
Our device and our operations are subject to regulation by numerous worldwide regulatory bodies including the FDA and comparable international regulatory agencies. In previous communications with the FDA, the Company determined that the submission would need to use the De Novo classification process for the MyoVista device.
Our device is subject to regulation as a medical device under the Federal Food, Drug, and Cosmetic Act, or FDCA, as implemented and enforced by the FDA. The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.
In addition to U.S. regulations, we are subject to a variety of regulations in the European Economic Area, or the EEA, governing clinical trials and the commercial sales and distribution of our device. Whether or not we have or are required to obtain FDA clearance or approval for a product, we will be required to obtain authorization before commencing clinical trials and to obtain marketing authorization or approval of our device under the comparable regulatory authorities of countries outside of the United States before we can commence clinical trials or launch sales of our device in those countries. The approval process varies from country to country and the time may be longer or shorter than that required for FDA clearance or approval. Medical devices are generally subject to varying levels of regulatory control based on risk level of the device.
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A clearance or authorization letter from the FDA authorizes commercial marketing of the device for one or more specific indications of use. After clearance or authorization, the Company will be required to comply with a number of post-clearance requirements, including, but not limited to, Medical Device Reporting and complaint handling, and, if applicable, reporting of corrective actions. Also, quality control and manufacturing procedures must continue to conform to the QSR. The FDA periodically inspects manufacturing facilities to assess compliance with QSRs, which impose extensive procedural, substantive, and record keeping requirements on medical device manufacturers. In addition, changes to the manufacturing process are strictly regulated, and, depending on the change, validation activities may need to be performed. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with the QSR and other types of regulatory controls.
The FDA and the Federal Trade Commission, or FTC, will also regulate the advertising claims of the Company’s products to ensure that the claims it makes are consistent with its regulatory clearances, that there is scientific data to substantiate the claims and that product advertising is neither false nor misleading.
FDA Clearance Process and FDA Validation Clinical Study
Unless an exemption applies, each medical device commercially distributed in the United States requires FDA clearance of a 510(k) premarket notification, granting of a de novo request, or approval of an application for premarket approval, or PMA. Under the FDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of regulatory controls needed to ensure its safety and effectiveness.
Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the Quality System Regulation, or QSR, facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising and promotional materials.
Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, post-market surveillance, patient registries and FDA guidance documents. While most Class I devices are exempt from the 510(k) premarket notification requirement, manufacturers of most Class II devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to class II controls is generally described as 510(k) clearance.
Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a PMA. Some pre-amendment devices are unclassified but are subject to FDA’s premarket notification and clearance process in order to be commercially distributed.
510(k) Clearance Marketing Pathway
To obtain 510(k) clearance, we must submit to the FDA a premarket notification submission demonstrating that the proposed device is “substantially equivalent” to a predicate device already on the market. A predicate device is a legally marketed device that is not subject to PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance process usually takes from three to twelve months, but often takes longer. The FDA may
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require additional information, including clinical data, to make a determination regarding substantial equivalence. In addition, the FDA collects user fees for certain medical device submissions and annual fees for medical device establishments.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements or can request a risk-based classification determination for the device in accordance with the “De Novo” process, which is a route to market novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) or possibly a PMA. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with our determination not to seek a new 510(k) clearance, the FDA may retroactively require us to seek 510(k) clearance or possibly a PMA. The FDA could also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or a PMA is obtained. Also, in these circumstances, we may be subject to significant regulatory fines and penalties.
PMA Approval Pathway
Class III devices require approval of a PMA before they can be marketed, although some pre-amendment Class III devices for which the FDA has not yet required a PMA are cleared through the 510(k) process. The PMA process is more demanding than the 510(k) premarket notification process. In a PMA application, the manufacturer must demonstrate that the device is safe and effective, and the PMA application must be supported by extensive data, including data from preclinical studies and human clinical trials. The PMA application must also contain a full description of the device and its components, a full description of the methods, facilities, and controls used for manufacturing, and proposed labeling. Following receipt of a PMA application, the FDA determines whether the application is sufficiently complete to permit a substantive review. If the FDA accepts the application for review, it has 180 days under the FDCA to complete its review of a PMA application, although in practice, the FDA’s review often takes significantly longer, and can take up to several years. An advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance with the QSR. PMA devices are also subject to the payment of user fees.
The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA application constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). A PMA may include post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution, and collection of long-term follow-up data from patients in the clinical study that supported the PMA or requirements to conduct additional clinical studies post-approval. The FDA may condition PMA approval on some form of post-market surveillance when deemed necessary to protect the public health or to provide additional safety and efficacy data for the device in a larger population or for a longer period of use. In such cases, the manufacturer might be required to follow certain patient groups for a number of years and to make periodic reports to the FDA on the clinical status of those patients. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.
Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the design performance specifications, which affect the safety or effectiveness
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of the device, require submission of a PMA supplement. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Certain other changes to an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation, and technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that were submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness. None of our currently developed products require a PMA to be marketed.
De Novo Classification
Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the De Novo classification procedure.
This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012, or FDASIA, a medical device could only be eligible for De Novo classification if the manufacturer first submitted a 510(k) pre-market notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the De Novo classification pathway by permitting manufacturers to request De Novo classification directly without first submitting a 510(k) pre-market notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the De Novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed.
Devices such as ECG devices are generally considered to have moderate risk and are generally classified as Class II devices. Applicants must submit a notification to the FDA demonstrating that its proposed device is either substantially equivalent to a predicate (existing) device that is a Class II, or for devices with no existing predicate they will seek to be designated with a De Novo classification. Through previous interactions and correspondence with the FDA, the Company determined there was not an existing predicate to the MyoVista AI algorithm and therefore was not eligible to submit an application via the more common 510(k) clearance process. The Company also previously received formal notification from the FDA that the regulatory pathway for MyoVista was determined to be with a De Novo classification.
After initial authorization, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) clearance or, depending on the modification, another De Novo classification request, or PMA approval. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, the manufacturer may be subject to significant regulatory fines or penalties. We
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have previously submitted and intend to seek authorization to market the device through submission of a new De Novo request for the MyoVista device. Delays in receipt or failure to receive the necessary clearances, or the failure to comply with existing or future regulatory requirements, could reduce the Company’s business prospects.
Clinical Trials
Clinical trials are almost always required to support a De Novo request and are sometimes required to support a 510(k) submission. All clinical investigations of investigational devices to determine safety and effectiveness must be conducted in accordance with the FDA’s investigational device exemption, or IDE, regulations which govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. If the device presents a “significant risk” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE application to the FDA, which must become effective prior to commencing human clinical trials. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the Company that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval.
In addition, the study must be approved by, and conducted under the oversight of, an Institutional Review Board, or IRB, for each clinical site. The IRB is responsible for the initial and continuing review of the IDE, and may pose additional requirements for the conduct of the study. If an IDE application is approved by the FDA and one or more IRBs, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a non-significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more IRBs without separate approval from the FDA, but must still follow abbreviated IDE requirements, such as monitoring the investigation, ensuring that the investigators obtain informed consent, and labeling and record-keeping requirements. Acceptance of an IDE application for review does not guarantee that the FDA will allow the IDE to become effective and, if it does become effective, the FDA may or may not determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study plan or the rights, safety or welfare of human subjects.
During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical study are also subject to FDA regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.
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Post-market Regulation
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
| • | establishment registration and device listing with the FDA; |
| • | QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process; |
| • | labeling and marketing regulations, which require that promotion is truthful, not misleading, fairly balanced and provide adequate directions for use and that all claims are substantiated, and also prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; FDA guidance on off-label dissemination of information and responding to unsolicited requests for information; |
| • | clearance or approval of product modifications to 510(k)-cleared devices, or those re-classified to 510(k) cleared devices, that could significantly affect safety or effectiveness or that would constitute a major change in intended use of one of our cleared devices, or approval of a supplement for certain modifications to PMA devices; |
| • | medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur; |
| • | correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health; |
| • | complying with the new federal law and regulations requiring Unique Device Identifiers (UDI) on devices and also requiring the submission of certain information about each device to the FDA’s Global Unique Device Identification Database (GUDID); |
| • | the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and |
| • | post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device. |
The manufacturing processes for medical devices are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file, and complaint files. These requirements impose certain procedural and documentation requirements upon us and our third-party manufacturers related to the methods used in and the facilities and controls used for designing, manufacturing, packaging, labeling, storing, medical devices. As a manufacturer, we will be subject to periodic scheduled or unscheduled inspections by the FDA. Following these inspections, the FDA may assert noncompliance with QSR requirements on a Form 483, which is a report of observations from an inspection, or by way of “untitled letters” or “warning letters” that could cause us or any third-party manufacturers to modify certain activities. A Form 483 notice, if issued at the conclusion of an FDA inspection, can list conditions the FDA investigators believe may have violated QSR or other FDA requirements. We cannot be certain that we or our present or any future third-party manufacturers or suppliers will be able to comply with QSR or other FDA regulatory requirements to the agency’s satisfaction. Failure to comply with these obligations may lead to possible legal or regulatory enforcement action by the FDA.
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The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:
| • | warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties; |
| • | recalls, withdrawals, or administrative detention or seizure of our device; |
| • | operating restrictions or partial suspension or total shutdown of production; |
| • | refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products; |
| • | withdrawing 510(k) clearances or PMA approvals that have already been granted; |
| • | refusal to grant export or import approvals for our device; or |
| • | criminal prosecution. |
Advertising and Promotion
The FDA and other regulatory agencies closely regulate the post-approval marketing and promotion of medical devices, including standards and regulations for direct-to-consumer advertising, communications about unapproved uses, industry-sponsored scientific and educational activities and promotional activities involving the internet. Devices may be marketed only for the approved or cleared indications and in accordance with the provisions of the approved or cleared label.
Foreign Regulation
As we plan to market our device in the EU and other foreign markets, in addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our device in foreign countries. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement also vary greatly from country to country and such regulatory requirements have been changing and increasing in some countries. We may be unable to maintain regulatory qualifications, clearances, approvals or CE Certificates of Conformity in these countries or to obtain clearances or approvals in other countries. We may incur significant costs in attempting to obtain, renew, or modify foreign regulatory clearances or approvals, qualifications or CE Certificates of Conformity. If we experience difficulties in receiving, maintaining, renewing or modifying necessary qualifications, clearances, approvals or CE Certificates of Conformity to market our products outside the United States, or if we fail to receive, renew, modify or maintain those qualifications, clearances, approvals or CE Certificates of Conformity, we may be unable to market our products or enhancements in certain international markets effectively, or at all. We previously received CE clearance for marketing the MyoVista in Europe and will continue efforts to maintain regulatory approval in Europe.
On April 5, 2017, a new regulation on medical devices was adopted to establish a modernized and more robust European Union legislative framework, with the aim of ensuring better protection of public health and patient safety: Regulation (EU) 2017/745 of the European Parliament and of the Council of 5 April 2017 on medical devices, amending Directive 2001/83/EC, Regulation (EC) No 178/2002 and Regulation (EC) No 1223/2009 and repealing Council Directives 90/385/EEC and 93/42/EEC, which became applicable from May 26, 2021, or the EU MDR. The EU MDR repeals and replaces the EU Medical Devices Directive and unlike directives, which must be given effect through transposition into the national domestic laws of the Relevant States, regulations are directly applicable (i.e., without the need for transposition into national laws implementing
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them) in all Relevant States. The EU MDR is also applicable in the EEA. Regulations (as EU law instruments) must be applied in their entirety across the EU so that legal acts are automatically and uniformly applied to all EU countries as soon as they enter into force to minimize variations that may arise in transposition of EU law into national law. These modifications may have an effect on the way we design and manufacture products and conduct our business in the EU and EEA. For example, as a result of the transition towards the new regime, Notified Bodies have lengthened their review times, and product introductions or modifications could be delayed or cancelled or otherwise rejected, which could adversely affect our ability to grow our business.
The Company previously achieved a CE Mark under the EU Medical Devices Directive or MDD in February 2017. The Medical Device Directive was established on June 14, 1993 but EU Medical Devices Directive or MDD regulatory framework has since been replaced by EU MDR. In order to sell in member countries of the European Economic Area, or EEA, our device must now comply with the essential requirements of the newer, updated regulatory framework or EU MDR. In October 2021, the Company submitted the documentation required to establish compliance with EU MDR. The submission of the technical file is currently under review and our CE Mark issued under MDD lapsed in February 2022. If the technical file submission is found to comply with the new requirements, a certificate of conformity will be issued to verify the Company’s compliance with EU MDR. An updated CE mark certificate under EU MDR will entitle the Company to market the MyoVista in the European Economic Area as well as other countries for which CE Mark represents an appropriate regulatory standard.
Intellectual Property
Our technology is protected by a patent portfolio as well as trade secrets, which together comprise an important part of technology protection especially when developing proprietary algorithms. We believe that the combination of patents and trade secrets create valuable competitive barriers for HeartSciences.
The USPTO has issued six utility patents and one design patent to us, and has allowed a seventh utility patent application. We have one utility patent application under the USPTO’s review. These patents expire from March 5, 2029 to August 27, 2040. We also have seven utility patents (which expire from September 20, 2036 to March 9, 2037) and fourteen design registrations granted by international jurisdictions such as China, Japan, South Korea, the United Kingdom, France, Germany and Australia, and have received allowances of further applications by the European Patent Office and in Israel. We also have several pending patent applications in several international jurisdictions including Brazil, Canada, India, South Korea, Mexico and the United Arab Emirates.
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The following chart includes a list of the five utility patents that have been granted to us by the USPTO:
| Patent No. |
Patent Title |
Description of General Subject Matter |
Expiration Date | |||
| US 8219186 | System and method for scanning the heart | Medical apparatus for scanning the heart to locate and detect heart malfunctions, vascular and nonvascular plaque and ischemia. | March 5, 2029 | |||
| US 9700226 US 10561327 (continuation of US 9700226) |
Quantitative Heart Testing | Heart condition and function can be quantified using repolarization measures and/or repolarization indices derived from a time-frequency transform of an electrocardiogram | September 20, 2036 | |||
| US 10170846 US 11336034 (division of US 10170846) |
Electrode and Cable Connectors in Electrocardiography | Patient cable connecting one or more electrodes to a processing device for processing ECG signals may include one or more electrode connectors mechanically keyed to respective electrodes | March 9, 2037 | |||
| US 10856756 | Time-Frequency Analysis of Electrocardiograms | Electrocardiograms can be analyzed in the time-frequency domain, following conversion into time-frequency maps, to determine characteristics or features of various waveforms, such as waveform morphology and/or the amplitude(s) and location(s) (in time and/or frequency) of one or more extrema of the waveform | September 11, 2038 |
The following chart includes a list of the trademarks that we have registered with the USPTO:
| Application No. |
Trademark |
Type of Trademark | ||
| 87/073,995 | HEART TEST LABORATORIES | Design | ||
| 87/073,975 | MYOVISTA | Design | ||
| 87/460,853 | HEARTSCIENCES | Word | ||
| 87/460,859 | Heart Logo | Design | ||
| 87/888,945 | wavECG | Word |
MyoVista Technology Agreement
In 2014, the Company entered into a technology agreement, which we refer to as the MyoVista Technology Agreement, with the inventor of certain specified MyoVista technology and proprietary and intellectual property rights thereto (including patents, copyright, trademarks, trade secrets and know-how). In the MyoVista Technology Agreement, the inventor conveyed ownership of all his rights in the MyoVista to us. In exchange, we (a) issued promissory notes in the amounts of $448,000, $700,000 and $300,000, payable to the inventor, all of which have been paid, and (b) entered into a security agreement with the inventor that requires us to pay the inventor royalties on any sales of the MyoVista. Royalty payments are $500 per device for the first 2,400 devices sold and then $200 per device thereafter until the aggregate amount of royalties paid to the inventor equals $3.5 million which, in any event, is the maximum amount we are required to pay in royalties under the MyoVista Technology Agreement.
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Glasgow Licensing Agreement
In December 2015, we entered into a licensing agreement, which we refer to as the Glasgow Licensing Agreement, with The University Court of the University of Glasgow, under which we obtained a non-exclusive, worldwide license, automatically renewing every five years, to software modules for an Android platform for analysis of resting 12-lead electrocardiograms and all intellectual property rights (including patents, copyright, trademarks, trade secrets and know-how) relating to the software modules, which are collectively referred to in only this section as the Glasgow Technology, to be used in the MyoVista. The Glasgow Licensing Agreement also granted the Company the right to sub-license all of the Company’s rights under the Glasgow Licensing Agreement to any third party to, among other things, manufacture, assemble, market, distribute and sell the MyoVista product containing the Glasgow Technology. Under the Glasgow Licensing Agreement, we are currently obliged to pay, per 12-month period, the greater of (i) $42,236, subject to a 3% increase each year, or (ii) the aggregate amount of royalties owed per MyoVista sold, which is $57.96 per unit for the first 2,000 sold, $46.37 per unit for the next 3,000 sold and $40.57 per unit thereafter, subject to a 3% increase each year.
Preparations for Manufacturing
At this time, we have fully functional hardware versions of the MyoVista, which have also been used in most of our medical clinical studies. We have a scalable manufacturing strategy and have engaged Benchmark Electronics, a firm with deep experience in manufacturing medical devices.
Benchmark Electronics is an NYSE listed US-based medical device manufacturing organization that is FDA Registered and ISO 13485 Certified and has over 30 years of product manufacturing experience.
Research and Development
The Company’s R&D staff designs the hardware, software and AI-based algorithms. Hardware development assistance is provided by outside consulting firms. The Company internally develops the signal processing software elements along with outside assistance. The user interface elements of the software are designed by the Company along with the assistance of outside consultants. The data science work necessary to build the AI-based algorithms is performed both internally and externally using outside consultants. Incorporation of all software elements into the MyoVista hardware is performed internally. We currently employ five full-time R&D staff.
We believe our research demonstrates the potential to develop further algorithms for a range of additional or alternative clinical indications. Studies involving use of the MyoVista have already been published as an example of alternative clinical indications. We believe that, in the future, the ECG will have significantly greater clinical value and will facilitate far more effective heart disease screening and referral.
Future Products
Our future plans include the development of additional algorithms for different clinical indications, additional hardware platforms and cloud-based services that allow other ECG devices to send standard ECG recordings and have them evaluated using our algorithms. Additional development opportunities could include development of a version of the algorithm to run on smartphones or tablets or a lower cost version of the MyoVista.
The Company has already cooperated with cardiology researchers to assist them in the development of three proof-of-concept algorithms in key specific areas of heart disease beyond cardiac dysfunction. For example, a proof-of-concept algorithm was developed to detect abnormally high coronary artery calcium scores; the results were published in the European Heart Journal in November 2020. Two additional proof-of-concept algorithms were developed by researchers and results presented as abstracts. A proof-of-concept algorithm was developed to predict which heart disease patients were at a higher risk for having a major adverse cardiac event, or MACE,
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within three years, and results were presented at the annual ACC conference in April 2021. In addition, a proof-of-concept algorithm has also been developed to detect patients that have valvular heart disease; results will be presented at the ACC conference in March 2022. Some additional opportunities for new algorithms include reduced ejection fraction and CAD.
Property and Facilities
The Company leases a 4,634 square foot suite located at 550 Reserve Street, Suite 360, Southlake, Texas 76092, pursuant to an Office Lease, dated May 2, 2017, by and between the Company and GPI-MT, LP. The lease is a 64-month lease and expires in January 2023. We consider our current office space sufficient to meet our anticipated needs for the foreseeable future and believe it is suitable for the conduct of our business.
Employees and Independent Contractors
As of June 1, 2022, we had 13 employees (including our Chief Executive Officer), all of which are full-time employees, and several independent contractors. All of our employment and consulting agreements include employees’ and consultants’ undertakings with respect to non-competition and assignment to us of intellectual property rights developed in the course of employment and with respect to confidentiality.
Legal Proceedings
From time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations. We are not currently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
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Executive Officers and Directors
Our business and affairs are managed under the direction of our Board of Directors, which currently consists of five members. The number of directors is determined by our Board of Directors, subject to the terms of our amended and restated certificate of formation and amended and restated bylaws. Upon the completion of this offering, our Board of Directors will consist of five members.
Our Board of Directors will be divided into three classes as nearly equal in size as is practicable. The composition of the Board of Directors immediately following the offering will be as follows:
| • | Class I, which will initially consist of Brian Szymczak and Bruce Bent, whose terms will expire at our annual meeting of shareholders to be held in 2023; |
| • | Class II, which will initially consist of Mark Hilz and Patrick Kanouff, whose terms will expire at our annual meeting of shareholders to be held in 2024; and |
| • | Class III, which will initially consist of Andrew Simpson, whose term will expire at our annual meeting of shareholders to be held in 2025. |
Upon the expiration of the initial term of office for each class of directors, each director in such class shall be elected for a term of three years and serve until a successor is duly elected and qualified or until his or her earlier death, resignation or removal. Vacancies occurring on the Board of Directors, whether due to death, resignation, removal, retirement, disqualification or for any other reason, and newly created directorships resulting from an increase in the authorized number of directors, may be filled by a majority of the remaining members of the Board of Directors. Directors may be removed, but only for cause, with the affirmative vote of the holders of a majority of the voting power of our Common Stock and Preferred Stock voting together as a single class.
Director Independence
We have applied to list our Common Stock and Warrants on the Nasdaq. No assurance can be given that our application will be approved or that a trading market will develop. In the event our listing application is not approved, we will not consummate this offering. If our listing application is approved, upon the completion of this offering, our Common Stock and Warrants will be listed on the Nasdaq under the symbol “HSCS” and “HSCSW,” respectively. Under Nasdaq rules, independent directors must comprise a majority of a listed company’s Board of Directors within a specified period after completion of this offering. In addition, Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees must be independent. Under Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of that Company’s Board of Directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Ownership of a significant amount of our stock, by itself, does not constitute a material relationship.
Audit committee members of a listed company must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the Board of Directors, or any other board committee: (i) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (ii) be an affiliated person of the listed company or any of its subsidiaries.
Our Board of Directors undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our Board of Directors has determined that that Bruce Bent, Patrick Kanouff and Brian Szymczak, representing a majority of our directors, do not have any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under
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Nasdaq rules and Rule 10A-3 under the Exchange Act. In making these determinations, our Board of Directors considered the relationships that each non-employee director has with our Company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.
Background and Experience of Directors and Executive Officers
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our Board of Directors to satisfy its oversight responsibilities effectively in light of our business and structure, the Board of Directors focused primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth below. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business.
The following table sets forth certain information regarding our executive officers and directors as of the date of this prospectus:
Board of Directors and Executive Officers
| Name |
Age | Position | ||||
| Andrew Simpson |
54 | President, Chief Executive Officer and Chairman of the Board of Directors | ||||
| Mark Hilz |
64 | Chief Operating Officer, Secretary and Director | ||||
| Danielle Watson |
40 | Chief Financial Officer and Treasurer | ||||
| Bruce Bent |
66 | Director | ||||
| Patrick Kanouff |
52 | Director | ||||
| Brian Szymczak |
49 | Director | ||||
Andrew Simpson—President, Chief Executive Officer and Chairman of the Board of Directors
Since March 2022, Andrew Simpson, 54, has served as the President and Chief Executive Officer of the Company. Mr. Simpson has also served as the Chairman of the Board of Directors, since June 2013, and as a director, since July 2012. Mr. Simpson is the sole director and controlling shareholder of Kyngstone Limited, which has provided consulting services to the Company. For more information related to this, see “Related Party Transactions—Agreements with Related Parties—Kyngstone Agreement.” Mr. Simpson has over 30 years’ experience across a variety of business sectors and sizes. He was Group CEO of The Peel Group from 2006 to 2010, which is a large private company in the UK which, at the time, had approximately $8 billion of business assets across the real estate, ports, airports, energy, media, telecoms and environmental sectors. He was a main board director of Speedy Hire plc from 2003 to 2006 (during which time it became a FTSE 250 company) and during his tenure was Managing Director of its Equipment Rental division which had revenues of approximately $200 million and was also responsible for the Group’s development and expansion which included seventeen acquisitions and several non-core divestments. Mr. Simpson qualified as a Chartered Accountant with Price Waterhouse and spent eight years working in investment banking at Rothschild, advising on a wide variety of merger and acquisition transactions, debt and equity fundraisings, IPOs and other advisory assignments. Mr. Simpson graduated with first class honors in 1991 from Sheffield Hallam University in the UK where he received a Bachelor of Arts (honors) in Accounting and Management Control.
Mark Hilz—Chief Operating Officer, Secretary and Director
Since March 2022, Mark Hilz, 64, has served as the Chief Operating Officer and Secretary of the Company and, since June 2013, has also been a director of the Company. Mr. Hilz served as the Chief Executive Officer of
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the Company from June 2013 until March 2022. Mr. Hilz has over 30 years of experience as a President and/or CEO of multiple startup companies. He was previously CEO of INX Inc., a technology infrastructure consulting company. INX Inc. started in 2000 and grew to $400 million in revenue. INX Inc. was traded on the NASDAQ, completed multiple offerings until it was acquired in December 2011. Prior to that, Mr. Hilz founded and was CEO of a technology logistics outsourcing firm, PC Service Source Inc., that grew to over $160 million in revenue. Mr. Hilz raised the startup capital from traditional venture capital sources and after four years of operations took PC Service Source Inc. public in an IPO as a NASDAQ global listed company. Mr. Hilz’s experience includes raising venture capital as well as multiple successful public offerings and numerous merger and acquisition transactions as both a buyer and a seller.
Danielle Watson—Chief Financial Officer and Treasurer
Since April 2022, Danielle Watson, 40, has served as our Chief Financial Officer. Prior to her appointment in April 2022, Ms. Watson, a CPA, served as the Company’s Financial Controller since November 2021. Ms. Watson brings over 15 years of financial experience to her role. Before joining the Company, Ms. Watson held senior leadership roles at Moss Adams, LLP from November 2007 to November 2021 where she provided audit and assurance services to both public and privately held companies with an emphasis in financial reporting, consolidations, strategic planning, purchase price accounting, and SEC reporting. Ms. Watson earned her Bachelor of Science, with a double concentration in accounting and finance from Texas Christian University and her Master of Science in accounting from the University of Texas at Arlington and is an active Certified Public Accountant in Texas.
Bruce Bent—Director
Since May 2020, Bruce Bent, 66, has served as a director of the Company. Mr. Bent has more than 35 years of experience in financial management. Since September 2014, Mr. Bent has served as Chairman of Enerdynamic Hybrid Technologies Corp., a TSXV listed public company. In addition, since March 2018, Mr. Bent has served as Chairman for Astro Aerospace Ltd., an OTC listed public company. Since June 2020, Mr. Bent has been Vice President and Chief Financial Officer Emeritus of The Matthews Group, referred to in this section as Matthews, and, from August 2004 to June 2020, he served as the Chief Financial Officer of Matthews as well as president of various Canadian subsidiaries of Matthews. Matthews is a $500M real estate development company. During his tenure with Matthews, among other projects, Mr. Bent was integral in the completion of a $1.7 billion dollar corporate headquarters building for Encana (now Ovintiv Inv., NYSE: OVV). Since April 2000, Mr. Bent has served as president of MSW Investments Limited, a family office providing early stage financing. Mr. Bent graduated from the University of Manitoba with a Bachelor of Commerce (honors) and obtained his Chartered Professional Accounting designation from the Province of Ontario.
We believe Mr. Bent’s extensive financial experience provides valuable knowledge to our Board of Directors. In addition, Matthews is one of our largest shareholders. Mr. Bent also serves as the chairman of the Audit Committee and “audit committee financial expert.” For more information, see “—Board Committees—Audit Committee.”
Brian Szymczak—Director
Since 2014, Brian Szymczak, 49, has served as a director of the Company. Since 2014, Mr. Szymczak has been the lead attorney for Apollo Endosurgery, Inc., referred to in this section as Apollo, in Austin, Texas where he serves as Vice President of Legal and Compliance. In this role, Mr. Szymczak manages legal disputes and litigation matters and provides general legal counsel to the company’s leadership, sales, operations, research and development, and human resources groups. Prior to working at Apollo, from 2006 to 2014, Mr. Szymczak served in various roles including as Associate General Counsel and Director of Legal Affairs for a large surgical device manufacturer and from, 1999 to 2006, worked as an associate at the law firm of Baker Botts, LLP where he counseled clients on patent and other intellectual property matters in a variety of industries. Mr. Szymczak is a 1999 graduate of Duke University School of Law and holds a Bachelor of Science in Mechanical Engineering from Texas A&M University.
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Mr. Szymczak was designated a director pursuant to the MyoVista Technology Agreement, which grants Guangren “Gary” Chen the right to designate a person of his choosing to sit on the Board of Directors of the Company. We believe Mr. Szymczak’s education, legal skills and experience with medical device manufacturers provides valuable knowledge to our Board of Directors.
Patrick Kanouff—Director
Since April 2019, Patrick Kanouff, 52, has served as a director of the Company. Mr. Kanouff has served as Chief Operating Officer of Bohemian Companies since 2020. Bohemian Companies is a private family financial office and is associated with Bohemian Asset Management, an investment management company with private equity, fixed income securities, and private equity investments. Prior to Bohemian Companies, from 2009 to 2014, Mr. Kanouff was the managing partner of Davis & Ceriani, P.C., a law firm located in Denver, CO, where Mr. Kanouff’s practice was comprised of a combination of complex commercial litigation and business counseling. Mr. Kanouff is a 1995 graduate of the University of Denver School of Law and holds a Bachelor of Arts from Creighton University.
Mr. Kanouff was designated as a director pursuant to the letter agreement entered into by and between the Company and FRV on April 10, 2019, or the FRV Side Letter, which grants FRV the right to designate a person of its choosing to sit on the Board of Directors of the Company. We believe Mr. Kanouff’s education and legal, operational and business counseling experience provides valuable knowledge to our Board of Directors.
Board Committees
Upon the closing of this offering, our Board of Directors will have three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. Under Nasdaq rules and Rule 10A-3 under the Exchange Act, the membership of the audit committee is required to consist entirely of independent directors, subject to applicable phase-in periods. The following is a brief description of our committees.
Audit Committee
In accordance with our audit committee charter, after this offering, our audit committee will: oversee our corporate accounting and financial reporting processes and our internal controls over financial reporting; evaluate our independent registered public accounting firm’s qualifications, independence and performance; engage and provide for the compensation of our independent registered public accounting firm; approve the retention of our independent registered public accounting firm to perform any proposed permissible non-audit services; review our financial statements; review our critical accounting policies and estimates and internal controls over financial reporting; and discuss with management and our independent registered public accounting firm the results of the annual audit and the reviews of our quarterly financial statements. We believe that our audit committee members meet the requirements for financial literacy under the current requirements of the Sarbanes-Oxley Act, Nasdaq and SEC rules and regulations. The audit committee will be composed of Bruce Bent, Patrick Kanouff and Brian Szymczak. Nasdaq rules require that all of the members of the audit committee meet the independence standards set forth above, subject to the applicable phase-in periods of Nasdaq. Our Board of Directors has determined that Bruce Bent, Patrick Kanouff and Brian Szymczak meet the independence requirements of the Sarbanes-Oxley Act, Rule 10A-3 under the Exchange Act and the applicable listing standards of Nasdaq.
Compensation Committee
In accordance with our compensation committee charter, after this offering, our compensation committee will review and recommend policies relating to compensation and benefits of our officers and employees, including reviewing and approving corporate goals and objectives relevant to compensation of the Chief Executive Officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives and setting compensation of these officers based on such evaluations. The compensation
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committee will also administer the issuance of stock options and other awards under our equity-based incentive plans. We believe that the composition of our compensation committee meets the requirements for independence under, and the functioning of our compensation committee complies with, any applicable requirements of the Sarbanes-Oxley Act, Nasdaq and SEC rules and regulations. We intend to comply with future requirements to the extent they become applicable to us. The compensation committee will be composed of Bruce Bent, Patrick Kanouff and Brian Szymczak.
Nominating and Governance Committee
In accordance with our nominating and governance committee charter, after this offering, our nominating and governance committee will recommend to the Board of Directors nominees for election as directors, and meet as necessary to review director and nominees for election as directors; recommend members for each committee of the Board of Directors; oversee corporate governance standards and compliance with applicable listing and regulatory requirements; develop and recommend to the Board of Directors governance principles applicable to the company; and oversee the evaluation of the Board of Directors and its committees. We believe that the composition of our nominating and governance committee meets the requirements for independence under, and the functioning of our nominating and governance committee complies with, any applicable requirements of the Sarbanes-Oxley Act, Nasdaq and SEC rules and regulations. We intend to comply with future requirements to the extent they become applicable to us. The nominating and governance committee will be composed of Bruce Bent, Patrick Kanouff and Brian Szymczak.
Code of Business Conduct and Ethics
We will adopt a new code of business conduct and ethics that applies to all of our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions, which will be posted on our website. Our code of business conduct and ethics is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. The information contained on, or accessible from, our website is not part of this prospectus by reference or otherwise. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of business conduct and ethics on our website.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is an executive officer or employee of our Company. None of our executive officers serves as a member of the Board of Directors or compensation committee of any entity that has one or more executive officers serving on our Board of Directors or compensation committee.
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Summary Compensation Table
The following table sets forth summary compensation information for our President, Chief Executive Officer and our Chairman of the Board of Directors and Chief Operating Officer. We refer to these persons as our “named executive officers” in this prospectus. The Company had no other executive officers during Fiscal 2021 and Fiscal 2020. The following table includes all compensation earned by the named executive officers for the respective period, regardless of whether such amounts were actually paid during the period
| Name and Position(1) |
Fiscal Years |
Salary($) | Option Awards($)(2) |
Total($) | ||||||||||||
| Andrew Simpson President, Chief Executive Officer and Chairman of the Board of Directors |
2021 | — | (3) | 43,225 | 43,225 | |||||||||||
| 2020 | — | (3) | 50,225 | 50,225 | ||||||||||||
| Mark Hilz Chief Operating Officer and Secretary |
2021 | 104,167 | 43,225 | 147,392 | ||||||||||||
| 2020 | 219,276 | 50,225 | 269,501 | |||||||||||||
| — | — | |||||||||||||||
| (1) | During Fiscal 2020 and Fiscal 2021, the Company did not employ a chief financial officer. |
| (2) | Represents the full grant date value of the stock award or option grant, as applicable, calculated in accordance with FASB ASC Topic 718, Compensation—Stock Compensation. Our policy and assumptions made in the valuation of share-based payments are contained in Note 7 of our Fiscal 2021 financial statements. The value of option awards presented in the Summary Compensation Table reflects the grant date fair value of the awards and does not correspond to the actual value that will be recognized by the named executive officers. |
| (3) | Excludes $100,000 and $191,667 in Fiscal 2021 and Fiscal 2020, respectively, in respect of fees payable to Kyngstone Limited of which Mr. Simpson is the sole director and controlling shareholder. For additional information regarding this agreement, see “Related Party Transactions.” |
The annual base salary of Danielle Watson, our Chief Financial Officer, as of the date of this prospectus is $150,000. Additionally, (i) on February 1, 2022, Ms. Watson was granted options to purchase 4,545 shares of the Company’s Common Stock at an exercise price of $3.47 per share, expiring February 1, 2032, and (ii) on March 1, 2022, Ms. Watson was granted options to purchase 4,545 shares of the Company’s Common Stock at an exercise price of $3.47 per share, expiring March 1, 2032.
Employment Agreements
The Company has an employment agreement with its President and Chief Executive Officer, Andrew Simpson and with its Chief Operating Officer and Secretary, Mark Hilz. The employment agreements for each of Mr. Simpson and Mr. Hilz provides for their terms of employment, duties and responsibilities, base salary, bonus and stock option opportunities at the discretion of the Board of Directors, and eligibility to participate in our employee benefit plans generally. Each of their employment agreements contains certain restrictive covenants that restrict their ability to take certain actions, such as a non-compete, a non-solicitation covenant restricting their ability to solicit employees of the Company, and the requirement that they devote their full time and attention to the business of the Company. Each of Mr. Simpson’s and Mr. Hilz’s employment agreements automatically renew until otherwise terminated in accordance with its terms.
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Outstanding Equity Awards at April 30, 2021
The following table shows outstanding option awards held by the named executive officers as of April 30, 2021:
| Option Awards | Stock Awards | |||||||||||||||||||||||
| Name / Grant Date |
Number of Securities Underlying Unexercised Options (#) Vested |
Number of Securities Underlying Unexercised Options (#) Unvested |
Option Exercise Price ($) |
Option Expiration Date |
Number of Shares or Units of Stock that Have Not Vested (#) |
Market Value of Shares or Units of Stock that Have Not Vested ($) |
||||||||||||||||||
| Andrew Simpson |
||||||||||||||||||||||||
| July 30, 2015 |
30 | (1) | 5 | |||||||||||||||||||||
| May 1, 2016 |
18,939 | (2) | 3,788 | (2) | 12.21 | May 1, 2026 | ||||||||||||||||||
| March 14, 2018 |
— | 22,727 | (2) | 15.18 | March 14 2028 | |||||||||||||||||||
| November 1, 2018 |
— | 22,727 | (2) | 15.18 | November 1, 2028 | |||||||||||||||||||
| September 1, 2019 |
— | 53,030 | (2) | 1.29 | September 1, 2029 | |||||||||||||||||||
| November 6, 2020 |
— | 53,030 | (2) | 1.16 | November 6, 2030 | |||||||||||||||||||
| Mark Hilz |
||||||||||||||||||||||||
| July 30, 2015 |
30 | (1) | 5 | |||||||||||||||||||||
| May 1, 2016 |
18,939 | (2) | 3,788 | (2) | 12.21 | May 1, 2026 | ||||||||||||||||||
| March 14, 2018 |
— | 22,727 | (2) | 15.18 | March 14 2028 | |||||||||||||||||||
| November 1, 2018 |
— | 22,727 | (2) | 15.18 | November 1, 2028 | |||||||||||||||||||
| September 1, 2019 |
— | 53,030 | (2) | 1.29 | September 1, 2029 | |||||||||||||||||||
| November 6, 2020 |
— | 53,030 | (2) | 1.16 | November 6, 2030 | |||||||||||||||||||
| (1) | Represents restricted shares of Series B Preferred Stock. These restricted shares will be cancelled as a result of this offering. |
| (2) | Represents options to purchase shares of Common Stock. |
In March 2022, Andrew Simpson was granted options to purchase 53,030 shares of the Company’s Common Stock at an exercise price of $3.47 per share, expiring March 1, 2032.
In March 2022, Mark Hilz was granted options to purchase 53,030 shares of the Company’s Common Stock at an exercise price of $3.47 per share, expiring March 1, 2032.
Non-Employee Director Compensation
We compensate our directors with equity awards. There were no equity awards granted in Fiscal 2021.
The following table shows outstanding vested and unvested option awards held by the named directors as of April 30, 2021:
| Name |
Vested Option Awards |
Unvested Option Awards |
Total Awards | |||||||||
| Bruce Bent |
— | — | — | |||||||||
| Brian Szymczak |
19,318 | 4,924 | 24,242 | |||||||||
| Patrick Kanouff |
— | 3,030 | 3,030 | |||||||||
In March 2022, Bruce Bent, Brian Szymczak and Patrick Kanouff were each granted options to purchase 3,788 shares of the Company’s Common Stock at an exercise price of $3.47 per share, expiring March 1, 2032.
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BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our Common Stock and Series C Preferred Stock as of June 1, 2022 by:
| • | each person, or group of affiliated persons, known to us to be the beneficial owner of more than 5% of our outstanding Common Stock or Series C Preferred Stock; |
| • | each of our directors and executive officers; and |
| • | all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to the shares of capital stock indicated. The Common Stock issuable upon (i) conversion of notes or Series C Preferred Stock or (ii) exercise or conversion of convertible securities, Series C Preferred Stock, options or warrants that are exercisable or convertible within 60 days after June 1, 2022, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such convertible securities, Series C Preferred Stock, options or warrants but are not deemed outstanding for the purpose of computing the percentage ownership of any other person.
We are not controlled by another corporation, by any foreign government or by any natural or legal persons except as set forth herein, and there are no arrangements known to us which would result in a change in control of our Company at a subsequent date. Except as indicated in footnotes to this table, we believe that the shareholders named in this table have sole voting and investment power with respect to all shares shown to be beneficially owned by them, based on information provided to us by such shareholders. Unless otherwise noted below, each beneficial owner’s address is c/o Heart Test Laboratories, Inc., 550 Reserve Street, Suite 360, Southlake, Texas 76092.
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With respect to the calculations set forth in the table below, the percentages of beneficial ownership prior to this offering are based on [ ] shares of our Common Stock deemed to be outstanding as of June 1, 2022, which assumes the conversion of the $1.5M Notes into a total of [ ] shares of Common Stock and the conversion of the Maximum Percentage of Bridge Notes (including accrued and unpaid interest through April 30, 2022) into[ ] shares of Common Stock. The percentage of beneficial ownership in the table below is based on [ ] shares of our Common Stock assumed to be outstanding after the closing of this offering, which (i) assumes the exercise of all unvested options that vest as a result of this offering and (ii) excludes exercise of all other unvested options. The information in the table below assumes no exercise of the Warrants and no exercise of the underwriters’ representative’s warrants or option to purchase additional shares or Warrants.
| Beneficial Ownership | ||||||||||||||||||||||||||||
| Number of Shares(1) | Percentage(2) | |||||||||||||||||||||||||||
| Common | Series C Preferred |
Common Prior to Offering |
Common After Offering |
Series C Preferred |
Combined Voting Power Prior to Offering(3) |
Combined Voting Power After Offering(3) |
||||||||||||||||||||||
| Holders of 5% or more of each class of our securities: |
||||||||||||||||||||||||||||
| Front Range Ventures, LLC(4) |
143,013 | % | % | 30.3 | % | % | % | |||||||||||||||||||||
| John H. Matthews(5) |
— | % | % | — | % | % | ||||||||||||||||||||||
| Paul Knuckley(6) |
25,162 | % | % | 5.2 | % | % | % | |||||||||||||||||||||
| John Q. Adams, Sr.(7) |
49,176 | % | % | 10.2 | % | % | % | |||||||||||||||||||||
| Lary Snodgrass(8) |
29,240 | % | % | 6.1 | % | % | % | |||||||||||||||||||||
| Directors and executive officers: |
||||||||||||||||||||||||||||
| Andrew Simpson(9) |
6,117 | % | % | 1.2 | % | % | % | |||||||||||||||||||||
| Mark Hilz(10) |
2,080 | % | % | * | % | % | ||||||||||||||||||||||
| Brian Szymczak(11) |
400 | % | % | * | % | % | ||||||||||||||||||||||
| Patrick Kanouff(12) |
— | % | % | — | % | % | ||||||||||||||||||||||
| Bruce Bent(13) |
— | % | % | — | % | % | ||||||||||||||||||||||
| Danielle Watson |
— | — | — | — | — | — | ||||||||||||||||||||||
| All directors and executive officers as a group (6 persons): |
27,522 | % | % | 1.9 | % | % | % | |||||||||||||||||||||
| * | Less than 1%. |
| (1) | For each person named in the table, the total number of shares of Series C Preferred Stock beneficially owned by such person is listed opposite of such person’s name. All outstanding shares of Series A Preferred Stock will be converted into shares of Common Stock at a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock pursuant to the terms of the Series A Preferred Stock and all outstanding shares of Series B Preferred Stock will be cancelled, in each case, in June 2022 as result of this offering. |
| (2) | For each person named in the table, the Series C Preferred Stock percentage listed opposite of such person’s name represents the percentage of the total number of the shares of Series C Preferred Stock owned by such person as a percentage of all of the shares our outstanding Series C Preferred Stock as a class. No shares of Series A Preferred Stock or Series B Preferred Stock will be outstanding upon completion of this offering. |
| (3) | For each person named in the table, the voting percentages listed opposite of such person’s name under the columns “Combined Voting Power Prior to Offering” and “Combined Voting Power After Offering” represent the combined voting percentage of all shares of our Common Stock and Series C Preferred Stock, on an as converted basis, owned by such person prior to and immediately after the offering, respectively. |
| (4) | Includes (i) [ ] shares of our Common Stock issuable upon conversion of the Series C Preferred Stock; (ii) [ ] shares of our Common Stock issuable upon exercise of $1M Lender Warrants; and (iii) [ ] shares of our Common Stock issuable upon conversion of the $130K Note. FRV’s sole member is the L. Lee Stryker Irrevocable Trust U/A/D 09/10/1974. Bohemian Asset Management, Inc. has voting and dispositive power with respect to the shares of our Common Stock on behalf of the L. Lee Stryker Irrevocable Trust U/A/D 09/10/1974. |
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| (5) | Mr. Matthews is the controlling shareholder of Matthews Holdings Southwest, Inc. and has sole voting and dispositive power over all of the shares set forth opposite his name. Includes (i) [ ] shares of our Common Stock issuable upon exercise of $1.5M Lender Warrants; (ii) [ ] shares of our Common Stock issuable upon conversion of $1.5M Notes beneficially owned by Mr. Matthews; and (iii) [ ] shares of our Common Stock issuable upon conversion of Bridge Notes. Excludes (i) [ ] shares of our Common Stock issuable upon not less than 61 days’ prior notice to the Company of the exercise of Prefunded Warrants and (ii) [ ] shares of our Common Stock issuable upon not less than 61 days’ prior notice to the Company, of the exercise of Bridge Warrants. |
| (6) | All of the shares are owned of record by either PSKS Investments, L.P. or Mr. Knuckley and Mr. Knuckley, as general partner of PSKS Investments, L.P., has sole voting and dispositive power over all such shares. Includes (i) [ ] shares of our Common Stock issuable upon conversion of the Series C Preferred Stock; (ii) [ ] shares of our Common Stock issuable upon exercise of $1.5M Lender Warrants; (iii) [ ] shares of our Common Stock issuable upon conversion of Bridge Notes; and (iv) [ ] shares of our Common Stock issuable upon exercise of Bridge Warrants. |
| (7) | Includes (i) [ ] shares of our Common Stock issuable upon conversion of the Series C Preferred Stock and (ii) [ ] shares of our Common Stock issuable upon exercise of options issued as compensation for service as a director of the Company. |
| (8) | Includes (i) [ ] shares of our Common Stock issuable upon conversion of the Series C Preferred Stock; (ii) [ ] shares of our Common Stock issuable upon exercise of $1.5M Lender Warrants; (iii) [ ] shares of our Common Stock issuable upon conversion of Bridge Notes; and (iv) [ ] shares of our Common Stock issuable upon exercise of Bridge Warrants. The number of shares of Common Stock and the number of shares of Series C Preferred Stock also includes, in aggregate, [ ] shares of our Common Stock and [ ] shares of the Series C Preferred Stock, respectively, owned by Lary Snodgrass Family Limited and Snodgrass Children’s Limited, of which Mr. Snodgrass is the sole managing member and general partner and has sole voting and dispositive power over all such shares. |
| (9) | Includes (i) [ ] shares of our Common Stock issuable upon conversion of our Series C Preferred Stock; (ii) [ ] shares of our Common Stock issuable upon exercise of $1.5M Lender Warrants; (iii) [ ] shares of our Common Stock issuable upon exercise of Investor Warrants; and (iv) options to purchase [ ] shares of our Common Stock, which were issued as compensation for services rendered to the Company as its Chairman of the Board of Directors. Excludes [ ] shares of our Common Stock owned by the Simpson Family Benefit Trust, the trustee of which, [ ], has voting and dispositive power over all such shares. [ ] disclaims beneficial ownership of all such shares. |
| (10) | Includes (i) [ ] shares of our Common Stock issuable upon conversion of the Series C Preferred Stock; (ii) [ ] shares of our Common Stock issuable upon exercise of $1.5M Lender Warrants; and (iii) [ ] shares of our Common Stock issuable upon exercise of Investor Warrants and (iv) options to purchase [ ] shares of our Common Stock issued as compensation for services as an officer of the Company. |
| (11) | Includes (i) [ ] shares of our Common Stock issuable upon conversion of our Series C Preferred Stock; (ii) [ ] shares of our Common Stock issuable upon conversion of our Series C Preferred Stock held jointly with Mr. Szymczak’s spouse; (iii) [ ] shares of our Common Stock issuable upon exercise of $1.5M Lender Warrants; and (iv) [ ] shares of our Common Stock issuable upon exercise of options issued as compensation for services rendered to the Company. Also includes 400 shares of our Series C Preferred Stock held jointly with Mr. Szymczak’s spouse. |
| (12) | Includes (i) [ ] shares of our Common Stock issuable upon exercise of options issued as compensation for services rendered to the Company; (ii) [ ] shares of our Common Stock issuable upon conversion of Bridge Notes; and (iii) [ ] shares of our Common Stock issuable upon exercise of Bridge Warrants. |
| (13) | Includes (i) [ ] shares of our Common Stock held by Mr. Bent’s spouse and (ii) [ ] shares of our Common Stock issuable upon exercise of options issued as compensation for services rendered to the Company. |
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The following is a description of transactions or series of transactions since the beginning of Fiscal 2021 to which we were or will be a party, in which:
| • | The amount involved in the transaction exceeds, or will exceed, the lesser of $120,000 or one percent of the average of our total assets for the last two completed fiscal years; and |
| • | in which any of our executive officers, directors or holders of five percent or more of any class of our capital stock, including their immediate family members or affiliated entities, had or will have a direct or indirect material interest. |
For additional information regarding compensation arrangements for our named executive officers and directors, see “Executive Compensation.”
Agreements with Related Parties
$130K Note
On August 12, 2019, the Company entered into an unsecured drawdown convertible promissory note, which is referred to as the $130K Note, with Front Range Ventures, LLC, or FRV, for an aggregate amount not to exceed $130,000. FRV is a beneficial owner of more than five percent (5%) of the combined voting power of our outstanding capital stock and is entitled to appoint a member of the Company’s Board of Directors. As of the date of this prospectus, the Company had a total of $130,000 outstanding under the $130K Note. For more information regarding the $130K Note and other indebtedness of the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Indebtedness—$130K Note.”
$1.5M Notes
In December 2020, we issued a series of secured convertible promissory notes, which we refer to as the $1.5M Notes, in the amount of $1.5 million. The $1.5M Notes bear interest at a simple interest rate of 12% per annum. For more information regarding the $1.5M Notes and other indebtedness of the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Indebtedness—$1.5M Notes.”
In November 2021, in consideration for the extension of the maturity date of the $1.5M Notes from July 31, 2022 to October 31, 2022, we issued warrants, that we refer to as the $1.5M Lender Warrants, to purchase an aggregate of 4,545 shares of Common Stock. For more information regarding the $1.5M Lender Warrants, see “Description of Securities—Warrants—$1.5M Lender Warrants.”
The following table summarizes purchases of the $1.5M Notes by related parties of the Company and the number of shares of Common Stock issuable upon exercise of $1.5M Lender Warrants issued to related parties of the Company in consideration of the extension of the maturity of the $1.5M Notes:
| Related Party |
Principal Amount of $1.5M Notes |
$1.5M Lender Warrants |
||||||
| John H. Matthews(1) |
$ | 515,500 | 1,562 | |||||
| Brian Szymczak |
$ | 10,000 | 30 | |||||
| Andrew Simpson . |
$ | 10,000 | 30 | |||||
| Mark Hilz |
$ | 10,000 | 30 | |||||
| Lary Snodgrass(2) |
$ | 100,000 | 303 | |||||
| Paul Knuckley(3) |
$ | 50,000 | 152 | |||||
| (1) | Includes principal amount of $1.5M Notes held by Matthews Holdings Southwest, Inc. |
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| (2) | Includes principal amount of $1.5M Notes held by Lary Snodgrass Family Limited and Snodgrass Children’s Limited. |
| (3) | Includes principal amount of $1.5M Notes held by PSKS Investments LP. |
In May 2022, the terms of the $1.5M Notes were further amended. As amended, the $1.5M Notes automatically convert upon the consummation of this offering, eliminating the condition that the $1.5M Notes would automatically convert upon the consummation of a public offering of Common Stock which values the entire equity capital of the Company at $50 million or more.
All such purchases of the $1.5M Notes by, and issuances of the $1.5M Lender Warrants to, related parties of the Company were made on the same basis as the purchases made by, and issuances made to, unrelated purchasers.
$1M Loan and Security Agreement
Beginning in April 2020, the Company entered into a loan and security agreement, which we refer to as the $1M Loan and Security Agreement, with FRV, a beneficial owner of more than five percent (5%) of the combined voting power of our outstanding capital stock, and John Q. Adams, Sr. (a former director of the Company). For more information regarding the $1M Loan and Security Agreement and other indebtedness of the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Indebtedness—$1M Loan and Security Agreement.”
In November 2021, in consideration for an extension of the maturity date of the $1M Loan and Security Agreement from September 30, 2021 to September 30, 2022, we issued warrants, that we refer to as the $1M Lender Warrants, to purchase an aggregate of 15,152 shares of Common Stock to FRV and Mr. Adams. For more information regarding $1M Lender Warrants, see “Description of Securities—Warrants—$1M Lender Warrants”. The $1M Loan and Security Agreement was further amended in May 2022 to extend the maturity date to September 30, 2023, subject to completion of this offering. In connection with this amendment, we agreed to pay all accrued and unpaid interest owed to Mr. Adams prior to September 30, 2022.
2021 Bridge Financing
In connection with the 2021 Bridge Financing, the related parties listed below purchased Bridge Notes and received Bridge Warrants. All such purchases were made on the same basis as the purchases made by unrelated purchasers. For more information in regards to the 2021 Bridge Financing, see “Prospectus Summary—Recent Developments—2021 Bridge Financing.”
The following table sets forth the names of such related parties and amount of the Bridge Notes and Bridge Warrants purchased:
| Related Party |
Principal Amount of Bridge Notes |
Warrants to Purchase the Following Number of Shares |
||||||
| Paul Knuckley |
$ | 111,111.11 | [ | ] | ||||
| Lary Snodgrass |
$ | 222,222.22 | [ | ] | ||||
| John H. Matthews(1) |
$ | 555,555.55 | [ | ] | ||||
| Patrick Kanouff |
$ | 22,222.22 | [ | ] | ||||
| (1) | Includes Bridge Notes and Bridge Warrants held by Matthews Holdings Southwest, Inc. |
Registration Rights Agreement
In connection with the 2021 Bridge Financing, we entered into the Registration Rights Agreement with the purchasers of the Bridge Notes pursuant to which we agreed to file a resale registration statement, no later than [ ], 2022, with respect to the shares of Common Stock issuable upon conversion of the Bridge Notes,
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exercise of the Bridge Warrants or resulting from anti-dilution provisions in the Bridge Notes, the Bridge Warrants and the Pre-Funded Warrants (if any) or any securities issued or the issuable upon any stock split, dividend or other distribution, recapitalization or similar event, collectively referred to as the Registrable Securities. For more information regarding the Registration Rights Agreement, see “Description of Securities—Registration Rights.”
Short-term $500K Unsecured Note
On August 12, 2021, we issued a note, for the amount of $500,000 to Matthews Southwest Holdings, Inc., a beneficial owner owning more than 5% of our Common Stock. The maturity date of this note, as amended, was November 30, 2021. This note has been repaid and there are no further obligations owed by the Company. In connection with the issuance of this note, we also issued 10,101 shares of Common Stock to Matthews Southwest Holdings, Inc.
Kyngstone Agreement
Andrew Simpson, the Chairman of the Board of Directors of the Company, is the sole member of the board of directors and controlling shareholder of Kyngstone Limited, or Kyngstone, a company incorporated in the United Kingdom. Kyngstone has provided advisory services to the Company pursuant to an Agreement dated June 25, 2013 between the Company and Kyngstone. From the beginning of Fiscal 2021 to April 30, 2022, the Company has expensed $187,500 in respect of fees to Kyngstone.
Agreements with Front Range Ventures
The Company is a party to several agreements with FRV, including with respect to the $130K Note, the $1M Loan and Security Agreement, the $1M Lender Warrants and the Series C Preferred Stock. In addition, pursuant to the FRV Side Letter, FRV has the right to designate a director of the Company, who is currently Patrick Kanouff.
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The following description summarizes the terms of our securities, our amended and restated certificate of formation and our amended and restated bylaws. As it is only a summary, it does not contain all the information that may be important to you. For a complete description, you should refer to our amended and restated certificate of formation and amended and restated bylaws, each of which is in effect as of this offering, the forms of which are filed as exhibits to the registration statement of which this prospectus is a part.
Our purpose is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the Texas Business Organizations Code, or the TBOC. Our authorized capital stock consists of five hundred million (500,000,000) shares of Common Stock, par value $0.001 per share, and twenty million (20,000,000) shares of preferred stock, or Preferred Stock, par value $0.001 per share of which, as of June 1, 2022, there were 3,323,942 shares of Common Stock outstanding and held of record by 335 shareholders and 463,265 shares of Series C Preferred Stock outstanding and held of record by 73 shareholders. Of our authorized Preferred Stock, six hundred thousand (600,000) shares have been designated as Series C Convertible Preferred Stock, or the Series C Preferred Stock, having a par value of $0.001 per share. Unless our Board of Directors determines otherwise, we will issue all shares of our capital stock in uncertificated form.
Our executive officers and directors have entered into lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our Common Stock and certain other securities held by them for 12 months following the date of the underwriting agreement entered into with the underwriters’ representative in connection with this offering, or the underwriting agreement. In addition, certain of our shareholders have entered into substantially similar lock-up agreements, except their lock-up agreements will expire six months following the date of the underwriting agreement. A total of 3,064,881 shares of our Common Stock are subject to lock-up agreements entered into by our executive officers and directors and certain shareholders. Further, the shares of Common Stock issuable upon conversion of the Bridge Notes, Pre-Funded Warrants and Bridge Warrants will instead be subject to the lock-up agreements entered into in connection with the 2021 Bridge Financing. See “Shares Eligible for Future Sale–Lock-up Agreements” and “Underwriting–Lock-up Agreements” for a description of these lock-up agreements.
Common Stock
Holders of our Common Stock are entitled to one vote for each share held of record on all matters on which shareholders are entitled to vote generally, including the election or removal of directors, subject to certain limitations. The holders of our Common Stock do not have cumulative voting rights in the election of directors. Upon our liquidation, dissolution or winding up and after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of our Common Stock will be entitled to receive pro rata our remaining assets available for distribution on a pro rata basis. Holders of our Common Stock do not have preemptive, subscription, redemption or conversion rights. The Common Stock will not be subject to further calls or assessment by us. There will be no redemption or sinking fund provisions applicable to the Common Stock. All shares of our Common Stock that will be outstanding at the time of the completion of the offering will be fully paid and non-assessable. The rights, powers, preferences and privileges of holders of our Common Stock will be subject to those of the holders of any shares of our preferred stock we may authorize and issue in the future.
As a Texas corporation, we are subject to certain restrictions on dividends under the TBOC. Generally, a Texas corporation may pay dividends to its shareholders out of its surplus (the excess of its assets over its liabilities and stated capital) unless the dividend would render the corporation insolvent.
The declaration, amount and payment of any future dividends will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our shareholders.
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We currently expect to retain all future earnings for use in the operation and expansion of our business and have no current plans to pay dividends.
Preferred Stock
Our amended and restated certificate of formation authorizes our Board of Directors to establish one or more series of preferred stock (including convertible preferred stock). Unless required by law or by the TBOC, the authorized shares of preferred stock will be available for issuance without further action by our shareholders.
Our Board of Directors will be able to determine, with respect to any series of preferred stock, the powers including preferences and relative participations, optional or other special rights, and the qualifications, limitations or restrictions thereof, of that series, including, without limitation:
| • | the designation of the series; |
| • | the number of shares of the series, which our Board of Directors may, except where otherwise provided in the preferred stock designation, increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares then outstanding); |
| • | whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series; |
| • | the dates at which dividends, if any, will be payable; |
| • | the redemption rights and price or prices, if any, for shares of the series; |
| • | the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series; |
| • | the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company; |
| • | whether the shares of the series will be convertible into shares of any other class or series, or any other security, of the Company or any other corporation and, if so, the specification of the other class or series or other security, the conversion price or prices or rate or rates, any rate adjustments, the date or dates as of which the shares will be convertible and all other terms and conditions upon which the conversion may be made; |
| • | restrictions on the issuance of shares of the same series or of any other class or series; and |
| • | the voting rights, if any, of the holders of the series. |
We will be able to issue a series of preferred stock that could, depending on the terms of the series, impede or discourage an acquisition attempt or other transaction that some, or a majority, of the holders of our Common Stock might believe to be in their best interests or in which the holders of our Common Stock might receive a premium for their Common Stock over the market price of the Common Stock. In addition, the issuance of Preferred Stock may adversely affect the rights of holders of our Common Stock by restricting dividends on the Common Stock, diluting the voting power of the Common Stock or subordinating the liquidation rights of the Common Stock. As a result of these or other factors, the issuance of Preferred Stock may have an adverse impact on the market price of our Common Stock.
As of January 31, 2022, there were 10,000 shares of the Series A Preferred Stock, 10,000 shares of the Series B Preferred Stock and 463,265 shares of Series C Preferred Stock outstanding. The Series A Preferred Stock was issued to certain employees and directors of the Company in 2014 and the Series B Preferred Stock was issued to certain employees and directors in 2015. In June 2022, as a result of this offering, all outstanding shares of Series A Preferred Stock will be converted into 719,397 shares of Common Stock (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock pursuant to the terms of the Series A Preferred Stock) and all outstanding shares of Series B Preferred Stock will be cancelled.
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The Series C Preferred Stock was issued from April 2019 to October 2020 to accredited investors and has a liquidation preference to the Common Stock. As of January 31, 2022, the liquidation preference was approximately $11.6 million. An amendment to, or waiver of rights of the Series C Preferred Stock requires the approval of holders of a majority of the outstanding shares of the Series C Preferred Stock. Additionally, pursuant to the FRV Side Letter, FRV is entitled to appoint a member of the Board of Directors as well as a board observer, for so long as FRV holds at least 71,000 shares of Series C Preferred Stock.
Voting and Dividends
The holders of the shares of the Series C Preferred have voting rights equal to an equivalent number of shares of the Common Stock into which it is convertible and vote together as one class with the Common Stock.
The holders of the Series C Preferred Stock are entitled to receive dividends at an annual rate of $1.50 per share. Such dividends shall accrue and are payable out of funds legally available, are payable only when and if declared by the Board, and are noncumulative. The Company is not permitted to declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than dividends on shares of the Common Stock payable in shares of Common Stock) unless the holders of the shares of the Series C Preferred Stock then outstanding first receive, or simultaneously receive, a dividend on each outstanding share of the Series C Preferred Stock in an amount at least equal to the greater of (i) the amount of the aggregate dividends then accrued on such share of the Series C Preferred Stock and not previously paid and (ii) in the case of a dividend on the Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Series C Preferred Stock as would equal the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (2) the number of shares of Common Stock issuable upon conversion of a share of the Series C Preferred Stock.
No dividends have been declared to date on any shares of Preferred Stock.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, the holders of the Series C Preferred Stock are entitled to receive, prior and in preference to the holders of the Common Stock, a per share amount equal to 1.0 times the original issue price ($25.00 per share) plus any accrued but unpaid dividends thereon.
If upon the liquidation, dissolution or winding up of the Company, the assets of the Company that are legally available for distribution to the holders of the Series C Preferred Stock are insufficient to permit the payment to such holders of the full amounts above, then the entire assets of the Company that are legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Series C Preferred Stock in proportion to what they would otherwise be entitled to receive.
After the payment of the full Series C Preferred Stock liquidation preference and unpaid accrued dividends, the holders of the Series C Preferred Stock shall participate in the distribution of the entire remaining assets of the Company legally available for distributions pro rata to holders of the Common Stock on an as converted basis. The sale of a majority of the capital stock of the Company or the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole shall be a deemed liquidation for the purpose of the Series C Preferred Stock.
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Conversion
Each share of Series C Preferred Stock is convertible, at the option of the holder, at any time after the date of issuance of such share, into such number of fully paid and non-assessable shares of Common Stock determined by dividing the original issue price of $25.00 by the conversion price for such series in effect at the time of conversion for the Series C Preferred Stock. The conversion price for the Series C Preferred Stock is subject to adjustment in accordance with conversion provisions contained in the Company’s certificate of formation, as amended. Following this offering, based upon an assumed offering price of $5.00 per Unit (which is the midpoint of the price range set forth on the cover page of this prospectus), the conversion price of the Series C Preferred Stock will be $6.67 per share. See “—Antidilution Provisions”.
Each share of Series C Preferred Stock automatically converts into shares of Common Stock at the conversion price at the time in effect immediately upon the Company’s sale of its Common Stock in a public offering provided that the offering price is not less than $16.50 per share (as adjusted for recapitalizations, stock combinations, stock dividends, stock splits and the like) and which results in aggregate cash proceeds of not less than $20.0 million before underwriting discounts, commissions, and fees.
Warrants
Investor Warrants
The Company issued warrants, or the Investor Warrants, in connection with funding or as consideration for services rendered to the Company. The Investor Warrants have terms ranging from five to ten years from the date of issuance. As of January 31, 2022, there were Investor Warrants to purchase 76,440 shares of Common Stock at exercise prices ranging from $3.41 to $15.18 per share.
Warrants issued in connection with the 2021 Bridge Financing
We issued the Bridge Warrants to purchase 775,420 shares of Common Stock in connection with the 2021 Bridge Financing. The Bridge Warrants expire in five years after the date of issuance, beginning on December 22, 2026, with an initial Exercise Price of $9.08 per share, subject to certain adjustments. No holder of a Bridge Warrant may exercise any portion of a Bridge Warrant if after giving effect to such exercise such holder (together with its Attribution Parties) would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of such holder’s Bridge Warrant. This limitation may be waived by a holder, at its election, upon not less than 61 days’ prior notice to the Company, to change the limitation to 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of such holder’s warrant. Any exercise of the Bridge Warrants resulting in a number of shares in excess of 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the exercise shall be deemed null and void and shall be cancelled ab initio.
The exercise price of the Bridge Warrants is subject to adjustment for certain events such as stock dividends and splits and, if and whenever on or prior to the later of (i) the second anniversary of the issuance date or (ii) the 18-month anniversary of the effective date of this offering, there are issuances of shares of Common Stock or securities convertible into or exercisable for shares of Common Stock at a price less than the exercise price of the Bridge Warrants in which event the exercise price will be reduced to the price at which such newly issued shares of Common Stock or securities convertible into or exercisable for shares of Common Stock were issued. In addition, if the per share issuance price in this offering is less than 125% of the Exercise Price then in effect, the Exercise Price would be decreased to 125% of the issuance price of the Common Stock being issued in this offering. Based upon an offering price of $5.00 per Unit, the midpoint of the price range of the Units set forth on the cover page of this prospectus, pursuant to the terms of the Bridge Warrants, the amount allocated to each share of Common Stock in this offering is $4.875 and as a result, the exercise price of the Bridge Warrants will be reduced to $6.09 per share upon completion of this offering. Upon a decrease of the Exercise Price, the number of shares of Common Stock
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to be received shall be adjusted such that the total consideration to be received by the Company upon exercise in full of the Bridge Warrants would equal 150% of the principal amount of the Bridge Note purchased by the holder in the 2021 Bridge Financing.
In addition to the Bridge Warrants, in the event any holder (including its Attribution Parties) of the Bridge Notes who would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately prior to, and immediately after giving effect to, the conversion of all or any portion of the Bridge Notes, may elect to receive a pre-funded warrant, or the Pre-Funded Warrants, for all shares in excess of such percentage. The Pre-Funded Warrants have substantially the same terms as the Bridge Warrants except that the exercise price is $0.0001 per share. For more information regarding the Bridge Notes, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Indebtedness.”
$1M Lender Warrants
In November 2021, the Company issued warrants to purchase 15,152 shares of our Common Stock, which we refer to as the $1M Lender Warrants, to the lenders of the $1M Notes as consideration for the extension of the maturity of the $1M Loan and Security Agreement to September 30, 2022. The $1M Lender Warrants expire on September 30, 2026. The $1M Lender Warrants are exercisable for Common Stock at an exercise price equal to the lower of (i) $6.05 per share and (ii) a 30% discount to the offering price for the sale of Common Stock in an initial public offering. Pursuant to the terms of the $1M Lender Warrants, the amount allocated to each share of Common Stock is $4.99 (based on an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus) and as a result, the exercise price of the $1M Lender Warrants will be reduced to $3.49 per share upon completion of this offering.
$1.5M Lender Warrants
In November 2021, the Company also issued warrants to purchase 4,545 shares of our Common Stock, which we refer to as the $1.5M Lender Warrants, to noteholders of the $1.5M Notes as consideration for the extension of the maturity of the $1.5M Notes to October 31, 2022. The $1.5M Lender Warrants expire on October 12, 2026. The $1.5M Lender Warrants are exercisable for Common Stock at an exercise price equal to the lower of (i) $6.05 per share and (ii) a 30% discount to the offering price for the sale of Common Stock in an initial public offering. Pursuant to the terms of the $1.5M Lender Warrants, the amount allocated to each share of Common Stock is $4.99 (based on an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus) and as a result, the exercise price of the $1.5M Lender Warrants will be reduced to $3.49 per share upon completion of this offering.
Warrants to be Issued in this Offering
The following summary of certain terms and provisions of the Warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us and American Stock Transfer & Trust Company, LLC, as warrant agent, and the form of warrant, both of which are filed as exhibits to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the warrant agent agreement, including the annexes thereto, and the form of warrant.
Exercisability. The Warrants are immediately exercisable at any time following the consummation of this offering and at any time up to the date that is five years after their original issuance. The Warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuance of the shares of Common Stock underlying the Warrants under the Securities Act is effective and available for the issuance of such shares of Common Stock, or an exemption from registration under the Securities Act is available for the issuance of such shares of Common Stock, by payment in full in immediately available funds for the number of shares of Common Stock purchased upon such exercise. If a registration statement registering the issuance of the Common Stock underlying the Warrants under the Securities Act is not effective or available and an exemption from registration under the Securities Act is not available for the issuance of such Common Stock, the holder may, in its sole discretion,
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elect to exercise the Warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of Common Stock determined according to the formula set forth in the Warrant. No fractional shares of Common Stock will be issued in connection with the exercise of a Warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price. We will not effect the exercise of any portion of the Warrants, and the holder will not have the right to exercise any portion of the Warrants, and any such exercise shall be null and void and treated as if never made, to the extent that after giving effect to such exercise, the holder together with its affiliates and certain other persons specified in the Warrants collectively would own beneficially in excess of 4.99% (or, upon election by a holder prior to the issuance of any Warrants, 9.99%) of the shares of Common Stock outstanding immediately after giving effect to such exercise.
Exercise Price. The exercise price per share purchasable upon exercise of the Warrants is $[ ] per share. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our shares of Common Stock and also upon any distributions of assets, including cash, stock or other property to our shareholders.
Transferability. Subject to applicable laws, the Warrants may be offered for sale, sold, transferred or assigned without our consent.
Warrant Agent. The Warrants will be issued in registered form under a warrant agent agreement between American Stock Trading & Trust Company, LLC, as warrant agent, and us. The Warrants shall be represented only by one or more global warrants deposited with the warrant agent, as custodian on behalf of The Depository Trust Company (“DTC”) and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.
Fundamental Transactions. In the event of a fundamental transaction, as described in the Warrants and generally including any reorganization, recapitalization or reclassification of our ordinary shares, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding shares of Common Stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our shares of Common Stock, the holders of the Warrants will be entitled to receive upon exercise of the Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Warrants immediately prior to such fundamental transaction.
Rights as a Shareholder. Except as otherwise provided in the Warrants or by virtue of such holder’s ownership of our shares of Common Stock, the holder of a Warrant does not have the rights or privileges of a holder of our Common Stock, including any voting rights, until the holder exercises the Warrant.
Governing Law. The Warrants and the warrant agent agreement are governed by New York law.
Options
The Company grants certain employees and board members stock option awards where vesting is contingent upon a service period, as it believes that such awards better align the interests of its employees with those of its shareholders. Stock option awards are granted with an exercise price equal to or above the market price of the Company’s stock at the date of grant. Certain stock option awards provide for accelerated vesting if there is a change in control, as defined in the option agreement. Stock options may not, subject to certain limited exceptions, be exercised when an employee leaves the Company.
Where option awards are granted based on service periods, they generally vest quarterly based on three years of continuous service for executive directors and employees, or 12 months continuous service for directors and have 10-year contractual terms. At April 30, 2022, there were time-based options to purchase a total of 260,823 shares of Common Stock at an average exercise price of $11.81 per share.
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The Company also grants stock option awards where vesting is contingent upon meeting various departmental and/or company-wide performance goals, including, in some instances, FDA and/or CE Mark regulatory approval and/or certain EBITDA and funding thresholds. Such performance-based stock options are expected to vest when the performance criteria and metrics have been met. These stock options have a term of ten years. At April 30, 2022, there were performance-based options to purchase a total of 581,768 shares of Common Stock at an average exercise price of $5.16 per share.
Antidilution Provisions
Approximately 2,891,469 shares of Common Stock issuable upon exercise of outstanding warrants (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus) and the Series C Preferred Stock are subject to antidilution protection provisions. The holders of these securities may be entitled to receive additional shares of Common Stock upon exercise of the Bridge Warrants or conversion of the Series C Preferred Stock, as applicable.
Registration Rights
In connection with the 2021 Bridge Financing, we entered into the Registration Rights Agreement with the purchasers of the Bridge Notes pursuant to which we agreed to file a resale registration statement, no later than [ ], 2022, with respect to the shares of Common Stock issuable upon conversion of the Bridge Notes, exercise of the Bridge Warrants or resulting from anti-dilution provisions in the Bridge Notes, the Bridge Warrants and the Pre-Funded Warrants (if any) or any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event, collectively referred to as the Registrable Securities. In the event that the Registration Statement relating to the resale of the Registrable Securities is not declared effective by the SEC on or prior to [ ], 2022, we are required to pay to each holder of Registrable Securities an amount in cash equal to two percent of the principal amount of such holder’s Bridge Notes.
We have also previously granted certain registration rights to the holders of the Series C Preferred Stock. Under the terms of this registration rights agreement, which we refer to as the Series C Registration Rights Agreement, the holders of the Series C Preferred Stock owning not less than 30% of (i) the Common Stock issuable or issued upon conversion of the Series C Preferred Stock; and (ii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referenced in clause (i) above, referred to herein as the Series C Registrable Securities, and the anticipated aggregate offering price, net of certain expenses, would exceed $10 million, may demand that the Company file a registration statement relating to the Series C Registrable Securities owned by the holders who have demanded such registration. In addition, if at any time when it is eligible to use a Form S-3 registration statement, the Company receives a request from holders of at least twenty-five percent (25%) of the Series C Registrable Securities then outstanding that the Company file a Form S-3 registration statement with respect to outstanding Series C Registrable Securities of such holders having an anticipated aggregate offering price, net of certain expenses, of at least $3 million, then the Company will be required to file a registration statement relating to the resale of the Series C Registrable Securities owned by such holders. Finally, if the Company proposes to register (including, for this purpose, a registration effected by the Company for shareholders other than the holders of the Series C Preferred Stock) any of the Common Stock under the Securities Act in connection with the public offering of such securities solely for cash, the Company is required to give each holder of Series C Registrable Securities notice of such registration and such holders may include their Series C Registrable Securities in such registration statement. For purposes of this prospectus, we have assumed that the holders of the Series C Preferred Stock will include their Series C Registrable Securities in the registration statement we file with respect to the Registrable Securities related to the 2021 Bridge Financing.
We have also agreed to grant certain unlimited “piggyback” registration rights to the underwriters’ representative in connection with the underwriters’ representative’s warrants. For more information, see “Underwriting—Representative’s Warrants”.
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Annual Shareholder Meetings
Our amended and restated bylaws provide that annual shareholder meetings will be held at a date, time and place, if any, as exclusively selected by our Board of Directors. To the extent permitted under applicable law, we may conduct meetings by remote communications, including by webcast.
Anti-takeover Effects of Certain Provisions of Our Amended and Restated Certificate of Formation, Amended and Restated Bylaws and Texas Law
Our amended and restated certificate of formation and amended and restated bylaws and the TBOC contain provisions, which are summarized in the following paragraphs, that are intended to enhance the likelihood of continuity and stability in the composition of our Board of Directors. These provisions are intended to avoid costly takeover battles, reduce our vulnerability to a hostile change of control and enhance the ability of our Board of Directors to maximize shareholder value in connection with any unsolicited offer to acquire us. However, these provisions may have an anti-takeover effect and may delay, deter or prevent a merger or acquisition of the Company by means of a tender offer, a proxy contest or other takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the prevailing market price for the shares of Common Stock held by shareholders.
Authorized but unissued capital stock
Texas law does not require shareholder approval for any issuance of authorized shares. However, the listing requirements of the Nasdaq, which would apply if and so long as our Common Stock remains listed on the Nasdaq, require shareholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of Common Stock. Additional shares that may be issued in the future may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions.
Our Board of Directors may generally issue preferred shares on terms calculated to discourage, delay or prevent a change of control of the Company or the removal of our management. Moreover, our authorized but unissued shares of preferred stock are available for future issuances without shareholder approval and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, to facilitate acquisitions and employee benefit plans.
One of the effects of the existence of unissued and unreserved shares of Common Stock or preferred stock may be to enable our Board of Directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive our shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices.
Classified Board of Directors
Our amended and restated certificate of formation provides that our Board of Directors be divided into three classes of directors, with the classes to be as nearly equal in number as possible, and with the directors serving three-year terms. As a result, approximately one-third of our Board of Directors will be elected each year. The classification of directors will have the effect of making it more difficult for shareholders to change the composition of our Board of Directors. Our amended and restated certificate of formation and amended and restated bylaws provide that, subject to any rights of holders of preferred stock to elect additional directors under specified circumstances, the number of directors will be fixed from time to time exclusively pursuant to a resolution adopted by the Board of Directors.
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Removal of directors; vacancies
Under the TBOC, unless otherwise provided in our certificate of formation, directors serving on a classified board may be removed by the shareholders only for cause. Our amended and restated certificate of formation provides that directors may be removed only for cause. In addition, our amended and restated certificate of formation also provides that, subject to the rights granted to one or more series of preferred stock then outstanding, any vacancy occurring in our Board of Directors may be filled by election at an annual or special meeting of the shareholders called for that purpose or by the affirmative vote of a majority of the directors then in office (even if the remaining directors constitute less than a quorum of the Board of Directors), and any director so chosen shall hold office for the remainder of the term to which the director has been selected and until such director’s successor shall have been elected and qualified.
No cumulative voting
Under Texas law, the right to vote cumulatively does not exist unless the certificate of formation specifically authorizes cumulative voting. Our amended and restated certificate of formation does not authorize cumulative voting. Therefore, shareholders holding a majority in voting power of the shares of our stock entitled to vote generally in the election of directors will be able to elect all our directors.
Special shareholder meetings
Our amended and restated certificate of formation provides that special meetings of our shareholders may be called at any time by the Board of Directors, the chairman of the Board of Directors or the chief executive officer of the Company. Our amended and restated bylaws prohibit the conduct of any business at a special meeting other than as specified in the notice for such meeting. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or changes in control or management of the Company.
Requirements for advance notification of director nominations and shareholder proposals
Our amended and restated bylaws establish advance notice procedures with respect to shareholder proposals and the nomination of for election as directors, other than nominations made by or at the direction of the Board of Directors or a committee of the Board of Directors. In order for any matter to be “properly brought” before a meeting, a shareholder will have to comply with advance notice requirements and provide us with certain information. Generally, to be timely, a shareholder’s notice must be received at our principal executive offices not less than 75 days nor more than 100 days prior to the first anniversary date of the immediately preceding annual meeting of shareholders. Our amended and restated bylaws also specify requirements as to the form and content of a shareholder’s notice. Our amended and restated bylaws allow the chairman of the meeting at a meeting of the shareholders to adopt rules and regulations for the conduct of meetings which may have the effect of precluding the conduct of certain business at a meeting if the rules and regulations are not followed. These provisions may also defer, delay or discourage a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to influence or obtain control of the Company.
Shareholder action by written consent
Our amended and restated certificate of formation provides that any action required or permitted to be taken at an annual or special meeting of shareholders may be taken by written consent in lieu of a meeting of shareholders only with the unanimous written consent of our shareholders.
Amendment and restatement of bylaws
Our amended and restated bylaws provide that the Board of Directors is expressly authorized to make, alter, amend, change, add to, rescind or repeal, in whole or in part, our amended and restated bylaws without a shareholder vote in any matter not inconsistent with the laws of the State of Texas and our amended and restated certificate of formation.
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The combination of the classification of our Board of Directors and the lack of cumulative voting will make it more difficult for shareholders to replace our Board of Directors as well as for another party to obtain control of us by replacing our Board of Directors. Because our Board of Directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing shareholders or another party to effect a change in management.
These provisions may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management or the Company, such as a merger, reorganization or tender offer. These provisions are intended to enhance the likelihood of continued stability in the composition of our Board of Directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of the Company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions are also intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions may also have the effect of preventing changes in management.
Dissenters’ rights of appraisal and payment
Under the TBOC, with certain exceptions, our shareholders will have appraisal rights in connection with a merger, a sale of all or substantially all of our assets, an interest exchange or a conversion. Pursuant to the TBOC, shareholders who properly request and perfect appraisal rights in connection with such merger, sale of all or substantially all of our assets, interest exchange or conversion will have the right to receive payment of the fair value of their shares as agreed to between the shareholder and the Company or, if they are unable to reach agreement, as determined by the State District Court in Tarrant County, Texas.
Shareholders’ derivative actions
Under the TBOC, any of our shareholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the shareholder bringing the action (i) is a holder of our shares at the time of the transaction to which the action relates or such shareholder became a shareholder by operation of law from a person that was a shareholder at the time of the transaction to which the action relates and (ii) fairly and adequately represents the interests of the Company in enforcing the right of the Company.
Limitations on liability and indemnification of officers and directors
The TBOC authorizes corporations to limit or eliminate the personal liability of directors to corporations and their shareholders for monetary damages for breaches of directors’ fiduciary duties (other than breaches of the directors’ duty of loyalty to corporations or their shareholders), subject to certain exceptions. Our amended and restated certificate of formation includes a provision that limits the personal liability of directors for monetary damages for an act or omission in the director’s capacity as a director to the fullest extent permitted by Texas law. However, exculpation will not apply to any director if the director has acted in bad faith, engaged in intentional misconduct, knowingly violated the law, authorized illegal dividends or redemptions, derived an improper benefit from his or her actions as a director or engaged in an act or omission for which the liability of the director is expressly provided by an applicable statute.
Our amended and restated certificate of formation provides that we must indemnify our directors and officers to the fullest extent authorized by the TBOC. We also are expressly authorized to carry directors’ and officers’ liability insurance providing indemnification for our directors, officers and certain employees for some liabilities. We believe that these indemnification provisions and insurance will be useful to attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our amended and restated certificate of formation and amended and restated bylaws may discourage shareholders from bringing a lawsuit against
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directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our shareholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.
Business combinations
Under Title 2, Chapter 21, Subchapter M of the TBOC, we may not engage in certain “business combinations” with any “affiliated shareholder,” or any affiliate or associate of the affiliated shareholder for a three-year period following the tie that the shareholder became an affiliated shareholder, unless:
| • | prior to such time, our Board of Directors approved either the business combination of the transaction which resulted in the shareholder becoming an affiliated shareholder; or |
| • | not less than six months after the affiliated shareholders’ share acquisition date, the business combination is approved by the affirmative vote at a meeting, and not by written consent, of holders of at least 662⁄3% of our outstanding voting shares that are not owned by the affiliated shareholder or an affiliate or associate of the affiliated shareholder. |
Generally, a “business combination” includes a merger, asset or stock sale or other similar transaction. Subject to certain exceptions, an “affiliated shareholder” is a person who beneficially owns (as determined pursuant to Title 2, Chapter 21, Subchapter M of the TBOC), or within the previous three years beneficially owned, 20% or more of our outstanding voting shares. For purposes of this section only, “voting share” has the meaning given to it in Title 2, Chapter 21, Subchapter M of the TBOC.
Under certain circumstances, this provision will make it more difficult for a person who would be an “affiliated shareholder” to effect various business combinations with the Company for a three-year period. This provision may encourage companies interested in acquiring the Company to negotiate in advance with our Board of Directors because the shareholder approval requirement would be avoided if our Board of Directors approves either the business combination or the transaction that results in such shareholder becoming an affiliated shareholder. These provisions also may have the effect of preventing changes in our Board of Directors and may make it more difficult to accomplish transactions which shareholders may otherwise deem to be in their best interests.
Listing
We have applied to list our Common Stock and Warrants to be issued in this offering on the Nasdaq under the symbol “HSCS” and “HSCSW,” respectively. No assurance can be given that our application will be approved or that a trading market will develop. In the event our listing application is not approved, we will not consummate this offering.
Transfer agent and registrar
The transfer agent and registrar for our Common Stock and Warrants is American Stock Transfer and Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
We have applied to list our Common Stock and Warrants to be issued in this offering on the Nasdaq under the symbol “HSCS” and “HSCSW,” respectively. No assurance can be given that our application will be approved or that a trading market will develop. In the event our listing application is not approved, we will not consummate this offering. Sales of substantial amounts of shares of our Common Stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices of our Common Stock and Warrants. Upon completion of this offering, we will have approximately 8,112,199 outstanding shares of Common Stock (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus), assuming no exercise of the Warrants and the underwriters do not exercise their over-allotment option or the underwriters’ representative’s warrants. All of the shares of Common Stock and Warrants sold in this offering will be freely transferable without restriction or further registration under the Securities Act by persons other than by our affiliates.
Lock-up Agreements
Our executive officers and directors have entered into lock-up agreements pursuant to which they have agreed not to offer, sell, agree to sell, directly or indirectly, or otherwise dispose of any shares of Common Stock or any other securities convertible into or exchangeable for Common Stock, subject to certain customary exceptions, without the prior written consent of the underwriters’ representative for a period of 12 months after the date of the underwriting agreement. In addition, certain of our shareholders have entered into substantially similar lock-up agreements except that such agreements cover a period of six months instead of 12 months. A total of 3,064,881 shares of our Common Stock are subject to lock-up agreements entered into by our executive officers and directors and certain shareholders. The lock-up agreements further provide that the shares of Common Stock issuable upon conversion of the Bridge Notes, or the Bridge Conversion Shares, are instead subject to the lock-up agreements entered into in connection with the Bridge Notes, or the Bridge Lock-up Agreements. Pursuant to the Bridge Lock-Up Agreements, the holders of the Bridge Notes have agreed not to offer, sell, agree to sell, directly or indirectly, or otherwise dispose of any Bridge Conversion Shares for a period commencing on the date of this offering and continuing until after (i) the three month anniversary of this offering with respect to one-third of the Bridge Conversion Shares, (ii) the four month anniversary of this offering with respect to an additional one-third of the Bridge Conversion Shares, and (iii) the five month anniversary of this offering with respect to the remaining Bridge Conversion Shares. After the expiration of the applicable period, whether under the lock-up agreements entered into in connection with this offering or under the Bridge Lock-up Agreements, the shares of Common Stock held by our directors, executive officers and shareholders may be sold subject to the restrictions under applicable securities laws or by means of registered public offerings.
Rule 144
In general, under Rule 144 under the Securities Act as in effect on the date hereof, or Rule 144, beginning 90 days after the date hereof, a person who holds restricted shares of Common Stock (assuming there are any restricted shares) and is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned these restricted shares for at least six months, would be entitled to sell an unlimited number of shares of our Common Stock, provided current public information about us is available. In addition, under Rule 144, a person who holds restricted shares in us and is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned these restricted shares for at least one year, would be entitled to sell an unlimited number of shares immediately upon the closing of this offering without regard to whether current public information about us is available. Beginning 90 days after the date hereof, our affiliates who have beneficially owned shares of our Common Stock for at least six months will be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
| • | 1% of the number of shares of Common Stock then outstanding; or |
| • | the average weekly trading volume of shares of our Common Stock on Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale; provided that current public information about us is available and the affiliate complies with the manner of sale requirements imposed by Rule 144. |
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Affiliates are also subject to additional restrictions on the manner of sales under Rule 144 and notice filing requirements. We cannot estimate the number of shares of our Common Stock that our existing shareholders will elect to sell.
In addition to the shares of Common Stock sold in the offering, in connection with the completion of this offering, 1,698,280 shares of our Common Stock will become unrestricted shares pursuant to Rule 144 and will not be subject to lock-up restrictions.
Regulation S
Regulation S under the Securities Act provides that securities owned by any person may be sold without registration in the United States, provided that the sale is effected in an offshore transaction and no directed selling efforts are made in the United States (as these terms are defined in Regulation S), subject to certain other conditions. In general, this means that our Common Stock may be sold in some manner outside the United States without requiring registration in the United States.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases shares of our Common Stock from us in connection with a compensatory share plan or other written agreement executed prior to the completion of this offering is eligible to resell such shares of our Common Stock in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144.
THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL SHARE TRANSFER RESTRICTION MATTERS THAT MAY BE OF IMPORTANCE TO A PROSPECTIVE INVESTOR. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE PARTICULAR SECURITIES LAWS AND TRANSFER RESTRICTION CONSEQUENCES OF PURCHASING, HOLDING, AND DISPOSING OF THE COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSIDERED TO BE, LEGAL OR TAX ADVICE. EACH U.S. HOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF COMMON STOCK AND AMERICAN DEPOSITARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
Subject to the limitations described in the next two paragraphs, the following discussion summarizes the material U.S. federal income tax consequences to a “U.S. Holder” arising from the purchase, ownership and sale of the Common Stock. For this purpose, a “U.S. Holder” is a holder of Common Stock that is: (1) an individual citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under U.S. federal income tax laws; (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury regulations) created or organized under the laws of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust; or (5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations.
This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase our Common Stock. This summary generally considers only U.S. Holders that will own our Common Stock as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer’s status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury regulations promulgated thereunder, administrative and judicial interpretations thereof, all as in effect as of the date hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations. We will not seek a ruling from the Internal Revenue Service, or the IRS, with regard to the U.S. federal income tax treatment of an investment in our Common Stock by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.
This discussion does not address all of the aspects of U.S. federal income taxation that may be relevant to a particular U.S. holder based on such holder’s particular circumstances and in particular does not discuss any estate, gift, generation-skipping transfer, state, local, excise or foreign tax considerations. In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution or “financial services entity;” (2) a broker or dealer in securities or foreign currency; (3) a person who acquired our Common Stock in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds our Common Stock as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment trusts or grantor trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional currency other than the U.S. dollar. This discussion does not address the U.S. federal income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, Common Stock representing 10% or more of our voting power. Additionally, the U.S. federal income tax treatment of partnerships (or other pass-through entities) or persons who hold Common Stock through a partnership or other pass-through entity are not addressed.
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Each prospective investor is advised to consult his or her own tax adviser for the specific tax consequences to that investor of purchasing, holding or disposing of our Common Stock, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.
General Treatment of Units and Allocation of Purchase Price
There is no authority directly addressing the treatment for U.S. federal income tax purposes of instruments with terms substantially the same as the Units and, therefore, the treatment of a Unit is not entirely clear. The acquisition of a Unit is expected to be treated for U.S. federal income tax purposes as the acquisition of one share of our Common Stock and one Warrant. We intend to treat the acquisition of a Unit in this manner and, by purchasing a Unit, you agree to adopt such treatment for U.S. federal income tax purposes. Each U.S. Holder of a Unit must allocate the purchase price paid by such U.S. Holder for such Unit between the share of Common Stock and the Warrant based on their respective relative fair market values at the time of issuance. A U.S. Holder’s initial tax basis in the Common Stock and the Warrant included in each Unit should equal the portion of the purchase price of the Unit allocated thereto. Any disposition of a Unit should be treated for U.S. federal income tax purposes as a disposition of the share of Common Stock and one Warrant comprising the Unit, and the amount realized on the disposition should be allocated between the Common Stock and the Warrant based on their respective relative fair market values at the time of disposition. The separation of the Common Stock and Warrant comprising a Unit should not be a taxable event for U.S. federal income tax purposes.
The foregoing treatment of the Units and a U.S. Holder’s purchase price allocation is not binding on the IRS or the courts. Because there is no authority that directly addresses instruments that are similar to the Units, no assurance can be given that the IRS or the courts will agree with the characterization described above or the discussion below. Each prospective investor is urged to consult its tax advisors regarding the U.S. federal, state, local and any foreign tax consequences of an investment in a Unit (including alternative characterizations of a Unit and its components). The following discussion is based on the assumption that the characterization of the Common Stock and Warrants and the allocation described above are accepted for U.S. federal income tax purposes.
Taxation of Dividends Paid on Common Stock
We do not intend to pay dividends in the foreseeable future. In the event that we do pay dividends, and subject to the discussion of “qualified dividend income” below, a U.S. Holder, other than certain U.S. Holders that are U.S. corporations, will be required to include in gross income as ordinary income the amount of any distribution paid on Common Stock to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis for the Common Stock to the extent thereof, and then capital gain. We do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles and, therefore, U.S. Holders should expect that the entire amount of any distribution generally will be reported as dividend income.
In general, preferential tax rates for “qualified dividend income” and long-term capital gains are applicable for U.S. Holders that are individuals, estates or trusts. “Qualified dividend income” means, inter alia, dividends received from a U.S. Corporation. A U.S. Holder will not be entitled to the preferential rate: (1) if the U.S. Holder has not held our Common Stock for at least 61 days of the 121 day period beginning on the date which is 60 days before the ex-dividend date, or (2) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished its risk of loss on our Common Stock are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as “investment income” pursuant to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.
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The amount of a distribution of property other than cash with respect to our Common Stock will be measured by the amount of the fair market value of any property distributed.
Taxation of the Disposition of Common Stock
Upon the sale, exchange or other disposition of our Common Stock or the Warrants (including, in certain circumstances, a redemption of our Common Stock or the Warrants), a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s tax basis for the Common Stock or Warrants in U.S. dollars and the amount realized on the disposition. The gain or loss realized on the sale, exchange or other disposition of Common Stock or Warrants will be long-term capital gain or loss if the U.S. Holder has a holding period for such Common Stock or Warrants of more than one year at the time of the disposition. Individuals who recognize long-term capital gains may be taxed on such gains at reduced rates of tax. The deduction of capital losses is subject to various limitations.
Tax on Net Investment Income
Certain U.S. Holders who are individuals, estates or trusts will be required to pay a 3.8% Medicare tax on their net investment income (including dividends on and gains from the sale or other disposition of our Common Stock or Warrants), or in the case of estates and trusts on their net investment income that is not distributed to beneficiaries of the estate or trust. In each case, the 3.8% Medicare tax applies only to the extent the U.S. Holder’s total adjusted income exceeds applicable thresholds.
Tax Consequences for Non-U.S. Holders of Units
Except as provided below, an individual, corporation, estate or trust that is not a U.S. Holder, referred to below as a non-U.S. Holder, generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our Common Stock or Warrants.
A non-U.S. Holder may be subject to U.S. federal income tax on a dividend paid on our Common Stock or gain from the disposition of our Common Stock or Warrants if: (1) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States and, if required by an applicable income tax treaty is attributable to a permanent establishment or fixed place of business in the United States; or (2) in the case of a disposition of our Common Stock or Warrants, the individual non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the disposition and other specified conditions are met.
In general, non-U.S. Holders will not be subject to backup withholding with respect to the payment of dividends on our Common Stock if payment is made through a paying agent, or office of a foreign broker outside the United States. However, if payment is made in the United States or by a U.S. related person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder provides an applicable IRS Form W-8 (or a substantially similar form) certifying its foreign status, or otherwise establishes an exemption.
The amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.
Information Reporting and Withholding
A U.S. Holder may be subject to backup withholding at a rate of 24% with respect to cash dividends and proceeds from a disposition of Common Stock or Warrants. In general, backup withholding will apply only if a U.S. Holder fails to comply with specified identification procedures. Backup withholding will not apply with respect to payments made to designated exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
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We and the underwriters named below have entered into an underwriting agreement with respect to the Units being offered. Subject to certain conditions, the underwriters have agreed to purchase the number of Units indicated in the following table. The Benchmark Company, LLC is acting as the representative of the underwriters.
| Underwriter |
Number of Units |
|||
| The Benchmark Company, LLC |
||||
|
|
|
|||
| Total |
||||
|
|
|
|||
The underwriters are committed to take and pay for all of the Units being offered, if any are taken, other than the Common Stock and Warrants covered by the option described below unless and until this option is exercised. The underwriting agreement also provides that if underwriters default, the offering may be terminated.
The underwriters have an option to purchase up to 262,500 additional shares of Common Stock and additional Warrants to purchase 262,500 shares of Common Stock from us, or any combination thereof, to cover sales of shares and Warrants by the underwriters which exceed the number of Units specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this over-allotment option. If any shares and/or additional Warrants are purchased with this over-allotment option, the underwriters will purchase shares and/or additional Warrants in approximately the same proportion as shown in the table above. If any additional shares of Common Stock and/or additional Warrants are purchased, the underwriters will offer the additional shares and additional Warrants, respectively, on the same terms as those on which the shares and Warrants are being offered.
The following table shows the per Unit and total underwriting discounts and commissions to be paid to the underwriters by us assuming both no exercise and full exercise of the underwriter’s over-allotment option.
| Without Over-Allotment Exercise |
With Full Over-Allotment Exercise |
|||||||
| Per Unit(1) |
$ | [ | ] | [ | ] | |||
| Total |
$ | [ | ] | [ | ] | |||
| (1) | The underwriters will receive a discount of 7.0% of the public offering price and a non-accountable expense allowance equal to 1.0% of the gross proceeds received by the Company from the sale of the Units. |
Units sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any Units sold by the underwriter to securities dealers may be sold at a discount of up to $[ ] per Unit from the initial public offering price. After the initial offering of the Units, the representative may change the offering price and the other selling terms. The offering of the Units by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part. Sales of Units made outside of the United States may be made by affiliates of the underwriter.
Representative’s Warrants
We have agreed to issue to the representative, or its designees, warrants to purchase up to 7.0% of the aggregate number of shares of Common Stock underlying the Units sold in this offering (or up to 140,875 shares). The warrants will have a term of five years from the effective date of the offering, will have an exercise price equal to 100% of the public offering price per Unit set forth on the cover page of this prospectus (or $5.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus), will provide for a “cashless” exercise, and will contain certain antidilution adjustments (but excluding any price based anti-dilution). The warrants will contain provisions for unlimited “piggyback” registration rights for a period of no
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greater than three (3) years from the effective date of the offering in compliance with FINRA Rule 5110(g)(8)(D). Pursuant to FINRA Rule 5110(e), the warrants and any shares of Common Stock issued upon exercise of the warrants may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days beginning on the date of commencement of sales of this offering, except certain transfers of such securities, including: (i) by operation of law or by reason of our reorganization; (ii) to any FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction set forth above for the remainder of the time period; (iii) if the aggregate amount of our securities held by the underwriters or related persons do not exceed 1% of the securities being offered; (iv) that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund and the participating members in the aggregate do not own more than 10% of the equity in the fund; or (v) the exercise or conversion of any security, if all securities remain subject to the lock-up restriction set forth above for the remainder of the time period.
Expense Reimbursement
We have agreed to pay or reimburse the underwriters for certain of their actual out-of-pocket fees and expenses, including “road show,” diligence, filing fees and communication expenses associated with the review
of this offering by the Financial Industry Regulatory Authority, Inc., and legal fees up to a maximum of $100,000. The underwriters’ maximum aggregate expense reimbursement allowance for such expenses will be $125,000. We have also agreed to pay the costs of background checks on our senior management in an amount of up to $7,500.
Non-accountable Expense Allowance
In connection with and upon closing of this offering, the Company shall pay to the underwriters a non-accountable expense allowance equal to one percent (1%) of the gross proceeds received by the Company from the sale of the Units.
Lock-up Agreements
We have agreed with the underwriters’ representative that we will not, without the prior consent of the underwriters’ representative, directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer, or otherwise dispose of or enter into any transaction which may result in the disposition of any Common Stock or securities convertible into, exchangeable or exercisable for any Common Stock for a period of six months after the date of the underwriting agreement.
In addition, each of our executive officers and directors have agreed with the underwriters’ representative, subject to certain customary exceptions, not to directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer, or otherwise dispose of or enter into any transaction which may result in the disposition of any Common Stock or securities convertible into, exchangeable or exercisable for any Common Stock, without the prior written consent of the representative, for a period of 12 months after the date of the underwriting agreement. In addition, certain of our shareholders have entered into substantially similar lock-up agreements except that such agreements cover a period of six months instead of 12 months. A total of 3,064,881 shares of our Common Stock are subject to lock-up agreements entered into by our executive officers and directors and certain shareholders. In addition to the shares of Common Stock sold in the offering, in connection with the completion of this offering, 1,698,280 shares of our Common Stock will become unrestricted shares pursuant to Rule 144 and will not be subject to lock-up restrictions. The lock-up agreements further provide that the Bridge Conversion Shares are instead subject to the Bridge Lock-up Agreements. Pursuant to the Bridge Lock-Up Agreements, the holders of the Bridge Notes have agreed not to offer, sell, agree to sell, directly or indirectly, or otherwise dispose of any Bridge Conversion Shares for a period commencing on the date of this offering and continuing until after (i) the three month anniversary of this offering with respect to one-third of the Bridge Conversion Shares, (ii) the four month anniversary of this offering with respect to an additional one-third of the Bridge Conversion Shares, and (iii) the five month anniversary of this offering with respect to the remaining Bridge Conversion Shares.
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Stabilization
In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our Common Stock. Specifically, the underwriters may over-allot in connection with this offering by selling more shares than they are obligated to purchase under the underwriting agreement, creating a short position in our securities. The short position may be either a covered short position or a naked short position. In a covered short position, the number of securities over-allotted by the underwriters is not greater than the number of securities that they may purchase in the over-allotment option. In a naked short position, the number of securities involved is greater than the number of securities in the over-allotment option. To close out a short position or to stabilize the price per security the underwriters may bid for, and purchase, securities in the open market. The underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option. In determining the source of securities to close out the short position, the underwriters will consider, among other things, the price of the security available for purchase in the open market as compared to the price at which it may purchase the security through the over-allotment option. If the underwriters sell more than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying securities in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the securities in the open market after pricing that could adversely affect investors who purchase in the offering.
Finally, the underwriters may bid for, and purchase, securities in market making transactions, including “passive” market making transactions as described below.
The foregoing transactions may stabilize or maintain the market price of our securities at a price that is higher than the price that might otherwise exist in the absence of these activities. The underwriters are not required to engage in these activities, and may discontinue any of these activities at any time without notice. These transactions may be effected on a national securities exchange or otherwise.
In connection with this offering, the underwriters and selling group, if any, or their affiliates may engage in passive market making transactions in Common Stock on a national securities exchange immediately prior to the commencement of sales in this offering, in accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103 generally provides that:
| • | a passive market maker may not effect transactions or display bids for our Common Stock in excess of the highest independent bid price by persons who are not passive market makers; net purchases by a passive market maker on each day are generally limited to 30% of the passive market maker’s average daily trading volume in our common share during a specified two-month prior period or 200 shares, whichever is greater, and must be discontinued when that limit is reached; and |
| • | passive market making bids must be identified as such. |
Such passive market transactions may stabilize or maintain the market price of our Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.
Participation in Future Offering
Until twelve months from the closing of the offering, the underwriters have a right of first refusal to act on our behalf as exclusive placement agent or sole book-running manager and sole lead managing underwriter, as applicable, for any offering of securities.
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Determination of Public Offering Price
Prior to this offering, there has not been a public market for our shares of Common Stock or Warrants. The public offering price of the Units offered by this prospectus has been determined by negotiation between us and the underwriter. Among the factors considered in determining the public offering price of the Units were:
| • | our history and our prospects; |
| • | our financial information and historical performance; |
| • | the industry in which we operate; |
| • | the status and development prospects for our device; |
| • | the experience and skills of our executive officers; and |
| • | the general condition of the securities market at the time of this offering. |
The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the securities. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the securities can be resold at or above the public offering price.
Listing
We have applied to list our Common Stock and Warrants to be issued in this offering on the Nasdaq under the symbol ”HSCS” and “HSCSW,” respectively. No assurance can be given that our application will be approved or that a trading market will develop. In the event our listing application is not approved, we will not consummate this offering.
Electronic Distribution
A prospectus in electronic format may be made available on websites or through other online services maintained by the underwriters of this offering, or by its affiliates. Other than the prospectus in electronic format, the information on the underwriters’ website and any information contained in any other website maintained by the underwriters is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.
Other Relationships
The underwriters have informed us that they do not expect to confirm sales of our shares offered by this prospectus to any accounts over which they exercise discretionary authority.
The underwriters and their affiliates may in the future engage in investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They may in the future receive customary fees and commissions for these transactions. In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment
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management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. The underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to the issuer and to persons and entities with relationships with the issuer, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities or instruments of the issuer (directly, as collateral securing other obligations or otherwise) or persons and entities with relationships with the issuer. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.
Selling Restrictions
This prospectus does not constitute an offer to sell to, or a solicitation of an offer to buy from, anyone in any country or jurisdiction (i) in which such an offer or solicitation is not authorized, (ii) in which any person making such offer or solicitation is not qualified to do so or (iii) in which any such offer or solicitation would otherwise be unlawful. No action has been taken that would, or is intended to, permit a public offer of the Units or possession or distribution of this prospectus or any other offering or publicity material relating to the Units in any country or jurisdiction (other than the U.S.) where any such action for that purpose is required. Accordingly, each underwriter has undertaken that it will not, directly or indirectly, offer or sell any Units or have in its possession, distribute or publish any prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of Units by it will be made on the same terms.
Switzerland
This prospectus is not intended to constitute an offer or solicitation to purchase or invest in the securities described herein. The securities may not be publicly offered, directly or indirectly, in Switzerland within the meaning of the Swiss Financial Services Act, or FinSA, and will not be listed on the SIX Swiss Exchange or on any other exchange or regulated trading facility in Switzerland. Neither this prospectus nor any other offering or marketing material relating to the securities constitutes a prospectus as such term is understood pursuant to the FinSA, and neither this prospectus nor any other offering or marketing material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland.
European Economic Area
In relation to each Relevant State, no securities have been offered or will be offered pursuant to this offering to the public in any Relevant State prior to the publication of a prospectus in relation to the securities which have been approved by the competent authority in such Relevant State or, where appropriate, approved in another Relevant State with notification provided to the competent authority in such Relevant State, all in accordance with the Prospectus Regulation, except that the securities may be offered to the public in any Relevant State at any time:
| • | to any legal entity that is a qualified investor as defined under Article 2 of the Prospectus Regulation; |
| • | to fewer than 150 natural or legal persons (other than qualified investors as defined under Article 2 of the Prospectus Regulation), subject to obtaining the prior consent of the representative for any such offer; or |
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| • | in any other circumstances falling within Article 1(4) of the Prospectus Regulation, |
This all applies so long as no such offer of the securities requires the Company or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.
For the purposes of this provision, (i) the expression an “offer to the public” in relation to securities in the UK means the communication in any form and by any means of sufficient information on the terms of the offer and any securities to be offered so as to enable an investor to decide to purchase or subscribe for any securities and (ii) the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
United Kingdom
No securities have been offered or will be offered pursuant to this offering to the public in the UK prior to the publication of a prospectus in relation to the securities which have been approved by the Financial Conduct Authority of the UK, except that the shares may be offered to the public in the UK at any time:
| • | to any legal entity which is a qualified investor as defined under Article 2 of the Prospectus Regulation; |
| • | to fewer than 150 natural or legal persons (other than qualified investors as defined under Article 2 of the Prospectus Regulation), subject to obtaining the prior consent of the representative for any such offer; or |
| • | in any other circumstances falling within Section 86 of the UK’s Financial Services and Markets Act 2000, as amended, or FSMA. |
This all applies so long as no such offer of the securities requires the Company or any underwriter to publish a prospectus pursuant to Section 85 of the FSMA or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.
For the purposes of this provision, (i) the expression an “offer to the public” in relation to securities in the UK means the communication in any form and by any means of sufficient information on the terms of the offer and any securities to be offered so as to enable an investor to decide to purchase or subscribe for any securities and (ii) the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
The communication of this prospectus and any other document or materials relating to the issue of the securities offered hereby is not being made, and such documents and/or materials have not been approved, by an authorized person for the purposes of Section 21 of the FSMA. Accordingly, such documents and/or materials are not being distributed to, and must not be passed on to, the general public in the UK. The communication of such documents and/or materials as a financial promotion is only being made to and directed at persons outside the UK and those persons in the UK who have professional experience in matters relating to investments and who fall within the definition of investment professionals (as defined in Article 19(5) of the FSMA), or who fall within Article 49(2)(a) to (d) of the Financial Promotion Order, or who are any other persons to whom it may otherwise lawfully be made under the Financial Promotion Order (all such persons together being referred to as “relevant persons”). In the UK, the securities offered hereby are only available to, and any investment or investment activity to which this prospectus relates will be engaged only with, relevant persons. Any person in the UK that is not a relevant person should not act or rely on this prospectus or any of its contents. Each underwriter has represented, warranted and agreed that it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the securities in circumstances in which Section 21(1) of the FSMA does not apply to the Company; and it has complied with and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the securities in, from or otherwise involving the UK.
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The validity of the securities offered by this prospectus will be passed upon for us by Jackson Walker L.L.P., Dallas, Texas. Certain legal matters related to the offering will be passed upon for the underwriters by Mitchell Silberberg Knupp LLP, New York, New York.
The financial statements for Fiscal 2021 and Fiscal 2020 that are included in this prospectus have been so included in reliance upon the report of Haskell & White LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, which includes exhibits, schedules and amendments, under the Securities Act with respect to the securities we are offering pursuant to this prospectus. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement, some of which is contained in exhibits to the registration statement, as permitted by the rules and regulations of the SEC. For further information with respect to us and our securities, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements made in this prospectus concerning the contents of any contract, agreement or other document are summaries of all material information about the contract, agreement or other document summarized, but are not complete descriptions of all terms of those contracts, agreements or other documents. If we filed any of those contracts, agreements or other documents as an exhibit to the registration statement, you may read the contract, agreement or other document itself for a complete description of its terms. Each statement in this prospectus relating to a contract, agreement or other document filed as an exhibit is qualified in all respects by the filed exhibit. When we complete this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with law, we will be required to file annual, quarterly and special reports, proxy statements and other information with the SEC.
You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.secgov. We also maintain a website at www.heartsciences.com, at which, following the completion of this offering, you may access our annual, quarterly and special reports, proxy statements and other information free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only. Investors should not rely on any such information in deciding whether to purchase our securities.
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The following definitions shall apply to the terms used in this prospectus.
Terms Used by and for United States Federal Regulators and Regulations
“510(k)” means a premarket notification submission to the FDA for determination that a medical device is substantially equivalent to another legally U.S. marketed medical device prior to such device being marketed.
“510(k) Clearance” means a determination from FDA that a device is substantially equivalent to another legally U.S. marketed medical device thereby authorizing the device to be marketed in the U.S.
“ACA” means the Patient Protection and Affordable Care Act, as amended.
“CARES Act” means the Coronavirus Aid, Relief and Economic Security Act.
“CDC” means the U.S. Centers for Disease Control and Prevention.
“Class I” means a classification of medical devices with the lowest risk to the patient for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the QSR facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising and promotional materials.
“Class II” means a classification of medical devices that are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include submission of a 510(k), performance standards, post-market surveillance, patient registries and FDA guidance documents.
“Class III” means a classification of medical devices that pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device. Class III devices generally require approval of a PMA.
“Covered Entities” means, collectively, health plans, health care clearinghouses and certain health care providers as provided for under HIPAA.
“CMS” means U.S. Centers for Medicare & Medicaid Services.
“De Novo” means the process for obtaining authorization from the FDA of a novel medical device that is low to moderate risk for which general controls alone, or general and special controls, provide reasonable assurance of safety and effectiveness for the intended use, but for which there is no legally marketed predicate device. Devices that are classified (or re-classified) into Class I or Class II through a De Novo classification request may be marketed and used as predicates for future premarket notification 510(k) submissions, when applicable.
“DOJ” means the U.S. Department of Justice.
“FCA” means the False Claims Act.
“FDA” means the U.S. Food and Drug Administration.
“FDASIA” means the Food and Drug Administration Safety and Innovation Act of 2012, as amended.
“FDCA” means the Federal Food, Drug and Cosmetic Act, as amended.
“FINRA” means the Financial Industry Regulatory Authority.
“GUDID” means the FDA’s Global Unique Device Identification Database.
“HCPCS” means Healthcare Common Procedure Coding System.
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“HHS” means the U.S. Health and Human Services—Office of the Inspector General.
“HIPAA” means the Health Insurance Portability and Accountability Act of 1996, as amended.
“HITECH” means the Health Information Technology for Economic and Clinical Health Care Act.
“IDE” means the FDA’s investigational device exemption regulations which govern medical device clinical trials. The IDE regulations exempt investigational devices from many regulations, but otherwise govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of submission, recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators intended to encourage public health and safety and with ethical standards.
“IRB” means the Institutional Review Board formally designated by the FDA regulations, which has oversite of a study being conducted at a clinical site.
“JOBS Act” means the Jumpstart our Business Startups Act of 2012.
“NAMCS” means the 2018 National Ambulatory Medical Care Survey.
“PMA” means a premarket approval application requesting the determination of the safety and effectiveness of Class III medical devices pursuant to a scientific and regulatory review by the FDA.
“QSR” means the FDA’s Quality System Regulation, which is the current good manufacturing practice requirements for medical devices. The requirements govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging, labeling, storage, installation, and servicing of all finished devices intended for human use. The requirements are intended to ensure that finished devices will be safe and effective and otherwise in compliance with the Federal Food, Drug, and Cosmetic Act.
“SEC” means the U.S. Securities and Exchange Commission.
“Trade Laws” means, collectively, U.S. and foreign anticorruption, anti-money laundering, export control, sanctions and other trade laws and regulations.
“UDI” means Unique Device Identifiers as required by U.S. federal laws and regulations.
“USPSTF” means the U.S. Preventive Services Task Force.
“VA” means the U.S. Department of Veterans Affairs.
Terms Used for Other Regulators and Regulations within the U.S.
“CCPA” means the California Consumer Privacy Act.
“CPRA” means the California Privacy Rights Act.
Terms Used in Jurisdictions Other Than the U.S.
“CE” means Conformité Européene.
“CJEU” means the Court of Justice of the European Union.
“EC” means European Community.
“EEA” means the European Economic Area.
“EU” means the European Union.
“EU MDR” means the EU Medical Device Regulation.
“Financial Promotion Order” means the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended.
“FinSA” means the Swiss Financial Services Act.
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“FSMA” means the UK’s Financial Services and Markets Act 2000, as amended.
“GDPR” means the EU’s General Data Protection Regulation.
“MDD” means the EU Medical Devices Directive.
“Notified Body” means an organization accredited by a Relevant State to conduct conformity assessments.
“Privacy Shield” means the transfer framework, agreed to by the U.S. and the EU, for transferring data from the EU to the U.S., but which was invalidated in July 2020 by the CJEU.
“Prospectus Regulation” means Regulation (EU) 2017/1129.
“relevant persons” means, collectively, persons outside the UK and those persons in the UK who (i) who have professional experience in matters relating to investments and who fall within the definition of investment professionals (as defined in Article 19(5) of the Financial Promotion Order), (ii) fall within Article 49(2)(a) to (d) of the Financial Promotion Order, or (iii) are any other persons to whom it may otherwise lawfully be made under the Financial Promotion Order.
“Relevant State” means a member state of the EEA.
“UK” means the United Kingdom.
Terms Used for Medical and Medical Device Related Purposes
“ACC” means the American College of Cardiology.
“Afib” means atrial fibrillation or an irregular and often very rapid heart rhythm (or arrhythmia).
“AI” means artificial intelligence.
“AMA” means the American Medical Association.
“APC” means ambulatory payment classification.
“ARIC score” means the Atherosclerosis Risk in Communities studies score.
“AUC” means area under the curve.
“BNP testing” means the B-type natriuretic peptide testing.
“CAD” means coronary artery disease.
“CPT” means Current Procedural Terminology.
“CROs” means contract research organizations.
“CT” means computerized tomography.
“CCTAs” means coronary CT angiograms
“CVD” means cardiovascular disease.
“diastolic phase” means the period of the heart’s relaxation or filling phase (as opposed to the heart’s period of contraction or pumping phase called “systolic”) of a heartbeat.
“diastolic dysfunction” means impaired left ventricular relaxation and elevated filling pressures during the diastolic phase.
“ECG” means electrocardiogram or electrocardiograph as appropriate, which is also known by the acronym “EKG.”
“echo” means an echocardiogram.
“elderly” means an individual that is 65 years old or older.
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“e-prime” or “ e’ ” means a key echocardiographic measurement of left ventricular diastolic function during the early diastolic phase, more specifically, this is a measurement of the speed of mitral annular motion at early diastole.
“GCP” means good clinical practice.
“HFpEF” means heart failure with preserved ejection fraction or where a patient is not yet classified as having systolic dysfunction, or, also known as severe diastolic dysfunction.
“HFrEF” means heart failure with reduced ejection fraction, or heart failure is classified with systolic dysfunction, also known as severe diastolic dysfunction.
“KOLs” means key opinion leaders, such as leading cardiologists.
“LV” means left ventricular.
“LVD” means left ventricular dysfunction.
“LVDD” means left ventricular diastolic dysfunction.
“myocardial infarction” is another term for a heart attack.
“off-label” means the use of products for a purpose other than as approved by the FDA.
“sensitivity” means the true positive rate or the percentage probability of a positive test result identifying patient with a condition as compared to the gold standard test which in our case is an echo.
“specificity” means the true negative rate or the percentage probability of a negative test result identifying a patient without a condition as compared to the gold standard test, which in our case is an echo.
Terms Used in Connection with Our Company and Products
“$1.5M Lender Warrants” means the warrants issued to holders of the $1.5M Notes as consideration for the extension of the maturity of the $1.5M Notes.
“$1.5M Notes” means our 12% secured subordinated convertible promissory notes in the aggregate principal amount of $1.5 million issued to accredited investors between December 2020 and April 2021.
“$130K Note” means our private placement on August 12, 2019 with FRV, an accredited investor, of an unsecured drawdown convertible promissory note in the amount of $130,000.
“$1M Lender Warrants” means the warrants issued to holders of the $1M Notes as consideration for the extension of the maturity of the $1M Notes.
“$1M Loan and Security Agreement” means Loan and Security Agreement by and among the Company, FRV and John Q. Adams, Sr. in April 2020 in connection with the $1M Notes.
“$1M Notes” means our 12% secured, non-convertible promissory notes payable to FRV and John Q. Adams, Sr. in the aggregate principal amount of $1 million.
“ewECG” means energy waveform ECG, an alternative description of the MyoVista wavECG device used in the study published in JACC Cardiovascular Imaging Oct 2021, Volume 14 Number 10 and undertaken by Elizabeth L. Potter, MBBS, Thomas H. Marwick, MBBS, PHD, MPH et al.
“Investor Warrants” means all outstanding warrants to purchase 22,083 shares of our Common Stock issued in connection with funding or as consideration for services rendered to the Company and excludes the Bridge Warrants, other Pre-Funded Warrants, $1M Lender Warrants and $1.5M Lender Warrants.
“IT” means our information technology.
“MyoVista” means the MyoVista wavECG device.
“MyoVista Algorithm” means our wavECG proprietary algorithm.
“Series A Preferred Stock” means our Series A convertible preferred stock, par value $0.001 per share.
“Series B Preferred Stock” means our Series B convertible preferred stock, par value $0.001 per share.
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“Series C Preferred Stock” means our Series C convertible preferred stock, par value $0.001 per share.
Terms Used in Connection with Our 2021 Bridge Financing
“2021 Bridge Financing” means our private placement, pursuant to a Securities Purchase Agreement, with a lead investor and additional accredited investors of the Bridge Notes and Bridge Warrants from December 2021 to February 2022, which were issued to such additional accredited investors in exchange for the secured subordinated convertible notes and warrants issued to them in an initial closing of a private placement in October 2021.
“Attribution Parties” are any Purchaser, together with its affiliates and any other person acting as a group as defined under Section 13(d) of the Exchange Act with regard to determining Maximum Percentage.
“Bridge Notes” means the 8% secured subordinated convertible notes we sold to Purchasers pursuant to the Securities Purchase Agreement.
“Bridge Warrants” means warrants to purchase our Common Stock issued pursuant to the Securities Purchase Agreement.
“Conversion Price” means the initial conversion price of the Bridge Notes.
“Exercise Price” means the exercise price of the Bridge Warrants.
“Maximum Percentage” means the beneficial ownership in excess of 4.99% of the number of shares of the Common Stock outstanding immediately prior to, and immediately after giving effect to, the conversion of all or any portion of the Bridge Notes as applied to Attribution Parties unless a holder has notified the Company that it has elected to increase the Maximum Percentage to 9.99%.
“OID” means the 10% original issue discount on our Bridge Notes.
“Pre-Funded Warrants” means the warrants issued in the event the number of shares of Common Stock to be issued to a Purchaser upon conversion of in the Bridge Notes would be in excess of the Maximum Percentage.
“Purchasers” means the accredited investors who purchased our Securities pursuant to the Securities Purchase Agreement.
“Registration Rights Agreement” means the registration rights agreement we entered into with the Purchasers in conjunction with the Securities Purchase Agreement.
“Securities” means, collectively, all of the Bridge Notes, Bridge Warrants and Pre-Funded Warrants sold pursuant to the Securities Purchase Agreement.
“Securities Purchase Agreement” means the Securities Purchase Agreement we entered into with the Purchasers in connection with the 2021 Bridge Financing.
Terms Used in Connection with this Offering Not Otherwise Listed
“ASC” means the Accounting Standards Codification.
“FRV” means Front Range Ventures, LLC.
“FRV Side Letter” means the letter agreement entered into by and between the Company and FRV on April 10, 2019.
“GE” means the General Electric Company.
“Hill-Rom” means Hill-Rom Holdings, Inc.
“MD&A” means Management’s Discussion & Analysis of Financial Condition and Results of Operations.
“Nasdaq” means the Nasdaq Capital Market.
“Philips” means Koninklijke Philips N.V.
“PPP” means the Paycheck Protection Program established pursuant to the CARES Act.
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HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Heart Test Laboratories, Inc. dba HeartSciences
Southlake, Texas
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Heart Test Laboratories, Inc. dba HeartSciences (the “Company”) as of April 30, 2021 and 2020, the related statements of operations, stockholders’ (deficit) equity, and cash flows for each of the two years in the period ended April 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended April 30, 2021, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has experienced recurring losses, negative cash flows from operations, limited capital resources, a net stockholders’ deficit, and significant debt obligations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ Haskell & White LLP | ||
| HASKELL & WHITE LLP | ||
We have served as the Company’s auditor since 2021.
Irvine, California
February 25, 2022, except for Note 12, as to which the date is June 3, 2022.
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D/B/A HEARTSCIENCES
Balance Sheets
| January 31, | April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| ASSETS |
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| CURRENT ASSETS: |
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| Cash and cash equivalents |
$ | 1,328,208 | $ | 723,481 | $ | 496,853 | ||||||
| Inventory |
673,966 | 750,774 | 857,008 | |||||||||
| Prepaid expenses |
123,714 | 94,750 | 131,174 | |||||||||
| Other current assets |
40,374 | 69,037 | 52,774 | |||||||||
| Deferred offering costs |
230,760 | — | — | |||||||||
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| Total current assets |
2,397,022 | 1,638,042 | 1,537,809 | |||||||||
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| Property and equipment, net |
76,531 | 94,669 | 128,587 | |||||||||
| Right-of-use assets, net |
116,280 | 194,660 | 289,460 | |||||||||
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| TOTAL ASSETS |
$ | 2,589,833 | $ | 1,927,371 | $ | 1,955,856 | ||||||
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|
|
|||||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY |
||||||||||||
| CURRENT LIABILITIES |
||||||||||||
| Accounts payable |
$ | 396,490 | $ | 335,781 | $ | 358,786 | ||||||
| Accrued expenses |
915,020 | 421,161 | 337,589 | |||||||||
| Operating lease liabilities |
119,524 | 107,632 | 93,345 | |||||||||
| Current portion of notes payable |
2,630,000 | 130,000 | 100,566 | |||||||||
| PPP loans payable |
— | 250,200 | 250,200 | |||||||||
| Other current liabilities |
1,220 | 1,220 | 1,220 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total current liabilities |
4,062,254 | 1,245,994 | 1,141,706 | |||||||||
| LONG-TERM LIABILITIES |
||||||||||||
| Notes payable, net of current portion |
2,629,377 | 2,500,000 | 300,000 | |||||||||
| Operating lease liabilities |
— | 90,967 | 198,599 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total long-term liabilities |
2,629,377 | 2,590,967 | 498,599 | |||||||||
|
|
|
|
|
|
|
|||||||
| TOTAL LIABILITIES |
6,691,631 | 3,836,961 | 1,640,305 | |||||||||
|
|
|
|
|
|
|
|||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 2, 5, and 10) |
||||||||||||
| STOCKHOLDERS (DEFICIT) EQUITY |
||||||||||||
| Series A, B, and C convertible preferred stock, $0.001 par value, 20,000,000 shares authorized and 620,000 designated; 483,265 shares issued and outstanding as of January 31, 2022 (unaudited) and April 30, 2021, and 475,265 shares issued and outstanding as of April 30, 2020, respectively |
483 | 483 | 475 | |||||||||
| Common stock, $0.001 par value, 300,000,000 shares authorized; 3,323,942 shares issued and outstanding as of January 31, 2022 (unaudited) and 3,313,841 shares issued and outstanding as of April 30, 2020 and 2021, respectively |
3,323 | 3,313 | 3,313 | |||||||||
| Additional paid-in capital |
48,244,168 | 47,661,262 | 47,434,241 | |||||||||
| Accumulated deficit |
(52,349,772 | ) | (49,574,648 | ) | (47,122,478 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| TOTAL STOCKHOLDERS (DEFICIT) EQUITY |
(4,101,798 | ) | (1,909,590 | ) | 315,551 | |||||||
|
|
|
|
|
|
|
|||||||
| TOTAL LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |
$ | 2,589,833 | $ | 1,927,371 | $ | 1,955,856 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to the financial statements
F-3
Table of Contents
D/B/A HEARTSCIENCES
Statements of Operations
| Nine months ended January 31, | Years ended April 30, | |||||||||||||||
| 2022 | 2021 | 2021 | 2020 | |||||||||||||
| (unaudited) | ||||||||||||||||
| Revenue |
$ | 10,224 | $ | 10,654 | $ | 25,604 | $ | 64,182 | ||||||||
| Cost of sales |
6,610 | 4,444 | 10,665 | 46,460 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross margin |
3,614 | 6,210 | 14,939 | 17,722 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
1,645,902 | 1,114,459 | 1,708,447 | 2,040,227 | ||||||||||||
| Selling, general and administrative |
1,089,301 | 672,551 | 874,620 | 1,795,679 | ||||||||||||
| (Gain) loss on disposal of property and equipment |
— | (573 | ) | (1,663 | ) | 10,016 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
2,735,203 | 1,786,437 | 2,581,404 | 3,845,922 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Loss from operations |
(2,731,589 | ) | (1,780,227 | ) | (2,566,465 | ) | (3,828,200 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other income (expense) |
||||||||||||||||
| Interest expense |
(294,586 | ) | (68,338 | ) | (132,454 | ) | (2,811 | ) | ||||||||
| Gain on extinguishment of debt |
250,200 | 250,200 | 250,200 | — | ||||||||||||
| Gain on settlement of payables |
— | — | — | 21,790 | ||||||||||||
| Other income |
851 | — | — | — | ||||||||||||
| Other expense |
— | (2,232 | ) | (3,451 | ) | (1,897 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total other income (expense) |
(43,535 | ) | 179,630 | 114,295 | 17,082 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net loss |
$ | (2,775,124 | ) | $ | (1,600,597 | ) | $ | (2,452,170 | ) | $ | (3,811,118 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net loss per share, basic and diluted |
$ | (0.84 | ) | $ | (0.48 | ) | $ | (0.74 | ) | $ | (1.15 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average common shares outstanding, basic and diluted |
3,317,208 | 3,313,841 | 3,313,841 | 3,313,803 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes to the financial statements
F-4
Table of Contents
D/B/A HEARTSCIENCES
Statements of Stockholders’ (Deficit) Equity For the Nine Month Periods Ended January 31, 2021 and 2022
| Series A Convertible Preferred Stock |
Series B Convertible Preferred Stock |
Series C Convertible Preferred Stock |
Total Convertible Preferred Stock |
Common Stock | Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholder’s (Deficit) Equity |
|||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| BALANCES AT APRIL 30, 2020 |
10,000 | $ | 10 | 10,000 | $ | 10 | 455,265 | $ | 455 | $ | 475 | 3,313,841 | $ | 3,313 | $ | 47,434,241 | $ | (47,122,478 | ) | $ | 315,551 | |||||||||||||||||||||||||||
| Preferred stock issued to investors (unaudited) |
— | — | — | — | 8,000 | 8 | 8 | — | — | 199,992 | — | 200,000 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation - non-employee advisers (unaudited) |
— | — | — | — | — | — | — | — | — | 15,151 | — | 15,151 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation - board of directors (unaudited) |
— | — | — | — | — | — | — | — | — | 6,705 | — | 6,705 | ||||||||||||||||||||||||||||||||||||
| Series C convertible preferred stock issued to investors (unaudited) |
— | — | — | — | — | — | — | — | — | 2,354 | — | 2,354 | ||||||||||||||||||||||||||||||||||||
| Net loss (unaudited) |
— | — | — | — | — | — | — | — | — | — | (1,600,597 | ) | (1,600,597 | ) | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| BALANCES AT JANUARY 31, 2021 (unaudited) |
10,000 | 10 | 10,000 | 10 | 463,265 | 463 | 483 | 3,313,841 | 3,313 | 47,658,443 | (48,723,075 | ) | (1,060,836 | ) | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| BALANCES AT APRIL 30, 2021 |
10,000 | $ | 10 | 10,000 | $ | 10 | 463,265 | 463 | $ | 483 | 3,313,841 | $ | 3,313 | $ | 47,661,262 | $ | (49,574,648 | ) | $ | (1,909,590 | ) | |||||||||||||||||||||||||||
| Common stock issued to nonemployees (unaudited) |
— | — | — | — | — | — | — | 10,101 | 10 | 34,990 | — | 35,000 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation - management & other employees (unaudited) |
— | — | — | — | — | — | — | — | — | 60,359 | — | 60,359 | ||||||||||||||||||||||||||||||||||||
| Warrants issued to nonemployees (unaudited) |
— | — | — | — | — | — | — | — | — | 487,557 | — | 487,557 | ||||||||||||||||||||||||||||||||||||
| Net loss (unaudited) |
— | — | — | — | — | — | — | — | — | (2,775,124 | ) | (2,775,124 | ) | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| BALANCES AT JANUARY 31, 2022 (unaudited) |
10,000 | $ | 10 | 10,000 | $ | 10 | 463,265 | $ | 463 | $ | 483 | 3,323,942 | $ | 3,323 | $ | 48,244,168 | $ | (52,349,772 | ) | $ | (4,101,798 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
See accompanying notes to the financial statements
F-5
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Statements of Stockholders’ (Deficit) Equity For the Years Ended April 30, 2020 and 2021
| Series A Convertible Preferred Stock |
Series B Convertible Preferred Stock |
Series C Convertible Preferred Stock |
Total Convertible Preferred Stock |
Common Stock | Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholder’s (Deficit) Equity |
|||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| BALANCES AT APRIL 30, 2019 |
10,000 | $ | 10 | 10,000 | $ | 10 | 408,371 | $ | 408 | $ | 428 | 3,313,386 | $ | 3,313 | $ | 46,122,823 | $ | (43,311,360 | ) | $ | 2,815,204 | |||||||||||||||||||||||||||
| Common stock issued to nonemployees |
— | — | — | — | — | — | — | 455 | — | 585 | — | 585 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation - management & other employees |
— | — | — | — | — | — | — | — | — | 86,365 | — | 86,365 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation - non-employee advisers |
— | — | — | — | — | — | — | — | — | 24,453 | — | 24,453 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation - board of directors |
— | — | — | — | — | — | — | — | — | 24,249 | — | 24,249 | ||||||||||||||||||||||||||||||||||||
| Series C convertible preferred stock issued to investors |
— | — | — | — | 46,894 | 47 | 47 | — | — | 1,175,766 | — | 1,175,813 | ||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (3,811,118 | ) | (3,811,118 | ) | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| BALANCES AT APRIL 30, 2020 |
10,000 | 10 | 10,000 | 10 | 455,265 | 455 | 475 | 3,313,841 | 3,313 | 47,434,241 | (47,122,478 | ) | 315,551 | |||||||||||||||||||||||||||||||||||
| Stock based compensation - management & other employees |
— | — | — | — | — | — | — | — | — | 16,929 | — | 16,929 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation - non-employee advisers |
— | — | — | — | — | — | — | — | — | 7,746 | — | 7,746 | ||||||||||||||||||||||||||||||||||||
| Warrants issued to nonemployees |
— | — | — | — | — | — | — | — | — | 2,354 | — | 2,354 | ||||||||||||||||||||||||||||||||||||
| Series C convertible preferred stock issued to investors |
— | — | — | — | 8,000 | 8 | 8 | — | — | 199,992 | — | 200,000 | ||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | (2,452,170 | ) | (2,452,170 | ) | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| BALANCES AT APRIL 30, 2021 |
10,000 | $ | 10 | 10,000 | $ | 10 | 463,265 | $ | 463 | $ | 483 | 3,313,841 | $ | 3,313 | $ | 47,661,262 | $ | (49,574,648 | ) | $ | (1,909,590 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
See accompanying notes to the financial statements
F-6
Table of Contents
D/B/A HEARTSCIENCES
Statements of Cash Flows
| Nine months ended January 31, |
Years ended April 30, |
|||||||||||||||
| 2022 | 2021 | 2021 | 2020 | |||||||||||||
| (unaudited) | ||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||||
| Net loss |
$ | (2,775,124 | ) | $ | (1,600,597 | ) | $ | (2,452,170 | ) | $ | (3,811,118 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities |
||||||||||||||||
| Depreciation and amortization |
20,070 | 26,359 | 33,611 | 63,827 | ||||||||||||
| Amortization of debt discounts and deferred financing costs |
33,954 | — | — | — | ||||||||||||
| Stock-based compensation |
118,249 | 21,856 | 24,675 | 135,067 | ||||||||||||
| Gain on extinguishment of debt |
(250,200 | ) | (250,200 | ) | (250,200 | ) | — | |||||||||
| (Gain) Loss on disposal of property and equipment |
— | — | 1,663 | (10,016 | ) | |||||||||||
| Gain on settlement of payables |
— | — | — | (21,790 | ) | |||||||||||
| Changes in current assets and liabilities: |
||||||||||||||||
| Accounts receivable |
— | — | — | (7,000 | ) | |||||||||||
| Inventory |
76,808 | 65,897 | 106,234 | 147,311 | ||||||||||||
| Prepaid and other current assets |
(996 | ) | 27,270 | 20,972 | (6,623 | ) | ||||||||||
| Deferred offering costs |
(230,760 | ) | — | — | — | |||||||||||
| Other assets |
— | — | — | 19,273 | ||||||||||||
| Accounts payable |
62,318 | (79,494 | ) | (20,651 | ) | (305,936 | ) | |||||||||
| Accrued liabilities |
493,859 | 57,253 | 83,572 | (42,770 | ) | |||||||||||
| Other current liabilities |
— | — | — | (220 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash used in operating activities |
(2,451,822 | ) | (1,731,656 | ) | (2,452,294 | ) | (3,839,995 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
| Purchase of property and equipment |
(1,932 | ) | — | (712 | ) | (11,424 | ) | |||||||||
| Disposition of property and equipment |
— | — | — | 19,591 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash (used in) provided by investing activities |
(1,932 | ) | — | (712 | ) | 8,167 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
| Proceeds from issuance of common stock, net of issuance costs |
— | — | — | 585 | ||||||||||||
| Proceeds from issuance of series c preferred convertible stock, net of issuance costs |
— | 200,000 | 200,000 | 1,175,813 | ||||||||||||
| Proceeds from issuance of bridge convertible notes, net of discount |
3,436,001 | — | — | — | ||||||||||||
| Deferred financing costs |
(377,520 | ) | — | — | — | |||||||||||
| Proceeds from shareholder note |
500,000 | 700,000 | 700,000 | 300,000 | ||||||||||||
| Proceeds from convertible promissory note |
— | 1,042,934 | 1,529,434 | 100,566 | ||||||||||||
| Proceeds from PPP loan |
— | 250,200 | 250,200 | 250,200 | ||||||||||||
| Repayment of shareholder note |
(500,000 | ) | — | — | — | |||||||||||
| Repayment of financing lease |
— | — | — | (16,975 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by financing activities |
3,058,481 | 2,193,134 | 2,679,634 | 1,810,189 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net change in cash and cash equivalents during the year |
604,727 | 461,478 | 226,628 | (2,021,639 | ) | |||||||||||
| Cash and cash equivalents, beginning of year |
723,481 | 496,853 | 496,853 | 2,518,492 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash and cash equivalents, end of year |
$ | 1,328,208 | $ | 958,331 | $ | 723,481 | $ | 496,853 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| NON-CASH FINANCING ACTIVITIES: |
||||||||||||||||
| Issuance of common stock warrants in connection with payable settlements |
$ | 1,604 | $ | 2,354 | $ | 2,354 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Issuance of common stock warrants in connection with bridge financing |
$ | 463,058 | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes to the financial statements
F-7
Table of Contents
D/B/A HEARTSCIENCES
Notes to Financial Statements
Note 1 – Organization and Operations
Heart Test Laboratories, Inc. d/b/a HeartSciences (“HeartSciences” or the “Company”) is a medical technology company specializing in cardiovascular diagnostic technology. The Company is a Texas C-Corporation and is headquartered in Southlake, Texas.
HeartSciences’ initial focus is on applying novel technology to extend the clinical indications for use of an electrocardiograph (“ECG”) device. Its first device, the MyoVista® is an ECG which can be used in a wide range of clinical settings and provides diagnostic information to a qualified healthcare professional on cardiac dysfunction which has traditionally only been provided using cardiac imaging. In addition, the MyoVista® provides conventional ECG information. The Company plans to market its device both domestically and internationally to various hospitals, clinics, and medical centers and manufacture the devices using outsourced production facilities. To date the Company has had small amounts of revenue from key opinion leader engagement and establishment of distributor relationships outside the United States during the development and product improvement phase of the MyoVista®. There have been a number of published clinical studies that have validated the MyoVista® technology and the Company is preparing to seek U.S. Food and Drug Administration (“FDA”) clearance of the MyoVista® during 2022.
Note 2 – Liquidity, Going Concern, and Other Uncertainties
In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, management has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements are available to be issued. At January 31, 2022 (unaudited) the Company had an accumulated deficit of $52.3 million and stockholder’s deficit of $4.1 million and at April 30, 2021, the Compnay had an accumulated deficit of $49.6 million and stockholder’s deficit of $1.9 million, respectively. In addition, the Company has generated recurring losses and negative cash flows from operations since its inception. Based on its current business plan assumptions and expected cash burn rate, management believes that it has insufficient cash to fund its current operations without additional financing for the next 12 months. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
Management evaluated the significance of these conditions in relation to its ability to meet its obligations. The Company’s continued operations will depend on its ability to raise additional capital through various potential sources such as an IPO, equity and/or debt financings, or strategic relationships. The Company has implemented cost reduction measures and has continued its fundraising efforts as discussed in Note 4. If the Company does not complete an IPO, the Company plans to continue to fund its operations and capital funding needs through a combination of private equity offerings, debt financings, and other sources. While a number of the Company’s investors have participated in multiple rounds of funding, management can provide no assurance that such financing or strategic relationships will be available which would likely have a material adverse effect on the Company and its financial statements. Additionally, the Company’s ability to continue as a going concern is dependent upon receiving FDA clearance and achieving profitable operations by commercializing its medical devices.
Therefore, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period.
F-8
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency, a result of the new strain of coronavirus (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, numerous states and local jurisdictions imposed social distancing and shelter-in-place orders, quarantines, and other restrictions which impacted the Company’s operations due to changes in working practices and disruption in accessing clinical institutions and physicians for research. While the extent of these disruptions are reducing, they may continue to negatively impact the company’s results of operations and liquidity.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and have been prepared on a basis which assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
Unaudited Interim Financial Information
The accompanying interim financial balance sheet as of January 31, 2022 and the interim statements of operations, statements of stockholders’ (deficit) equity, and cash flows for the nine months ended January 31, 2022 and 2021 and the related notes to such financial information are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the presentation of the Company’s financial position as of January 31, 2022 and the Company’s results of operations and cash flows for the nine months ended January 31, 2022 and 2021. The results of operations for the nine months ended January 31, 2022 are not necessarily indicative of the results expected to be for the full year or any other future interim or annual period.
Reverse Stock Split
On June 3, 2022, the Company filed an amendment to its Amended and Restated Certificate of Formation to effect a Reverse Stock Split with an effective date of June 10, 2022, whereby every 33 shares of the Company’s issued and outstanding common stock were combined into one share of common stock, except to the extent that the Reverse Stock Split resulted in any of the Company’s stock holders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the par value per share of $0.001. All share and per share numbers have been retroactively adjusted to give effect to the reverse stock split for all periods presented, unless otherwise indicated. Upon completion of the initial public offering, all Series A shares will be converted into common shares and all Series B shares will be cancelled.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
F-9
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The fair value of cash and cash equivalents approximates carrying value. At times, the Company’s cash balances may exceed the current insured amounts under the Federal Deposit Insurance Corporation (“FDIC”).
Inventory
Inventory consists of the following:
| January 31, | April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| Raw materials |
$ | 359,965 | $ | 381,930 | $ | 384,697 | ||||||
| Sub-assemblies |
345,044 | 414,741 | 415,151 | |||||||||
| Work in progress |
21,741 | 28,250 | 28,250 | |||||||||
| Finished goods |
28,662 | 296,365 | 314,856 | |||||||||
| Reserve for obsolescence |
(81,445 | ) | (370,512 | ) | (285,946 | ) | ||||||
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| Total Inventory |
$ | 673,966 | $ | 750,774 | $ | 857,008 | ||||||
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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 the U.S. is subject to FDA clearance. The Company is partway through a new pivotal clinical validation study and device testing necessary for a revised FDA De Novo submission, which is expected to take place later in calendar year 2022. The Company believes that its 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 the U.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 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.
Research and Development Expenses
In accordance with ASC Topic 730, Accounting for Research and Development Costs, the Company accounts for research and development expenditures, including payments to collaborative research partners and regulatory filing costs, as research and development expenses. Accordingly, all research and development costs are charged to expense as incurred.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives. The range of estimated useful lives used to calculate
F-10
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
depreciation is generally 3 to 5 years. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized. When items are retired or otherwise disposed, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income (expense).
Property and equipment consist of the following:
| January 31, | April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| Equipment |
$ | 379,612 | $ | 377,680 | $ | 379,785 | ||||||
| Furniture & fixtures |
102,563 | 102,563 | 102,563 | |||||||||
| Leasehold improvements |
32,812 | 32,812 | 32,812 | |||||||||
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| Total |
514,987 | 513,055 | 515,160 | |||||||||
| Less: Accumulated depreciation |
(438,456 | ) | (418,386 | ) | (386,573 | ) | ||||||
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| Property and equipment, net |
$ | 76,531 | $ | 94,669 | $ | 128,587 | ||||||
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Depreciation expense for the nine months ended January 31, 2022 (unaudited), and the years ended April 30, 2021 and 2020, was $20,070, $32,967, and $45,712, respectively.
Deferred Offering Costs (unaudited)
Deferred offering costs, consisting of legal, accounting and other fees and costs related to the Company’s planned IPO, are capitalized and recorded on the balance sheet. The deferred offering costs will be offset against the proceeds received upon the closing of the planned IPO. In the event that the Company’s plans for an IPO are terminated, these costs will be written off within operating expenses of the Company’s statements of operations. As of January 31, 2022 (unaudited), the Company had recorded $230,760 of deferred offering costs on the balance sheet. The Company had no deferred offering costs recorded as of April 30, 2021 and 2020.
Fair Value Measurements
The accounting guidance establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset transaction between market participants on the measurement date. Where available, fair value is based on observable market prices or is derived from such prices. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| • | Level 1 – Observable inputs such as quoted prices in active markets; |
| • | Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; |
| • | Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
F-11
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the assignment of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement and considers factors specific to the asset or liability. The carrying amounts of the Company’s financial instruments, which primarily include cash and cash equivalents, accounts payable and accrued expenses, approximate their fair values due to their short-term nature. The carrying amounts of the Company’s existing notes payable approximate their fair values at the stated interest rates and are reflective of the prevailing market rates.
Leases
In February 2016, the Financial Accounting Standards Codification Board issued ASU 2016-2, Leases (“ASC 842”) to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet for all leases with a term of longer than 12 months. Leases with an initial term of 12 months or less are not recorded on the balance sheet but are recognized as lease expense on a straight-line basis over the applicable lease terms. The Company adopted ASC 842 on May 1, 2019 using the modified retrospective method, which was applied to all leases existing at the date of initial application of the ASU. As permitted under the transaction guidance, the Company elected the hindsight practical expedient with respect to determining the lease terms and assessing impairment of the right-of-use assets. No impairment is expected at this time. The adoption of Topic 842 did not materially impact the Company’s net income or cash flows and did not result in a cumulative-effect adjustment to the opening balance of retained earnings. For additional details, see Note 9.
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 has not been a public market for the Company’s common stock, 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 the US 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.
F-12
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
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.
Net Loss Per Common Share
Basic net loss per share excludes the effect of dilution and is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities.
Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, convertible preferred stock, stock options, common stock subject to repurchase related to early exercise of stock options, convertible stock warrants and convertible notes are considered to be potentially dilutive securities. As the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods.
On January 24, 2022, the Board of Directors of the Company and majority shareholders, respectively, approved an amendment to the Company’s Certificate of Formation in order to effect a plan of recapitalization that provides for a Reverse Stock Split of the Company’s common stock. On June 3, 2022, the Company filed an amendment to its Amended and Restated Certificate to effect a Reverse Stock Split with an effective date of June 10, 2022, whereby every 33 shares of the Company’s issued and outstanding common stock were combined into one share of common stock, except to the extent that the Reverse Stock Split resulted in any of the Company’s stock holders owning a fractional share, which was rounded up to the next highest whole share. In connection with the the Reverse Stock Split, there was no change in the par value per share of $0.001. All share and per share numbers have been retroactively adjusted to give effect to the reverse stock split for all periods presented, unless otherwise indicated.
Common Stock Warrants
The Company grants warrants to purchase common stock in connection with financing transactions. Warrants are valued based on Black-Scholes models and the fair value is recorded to additional paid-in-capital.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers, effective May 1, 2019 using the modified retrospective method. The adoption of this standard did not have a cumulative effect on opening accumulated deficit as of May 1, 2019, as the timing and measurement of revenue recognition is materially the same for the Company under ASC 606 as it was under the prior guidance.
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The guidance focuses on the core principle for revenue recognition, which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company
F-13
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
recognizes revenue in accordance with ASC 606, which provides a five-step model for recognizing revenue from contracts with customers as follows:
| • | Step 1: Identify the contract(s) with a customer |
| • | Step 2: Identify the performance obligations in the contract |
| • | Step 3: Determine the transaction price |
| • | Step 4: Allocate the transaction price to the performance obligations in the contract |
| • | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation |
A contract with a customer exists when (i) the Company enters into a legally enforceable contract with a customer, through a purchase order, that defines each party’s rights regarding the products to be transferred and identifies the payment terms related to these products, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The only performance obligation is to create and ship the product and each product has separate, distinct pricing. Performance obligations are met and revenue is recognized at a point in time when the order for its goods are shipped FOB manufacturer and control is transferred.
The transaction price is determined based on the amount expected to be entitled to in exchange for transferring the product to the customer net of any transaction price adjustments. The Company’s payment terms to customers generally range from 30 to 60 days.
Payment terms fall within the one-year guidance for the practical expedient which allows the Company to forgo adjustment of the promised amount of consideration for the effects of a significant financing component. The Company accepts product returns at its discretion or if the product is defective as manufactured. Historically, the actual product returns have been immaterial to the Company’s financial statements. The Company elected to treat shipping and handling costs as a fulfillment cost and included them in the cost of goods sold as incurred. Costs associated with product sales include commissions. The Company applies the practical expedient and recognizes commissions as expense when incurred because the expense is incurred at a point in time and the amortization period is less than one year. Commissions are recorded as selling expense.
As of January 31, 2022 (unaudited) and as of April 30, 2021 and 2020, the Company did not have any contract assets or liabilities from contracts with customers and there were no remaining performance obligations that the Company had not satisfied.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires recognition of deferred tax assets, subject to valuation allowances, and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Management considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent cumulative experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available to the Company for tax reporting purposes, and other relevant factors.
A valuation allowance is established if it is more likely than not that all or a portion of the net deferred tax assets will not be realized.
F-14
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
Accruals for uncertain tax positions are provided for in accordance with applicable accounting standards. The Company may recognize the tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Judgement is required in assessing the future tax consequences of events that have been recognized in the financial statements or tax returns.
Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of January 31, 2022 (unaudited) and as of April 30, 2021 and 2020.
The Company may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws.
The Company is subject to income taxes in the U.S. federal jurisdiction and franchise taxes in the State of Texas. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Generally, the Company is no longer subject to income tax examinations by major taxing authorities for years before 2018.
Recent Accounting Standards
In August 2020, the Financial 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 current 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 the application of the derivatives scope exception guidance results in accounting for some contracts as derivatives while accounting for economically similar contracts as equity. The FASB also decided to improve and amend the related EPS guidance.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted ASU 2020-06 as of the reporting period beginning May 1, 2021. The adoption of this ASU did not have a material impact on the Company’s financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align with the SEC’s regulations. The Company adopted ASU 2020-10 as of the reporting period beginning May 1, 2021. The adoption of this ASU did not have a material impact on the Company’s financial statements.
F-15
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash. The Company maintains its cash with high-credit quality financial institutions. At January 31, 2022 (unaudited) and at April 30, 2021 and 2020, the Company had cash balances in excess of federally insured limits of $1,078,208, $473,481, and $246,853, respectively. The Company does not anticipate non-performance by its financial institution. At January 31, 2022 (unaudited) and April 30, 2021, the Company has certain debt holders that account for 38% and 54% of the Company’s debt instruments, respectively, which are fully convertible.
Note 4 – Debt
Debt consists of the following:
| January 31, | April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| $130K Unsecured drawdown convertible promissory note |
$ | 130,000 | $ | 130,000 | $ | 100,566 | ||||||
| $1.5M Secured convertible promissory notes |
1,500,000 | 1,500,000 | — | |||||||||
| $1M Loan and security agreement |
1,000,000 | 1,000,000 | 300,000 | |||||||||
| Bridge convertible notes, net of discounts and deferred financing costs |
2,629,377 | — | — | |||||||||
| Payment protection program loans |
— | 250,200 | 250,200 | |||||||||
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| 5,259,377 | 2,880,200 | 650,766 | ||||||||||
| Less: current maturities |
(2,630,000 | ) | (380,200 | ) | (350,766 | ) | ||||||
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| Notes payable, long-term |
$ | 2,629,377 | $ | 2,500,000 | $ | 300,000 | ||||||
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$130K Unsecured Drawdown Convertible Promissory Note
On August 12, 2019, the Company entered into an unsecured drawdown convertible promissory note with Front Range Ventures, LLC (“FRV”) for an aggregate amount not to exceed $130,000 (“$130K Note”). FRV is a shareholder of the Company and the Company entered into an agreement with FRV where FRV is entitled to appoint a member of the Board of Directors and a board observer so long as it holds at least 71,000 shares of Series C convertible preferred stock.
The $130K Note may be repaid at any time upon 20 days’ notice to the holder. The $130K Note is convertible into Series C convertible 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 convertible preferred C stock prior to conversion, which is currently $25.00 per share. The $130K Note matures 20 days following FDA clearance of the Company’s MyoVista® medical device. Under the terms of the agreement, the note is non-interest bearing.
$1.5M Secured Convertible Promissory Notes
In December 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 of July 31, 2022 and were subsequently amended on November 2, 2021, extending maturity to October 31, 2022. As part of
F-16
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
the extension agreements, the Company issued 4,545 warrants to purchase common stock of the Company at an exercise price of $6.05.
In the event the $1.5M Notes are converted into common stock on or prior to the maturity date, no interest shall accrue or be payable. Interest is only payable if the notes are not converted on or prior to the maturity date, in which event interest shall accrue and be payable on the outstanding principal balance of the notes at a simple interest rate of 12% per annum.
The $1.5M Notes are collateralized by substantially all of the Company’s assets and intellectual property and such security interest is subordinate to the secured interests discussed in Note 10 and the $1M Loan and Security Agreement below.
The Company is entitled to either repay the principal and all accrued but unpaid interest on the $1.5M Notes upon giving 10 days written notice to the Holder at any time; or the outstanding principal amount, and accrued but unpaid interest, is convertible into common stock at $1.65 per share, adjusted for any splits, recapitalizations, combinations or other similar transactions affecting the Company’s common stock upon or after any of the following events: (i) 30 days following FDA clearance of the Company’s MyoVista® medical device; (ii) the closing of further funding of $5 million or more which values entire share capital of the Company at $50 million or more; (iii) a public offering of common stock; or (iv) the sale or merger of a majority of the voting stock of the Company. The Holder of a note may elect for conversion at any time upon written notice to the Company.
For the nine months ended January 31, 2022 (unaudited) and as of April 30, 2021, accrued interest was approximately $170,000 and $34,000, respectively.
$1M Loan and Security Agreement
In April 2020, the Company entered into a loan and security agreement with FRV and John Q. Adams who are both shareholders of the Company. John Q. Adams is also a 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 about July 2, 2020 and $350,000 on or about September 4, 2020. 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 re-paid. 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.
The loan had an original maturity date of September 30, 2021 which was amended on September 30, 2021 making the note repayable on demand. The loan was amended again on November 3, 2021, extending the maturity to September 30, 2022, and further amended in May 2022, extending maturity to September 30, 2023. As part of the extension agreement in 2021, the Company issued 15,152 warrants to purchase common stock of the Company at an exercise price of $6.05.
For the nine months ended January 31, 2022 (unaudited) and as of April 30, 2021 and 2020, accrued interest was approximately $196,000, $98,000, and $400, respectively.
Unsecured promissory draw down note (unaudited)
In August 2021, the Company issued an Unsecured Promissory Draw Down Note with Matthews Holdings Southwest, Inc. for a maximum amount of $500,000 as a short-term loan repayable upon closing a subsequent
F-17
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
offering. Per the terms of the note, $250,000 was drawn by the Company in August 2021 and an additional $250,000 was drawn in September 2021. The Company issued 10,101 shares of common stock as a facility fee for the note.
No interest was payable on the note other than upon the occurrence of an event of default, as defined in the agreement, at which time the borrower would be required to pay interest to the holder, payable on demand, on the outstanding principal balance of the note from the date of the event of default until payment in full at the rate of 12% per annum. The note originally matured on October 11, 2021 and was amended on October 11, 2021 and again on November 29, 2021, extending maturity to November 30, 2021 and December 31, 2021, respectively. The note was fully repaid on December 27, 2021.
Bridge Notes
In December 2021 the Board approved the sale of up to $5,555,555.56 principal amount of the Senior Subordinated Convertible Loan Notes (the “2021 Bridge Notes”) and up to 917,440 associated warrants (the “2021 Bridge Warrants”), together the “2021 Bridge Securities”.
The 2021 Bridge Notes were issued with a 10% original issue discount (OID), accrue interest at 8% per annum and have a maturity date of December 22, 2024. The notes convert into common stock of the Company, or in the event that such conversion would result in a note holder receiving more than 4.99% of the outstanding common stock then such note holder shall receive pre-funded warrants. The conversion price is the lower of $6.06 per share or a 30% discount to the new issue price in a qualified offering. For two years post issuance, the conversion price is subject to full ratchet downward adjustment in the event of an issuance of common stock prior to conversion at a lower price per share than the then conversion price (or issuance of convertible securities or options at a lower price conversion/ strike price than the then conversion price). The notes are convertible by the holder at any time and automatic conversion (of principal and accrued but unpaid interest)shall occur upon a qualified offering, which means a public offering in the United States pursuant to a registration statement declared effective by the Securities and Exchange Commission pursuant to the Securities Act, pursuant to which the Common Stock is listed for trading on The New York Stock Exchange, the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Select Market, or the Nasdaq Global Market. an Eligible Market, with (i) minimum gross proceeds of $6,000,000, and (ii) minimum net proceeds of $5,000,000 after deducting all fees and expenses in connection with such qualified offering. After one-year the Company may pre-pay the notes in an amount of 115% of the principal amount (plus accrued and unpaid interest) or in the event of a change of control or event of default each note holder shall have the right to have its notes redeemed in the amount of 125% of the principal amount (plus accrued but unpaid interest).
Investors in the 2021 Bridge Notes have also received warrants to purchase one share of Common Stock for each $6.06 purchased in the 2021 Bridge Note (inclusive of OID). The 2021 Bridge Warrants have a 5-year term from their date of issuance and an initial exercise price of $9.08 per share (being 150% of the conversion price of the note). The exercise price of the warrants is subject to full ratchet downward adjustment in the event of an issuance of common stock prior to conversion at a lower price per share than the then conversion price (or issuance of convertible securities or options at a lower price conversion/ strike price than the then conversion price). In addition if the new issue price on a qualified offering is less than 125% of the then exercise price in effect the exercise price of the warrants will be lowered to 125% of the new issue price. Upon a lowering of the exercise price the holder will be entitled to excise such number of warrants such that the then exercise price multiplied by the number of warrants is 150% of the principal amount of their 2021 Bridge Notes purchased.
On December 22, 2021 the Company entered into a first close for $2,222,222 of the 2021 Bridge Securities with various purchasers with Cavalry Investment Fund L.P. acting as lead investor. Subsequent to December 2021
F-18
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
through January 31, 2022, the Company sold further 2021 Bridge Securities in the amount of $1,595,555, including the exchange of $712,222 of convertible loan notes and warrants which had been issued in October 2021, representing the entire amount of such 2021 Bridge Securities issued and sold in October 2021. The convertible loan notes and warrants issued in October 2021 were originally issued on similar terms to the 2021 Bridge Securities and they were all voided as part of the exchange.
The Company recorded a $381,778 debt discount relating to the original issue discount and incurred deferred financing costs of $377,520. The Company recorded a $463,058 debt discount relating to 630,464 warrants issued to investors based on the relative fair value of the equity instruments on the dates of issuance. The debt discounts and deferred financing costs are being amortized over the life of the notes as non-cash interest expense. For the nine months ended January 31, 2022, amortization recorded was approximately $33,000.
For the nine months ended January 31, 2022, accrued interest was approximately $28,000.
Subsequent to January 31, 2022, and through February 28, 2022, the date which the bridge financing concluded, the Company sold further 2021 Bridge Securities in the amount of $877,777 and issued an additional 144,955 in Bridge Warrants.
As of January 31, 2022, the Company’s long-term notes payable mature in 2024.
Payment Protection Program Loans
On April 20, 2020, the Company received loan proceeds in the amount of $250,200 under the Paycheck Protection Program (“PPP”) which was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provided for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. Following the PPP guidelines, the Company filed for loan forgiveness in October 2020 and in November 2020, the Small Business Administration approved the filing and forgave the loan. The forgiveness of the PPP loan is recorded in gain on extinguishment of debt in the statement of operations.
On January 25, 2021, the Company received a second PPP loan in the amount of $250,200. Following the PPP guidelines, the Company filed for loan forgiveness in May 2021 and in June 2021, the Small Business Administration approved the filing and forgave the loan.
With these events, the Company has presented the PPP loans as current liabilities on the balance sheet as of April 30, 2021 and 2020.
Note 5 – Convertible Preferred Stock
The Company’s Certificate of Formation, as amended, has authorized 20,000,000 shares of preferred stock with a par value of $0.001 per share of which 620,000 had been designated in series A through C as described below. For the nine months ended January 31, 2022 (unaudited), there were no shares of Series C Convertible preferred stock issued by the Company. In the years ended April 30, 2021 and 2020, the Company issued 8,000 and 46,890 shares of Series C convertible preferred stock at a price per share of $25.00 for approximately $200,000 and $1,180,000, respectively.
F-19
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
Convertible preferred stock consists of the following:
| i | Series A convertible preferred stock (“Series A”) was issued to employees and directors in 2014 and is subordinate to the common stock. As of January 31, 2022 (unaudited) and as of April 30, 2021 and 2020, the common stock has a liquidation preference of $4,500,000 to the Series A. The Series A convertible preferred stock was issued subject to certain repurchase rights in favor of the Company. |
| Series A | ||||||||||||||||||||
| Original Issue Price |
Shares Authorized |
Shares Issued and Outstanding |
Net Carrying Value |
Liquidation Preference of the Common Stock to Series A |
||||||||||||||||
| January 31, 2022 (unaudited) |
$ | 0.001 | 10,000 | 10,000 | $ | 10 | $ | 4,500,000 | ||||||||||||
| April 30, 2021 |
$ | 0.001 | 10,000 | 10,000 | $ | 10 | $ | 4,500,000 | ||||||||||||
| April 30, 2020 |
$ | 0.001 | 10,000 | 10,000 | $ | 10 | $ | 4,500,000 | ||||||||||||
An amendment to, or waiver of rights of, the Series A convertible preferred stock requires the approval of holders of a two-thirds majority of the outstanding shares of Series A convertible preferred stock.
| ii | Series B convertible preferred stock (“Series B”) was issued to employees and directors in 2015 and is subordinate to the common stock. As of January 31, 2022 (unaudited) and as of April 30, 2021 and 2020, the common stock had a liquidation preference of $35,000,000 to the Series B. The Series B convertible preferred stock was issued subject to certain repurchase rights in favor of the Company. |
| Series B | ||||||||||||||||||||
| Original Issue Price |
Shares Authorized |
Shares Issued and Outstanding |
Net Carrying Value |
Liquidation Preference of the Common Stock to Series B |
||||||||||||||||
| January 31, 2022 (unaudited) |
$ | 0.001 | 10,000 | 10,000 | $ | 10 | $ | 35,000,000 | ||||||||||||
| April 30, 2021 |
$ | 0.001 | 10,000 | 10,000 | $ | 10 | $ | 35,000,000 | ||||||||||||
| April 30, 2020 |
$ | 0.001 | 10,000 | 10,000 | $ | 10 | $ | 35,000,000 | ||||||||||||
An amendment to, or waiver of rights of, the Series B convertible preferred stock requires the approval of holders of a two-thirds majority of the outstanding shares of Series B convertible preferred stock.
| iii | Series C convertible preferred stock (“Series C”) which was issued to investors and has a liquidation preference to the common stock. |
| Series C | ||||||||||||||||||||
| Original Issue Price |
Shares Authorized |
Shares Issued and Outstanding |
Net Carrying Value |
Liquidation Preference of the Series C to Common Stock |
||||||||||||||||
| January 31, 2022 (unaudited) |
$ | 25 | 600,000 | 463,265 | $ | 463 | $ | 11,581,625 | ||||||||||||
| April 30, 2021 |
$ | 25 | 600,000 | 463,265 | $ | 463 | $ | 11,581,625 | ||||||||||||
| April 30, 2020 |
$ | 25 | 600,000 | 455,265 | $ | 455 | $ | 11,381,625 | ||||||||||||
An amendment to, or waiver of rights in the Series C certificate of designations requires the approval of holders of a majority of the outstanding shares of Series C convertible preferred stock and Front Range Ventures LLC (“FRV”) (so long as FRV owns any at least 71,000 shares of Series C convertible preferred stock) (the “Requisite Holders”).
F-20
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
The holders of the convertible preferred stock have the following rights, privileges, and preferences:
Voting
Each share of Series A, Series B and Series C has voting rights equal to an equivalent number of shares of common stock into which it is convertible and vote together as one class with the common stock.
Dividends
The holders of Series A are not entitled to receive any dividends until the holders of common stock have received $4,500,000 in payments (in dividends, the proceeds of a sales transaction, or otherwise) (the “Series A Threshold”). Thereafter, the Series A shall participate in any dividend declared to common stockholders by the Company’s Board out of funds legally available on and as converted to common stock basis.
The holders of Series B are not entitled to receive any dividends until the holders of common stock have received $35,000,000 in payments (in dividends, the proceeds of a sales transaction, or otherwise) (the “Series B Threshold”). Thereafter, the Series B shall participate in any dividend declared to common stockholders by the Company’s Board out of funds legally available on an as converted to common stock basis.
Holders of Series C are entitled to receive dividends at an annual rate of $1.50 per share of Series C. Such dividends shall accrue and are payable out of funds legally available, are payable only when and if declared by the Board, and are noncumulative. The Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than dividends on shares of common stock payable in shares of common stock) unless the holders of Series C then outstanding first receive, or simultaneously receive, a dividend on each outstanding share of Series C in an amount at least equal to the greater of (i) the amount of the aggregate dividends then accrued on such share of Series C and not previously paid and (ii) in the case of a dividend on common stock or any class or series that is convertible into common stock, that dividend per share of Series C Preferred Stock as would equal the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock and (2) the number of shares of common stock issuable upon conversion of a share of Series C convertible preferred stock.
No dividends have been declared to date.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, the holders of Series C are entitled to receive, prior and in preference to the holders of Series A, Series B, and common stock, a per share amount equal to 1.0 times the original issue price plus any accrued but unpaid dividends thereon.
If upon the liquidation, dissolution or winding up of the Company, the assets of the Company that are legally available for distribution to the holders of Series C are insufficient to permit the payment to such holders of the full amounts above, then the entire assets of the Company that are legally available for distribution shall be distributed with equal priority and pro-rata among the holders of the Series C in proportion to what they would otherwise be entitled to receive.
After the payment of the full Series C liquidation preference and unpaid accrued dividends, the Series C stockholders shall participate in the distribution of the entire remaining assets of the Company legally available
F-21
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
for distributions pro-rata to holders of common stock on an as converted to common stock basis. The sale of a majority of the capital stock of the Company or the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole shall be a deemed liquidation for the purpose of the Series C.
In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, the holders of Series A shall only participate in the distribution of the entire remaining assets of the Company legally available for distributions after the holders of common stock have received $4,500,000 in payments (in dividends, the proceeds of a sales transaction, or otherwise). Thereafter, the Series A shall participate pro-rata to the common stockholders on an as converted to common stock basis.
In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, the holders of Series B shall only participate in the distribution of the entire remaining assets of the Company legally available for distributions after the holders of common stock have received $35,000,000 in payments (in dividends, the proceeds of a sales transaction, or otherwise). Thereafter, the Series B shall participate pro-rata to the common stockholders on an as converted to common stock basis.
Conversion
Each share of Series A convertible preferred stock is convertible, at the option of the holder thereof, into fully paid and non-assessable shares of common stock at any time prior to May 1, 2024. Additionally, if the holders of Series A convertible preferred stock are entitled to make, but have not made, an election to convert Series A convertible preferred stock by May 1, 2024, then such shares will automatically be converted into common stock and cancelled.
The number of shares of common stock into which Series A convertible preferred stock may be converted is based on a formula set forth in the Company’s certificate of formation, as amended. It varies according to the fair market value of the Company’s common stock at the time of conversion and is subject to a $4,500,000 minimum value threshold of the common stock, (less any payments previously made to common stockholders). Unless the $4,500,000 minimum value threshold is met, each share of Series A convertible preferred stock would convert into nil shares of common stock.
Each share of Series B convertible preferred stock is convertible, at the option of the holder thereof, into fully paid and non-assessable shares of common stock at any time prior to July 7, 2025. Additionally, if the holders of Series B convertible preferred stock are entitled to make, but have not made, an election to convert Series B convertible preferred stock by July 7, 2025, then such shares will automatically be converted into common stock and cancelled.
No conversion of the Series B convertible preferred stock may take place if a repurchase right exists. The holders of the Series B convertible preferred stock each entered into a restricted stock agreement in July 2015 whereby the Company was granted the right to repurchase up to all of such stockholders’ Series B convertible preferred stock at a price of $0.001 per share under certain conditions. The repurchase rights over 80% of the Series B convertible preferred stock have now expired with the remaining right over 20% expiring upon the Company receiving FDA clearance for its MyoVista® medical device.
In the event that the restricted stockholder is terminated as an employee of the Company for just cause (as defined in the restrictive stock agreement or resigns other than for a constructive termination (as defined in the
F-22
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
restrictive stock agreement), or (ii) if such holder is a director of HeartSciences, such holder resigns as a director of HeartSciences prior to the Company receiving FDA clearance for its MyoVista® medical device the remaining 20% may be repurchased by the Company. The Series B convertible preferred stock repurchase rights automatically terminate (i) upon the closing of a sales transaction (as defined below), or (ii) at such time as the holders of common stock have received $35,000,000 in proceeds from the Company.
The number of shares of common stock into which Series B convertible preferred stock may be converted is based on a formula set forth in the Company’s certificate of formation, as amended. It varies according to the fair market value of the Company’s common stock at the time of conversion and is subject to a $35,000,000 minimum value threshold (less any payments previously made to common stockholders). Unless the $35,000,000 minimum threshold value is met each share of Series B convertible preferred stock would convert into nil shares of common stock.
For the purpose of the Series A and Series B conversion formula the fair market value of the Company’s common stock is determined as: (i) if the common stock is publicly-traded the value will be determined by using a 30-day weighted average closing prices of the common stock; (ii) if the common stock is not publicly-traded, it shall be the value determined in good faith by the Board, which determination may, but is not required to, include a third-party valuation or (iii) in the event of a sales of the Company, the value determined by reference to that sales transaction.
Each share of Series C preferred stock is convertible, at the option of the holder at any time after the date of issuance of such share, into such number of fully paid and non-assessable shares of common stock determined by dividing the original issue price by the conversion price for such series in effect at the time of conversion for the Series C.
The conversion price at the time of the issuance of the Series C convertible preferred stock was $0.25 per share (being convertible into common stock on a one hundred-for-one basis) subject to adjustment in accordance with conversion provisions contained in the Company’s certificate of formation, as amended.
Each share of Series C is automatically converted into shares of common stock at the conversion price at the time in effect immediately upon the Company’s sale of its common stock in a public offering provided that the offering price is not less than $16.50 per share (as adjusted for recapitalizations, stock combinations, stock dividends, stock splits and the like) and which results in aggregate cash proceeds of not less than $20.0 million before underwriting discounts, commissions, and fees.
Note 6 – Stockholders’ (Deficit) Equity
Common Stock
The Company’s Certificate of Formation, as amended, has authorized 300,000,000 shares of common stock with a par value of $0.001 per share. As of January 31, 2022 (unaudited) and as of April 30, 2021 and 2020 the Company had issued 3,323,942 and 3,313,841 shares of common stock, respectively. During the nine month period ended January 31, 2022 (unaudited), the Company issued 10,101 shares of common stock as a facility fee in connection with the Unsecured Promissory Draw Down Note with Matthews Holdings Southwest for non-cash consideration amounting to $35,000, as discussed in Note 4. The holders of common stock are entitled to receive dividends whenever funds and assets are legally available and when declared by the board of directors, subject to the rights of holders of series of convertible preferred stock outstanding. No dividends were declared as of or through January 31, 2022 (unaudited) and as of or through April 30, 2021.
F-23
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
In the year ended April 30, 2020, the Company issued 455 shares of common stock for cash consideration of $585.
On March 23, 2022 (unaudited), the Company amended the number of authorized shares of common stock to 500,000,000.
Common Stock Warrants
The following table summarizes the Company’s warrant activity:
| Warrants Outstanding and Exercisable |
Exercise Price Per Share |
Weighted Average Strike Price per Share |
||||||||||
| Balance, May 1, 2019 |
664,866 | $ | 3.47-$49.50 | $ | 18.36 | |||||||
| Expired |
(2,505 | ) | $ | 9.90 | $ | 9.90 | ||||||
|
|
|
|||||||||||
| Balance, April 30, 2020 |
662,361 | $ | 3.47-$49.50 | $ | 18.39 | |||||||
| Issued |
13,992 | $ | 8.25 | $ | 8.25 | |||||||
| Expired |
(8,613 | ) | $ | 12.21 | $ | 12.21 | ||||||
|
|
|
|||||||||||
| Balance April 30, 2021 |
667,740 | $ | 3.47-$49.50 | $ | 18.26 | |||||||
| Issued (unaudited) |
661,245 | $ | 7.26 | $ | 8.98 | |||||||
| Forfeited (unaudited) |
(909 | ) | $ | 8.25 | $ | 8.25 | ||||||
| Expired (unaudited) |
(621,171 | ) | $ | 9.90-$49.50 | $ | 18.96 | ||||||
|
|
|
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| Balance January 31, 2022 (unaudited) |
706,905 | $ | 3.63-$15.18 | $ | 8.98 | |||||||
The Company has issued warrants to investors in connection with funding or for services rendered and these warrants are convertible into a fixed number of shares of the Company’s common stock for a period of 5 years from the date of issuance.
During the year ended April 30, 2020, there were no warrant issuances. During the year ended April 30, 2021, there were 13,992 warrants issued in exchange for consulting services at an exercise price of $8.25. The warrants had a grant date fair value of $2,354, using the Black-Scholes option-pricing model and the below assumptions.
In June and July 2021, the Company issued 11,084 warrants issued in exchange for consulting services at an exercise price of $8.25. The warrants had a grant date fair value of $1,609, using the Black-Scholes option-pricing model and the below assumptions.
In November 2021, the Company issued 19,697 warrants to note holders as consideration for note extensions, as discussed in Note 4, at an exercise price of $6.05. The warrants had a grant date fair value of $22,890, using the Black-Scholes option-pricing model and the below assumptions.
In connection with the Bridge Notes, the Company issued 630,464 warrants as of January 31, 2022 (unaudited) as discussed in Note 4, at an exercise price of $9.08. The warrants had a grant date fair value of $520,051, using the Black-Scholes option-pricing model and the below assumptions.
F-24
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
In February 2022 (unaudited), an additional 144,955 warrants were issued related to the Bridge Notes, at an exercise price of $9.08. The warrants had a grant date fair value of $119,874, using the Black-Scholes option-pricing model and the below assumptions.
| Nine months ended January 31, |
Years Ended April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| Risk free interest rate |
2.0 | % | 2.0 | % | 2.0 | % | ||||||
| Expected volatility |
55.0 | % | 66.2 | % | 66.2 | % | ||||||
| Expected life in years |
5 | 5 | 5 | |||||||||
The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant. Expected volatilities are derived from third party valuations. The expected life in years is based on the contract term of the warrant.
Note 7 – Stock-based Compensation
The Company grants certain employees and board members stock option awards where vesting is contingent upon a service period, as it believes that such awards better align the interests of its employees with those of its shareholders. Stock option awards are granted with an exercise price equal to or above the market price of the Company’s stock at the date of grant. Certain stock option awards provide for accelerated vesting if there is a change in control, as defined in the Nonstatutory Stock Option Agreement. Unvested stock options forfeit when an employee leaves the Company.
Where option awards are granted based on service periods, they generally vest quarterly based on 3 years continuous service for executive directors and employees, or 12 months continuous service for directors and have 10-year contractual terms. During the nine months ended January 31, 2022 (unaudited) and the years ended April 30, 2021 and 2020, the Company granted 2,273, 3,030, and 12,727 shares of common stock awards to employees based on service periods, respectively.
The Company also grants stock option awards where vesting is contingent upon meeting various departmental and company-wide performance goals, including FDA and CE Mark regulatory approval and certain EBITDA and funding thresholds. Such performance-based stock options are expected to vest when the performance criteria and metrics have been met. These stock options have contractual lives of ten years. There were no performance-based stock option awards granted for the nine months ended January 31, 2022 (unaudited). During the years ended April 30, 2021 and 2020, the Company granted 145,758 and 137,121 performance-based stock option awards, respectively.
In May 2021, February 2022, and March 2022 (unaudited), the Company granted options for 2,273, 4,545, and 3,030, respectively, shares of common stock, subject to service-based vesting conditions, with a weighted-average exercise price of $1.16, $3.47, and $3.47, respectively, per share to certain employees of the Company.
In March 2022 (unaudited), the Company granted options for 148,258 shares of common stock, subject to performance-based vesting conditions, with a weighted-average exercise price of $3.47 to certain employees of the Company. The Company also granted options for 11,364 shares of common stock, subject to performance-based vesting conditions, with a weighted-average exercise price of $3.47 to consultants and members of the Board of Directors.
The Company does not have an ERISA stock awards plan. So, all stock options issued are Non-ERISA Plan options and do not have any of the tax and other benefits afforded to ERISA stock option awards.
F-25
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
The following table summarizes the Company’s service-based stock options:
| Number of Options Outstanding |
Weighted Average Exercise Price |
Average Remaining Contractual Life (in years) |
||||||||||
| Outstanding - April 30, 2019 |
244,456 | $ | 12.96 | 7.4 | ||||||||
| Options granted |
12,727 | $ | 1.29 | 8.3 | ||||||||
| Options forfeited |
(2,800 | ) | $ | 7.48 | ||||||||
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|
|||||||||||
| Outstanding - April 30, 2020 |
254,383 | $ | 12.44 | 6.5 | ||||||||
| Options granted |
3,030 | $ | 1.16 | 9.5 | ||||||||
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|
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| Outstanding - April 30, 2021 |
257,413 | $ | 12.30 | 5.5 | ||||||||
| Options granted - January 31, 2022 (unaudited) |
2,273 | $ | 1.16 | 9.3 | ||||||||
| Options forfeited - January 31, 2022 (unaudited) |
(4,545 | ) | $ | 15.18 | — | |||||||
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|
|
|||||||||||
| Outstanding - January 31, 2022 (unaudited) |
255,141 | $ | 12.15 | 4.8 | ||||||||
| Non-vested at April 30, 2021 |
5,808 | $ | 4.68 | 8.5 | ||||||||
| Vested at April 30, 2021 |
251,605 | $ | 12.48 | 5.5 | ||||||||
| Non-vested at January 31, 2022 (unaudited) |
3,295 | $ | 1.18 | 8.8 | ||||||||
| Vested at January 31, 2022 (unaudited) |
251,846 | $ | 12.30 | 4.7 | ||||||||
The Company estimates fair values of service-based stock options using the Black-Scholes option-pricing model on grant date. The principal assumptions used in applying this model were as follows:
| Nine months ended January 31, |
Years Ended April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| Risk free interest rate |
1.08 | % | 1.08 | % | 2.15 | % | ||||||
| Volatility |
66.2 | % | 53.0% - 66.2 | % | 53.0% - 66.2 | % | ||||||
| Dividend yield |
— | — | — | |||||||||
| Weighted average expected term (in years) |
10.0 | 5.5 | 6.5 | |||||||||
F-26
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
The following summarizes the Company’s performance-based stock options:
| Number of Options Outstanding |
Weighted Average Exercise Price |
Average Remaining Contractual Life (in years) |
||||||||||
| Outstanding - April 30, 2019 |
154,874 | $ | 14.29 | 8.2 | ||||||||
| Options granted |
137,121 | $ | 1.29 | 9.3 | ||||||||
| Options forfeited |
(6,894 | ) | $ | 7.72 | — | |||||||
|
|
|
|||||||||||
| Outstanding - April 30, 2020 |
285,101 | $ | 8.20 | 8.2 | ||||||||
| Options granted |
145,758 | $ | 1.16 | 9.5 | ||||||||
| Options forfeited |
(3,788 | ) | $ | 6.25 | — | |||||||
|
|
|
|||||||||||
| Outstanding - April 30, 2021 |
427,071 | $ | 5.81 | 8.1 | ||||||||
| Options forfeited - January 31, 2022 (unaudited) |
(4,924 | ) | $ | 6.63 | — | |||||||
|
|
|
|||||||||||
| Outstanding - January 31, 2022 (unaudited) |
422,147 | $ | 5.80 | 7.3 | ||||||||
| Non-vested at April 30, 2021 |
403,535 | $ | 5.44 | 8.3 | ||||||||
| Vested at April 30, 2021 |
23,535 | $ | 12.21 | 4.8 | ||||||||
| Non-vested at January 31, 2022 (unaudited) |
338,005 | $ | 6.16 | 7.5 | ||||||||
| Vested at January 31, 2022 (unaudited) |
84,141 | $ | 4.34 | 6.6 | ||||||||
The Company estimates fair values of performance-based stock options using the Black-Scholes option-pricing model on grant date. The principal assumptions used in applying this model were as follows
| Nine months ended January 31, |
Years Ended April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| Risk free interest rate |
N/A | 1.08 | % | 2.15 | % | |||||||
| Volatility |
N/A | 53.0% - 66.2 | % | 53.0% - 66.2 | % | |||||||
| Dividend yield |
— | — | — | |||||||||
| Weighted average expected term (in years) |
N/A | 8.1 | 8.2 | |||||||||
As of January 31, 2022 (unaudited) and as of April 30, 2021, there was approximately $1,487,000 and $1,569,000 of unrecognized compensation costs related to non-vested performance-based common stock options and approximately $750 and $1,800 of unrecognized compensation costs related to non-vested service-based common stock options.
F-27
Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
The following is a summary of stock-based compensation expense:
| Nine months ended January 31, |
Years Ended April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| Research and Development |
$ | 2,325 | $ | 17,583 | $ | 52,840 | ||||||
| Selling, General and Administrative |
$ | 58,034 | 9,446 | 82,227 | ||||||||
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| $ | 60,359 | $ | 27,029 | $ | 135,067 | |||||||
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Note 8 – Income Taxes
The tax effects of temporary differences and carry-forwards that give rise to significant portions of the deferred tax assets and liabilities are presented below:
| As of January 31, |
As of April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| Deferred tax assets (liabilities): |
||||||||||||
| Net operating loss carryforwards |
$ | 7,805,017 | $ | 7,215,961 | $ | 6,659,255 | ||||||
| Start-up costs |
958,058 | 1,137,161 | 1,238,242 | |||||||||
| Stock option and warrant payments |
412,008 | 396,631 | 390,571 | |||||||||
| Accumulated depreciation |
(2,645 | ) | (2,440 | ) | (2,212 | ) | ||||||
| Research and development credits |
255,600 | 255,600 | 255,600 | |||||||||
| Research and development warrants |
21,488 | 21,488 | 21,488 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total deferred tax assets, net |
9,449,526 | 9,024,401 | 8,562,944 | |||||||||
| Valuation Allowance |
(9,449,526 | ) | (9,024,401 | ) | (8,562,944 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net Deferred Tax Assets |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
For the nine months ended January 31, 2022 (unaudited) and the years ended April 30, 2021 and 2020, the Company’s cumulative net operating loss for federal income tax purposes was approximately $37 million, $34 million, and $32 million respectively. The net operating loss, subject to limitations, may be available in future tax years to offset taxable income. The net operating loss carry-forward will begin to expire in year 2028.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences, and therefore, a full valuation allowance has been recorded at January 31, 2022 (unaudited) and at April 30, 2021 and 2020, resulting in an increase in the valuation allowance by $425,125, $461,457, and $183,973, respectively.
Note 9 – Leases
On May 1, 2019, the Company adopted ASU 2016-02, Leases, using the modified retrospective method. The new lease standard amended the previous guidance for lease accounting and related disclosure requirements. The new
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HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
guidance requires the recognition of right-of-use assets and liabilities on the balance sheet for leases with terms greater than twelve months or leases that contain a purchase option that is reasonably certain to be exercised. The Company has elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.
The Company has a long-term operating lease for office, industrial, and laboratory space that expires in 2023. The lease has an option to extend for five years however given the future anticipated expansion of the Company, it is more likely than not that the option will not be exercised. Rent expense for operating leases for the nine months ended January 31, 2022 (unaudited), and for the years ended April 30, 2021 and 2020 was $139,152, $173,405, and $208,360, respectively. The Company records right-of-use assets and liabilities at the present value of the fixed lease payments over the term at the commencement date. The Company uses its incremental borrowing rate of 12% to determine the present value of the lease as the rate implicit in the lease is typically not readily available.
Information related to the Company’s right-of-use assets and lease liabilities consist of the following:
| As of January 31, | As of April 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (unaudited) | ||||||||||||
| Right-of-use assets |
$ | 116,280 | $ | 194,660 | $ | 289,460 | ||||||
| Lease liabilities, current |
119,524 | 107,632 | 93,345 | |||||||||
| Lease liabilities, net of current portion |
— | 90,967 | 198,599 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total lease liabilities |
$ | 119,524 | $ | 198,599 | $ | 291,944 | ||||||
|
|
|
|
|
|
|
|||||||
| Weighted average remaining term (in years) |
1.0 | 1.8 | 2.8 | |||||||||
| Weighted average discount rate |
12 | % | 12 | % | 12 | % | ||||||
As of January 31, 2022 (unaudited), future maturities of lease liabilities due under lease agreements was as follows:
| 2022, balance for year ending April 30, 2022 |
$ | 31,858 | ||
| 2023 |
95,576 | |||
|
|
|
|||
| Total lease payments |
127,434 | |||
| Less imputed interest |
(7,910 | ) | ||
|
|
|
|||
| Total operating lease liabilities |
$ | 119,524 | ||
|
|
|
As of April 30, 2021, future maturities of lease liabilities due under lease agreements was as follows:
| 2022 |
$ | 125,697 | ||
| 2023 |
95,576 | |||
|
|
|
|||
| Total lease payments |
221,273 | |||
| Less imputed interest |
(22,674 | ) | ||
|
|
|
|||
| Total operating lease liabilities |
$ | 198,599 | ||
|
|
|
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Table of Contents
HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
Note 10 – Commitments and Contingencies
Litigation
From time to time, the Company may be subject to legal proceedings and claims that arise in the ordinary course of business. The Company does not believe that the outcome of those matters will have a material adverse effect to the financial position, operating results or cash flows. However, there can be no assurance such legal proceedings will not have a material impact.
The Company is not aware of any material claims outstanding or pending against the Company as of January 31, 2022 (unaudited), and as of April 30, 2021 and 2020.
Royalty Agreements
In 2013, the Company entered into an agreement (“Technology Agreement”) with its founder, conveying ownership of all intellectual property and rights to the Company. As part of that agreement, the Company will make royalty payments, based upon paid MyoVista® device unit sales, as follows:
| a) | $500 on each of the first 2,400 MyoVista® devices |
| b) | $200 on each MyoVista® device thereafter until royalties total $3,500,000. |
The royalty obligation has a first secured interest and pledge on the covered technology (as defined in the Technology Agreement but essentially the intellectual property of the MyoVista® device) over the debt holders of the $1.5M Secured Convertible Promissory Notes and $1M Loan and Security Agreement as discussed further in Note 4.
Upon either (i) the aggregate payment of $3,000,000 of royalties; (ii) if the common stock is publicly listed and the closing quoted share price is $68.75 per share or more; or (iii) a bona fide offer valuing the common stock at $68.75 is received, then the secured interest and pledge shall be released.
In the event of a bankruptcy of the Company, any balance of the $3,500,000 royalty not paid at that point would accelerate and become an immediately due debt obligation of the Company with the benefit of the secured interest and pledge (if it remained at such time).
For the nine months ended January 31, 2022 (unaudited), and for the years ended April 30, 2021 and 2020, the sales royalties expensed to cost of goods sold were $500, $1,500 and $7,000, respectively.
The Company has an agreement with The University Court of The University of Glasgow for the license of the Glasgow algorithm interpretive analysis for the conventional ECG trace. As part of that agreement the Company is obliged to make royalty payments, based upon MyoVista® device unit sales at the rate of $35-$50 per unit depending on sale volumes per year. The agreement is subject to an annual minimum fee and should the sale volume royalties be below this level then the minimum will apply. To date, MyoVista® device unit sales have such that the minimum payments have applied. Prior to FDA clearance, the Company does not expect to achieve device unit sales volumes which would exceed the minimum. The minimum fee has been expensed to research and development as the Glasgow algorithm is an essential part of the device development as part of the submission for FDA clearance of the MyoVista® device. For the nine months ended January 31, 2022 (unaudited) and the years ended April 30, 2021 and 2020, the minimum payments were $20,000.
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HEART TEST LABORATORIES, INC.
D/B/A HEARTSCIENCES
Notes to Financial Statements
Note 11 – Related Parties
Kyngstone Limited (“Kyngstone”), a company incorporated in the United Kingdom in which the Chairman of the Board is a director and controlling shareholder, has provided advisory services to the Company during the course of business. For the nine months ended January 31, 2022 (unaudited) and the years ended April 30, 2021 and 2020, the Company recorded expenditures of $75,000, $100,000, and $191,667, respectively with Kyngstone. As of January 31, 2022 (unaudited) and as of April 30, 2021 and 2020, the Company had balances outstanding to Kyngstone in the amounts of $97,178, $88,444, and $97,177, respectively.
See Note 4 for details regarding related party debt held with shareholders, board members, and Company directors.
Note 12 – Planned Initial Public Offering
In May 2022, the Company filed an initial public offering of units consisting of shares of common stock and warrants. In conjunction with the planned initial public offering, on January 24, 2022, the Board of Directors of the Company and majority shareholders, respectively, approved an amendment to the Company’s Certificate of Formation in order to effect a plan of recapitalization that provides for a Reverse Stock Split of the Company’s common stock. On June 3, 2022, the Company filed an amendment to its Amended and Restated Certificate to effect a Reverse Stock Split with an effective date of June 10, 2022, whereby every 33 shares of the Company’s issued and outstanding common stock were combined into one share of common stock, except to the extent that the Reverse Stock Split resulted in any of the Company’s stock holders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the par value per share of $0.001. All share and per share numbers have been retroactively adjusted to give effect to the reverse stock split for all periods presented, unless otherwise indicated. On June 2, 2022, the Company filed certificates of amendment to each of the amended and restated certificates of designations of each of the Series A and Series B Preferred Stock and as a result of such amendments, upon completion of the initial public offering, all outstanding shares of Series A Preferred Stock will be converted into 719,397 shares of common stock (based upon an assumed initial offering price of $5.00 per unit, which is the midpoint of the price range set forth on the cover page of the prospectus for the intial public offering) and all outstanding shares of Series B Preferred Stock will be cancelled.
Note 13 – Subsequent Events
For the annual audited financial statements as of April 30, 2021 and 2020, and for the unaudited financial statements as of January 31, 2022, the Company evaluated subsequent events through the date of this filing.
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1,750,000 Units Consisting of
Shares of Common Stock and Warrants
HEART TEST LABORATORIES, INC.
PROSPECTUS
Book Running Manager
The Benchmark Company
Table of Contents
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other expenses of issuance and distribution
The following table sets forth the expenses payable by the Registrant expected to be incurred in connection with the issuance and distribution of Common Stock and Warrants being registered hereby (other than the underwriting discounts and commissions). All of such expenses are estimates, except for the Securities and Exchange Commission, or the SEC, registration fee, the Financial Industry Regulatory Authority Inc., or FINRA, filing fee and the filing fee and listing fee.
| (dollars in thousands) |
||||
| SEC registration fee |
$ | 1,950 | ||
| FINRA filing fee |
3,500 | |||
| NASDAQ listing fee |
5,000 | |||
| Printing fees and expenses |
70,000 | |||
| Legal fees and expenses |
600,000 | |||
| Accounting fees and expenses |
125,000 | |||
| Blue Sky fees and expenses (including legal fees) |
5,000 | |||
| Transfer agent and registrar fees and expenses |
7,500 | |||
| Miscellaneous |
32,050 | |||
|
|
|
|||
| Total |
$ | 850,000 | ||
|
|
|
|||
Item 14. Indemnification of directors and officers
Heart Test Laboratories, Inc. was incorporated under the laws of Texas.
The Texas Business Organizations Code, or the TBOC, permits a corporation to indemnify a director who was, is or is threatened to be a named defendant or respondent in a proceeding as a result of the performance of his duties if such person acted in good faith and, in the case of conduct in the person’s official capacity as a director, in a manner he reasonably believed to be in the best interests of the corporation and, in all other cases, that the person reasonably believed his conduct was not opposed to the best interests of the corporation and with respect to any criminal action or proceeding, that such person had no reasonable cause to believe his conduct was unlawful. Subject to certain exceptions, the TBOC further permits a corporation to eliminate in its certificate of formation all monetary liability of the corporation’s directors to the corporation or its shareholders for conduct in performance of such director’s duties. Our amended and restated certificate of formation provides that a director of the Company will not be liable to the Company or its shareholders for monetary damages for any act or omission by the director in the performance of his duties, except that, pursuant to the TBOC, there will be no limitation of liability to the extent the director has been found liable under applicable law for: (i) breach of the director’s duty of loyalty owed to the Company or its shareholders; (ii) an act or omission not in good faith that constitutes a breach of duty of the director to the Company or that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which the director received an improper benefit, regardless of whether the benefit resulted from an action taken within the scope of the director’s duties; or (iv) an act or omission for which the liability of the director is expressly provided for by an applicable statute.
Sections 8.101 and 8.103 of the TBOC provide that a corporation may indemnify a person who was, is or is threatened to be a named defendant or respondent in a proceeding because the person is or was a director only if a determination is made that such indemnification is permissible under the TBOC: (i) by a majority vote of the directors who at the time of the vote are disinterested and independent, regardless of whether such directors
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constitute a quorum; (ii) by a majority vote of a board committee designated by a majority of disinterested and independent directors and consisting solely of disinterested and independent directors; (iii) by special legal counsel selected by the Board of Directors or a committee of the Board of Directors as set forth in (i) or (ii); (iv) by the shareholders in a vote that excludes the shares held by directors who are not disinterested and independent; or (v) by a unanimous vote of the shareholders.
Section 8.104 of the TBOC provides that a corporation may pay or reimburse, in advance of the final disposition of the proceeding, reasonable expenses incurred by a present director who was, is or is threatened to be made a named defendant or respondent in a proceeding after the corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under Section 8.101 and a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director is not otherwise permitted under the TBOC. Section 8.105 also provides that reasonable expenses incurred by a former director, or a present or former employee, agent or officer of a corporation, who was, is or is threatened to be made a named defendant or respondent in a proceeding may be paid or reimbursed by the corporation, in advance of the final disposition of the action, as the corporation considers appropriate.
Section 8.105 of the TBOC provides that, subject to restrictions in its certificate of formation and to the extent consistent with other law, a corporation may indemnify and advance expenses to a person who is not a director, including an officer, employee or agent of the corporation as provided by: (i) the corporation’s governing documents; (ii) an action by the corporation’s governing authority; (iii) resolution by the shareholders; (iv) contract; or (v) common law. As consistent with Section 8.105, persons who are not directors may seek indemnification and advancement of expenses from the Company to the same extent that directors may seek indemnification and advancement of expenses from the Company.
Further, our amended and restated certificate of formation and amended and restated bylaws provide that we must indemnify our directors and officers to the fullest extent authorized by law. We believe that these indemnification provisions and the directors’ and officers’ insurance are useful to attract and retain qualified directors and executive officers.
We have also entered into, or will enter into prior to the completion of this offering, indemnification agreements with each of our directors and certain of our officers. The indemnification agreements provide, or will provide, among other things, for indemnification to the fullest extent permitted by the TBOC and our amended and restated certificate of formation and amended and restated bylaws against (i) any and all direct and indirect liabilities and reasonable expenses, including judgments, fines, penalties, interest and amounts paid in settlement of any claim with our approval and reasonable counsel fees and disbursements and (ii) any liabilities incurred as a result of serving as a director, officer, employee or agent (including as a trustee, fiduciary, partner or manager or in a similar capacity) of another enterprise or an employee benefit plan at our request. The indemnification agreements also provide for, or will provide for, the advancement or payment of expenses to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable law and our amended and restated certificate of formation and amended and restated bylaws or the terms of the indemnification agreements.
We expect to maintain standard policies of insurance that provide coverage (1) to our directors and officers against loss rising from claims made by reason of breach of duty or other wrongful act and (2) to us with respect to indemnification payments that we may make to such directors and officers. The underwriting agreement provides for indemnification by the underwriters of us and our officers and directors, and by us of the underwriters, for certain liabilities arising under the Securities Act or otherwise in connection with this offering.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under any of the foregoing provisions, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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Item 15. Recent sales of Unregistered Securities
In the three years preceding the filing of this registration statement, we have issued the securities described in this section, which were not registered under the Securities Act.
Issuance of Capital Stock
| • | From April to May 2019, we issued and sold 246,685 shares of our Series C Preferred Stock to accredited investor at a purchase price of $25.00 per share for $6,167,125 in cash consideration. |
| • | In August 2019, we issued and sold an unsecured drawdown convertible promissory note, or the $130K Note, in the aggregate principal amount of $130,000 to an accredited investor. The $130K Note does not accrue interest. |
| • | In October 2019, we issued and sold 11,600 shares of our Series C Preferred Stock to accredited investors at a purchase price of $25.00 per share for $290,000 in cash consideration. |
| • | In April 2020, we issued and sold 28,990 shares of our Series C Preferred Stock to accredited investors at a purchase price of $25.00 per share for $724,750 in cash consideration. |
| • | In July 2020, we issued warrants to purchase an aggregate amount of 13,082 shares of our Common Stock at an exercise price of $8.25 per share in consideration of approximately $108,000 in research & development services rendered by two third-party contractors of the Company. |
| • | In October 2020, we issued and sold 8,000 shares of our Series C Preferred Stock to accredited investors at a purchase price of $25.00 per share for $200,000 in cash consideration. |
| • | From December 2020 to April 2021, we issued and sold secured convertible promissory notes, or the $1.5M Notes, to accredited investors in the aggregate principal amount of $1.5 million. The $1.5M Notes accrue interest at a rate of 12% per annum. |
| • | From June to July 2021, we issued warrants to purchase an aggregate amount of 11,084 shares of our common stock at an exercise price of $8.25 per share in consideration of approximately $110,000 in research & development services rendered by two third-party contractors of the Company. |
| • | In November 2021, we issued warrants to purchase 4,545 shares of our Common Stock at an exercise price equal to the lower of (i) $6.05 per share and (ii) 30% discount to the offering price for the sale of Common Stock in a public offering, to accredited investors as consideration for the extension of the maturity of the $1.5M Notes. |
| • | In November 2021, we issued warrants to purchase 15,152 shares of our Common Stock at an exercise price equal to the lower of (i) $6.05 per share and (ii) 30% discount to the offering price for the sale of Common Stock in a public offering, to accredited investors as consideration for the extension of the maturity of the $1M Loan and Security Agreement. |
| • | From October 2021 to February 28, 2022, in connection with our 2021 Bridge Financing, we issued and sold senior subordinated convertible notes, or the Bridge Notes, in the aggregate principal amount of $4.7 million to accredited investors for net proceeds of $4.2 million after deduction of the OID. The Bridge Notes accrue interest at a rate of 8% per annum. The Company received net proceeds of approximately $4.2 million. |
| • | From October 2021 to February 28, 2022, in connection with our 2021 Bridge Financing, we issued warrants to purchase 775,420 shares of our Common Stock to accredited investors at an initial exercise price of $9.08 per share subject to certain round down provisions. |
| • | In June 2022, as a result of this offering, we are issuing a total of 719,397 shares of Common Stock to accredited investors in connection with the conversion of the Series A Preferred Stock (based upon an assumed offering price of $5.00 per Unit, which is the midpoint of the price range set forth on the cover page of the prospectus included in this registration statement, and a conversion ratio of 71.96 shares of Common Stock for each share of Series A Preferred Stock). |
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Except in connection with the 2021 Bridge Financing, no underwriters were involved in the foregoing sales of securities described above in this Item 15(a). The Benchmark Company was paid a fee of $94,500 in connection with the 2021 Bridge Financing. Unless otherwise stated, the sales of securities described above were deemed to be exempt from registration pursuant to Section 4(a)(2) of the Securities Act, including Rule 506(b) of Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. All of the purchasers in these transactions represented to us in connection with their purchase that they were acquiring the securities for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time. Such purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act.
Grants and Exercises of Stock Options
| • | In September 2019, we granted stock options to certain employees, officers and directors of the Company to purchase an aggregate amount of 139,394 shares of our Common Stock at an exercise price of $1.29 per share, all of which vest upon specific Company performance metrics relating to FDA approval of the MyoVista. As of June 1, 2022, all of the performance-based awards were unvested. |
| • | In November 2020, we granted stock options to certain employees, officers and directors of the Company to purchase an aggregate amount of 148,788 shares of our Common Stock at an exercise price of $1.16 per share, of which 3,030 shares vest over a period of time and 145,758 shares vest upon specific Company performance metrics including the completion of financings in excess of $15.0 million and receipt of approval from the FDA of the MyoVista. As of June 1, 2022, 2,020 shares of time-based awards have vested and 1,010 shares were unvested. All of the performance-based awards were unvested at June 1, 2022. |
| • | In May 2021, we granted stock options to certain employees, officers and directors of the Company to purchase an aggregate amount of 2,273 shares of our Common Stock at an exercise price of $1.16 per share, vesting over a period of time. As of June 1, 2022, 947 shares have vested and 1,326 shares were unvested at June 1, 2022. |
| • | In March 2022, we granted stock options to certain employees, officers and directors of the Company to purchase an aggregate amount of 158,107 shares of our Common Stock at an exercise price of $3.47 per share, vesting over time and performance-based metrics. |
| • | In February and March 2022, we granted stock options to our Chief Financial Officer to purchase an aggregate amount of 9,090 shares of our Common Stock at an exercise price of $3.47 per share, vesting over time and performance-based metrics. |
The issuances of the securities described above in this Item 15(b) were deemed to be exempt from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 701 promulgated thereunder as transactions by an issuer not involving a public offering. All of the purchasers in these transactions represented to us in connection with their purchase that they were acquiring the securities for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time. Such purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. The shares of Common Stock to be issued upon the exercise of the options are deemed to be restricted securities for purposes of the Securities Act.
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Item 16. Exhibits and Financial Statement Schedules
| (a) | Exhibits. |
None.
Exhibits:
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Table of Contents
| * | Previously filed |
| † | Management contract or compensatory plan or arrangement. |
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or in the notes thereto.
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Table of Contents
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Southlake, State of Texas on June 10, 2022.
| Heart Test Laboratories, Inc. | ||
| By: | /s/ Andrew Simpson | |
| Name: | Andrew Simpson | |
| Title: | President, Chief Executive Officer and Chairman of the Board of Directors | |
The undersigned officers and directors of Heart Test Laboratories, Inc. hereby constitute and appoint each of Andrew Simpson, Mark Hilz and Danielle Watson with full power of substitution, each of them singly our true and lawful attorneys-in-fact and agents to take any actions to enable the Company to comply with the Securities Act, and any rules, regulations and requirements of the SEC, in connection with this registration statement on Form S-1, including the power and authority to sign for us in our names in the capacities indicated below any and all further amendments to this registration statement and any other registration statement filed pursuant to the provisions of Rule 462 under the Securities Act.
Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ Andrew Simpson Andrew Simpson |
President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) |
June 10, 2022 | ||
| /s/ Danielle Watson Danielle Watson |
Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
June 10, 2022 | ||
| /s/ Mark Hilz Mark Hilz |
Chief Operating Officer, Secretary and Director |
June 10, 2022 | ||
| /s/ * Bruce Bent |
Director |
June 10, 2022 | ||
| /s/ * Patrick Kanouff |
Director |
June 10, 2022 | ||
| /s/ * Brian Szymczak |
Director |
June 10, 2022 | ||
| By: /s/ Andrew Simpson Attorney-In-Fact |
||||
II-8
Exhibit 1.1
UNDERWRITING AGREEMENT
June, [__], 2022
The Benchmark Company, LLC
150 East 58th St., 17th Floor
New York, NY 10155
As Representative of the several Underwriters named on Schedule 1 attached hereto
Ladies and Gentlemen:
The undersigned, Heart Test Laboratories, Inc., a Texas corporation (the “Company”), hereby confirms its agreement (this “Agreement”) with The Benchmark Company, LLC (hereinafter the “Representative”) and with the other underwriters named on Schedule 1 hereto for which the Representative is acting as representative (the Representative and such other underwriters being collectively called the “Underwriters” or, individually, an “Underwriter”) as follows:
1. Purchase and Sale of Securities.
(a) Firm Shares and Firm Warrants.
(i) Nature and Purchase of Firm Shares and Firm Warrants.
(A) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the several Underwriters an aggregate of 1,750,000 units (each a “Unit”, and collectively, the “Units”), each comprised on one share (the “Firm Shares”) of the Company’s common stock, $0.001 par value per share (the “Common Stock”) and a warrant to purchase one Common Share at an exercise price of $[___] per share (the “Firm Warrants” and, collectively with the Firm Shares, the “Firm Securities”).
(B) The Underwriters, severally and not jointly, agree to purchase from the Company the number of Units set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof. The combined purchase price for one Unit shall be equal to 93% of the per Unit offering price set forth on the cover page of the Prospectus (as defined in Section 2(a)(i)(B) hereof) (the “Public Offering Price per Unit”). The Firm Shares and the Firm Warrants will be separated immediately upon issuance.
(ii) Firm Securities Payment and Delivery.
(A) Delivery and payment for the Units shall be made at 11:30 a.m., Eastern time, on [_____], 2022, which date shall be the second business day after the trade date of [_____], 2022, or at such earlier time as shall be agreed upon by the Representative and the Company, at the offices of Mitchell Silberberg & Knupp LLP, 437 Madison Avenue, 25th Floor, New York, NY 10022 (“Representative Counsel”), or at such other place (or remotely by facsimile or other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Units is called the “Closing Date.”
(B) Payment for the Units shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance satisfactory to the Representative) representing the Firm Shares (or through the facilities of the Depository Trust Company (“DTC”) or via a DWAC transfer), for the account of the Underwriters. The Firm Shares and Firm Warrants underlying the Units shall be registered in such name or names and in such authorized denominations as the Representative may request in writing prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares and Firm Warrants underlying the Units except upon tender of payment by the Representative for all of the Units or via delivery versus payment for the Units. The term “Business Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.
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(b) Over-allotment Option.
(i) Option Securities. For the purposes of covering any over-allotments in connection with the distribution and sale of the Units, the Company hereby grants to the Underwriters an option (the “Over-allotment Option”) to purchase (A) up to an additional 262,500 shares of Common Stock, representing up to fifteen percent (15%) of the Firm Shares sold in the offering (the “Option Shares”, and together with the Firm Shares, the “Shares”), at a purchase price per share of $[____] (93% of the public offering price allocated to each Firm Share), and (B) 262,500 warrants to purchase an aggregate of 262,500 shares of Common Stock, representing up to fifteen percent (15%) of the Firm Warrants sold in the offering (the “Option Warrants” and, together with the Firm Warrants, the “Warrants”), at a purchase price of $0.0093 per warrant (93% of the public offering price allocated to each set of Firm Warrants), for the purpose of covering over-allotments of such securities, if any, which may be purchased in any combination of Option Shares and/or Option Warrants. The Option Shares and the Option Warrants are referred to as the “Option Securities”. The Over-allotment Option is, at the Underwriters’ sole discretion, for Option Shares. The Firm Securities and the Option Securities are collectively referred to as the “Securities.” The Securities shall be issued directly by the Company and shall have the rights and privileges described in the Registration Statement, the Disclosure Package and the Prospectus (as defined below). The offering and sale of the Securities is herein referred to as the “Offering.”
(ii) Exercise of Option. The Over-allotment Option granted pursuant to Section 1(b)(i) hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) for any number of the Option Securities within 30 days after the Closing Date. The Underwriters shall not be under any obligation to purchase any of the Option Securities prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail or email or facsimile or other electronic transmission setting forth the number of Option Shares and/or Option Warrants to be purchased and the date and time for delivery of and payment for the Option Shares and/or Option Warrants, as the case may be (each, an “Option Closing Date”), which shall not be later than two (2) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of the Representative Counsel or at such other place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares and/or Option Warrants does not occur on the Closing Date, each Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Shares and/or Option Warrants subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Option Shares and/or Option Warrants specified in such notice; (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of Option Shares and/or Option Warrants then being purchased as set forth in Schedule 1 opposite the name of such Underwriter, subject to such adjustments as the Representative, in its sole discretion, shall determine.
(iii) Payment and Delivery. Payment for the Option Shares and/or Option Warrants shall be made on an Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to the Underwriters of certificates (in form and substance satisfactory to the Representative) representing the applicable number of Option Shares and/or Option Warrants (or through the facilities of DTC or DWAC transfer) for the account of the Underwriters. The applicable number of Option Shares and/or Option Warrants shall be registered in such name or names and in such authorized denominations as the Representative may request in writing prior to the applicable Option Closing Date. The Company shall not be obligated to sell or deliver Option Shares and/or Option Warrants except upon tender of payment by the Representative for the applicable Option Shares. An Option Closing Date may be simultaneous with, but not earlier than, the Closing Date.
(c) Representative’s Warrants.
(i) Purchase Warrants. The Company hereby agrees to issue to the Representative (and/or its designees) on the Closing Date, or Option Closing Date, as applicable, a warrant (the “Representative’s Warrant”) for the purchase of a number of shares of Common Stock equal to 7% of the number of the Firm Shares and Option Shares, if any, underlying the Units issued in the Offering for an aggregate purchase price of $[____]. The Representative’s Warrant agreement, in the form attached hereto as Exhibit A (the “Representative’s Warrant Agreement”), shall be exercisable, in whole or in part, commencing on a date which is six (6) months after the Closing Date and expiring on the five-year anniversary of the Closing Date at an initial exercise price per share of Common Stock of $[____], which is equal to 100% of the public offering price for one Unit. The Representative’s Warrant
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Agreement and the shares of Common Stock issuable upon exercise thereof are sometimes hereinafter referred to together as the “Representative’s Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative’s Warrant and the underlying shares of Common Stock during the one hundred and eighty (180) days after the Closing Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representative’s Warrant Agreement, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred and eighty (180) days following the Closing Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.
(ii) Delivery. Delivery of the Representative’s Warrant shall be made on the Closing Date or Option Closing Date, as applicable, and shall be issued in the name or names and in such authorized denominations as the Representative may request.
2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below) and as of the Closing Date and as of each Option Closing Date, if any, as follows (unless otherwise indicated, all references to the Company in this Section 2 shall refer to the Company and its subsidiaries):
(a) Filing of Registration Statement.
(i) Pursuant to the Securities Act.
(A) The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (File No. 333-265024), including any related prospectus or prospectuses, for the registration of the Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement was prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”) and contains and will contain all material statements that are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require, such registration statement on file with the Commission at any given time, including any amendments, exhibits and schedules thereto at such time, documents filed as a part thereof or incorporated pursuant to Item 12 of Form S-1 under the Securities Act at such time and the documents and information otherwise deemed to be a part thereof or included therein pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”) or otherwise pursuant to the Securities Act Regulations at such time, is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement was declared effective by the Commission on [_____], 2022.
(B) Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus”. The Preliminary Prospectus, subject to completion, dated [_____], 2022, that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus”. The final prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the “Prospectus”. Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.
(C) ”Applicable Time” means 7:30 a.m., Eastern time, on the date of this Agreement.
(D) “Disclosure Package” means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time, the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.
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(E) “Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations (“Rule 433”), including, without limitation, any “free writing prospectus” (as defined in Rule 405 of the Securities Act Regulations) relating to the Securities that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Securities or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).
(F) ”Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433 (the “Bona Fide Electronic Road Show”)), as evidenced by its being specified in Schedule 2-B hereto.
(G) ”Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.
(ii) Pursuant to the Exchange Act. The Common Stock and Warrants are registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock or Warrants under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.
(b) Stock Exchange Listing. The Common Stock and Warrants are listed on The Nasdaq Stock Market, LLC (the “Exchange”), and the Company has taken no action designed to, or likely to have the effect of, delisting the Common Stock or Warrants from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating either such listing.
(c) No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.
(d) Disclosures in Registration Statement.
(i) Compliance with Securities Act and 10b-5 Representation.
(A) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to the Commission’s Electronic Data Gathering, Analysis and Retrieval System or any successor system thereto (“EDGAR”), except to the extent permitted by Regulation S-T.
(B) Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made not misleading.
(C) The Disclosure Package, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), did not, does not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Limited Use Free Writing Prospectus hereto does not conflict with
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the information contained in the Registration Statement, the Preliminary Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Preliminary Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Disclosure Package or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the following disclosure contained in the “Underwriting” section of the Prospectus: (a) the fifth paragraph, (b) the information set forth under the sub-captions “Stabilization”, “Electronic Distribution”, “Other Relationships”, and “Selling Restrictions”, and (c) the table showing the number of Securities to be purchased by each Underwriter (the “Underwriters’ Information”); and
(D) Neither the Prospectus nor any amendment or supplement thereto, as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.
(ii) Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company or any of its direct and indirect subsidiaries, including each entity disclosed or described in the Registration Statement, the Disclosure Package and the Prospectus as being a subsidiary of the Company (each, a “Subsidiary” and, collectively, the “Subsidiaries”) is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Disclosure Package and the Prospectus, or (ii) is material to the business of the Company or any Subsidiary, has been duly authorized and validly executed by the Company or any Subsidiary, is in full force and effect in all material respects and is enforceable against the Company or any Subsidiary, and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (w) for such agreements or instruments for enforceability of which would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change (as defined below), (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None of such agreements or instruments has been assigned by the Company or any Subsidiary, and, except as would not reasonably be expected to result in a Material Adverse Change, neither the Company, any Subsidiary nor, to the Company’s knowledge, any other party is in default thereunder and, to the Company’s knowledge, except as would not reasonably be expected to result in a Material Adverse Change, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. To the Company’s knowledge, except as would not reasonably be expected to result in a Material Adverse Change, performance by the Company or any Subsidiary of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental or regulatory agency, body or court, domestic or foreign, having jurisdiction over the Company, any Subsidiary or any of their respective assets or businesses (each, a “Governmental Entity”), including, without limitation, those relating to environmental laws and regulations.
(iii) Prior Securities Transactions. Since the beginning of the last two full fiscal years, no securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Disclosure Package and the Prospectus.
(iv) Regulations. The disclosures in the Registration Statement, the Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign laws, rules and regulations relating to the respective businesses of the Company and its Subsidiaries as currently conducted or contemplated are correct and complete in all material respects and, to the Company’s knowledge, no other such laws, rules or regulations are required to be disclosed in the Registration Statement, the Disclosure Package and the Prospectus which are not so disclosed.
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(e) Changes After Dates in Registration Statement.
(i) No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect (as defined below) and no material adverse change in the financial position or results of operations of the Company, nor to the Company’s knowledge, any change or development that, singularly or in the aggregate, would involve a material adverse change or a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company (a “Material Adverse Change”); (ii) there have been no material transactions entered into by the Company, other than as contemplated pursuant to this Agreement; and (iii) no officer or director of the Company has resigned from any position with the Company.
“Material Adverse Effect” means (i) a material adverse effect on the legality, validity or enforceability of this Agreement or the Representative’s Warrant, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under this Agreement or the Representative’s Warrant. “Trading Day” means a day on which the Exchange is open for trading.
(ii) Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Disclosure Package and the Prospectus, the Company has not: (i) issued any securities, other than securities issued pursuant to the Company’s existing equity incentive or stock option plans or shares of Common Stock issuable upon the exercise or conversion, as the case may be, of then outstanding options, warrants and convertible securities, or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.
(f) Independent Accountants. To the knowledge of the Company, Haskell & White LLP (the “Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. Except as may otherwise be disclosed in the Registration Statement, the Disclosure Package and the Prospectus, the Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
(g) Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules included or incorporated by reference in the Registration Statement, the Disclosure Package and the Prospectus, fairly present the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and the supporting schedules included or incorporated by reference in the Registration Statement, the Disclosure Package and the Prospectus present fairly the information required to be stated therein. Except as included or incorporated by reference therein, no historical or pro forma financial statements are required to be included or incorporated by reference in the Registration Statement, the Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related notes, if any, included or incorporated by reference in the Registration Statement, the Disclosure Package and the Prospectus have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments
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used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained or incorporated by reference in the Registration Statement, the Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Disclosure Package and the Prospectus, (a) neither the Company nor any of its Subsidiaries, including each entity disclosed or described in the Registration Statement, the Disclosure Package and the Prospectus as being a Subsidiary of the Company, has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) neither the Company nor any of its Subsidiaries has declared or paid any dividends or made any distribution of any kind with respect to its capital stock, (c) there has not been any change in the capital stock of the Company or any of its Subsidiaries, other than grants under any stock compensation plan or arrangement made in the ordinary course of business and consistent with the Company’s prior policies, and (d) there has not been any Material Adverse Change in the long-term or short-term debt of the Company or any of its Subsidiaries.
(h) Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted share capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Disclosure Package and the Prospectus, as of the Applicable Time, on the Closing Date and any Option Closing Date, there will be no stock options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued shares of Common Stock or any security convertible or exercisable into shares of Common Stock, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities.
(i) Valid Issuance of Securities, etc.
(i) Outstanding Securities. All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable and have been issued in compliance with all federal and state securities laws; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized number of shares of Common Stock, Company preferred shares and other securities of the Company to be outstanding upon consummation of the offering of the Securities conform in all material respects to all statements relating thereto contained in the Registration Statement, the Disclosure Package and the Prospectus. The offers and sales of the outstanding shares of Common Stock were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such shares, exempt from such registration requirements. The authorized Common Stock and other outstanding securities conform in all material respects to all statements relating thereto contained in the Registration Statement, the Disclosure Package and the Prospectus.
(ii) Securities Sold Pursuant to this Agreement. The Securities and the Representative’s Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable, free and clear of all liens imposed by the Company; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Securities and Representative’s Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Securities and Representative’s Securities has been duly and validly taken; the shares of Common Stock issuable upon exercise of the Warrants and the Representative’s Warrant (the “Underlying Common Stock”) have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued in accordance with such Warrants or Representative’s Warrant, or exercised on a cashless basis as set forth in such Warrants or Representative’s Warrant, as the case may be, such Underlying Common Stock will be validly issued, fully paid and non-assessable; and the Securities and Representative’s Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Disclosure Package and the Prospectus.
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(j) Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Disclosure Package and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration statement to be filed by the Company (except for any such rights that have been waived).
(k) Validity and Binding Effect of Agreements. This Agreement and the Representative’s Warrant have been duly and validly authorized by the Company, and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
(l) No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement and the Representative’s Warrant and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a breach of, or conflict with any of the terms and provisions of, or constitute a default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company debt or otherwise) or other understanding pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company’s certificate of incorporation (as the same may be amended or restated from time to time, the “Charter”) or the by-laws of the Company (as the same may be amended or restated from time to time, the “Bylaws”) or other similar governing document; or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity as of the date hereof, except in the cases of clauses (i) and (iii) for such breaches, conflicts or violations which would not reasonably be expected to have a Material Adverse Change.
(m) Regulatory. Except as described in the Registration Statement, the Disclosure Package and the Prospectus or as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change: (i) the Company has not received written notice from any Governmental Entity alleging or asserting noncompliance with any Applicable Regulations (as defined in clause (ii) below) or Authorizations (as defined in clause (iii) below); (ii) the Company is and has been in material compliance with federal, state or foreign statutes, laws, ordinances, rules and regulations applicable to the Company (collectively, “Applicable Regulations”); (iii) the Company possesses all licenses, certificates, approvals, clearances, consents, authorizations, qualifications, registrations, permits, and supplements or amendments thereto required by any such Applicable Regulations and/or to carry on its businesses as now conducted (“Authorizations”) and such Authorizations are valid and in full force and effect and the Company is not in violation of any term of any such Authorizations; (iv) the Company has not received written notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Entity or third party alleging that any product, operation or activity is in violation of any Applicable Regulations or Authorizations or has any knowledge that any such Governmental Entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding, nor, to the Company’s knowledge, has there been any material noncompliance with or violation of any Applicable Regulations by the Company that could reasonably be expected to require the issuance of any such communication or result in an investigation, corrective action, or enforcement action by any Governmental Entity; and (v) the Company has not received written notice that any Governmental Entity has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations or has any knowledge that any such Governmental Entity has threatened or is considering such action. Neither the Company nor, to the Company’s knowledge, any of its directors, officers, employees or agents has been convicted of any crime under any Applicable Regulations.
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(n) No Defaults; Violations. No material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not (i) in violation of any term or provision of its Charter or Bylaws, or (ii) in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity applicable to the Company, except in the cases of clause (ii) for such violations which would not reasonably be expected to cause a Material Adverse Change.
(o) Corporate Power; Licenses; Consents.
(i) Conduct of Business. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Disclosure Package and the Prospectus, except for the absence of which would not reasonably be expected to have a Material Adverse Change.
(ii) Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained and no further action is required by the Company, the Company’s Board of Directors (the “Board”) or its shareholders in connection herewith or therewith. No consent, authorization or order of, and no filing with, any court, government agency or other body is required for the valid issuance, sale and delivery of the Securities and the consummation of the transactions and agreements contemplated by this Agreement and the Representative’s Warrant and as contemplated by the Registration Statement, the Disclosure Package and the Prospectus, except with respect to applicable securities laws and the rules and regulations of FINRA, and except with respect to such consent, authorization, order or filing that would not reasonably be expected to have a Material Adverse Change.
(p) D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers immediately prior to the Offering (the “Insiders”) as supplemented by all information concerning the Company’s directors and officers as described in the Registration Statement, the Disclosure Package and the Prospectus, provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate and incorrect.
(q) Litigation; Governmental Proceedings. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Disclosure Package and the Prospectus which is required to be disclosed, in each case which individually or in the aggregate, is reasonably expected to result in a Material Adverse Change, or which adversely affects or challenges the legality, validity or enforceability of this Agreement or the Representative’s Warrant or the Securities.
(r) Good Standing. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of Texas as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have or reasonably be expected to result in a Material Adverse Change.
(s) Insurance. The Company carries or is entitled to the benefits of insurance, with reputable insurers, and in such amounts and covering such risks which the Company believes are reasonably adequate, and all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable or new coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change.
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(t) Transactions Affecting Disclosure to FINRA.
(i) Finder’s Fees. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee or commission by the Company or any Insider with respect to the sale of the Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its shareholders that may affect the Underwriters’ compensation, as determined by FINRA.
(ii) Payments Within 180 Days. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) to: (A) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (B) any FINRA member; or (C) any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the 180-day period immediately preceding the original filing of the Registration Statement, other than the payment to the Underwriters as provided hereunder in connection with the Offering.
(iii) Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.
(iv) FINRA Affiliation. There is no (A) officer or director of the Company, (B) beneficial owner of 5% or more of any class of the Company’s securities or (C) beneficial owner of the Company’s unregistered equity securities which were acquired during the 180-day period immediately preceding the filing of the Registration Statement that, in each case and to the Company’s knowledge, is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
(v) Information. To the Company’s knowledge, all information provided by the Company in its FINRA Questionnaire to Representative Counsel specifically for use by Representative Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.
(u) Foreign Corrupt Practices Act. None of the Company and its subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its subsidiaries or any other person acting on behalf of the Company and its subsidiaries, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.
(v) Compliance with OFAC. None of the Company and its subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its subsidiaries or any other person acting on behalf of the Company and its subsidiaries, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
(w) Money Laundering Laws. The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
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(x) Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to the Representative or to Representative Counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.
(y) Lock-Up Agreements. Schedule 3 hereto contains a complete and accurate list of the Company’s officers and directors and each holder of the Company’s securities that will execute a Lock-Up Agreement (as defined below) (collectively, the “Lock-Up Parties”). The Company has caused its officers and directors deliver to the Representative an executed Lock-Up Agreement in the form attached hereto as Exhibit B and each of the other Lock-Up Parties an executed Lock-Up Agreement in the form attached hereto as Exhibit C (collectively, the “Lock-Up Agreements”), prior to the execution of this Agreement.
(z) Subsidiaries. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, the Company has no direct or indirect subsidiaries or variable interest entities and does not hold any equity interests in any other entity. The Company owns, directly or indirectly, all of the capital stock or other equity interests of each subsidiary free and clear of any lien, and all of the issued and outstanding shares of capital stock of each subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities. All direct and indirect subsidiaries of the Company are duly organized and in good standing under the laws of the place of organization or incorporation, and each subsidiary is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not have a Material Adverse Effect and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.
(aa) Related Party Transactions. There are no business relationships or related party transactions involving the Company or any of its subsidiaries or any other person required to be described in the Registration Statement, the Disclosure Package and the Prospectus that have not been described as required.
(bb) Board of Directors. The qualifications of the persons serving as members of the Board and the overall composition of the Board comply with the Exchange Act, the Exchange Act Regulations, the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent,” as defined under the listing rules of the Exchange.
(cc) Sarbanes-Oxley Compliance.
(i) Disclosure Controls. The Company has developed and currently maintains disclosure controls and procedures that will comply with Rule 13a-15 or 15d-15 under the Exchange Act Regulations applicable to it, and, except as described in the Registration Statement, the Disclosure Package and the Prospectus, such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.
(ii) Compliance. The Company is, or at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented or will implement such programs and taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act, except where the failure to be in compliance would not have or reasonably be expected to result in a Material Adverse Change.
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(dd) Accounting Controls. The Company and its subsidiaries maintain a system of internal accounting controls designed to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, the Company and its subsidiaries have established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and the subsidiaries designed to record, process, summarize and report the information that required to be disclosed by the Company in the reports it files or submits under the Exchange Act within the time periods specified in the Commission’s rules and forms.
(ee) No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.
(ff) No Labor Disputes. No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent. To the knowledge of the Company, no executive officer of the Company is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company to any liability with respect to any of the foregoing matters. The Company is in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(gg) Intellectual Property Rights. To the Company’s knowledge, the Company and its subsidiaries have, or can acquire on reasonable terms, ownership of and/or license to, or otherwise have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights necessary or required for use in connection with their respective businesses as described in the Registration Statement (collectively, the “Intellectual Property Rights”). None of, and neither the Company nor any subsidiary has received a notice (written or otherwise) that any of, the Intellectual Property Rights has expired, terminated or been abandoned, or is expected to expire or terminate or be abandoned, within two (2) years from the date of this Agreement. Neither the Company nor any subsidiary has received, since the date of the latest audited financial statements included within the Registration Statement, a written notice of a claim or otherwise has any actual knowledge that the Company’s business or planned business as described in the Registration Statement violate or infringe upon the rights of any person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another person of any of the Intellectual Property Rights. The Company and its subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(hh) Taxes. Each of the Company and its subsidiaries has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, each of the Company and its subsidiaries has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company or such subsidiary, except (i) such taxes the Company is challenging in good faith and (ii) for such exceptions as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Change. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriters or as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Change, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company or its subsidiaries, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company or its subsidiaries. The term “taxes” mean all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.
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(ii) ERISA Compliance. Each “employee benefit plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, “ERISA”)) sponsored by the Company or an ERISA Affiliate has been established, administered and maintained in all material respects in accordance with its terms and in compliance with all applicable laws (including ERISA, the Code and any applicable federal and state laws). For these purposes, “ERISA Affiliate” means, with respect to the Company, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”) of which the Company is a member.
(jj) Compliance with Laws. Except as otherwise described in the Registration Statement, the Disclosure Package and the Prospectus or except as could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change, to the Company’s knowledge, the Company’s operations are in compliance with all statutes, rules, or regulations applicable to the Company in all material respects. The disclosures in the Registration Statement, the Disclosure Package and the Prospectus concerning the effects of Federal, State, local and all foreign regulation on the Company’s business as currently contemplated are correct in all material respects.
(kk) [Intentionally Omitted]
(ll) [Intentionally Omitted]
(mm) Contracts Affecting Capital. There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company’s or any of its subsidiaries’ liquidity or the availability of or requirements for their capital resources required to be described or incorporated by reference in the Registration Statement, the Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.
(nn) Loans to Directors or Officers. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, there are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company or any of its subsidiaries to or for the benefit of any of the officers or directors of the Company, any of its subsidiaries or any of their respective family members.
(oo) Smaller Reporting Company. As of the effective date, or deemed effective date, of the Registration Statement, the Company was a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act Regulations.
(pp) Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, at the time of effectiveness of the Registration Statement and any amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act Regulations) of the Securities and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.
(qq) Industry Data. The statistical and market-related data included in each of the Registration Statement, the Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources.
(rr) Electronic Road Show. The Company has filed a “road show” (as defined in Rule 433(h) of the Securities Act Regulations) with the Commission as an Issuer Free Writing Prospectus in connection with the Offering, which complies with Rule 433 of the Securities Act Regulations.
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(ss) Forward-Looking Statements. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Disclosure Package or the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
(tt) Title. Except as described in the Registration Statement, the Disclosure Package and the Prospectus or except as could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change, the Company and each of its Subsidiaries has good and marketable title in fee simple to, or has valid rights to lease or otherwise use, all items of real or personal property that are material to its respective business, free and clear of all liens, encumbrances, security interests, claims and defects that do not, singularly or in the aggregate, materially affect the business of the Company or its Subsidiaries and do not interfere with the use made of such property by the Company or its Subsidiaries; and all of the leases and subleases material to the business of the Company and each of its Subsidiaries, and under which the Company or any of its Subsidiaries holds properties described in the Registration Statement, the Disclosure Package and the Prospectus, are, to the Company’s knowledge, in full force and effect, and neither the Company nor any of its Subsidiaries has received any notice of any material claim of any sort that have been asserted by anyone adverse to the rights of the Company or such Subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiaries to the continued possession of the leased or subleased premises under any such lease or sublease, which would result in a Material Adverse Change.
(uu) Integration. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause the Offering to be integrated with prior offerings by the Company for purposes of the Securities Act that would require the registration of any such securities under the Securities Act.
(vv) Confidentiality and Non-Competition. To the Company’s knowledge, no director, officer, key employee or consultant of the Company is subject to any confidentiality, non-disclosure, non-competition agreement or non-solicitation agreement with any employer or prior employer that could reasonably be expected to materially affect his ability to be and act in his respective capacity of the Company or be expected to result in a Material Adverse Change.
(ww) Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or shareholders (without the consent of the Representative) has taken, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.
3. Covenants of the Company. The Company covenants and agrees as follows:
(a) Amendments to Registration Statement. The Company shall deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement, any Preliminary Prospectus, Disclosure Package or Prospectus proposed to be filed and shall not file any such document to which the Representative shall reasonably object in writing; provided however, that this Section 3(a) shall not be applicable with respect to any supplements to the Registration Statement filed solely for the purpose of supplementing the Registration Statement or Prospectus with a report filed with the Commission by the Company pursuant to the Exchange Act.
(b) Federal Securities Laws.
(i) Compliance. The Company, subject to Section 3(b)(ii), shall comply with the requirements of Rule 424(b) and Rule 430A of the Securities Act Regulations, and will notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement or any amendment or supplement to any Preliminary Prospectus, the Disclosure Package or the Prospectus shall have been filed and when any post-effective amendment to the Registration Statement shall become effective; (ii) of the receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to any Preliminary Prospectus, the Disclosure Package or the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration
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Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus, the Disclosure Package or the Prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or, to the Company’s knowledge, threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement; and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Securities. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its best efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.
(ii) Continued Compliance. The Company shall comply with the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Registration Statement, the Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Disclosure Package or the Prospectus in order that the Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings made pursuant to the Exchange Act or the Exchange Act Regulations within 48 hours prior to the Applicable Time; the Company will give the Representative notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specific in Section 1.1(a)(iii) hereof and will furnish the Representative with copies of any such documents a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or Representative Counsel shall reasonably object.
(iii) Exchange Act Registration. For a period of three (3) years after the date of this Agreement, the Company shall use its commercially reasonable efforts to maintain the registration of the Common Stock and Warrants under the Exchange Act.
(iv) Free Writing Prospectuses. The Company agrees that, unless it obtains the prior written consent of the Representative, it shall not make any offer relating to the Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative shall be deemed to have consented to each Issuer General Use Free Writing Prospectus hereto and any “road show that is a written communication” within the meaning of Rule 433(d)(8)(i) that has been reviewed and approved in writing by the Representative. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Underwriters as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information
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contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Underwriters and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
(c) Delivery to the Underwriters of Registration Statements. Upon written request of the Representative, the Company shall deliver or make available to the Representative and Representative Counsel without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Underwriters, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters; provided, however, that the availability of the foregoing on the Commission’s EDGAR system shall be deemed to have been delivered to the Representative, the Representative Counsel and the Underwriters at the same time furnished or filed with the Commission.
(d) Delivery to the Underwriters of Prospectuses. The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus, as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) [Intentionally Omitted].
(f) Listing. The Company shall use its commercially reasonable efforts to maintain the listing of the Common Stock and Warrants on the Exchange for three (3) years after the date of this Agreement.
(g) [Intentionally Omitted].
(h) [Intentionally Omitted].
(i) Transfer Agent; Warrant Agent. For a period of three (3) years after the date of this Agreement, or such shorter period of time that the Common Stock and Warrants are listed on a national exchange, the Company shall maintain a transfer agent and registrar for the Common Stock and a warrant agent for the Warrants.
(j) Payment of Expenses.
(i) General Expenses Related to the Offering. The Company hereby agrees to pay on each of the Closing Date and each Option Closing Date, if any, to the extent not previously paid, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the Securities to be sold in the Offering with the Commission; (b) all Public Offering Filing System filing fees associated with the review of the Offering by FINRA; (c) all fees and expenses relating to the listing of the shares of Common Stock on the Exchange; (d) all fees, expenses and disbursements, if any, relating to the registration or qualification of the Securities under the “blue sky” securities laws of such states and other jurisdictions as the Representative may reasonably designate (including, without limitation, all filing and registration fees, and the reasonable fees and disbursements of “blue sky” counsel); (e) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Securities under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (f) the costs of all mailing and printing of the Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representative may reasonably deem necessary; (g) the costs of preparing, printing and delivering certificates representing the Securities; (h) fees and expenses of the transfer agent for the Common Stock; (i) share transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Underwriters; (j) the fees and expenses of the Company’s accountants; (k) the fees and expenses of the Representative’s legal counsel (the “Representative Legal Expenses”) up to a maximum of $100,000; (l) the due
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diligence fees and expenses of the Underwriter (including, without limitation, domestic and foreign legal counsel, background checks, travel expenses and other diligence expenses); (m) the Underwriters’ use of Ipreo’s book-building, prospectus tracking and compliance software for the Offering; (n) “road show” expenses for the offering; and (o) the costs associated with receiving commemorative mementos and lucite tombstones. The Representative’s maximum aggregate expense reimbursement allowance for such expenses will be $125,000. In addition to the forgoing, the Company shall be responsible for the costs of background checks on its senior management in an amount not to exceed $7,500. The Representative, with the prior approval of the Company, may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or an Option Closing Date, if any, the expenses set forth herein (as limited by this Section 3(j)(i)) to be paid by the Company to the Underwriters, provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 8(c) hereof.
(ii) Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3(j)(i), on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1.00%) of the gross proceeds received by the Company from the sale of the Securities.
(k) Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Disclosure Package and the Prospectus.
(l) Rule 158. The Company will timely file such reports pursuant to the Exchange Act as are necessary in order to make generally available to its security holders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, Rule 158(a) under Section 11(a) of the Securities Act.
(m) Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or shareholders (without the consent of the Representative) has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.
(n) Internal Controls. Except to the extent disclosed in the Registration Statement, Disclosure Package and Prospectus, for a period of thee (3) years after the date of this Agreement, the Company shall maintain a system of internal accounting controls designed to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(o) Accountants. The Company shall retain an independent registered public accounting firm reasonably acceptable to the Representative (it being understood that the Auditor is an independent registered public accounting firm that is reasonably acceptable to the Representative), and the Company shall continue to retain a nationally recognized independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement.
(p) FINRA. For a period of 90 days from the later of the Closing Date or the Option Closing Date (if any), the Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the Registration Statement is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
(q) Board Composition and Board Designations. For a period of three (3) years after the date of this Agreement, the Company shall ensure that: (i) the qualifications of the persons serving as Board members and the overall composition of the Board comply with the Sarbanes-Oxley Act and the rules promulgated thereunder and with the listing requirements of the Exchange and (ii) if applicable, at least one member of the Board qualifies as a “financial expert” as such term is defined under the Sarbanes-Oxley Act and the rules promulgated thereunder.
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(r) Securities Laws Disclosure; Pre-Closing Publicity. Prior to the Closing Date and any Option Closing Date, the Company shall not issue any press release or other communication directly or indirectly or hold any press conference with respect to the Company, its condition, financial or otherwise, or earnings, business affairs or business prospects (except for routine marketing communications in the ordinary course of business and consistent with the past practices of the Company and of which the Representative is notified), without the prior written consent of the Representative, which consent shall not be unreasonably withheld, unless in the judgment of the Company and its counsel, and after notification to the Representative, such press release or communication is required by law.
(s) No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual and commercial in nature, based on arms-length negotiations and that neither the Underwriters nor their affiliates or any selected dealer shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.
(t) Company Lock-Up Agreements. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of six (6) months after the date of this Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company (other than pursuant to a registration statement on Form S-8 for employee benefit plans or pursuant to registration rights disclosed or described in the Registration Statement, the Disclosure Package and the Prospectus); or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise. The restrictions contained in this section shall not apply to (i) the Securities and the Representative’s Warrant to be sold hereunder; (ii) the issuance by the Company of shares of Common Stock upon the exercise or vesting of an outstanding equity award, stock option or warrant or the conversion of a security outstanding on the date hereof and disclosed in the Registration Statement, the Disclosure Package or the Prospectus, (iii) the grant by the Company of stock options or other stock-based awards, or the issuance of shares of capital stock of the Company under any equity compensation plan or arrangement of the Company disclosed in the Registration Statement, the Disclosure Package or the Prospectus, or (iv) the issuance of securities in connection with mergers, acquisitions, joint ventures, licensing arrangements or any other similar non-capital raising transactions, which securities are “restricted securities” under the Securities Act and are not covered by any registration rights. Notwithstanding anything contained herein to the contrary, the Company shall be permitted to file any registration statement, supplement or amendment which is necessary or advisable in connection with the Company’s listing of Common Stock and/or Warrants on the Exchange without any lock-up, penalty, payment or other restriction or consequence set forth in this section.
(u) Blue Sky Qualifications. The Company shall use its commercially reasonable efforts, in cooperation with the Underwriters, if necessary, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
(v) Reporting Requirements. The Company, during the period when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations.
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(w) Sarbanes-Oxley. The Company shall at all times comply with all applicable provisions of the Sarbanes-Oxley Act in effect from time to time.
4. Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Securities, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and each Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:
(a) Regulatory Matters.
(i) Absence of Certain Commission Actions; Required Filings. At each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto shall have been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus shall have been issued and no proceedings for any of those purposes shall have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. A prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) under the Securities Act Regulations (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A under the Securities Act Regulations..
(ii) FINRA Clearance. On or before the date of this Agreement, the Representative shall have received correspondence from FINRA that it will raise no objection as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.
(iii) Stock Market Clearance. On or before the Closing Date, the Firm Shares and Firm Warrants, and on or before the Option Closing Date, the Option Securities, shall have been approved for listing on the Exchange.
(b) Company Counsel Matters. On the Closing Date and on each Option Closing Date (if any), the Representative shall have received the favorable opinion of Jackson Walker LLP, counsel to the Company, and a written statement providing certain “10b-5” negative assurances, dated the Closing Date and addressed to the Representative dated the Closing Date or Option Closing Date, as applicable, and addressed to the Representative, substantially in form and substance reasonably satisfactory to the Representative and Representative Counsel. In rendering such opinions, such counsel may rely, as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of the Company and officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company.
(c) Comfort Letters.
(i) Comfort Letter. Within 12 hours after the time this Agreement is executed the Representative shall have received a cold comfort letter containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Disclosure Package and the Prospectus, addressed to the Representative and in form and substance satisfactory in all respects to you and to Representative Counsel from the Auditor, dated such date.
(ii) Bring-down Comfort Letter. At the Closing Date and on each Option Closing Date (if any), the Representative shall have received from the Auditor a letter, dated as of the Closing Date or Option Closing Date, as applicable, to the effect that such Auditor reaffirms the statements made in the letter furnished pursuant to Section 4(c)(i), except that with respect to the initial comfort letter the specified date referred to shall be a date not more than three (3) Business Days prior to the Closing Date.
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(d) Officers’ Certificates.
(i) Officers’ Certificate. The Company shall have furnished to the Representative a certificate, dated the Closing Date or Option Closing Date, as applicable, of its Chairman and Chief Executive Officer, and its Chief Financial Officer stating that (A) such officers have carefully examined the Registration Statement, the Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as of the Applicable Time and as of the Closing Date or Option Closing Date, as applicable, did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Disclosure Package, as of the Applicable Time and as of the Closing Date, any Issuer Free Writing Prospectus as of its date and as of the Closing Date or Option Closing Date, as applicable, the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date or Option Closing Date, as applicable, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, (B) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Disclosure Package or the Prospectus, (C) to their knowledge after reasonable investigation, as of the Closing Date or Option Closing Date, as applicable, the representations and warranties of the Company in this Agreement are true and correct in all material respects (except for those representations and warranties qualified as to materiality, which shall be true and correct in all respects and except for those representations and warranties which refer to facts existing at a specific date, which shall be true and correct as of such date) and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date and any Option Closing Date (if such date is other than the Closing Date), and (D) there has not been, subsequent to the date of the most recent audited financial statements included in the Disclosure Package, any Material Adverse Change in the financial position or results of operations of the Company, or any change or development that, singularly or in the aggregate, would involve a Material Adverse Change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company, except as set forth in the Prospectus.
(ii) Secretary’s Certificate. At each of the Closing Date and any Option Closing Date, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date and Option Closing Date (if such date is other than the Closing Date), certifying: (A) that each of the Charter, Bylaws and similar governing documents is true and complete, has not been modified and is in full force and effect; (B) that the resolutions of the Board relating to the Offering are in full force and effect and have not been modified; (C) the good standing and foreign qualification of the Company; and (D) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.
(e) No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date: (i) there shall have been no Material Adverse Change or development involving a prospective Material Adverse Change in the condition or the business activities, financial or otherwise, of the Company or any subsidiary of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding would reasonably be expected to result in a Material Adverse Change, except as set forth in the Registration Statement, the Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(f) No Material Misstatement or Omission. The Underwriters shall not have discovered and disclosed to the Company on or prior to the Closing Date and any Option Closing Date that the Registration Statement or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Representative Counsel, is material or omits to state any fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Registration Statement, the Disclosure Package, any Issuer Free Writing Prospectus or the Prospectus or any amendment or supplement thereto contains an untrue statement of fact which, in the opinion of such counsel, is material or omits to state any fact which, in the opinion of such counsel, is material and is necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.
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(g) [Intentionally Omitted]
(h) Delivery of Agreements.
(i) Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.
(ii) Representative’s Warrant. On the Closing Date, the Company shall have delivered to the Representative an executed copy of the Representative’s Warrant.
(i) Additional Documents. At the Closing Date and on each Option Closing Date (if any), Representative Counsel shall have been furnished with such documents and opinions as they may require for the purpose of enabling Representative Counsel to deliver an opinion to the Underwriters, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities (as applicable) and the Representative’s Securities as herein contemplated shall be satisfactory in form and substance to the Representative and Representative Counsel.
5. Indemnification.
| (a) | Indemnification of the Underwriters. |
(i) General. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, agents employees, affiliates, agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each an “Underwriter Indemnified Party”), against any loss (excluding loss of profits), liability, claim, damage and expense (including the reasonable, documented out of pocket fees and expenses of counsel for the Underwriter Indemnified Parties incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries (a “Claim”), arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in (A) the Registration Statement, the Disclosure Package, the Preliminary Prospectus, the Prospectus or any Issuer Free Writing Prospectus (as from time to time each may be amended and supplemented); (B) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (C) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Securities and Representative’s Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; unless such statement or omission was made in reliance upon, and in conformity with, the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Registration Statement, Disclosure Package or Prospectus, the indemnity agreement contained in this Section 5(a)(i) shall not inure to the benefit of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Shares to such person as required by the Securities Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof. The
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Company also agrees that it will reimburse each Underwriter Indemnified Party for all reasonable, documented out-of-pocket fees and expenses (including the reasonable, documented out of pocket fees and expenses of counsel for the Underwriter Indemnified Parties) (collectively, the “Expenses”), and further agrees to advance payment of Expenses as they are incurred by an Underwriter Indemnified Party in investigating, preparing, pursuing or defending any Claim in which it is determined that the Underwriter Indemnified Party is entitled to indemnification hereunder, provided, further, that the Underwriter Indemnified Party shall repay any advanced Expenses to the extent it ultimately is determined that such persons are not entitled to indemnification hereunder.
(ii) Procedure. If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may reasonably be sought against the Company pursuant to Section 5(a)(i), such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel reasonably satisfactory to such Underwriter Indemnified Party. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter Indemnified Party unless the Company has failed promptly to assume the defense and employ counsel for the benefit of the Underwriter Indemnified Persons or such Underwriter Indemnified Person shall have been advised that in the opinion of counsel that there is an actual conflict of interest that prevents the counsel designated by the Company and approved by the Underwriters and engaged by the Company for the purpose of representing the Underwriter Indemnified Party, to represent both such Underwriter Indemnified Party and any other person requested or proposed to requested by such counsel. The Company shall not be liable for the fees and expenses of more than one separate counsel, representing all Underwriter Indemnified Parties who are parties to such action, which counsel for the Underwriter Indemnified Parties shall be selected by the Representative, subject to the Company’s approval (which shall not be unreasonably withheld). The Company shall not be liable for any settlement of any action effected without its prior written consent (which shall not be unreasonably withheld). In addition, the Company shall not, without the prior written consent of the Underwriters (which consent shall not be unreasonably withheld), settle, compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action in respect of which advancement, reimbursement, indemnification or contribution may be sought hereunder (whether or not such Underwriter Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination (i) includes an unconditional release of each Underwriter Indemnified Party, acceptable to such Underwriter Indemnified Party, from all liabilities, expenses and claims arising out of such action for which indemnification or contribution may be sought and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any Underwriter Indemnified Party.
(b) Indemnification of the Company. Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to such losses, liabilities, claims, damages and expenses (or actions in respect thereof) which arise out of or are based upon untrue statements or omissions, or alleged untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus Supplement, the Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in conformity with, the Underwriters’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus Supplement, the Registration Statement, the Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5(a)(ii). The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Securities or in connection with the Registration Statement, the Disclosure Package or the Prospectus.
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(c) Contribution.
(i) Contribution Rights. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5(a) or 5(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, from the Offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total net proceeds from the Offering of the Shares purchased under this Agreement (before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the Shares purchased under this Agreement, as set forth in the table on the cover page of the Prospectus, on the other hand. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 5(c)(i) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 5 shall be deemed to include, for purposes of this Section 5(c)(i), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5(c)(i) in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the Offering of the Shares exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
(ii) Contribution Procedure. Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (“contributing party”), notify the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder, except to the extent the contributing party is materially prejudiced as a result of such failure. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid 15 days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section 5(c) are intended to supersede, to the extent permitted by law, any right to contribution under the Securities Act, the Exchange Act or otherwise available. Each Underwriter’s obligations to contribute pursuant to this Section 5(c) are several and not joint.
6. Default by an Underwriter.
(a) Default Not Exceeding 10% of Firm Securities. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Securities, and if the number of the Firm Securities with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Securities that all Underwriters have agreed to purchase hereunder, then such Firm Securities to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.
(b) Default Exceeding 10% of Firm Securities. In the event that the default addressed in Section 6(a) relates to more than 10% of the Firm Securities, the Representative may in its discretion arrange for themselves or for another party or parties to purchase such Firm Securities to which such default relates on the terms contained herein.
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If, within one (1) Business Day after such default relating to more than 10% of the Firm Securities, the Representative does not arrange for the purchase of such Firm Securities, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties satisfactory to the Representative to purchase said Firm Securities on such terms. In the event that neither the Representative nor the Company arrange for the purchase of the Firm Securities to which a default relates as provided in this Section 6, this Agreement will automatically be terminated by the Representative or the Company without liability on the part of the Company (except as provided in Sections 3(k) and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided that if any such default occurs with respect to any Option Securities, this Agreement will not terminate in respect of the Firm Securities; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.
(c) Postponement of Closing Date. In the event that the Firm Securities to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representative or the Company shall have the right to postpone the Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Disclosure Package or the Prospectus that in the opinion of Representative Counsel may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such Securities.
7. Additional Covenants.
(a) [Intentionally Omitted].
(b) [Intentionally Omitted].
(c) [Intentionally Omitted].
(d) [Intentionally Omitted].
8. Effective Date of this Agreement and Termination Thereof.
(a) Effective Date. This Agreement shall become effective when both the Company and the Representative have executed the same and delivered counterparts of such signatures to the other party.
(b) Termination. The Representative shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in Representative’s reasonable opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or The Nasdaq Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in Representative’s reasonable opinion, make it inadvisable to proceed with the delivery of the Firm Securities; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) if the Representative shall have become aware after the date hereof of such a Material Adverse Change in the conditions of the Company, or such adverse material change in general market conditions as in the Representative’s reasonable judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Securities or to enforce contracts made by the Underwriters for the sale of the Securities. Either party shall have the right to terminate this Agreement if the Closing Date does not occur within twenty (20) Business Days of the date of this Agreement. Section 5 of this Agreement shall survive any termination of this Agreement.
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(c) Expenses. Except in the case of a default by the Underwriters pursuant to Section 6(b) above, and subject to the limitations set forth in Section 3(j)(i), in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the Representative Legal Expenses) and upon demand the Company shall pay the full amount thereof to the Representative on behalf of the Underwriters (less any amounts previously advanced to the Representative) up to $125,000; provided, however, that this in no way limits or impairs the indemnification and contribution provisions of this Agreement. Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).
(d) Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.
(e) Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Securities.
9. Miscellaneous.
(a) Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), or personally delivered and shall be deemed given when so delivered or if mailed, two (2) days after such mailing.
If to the Representative:
The Benchmark Company, LLC
150 East 58th St., 17th Floor
New York, NY 10155
Attention: John J. Borer III
with copies to:
Mitchell Silberberg & Knupp LLP
437 Madison Ave., 25th Floor
New York, NY 10022
Attention: Andrea Cataneo, Esq.
If to the Company:
Heart Test Laboratories, Inc.
550 Reserve St, Suite 360
Southlake, Texas 76092
Attention: Andrew Simpson
with copies to:
Jackson Walker LLP
2323 Ross Avenue, Suite 600
Dallas, Texas 75201-2725
Attention: Richard F. Dahlson
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(b) Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.
(c) Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.
(d) Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. Notwithstanding anything to the contrary set forth herein, it is understood and agreed by the parties hereto that all other terms and conditions of that certain engagement letter between the Company and Representative, dated as of April 19, 2021 shall remain in full force and effect.
(e) Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, each Indemnified Person referred to in Section 5, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.
(f) Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. Each party hereto hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon a party hereto may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9(a) hereof. Such mailing shall be deemed personal service and shall be legal and binding upon such party in any action, proceeding or claim. Each party hereto agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. Each of the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its shareholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
(g) Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by email/pdf transmission shall constitute valid and sufficient delivery thereof.
(h) Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
[Signature Page Follows]
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If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below.
| Very truly yours, | ||
| HEART TEST LABORATORIES, INC. | ||
| By: |
| |
| Name: | ||
| Title: | ||
Confirmed as of the date first written above mentioned, on behalf of itself and as Representative of the several Underwriters named on Schedule 1 hereto:
| THE BENCHMARK COMPANY, LLC | ||
| By: |
| |
| Name: John J. Borer III | ||
| Title: Senior Managing Director | ||
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SCHEDULE 1
| Underwriter | Total Number Firm |
Number of Option Securities to be Purchased if the Over- Allotment Option is Fully Exercised |
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| The Benchmark Company, LLC |
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| Total: |
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Sch. 1
SCHEDULE 2-A
Pricing Information
Number of Firm Shares: 1,750,000
Number of Firm Warrants: 1,750,000
Number of Option Shares:
Number of Option Warrants:
Public Offering Price per one Firm Share and one Warrant:
Underwriting Discount per one Firm Share and one Warrant:
Price per Option Share:
Underwriting Discount per Option Share:
Price per Option Warrant: $0.01
Underwriting Discount per Option Warrant: $0.0093 (7.0%)
Underwriting Non-accountable expense allowance per Share and Warrant:
Sch. 2-A
SCHEDULE 2-B
Issuer General Use Free Writing Prospectuses
Sch. 2-B
SCHEDULE 3
List of Lock-Up Parties
Directors and Officers:
Andrew Simpson
Brian Szymczak
Bruce Bent
Mark Hilz
Patrick Kanouff
Danielle Watson
Certain Holders of the Company’s Securities:
See attached.
Sch. 3
Exhibit 4.8
Representative’s Warrant Agreement
THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE, OR BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THIS PURCHASE WARRANT OR THE UNDERLYING SECURITIES FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS IMMEDIATELY FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE, OR BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF, THIS PURCHASE WARRANT OR THE UNDERLYING SECURITIES FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS IMMEDIATELY FOLLOWING THE EFFECTIVE DATE TO ANYONE OTHER THAN (I) THE BENCHMARK COMPANY, LLC OR ANY UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF THE BENCHMARK COMPANY, LLC, OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER.
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [ ] [ ], 2022. VOID AFTER 5:00 P.M., EASTERN TIME, [ ] [ ], 2027.
WARRANT TO PURCHASE COMMON STOCK
HEART TEST LABORATORIES, INC.
| Warrant Shares: | Initial Issuance Date: [ ] [ ], 2022 | |
| Initial Exercise Date: [ ] [ ], 2022 |
THIS WARRANT TO PURCHASE COMMON STOCK (the “Warrant”) certifies that, for value received, The Benchmark Company, LLC, or its assigns (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after [ ] [ ], 20221 (the “Initial Exercise Date”) and, in accordance with FINRA Rule 5110(f)(2)(G)(i), prior to [ ] [ ], 20272 at 5:00 p.m. (New York time) (the “Termination Date”) but not thereafter, to subscribe for and purchase from HEART TEST LABORATORIES, INC., a Texas corporation (the “Company”), up to [______] shares of common stock, par value $0.001 per share (“Common Stock”), of the Company (the “Warrant Shares”), as subject to adjustment hereunder. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
Section 1. Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms have the meanings indicated in this Section 1:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of a share of Common Stock for such date (or the nearest preceding date) on the OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on the OTCQB or OTCQX and if prices for the Common Stock are then reported on the OTC Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of Common Stock so reported, or (d) in all other cases, the fair market value of the Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
| 1 | Date that is six (6) months from the effective date of the offering. |
| 2 | Date that is five (5) years from the effective date of the offering. |
“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed; provided that banks shall not be deemed to be authorized or obligated to be closed due to a “shelter in place,” “non-essential employee” or similar closure of physical branch locations at the direction of any governmental authority if such banks’ electronic funds transfer systems (including for wire transfers) are open for use by customers on such day.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock Equivalents” means any securities of the Company that would entitle the holder thereof to acquire Common Stock.
“Effective Date” means the effective date of the registration statement on Form S-1, as amended (File No. 333- 265024) (the “IPO Registration Statement”), pursuant to which this Warrant is initially issued.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Trading Day” means a day on which the New York Stock Exchange is open for trading.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of a share of Common Stock for such date (or the nearest preceding date) on the OTCQB or OTCQX as applicable, (c) if Common Stock is not then listed or quoted for trading on the OTCQB or OTCQX and if prices for the Common Stock are then reported on the OTC Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date), or (d) in all other cases, the fair market value of the Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
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Section 2. Exercise.
a) Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise Form annexed hereto. Within two (2) Trading Days following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within five (5) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two (2) Business Days of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
b) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $[____], subject to adjustment hereunder (the “Exercise Price”).
c) Cashless Exercise. In lieu of exercising this Warrant by payment by wire transfer or cashier’s check pursuant to Section 2(a) above, this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive the number of Warrant Shares EQUAL to the quotient obtained by dividing [(A-B) (X)] by (A), where:
| (A) = | as applicable: (i) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b)(64) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) at the option of the Holder, either (x) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise or (y) the Bid Price of the Common Stock on the principal Trading Market as reported by Bloomberg L.P. as of the time of the Holder’s execution of the applicable Notice of Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within two (2) hours thereafter (including until two (2) hours after the close of “regular trading hours” on a Trading Day) pursuant to Section 2(a) hereof, which Bid Price shall be shown on supporting documents provided by the Holder to the Company within two (2) Trading Days of delivery of the Notice of Exercise or (iii) the VWAP on the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2(a) hereof after the close of “regular trading hours” on such Trading Day; |
| (B) = | the Exercise Price of this Warrant, as adjusted hereunder; and |
| (X) = | the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise. |
If Warrant Shares are issued in such a “cashless exercise,” the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares. The Company agrees not to take any position contrary to this Section 2(c).
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d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by its transfer agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144 and, in either case, the Warrant Shares have been sold by the Holder prior to the Warrant Share Delivery Date (as defined below), and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is two (2) Trading Days after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). If the Warrant Shares can be delivered via DWAC, the transfer agent shall have received from the Company, at the expense of the Company, any legal opinions or other documentation required by it to deliver such Warrant Shares without legend (subject to receipt by the Company of reasonable back up documentation from the Holder, including with respect to affiliate status) and, if applicable and requested by the Company prior to the Warrant Share Delivery Date, the transfer agent shall have received from the Holder a confirmation of sale of the Warrant Shares (provided the requirement of the Holder to provide a confirmation as to the sale of Warrant Shares shall not be applicable to the issuance of unlegended Warrant Shares upon a cashless exercise of this Warrant if the Warrant Shares are then eligible for resale pursuant to Rule 144(b)(1)). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi) prior to the issuance of such shares, having been paid. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the second Trading Day following the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after the second Trading Day following such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise.
ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause its transfer agent to deliver to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise; provided, however, that the Holder shall be required to return any Warrant Shares or Common Stock subject to any such rescinded exercise notice concurrently with the return to Holder of the aggregate Exercise Price paid to the Company for such Warrant Shares and the restoration of Holder’s right to acquire such Warrant Shares pursuant to this Warrant (including, issuance of a replacement warrant certificate evidencing such restored right).
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause its transfer agent to transmit to the Holder the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total
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purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either (a) pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or (b) round up to the next whole share if such fraction is greater than or equal to one-half or round down to the next whole share if such fraction is less than one-half.
vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all transfer agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
vii. Closing of Books. The Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
viii. Signature. This Section 2 and the exercise form attached hereto set forth the totality of the procedures required of the Holder in order to exercise this Purchase Warrant. Without limiting the preceding sentences, no ink-original exercise form shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any exercise form be required in order to exercise this Purchase Warrant. No additional legal opinion, other information or instructions shall be required of the Holder to exercise this Purchase Warrant. The Company shall honor exercises of this Purchase Warrant and shall deliver Shares underlying this Purchase Warrant in accordance with the terms, conditions and time periods set forth herein.
e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of
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its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon (A) exercise of this Warrant or (B) exercise, conversion or exchange of options, warrants, preferred stock, convertible notes, other convertible securities or other Common Stock Equivalents), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. For the purposes of clarification, neither the Exercise Price of this Warrant nor the number of shares issuable upon exercise of this Warrant will be adjusted in the event that the Company or any Subsidiary thereof, as applicable, sells or grants any option to purchase, or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents.
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b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
c) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend (other than cash dividends) or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of shares or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). To the extent that this Warrant has not been partially or completely exercised at the time of such Distribution, such portion of the Distribution shall be held in abeyance for the benefit of the Holder until the Holder has exercised this Warrant.
d) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder
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(without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable by holders of Common Stock as a result of such Fundamental Transaction for each share of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.
e) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
f) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any shareholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed a notice to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be
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taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to provide such notice or any defect therein shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
Section 4. Transfer of Warrant.
a) Transferability. Pursuant to FINRA Rule 5110(e)(1), neither this Warrant nor any Warrant Shares issued upon exercise of this Warrant shall be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the Effective Date or commencement of sales of the offering pursuant to which this Warrant is being issued, except the transfer of any security:
i. by operation of law or by reason of reorganization of the Company;
ii. to any FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction in this Section 4(a) for the remainder of the time period;
iii. if the aggregate amount of securities of the Company held by the Holder proposing to make such transfer, or related persons of such Holder, does not exceed 1% of the securities offered pursuant to the IPO Registration Statement;
iv. that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity in the fund; or
v. upon the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction in this Section 4(a) for the remainder of the time period.
Subject to the foregoing restriction, any applicable securities laws and the conditions set forth in Section 4(d), this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
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b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
d) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.
Section 5. Registration Rights.
a) “Piggy-Back” Registration.
i. Grant of Right. The Holder shall have the right, for a period of no more than three (3) years from the Initial Exercise Date in compliance with FINRA Rule 5110(f)(2)(G)(v), to include the unissued Warrant Shares (for purposes of this Section 5, the “Registrable Securities”) as part of any other registration of securities filed by the Company (other than (a) in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act, (b) pursuant to Form S-8 or any equivalent form or (c) a registration statement filed pursuant to registration rights described in the IPO Registration Statement); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of Shares which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders (in the event there are multiple Holders) seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.
ii. Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 5(a)(i) hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company during the three (3) year period following the Initial Exercise Date until such time as all of the Registrable Securities have been sold by the Holder. The Holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 5(a)(ii); provided, however, that such registration rights shall terminate on the third (3rd) anniversary of the Initial Exercise Date.
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b) General Terms.
i. Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20 (a) of the Exchange Act against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5(a) of the underwriting agreement, dated June [ ], 2022, by and between the Company and The Benchmark Company, LLC, as representative of the underwriters set forth therein (the “Underwriting Agreement”). The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5(b) of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.
ii. Exercise of Warrants. Nothing contained in this Warrant shall be construed as requiring the Holder(s) to exercise their Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.
iii. Documents Delivered to Holders. The Company shall furnish to each Holder participating in any of the foregoing offerings and to each underwriter of any such offering, if any, a signed counterpart, addressed to such Holder or underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.
iv. Underwriting Agreement. The Company shall enter into an underwriting agreement with the managing underwriter(s), if any, selected by the Company, which managing underwriter shall be reasonably satisfactory to the Holders. Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Warrant Shares and their intended methods of distribution, as well as customary agreements regarding indemnification and contribution.
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v. Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.
vi. Damages. Should the registration or the effectiveness thereof required by Sections 5(a) hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to obtain specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.
Section 6. Miscellaneous.
a) No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a shareholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i).
b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
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Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Underwriting Agreement.
f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Underwriting Agreement, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Underwriting Agreement.
i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
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(Signature Page Follows)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
| HEART TEST LABORATORIES, INC. | ||
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NOTICE OF EXERCISE
| TO: | HEART TEST LABORATORIES, INC. |
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3) Please register and issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:
(4) Accredited Investor. If the Warrant is being exercised via cash exercise, the undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
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ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________ whose address is
Dated: ______________, _______
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NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
Exhibit 4.9
WARRANT AGENT AGREEMENT
WARRANT AGENT AGREEMENT (this “Warrant Agreement”) dated as of [•] [•], 2022 (the “Issuance Date”) between Heart Test Laboratories, Inc., a Texas corporation (the “Company”), and American Stock Transfer & Trust Company, a [•] (the “Warrant Agent”).
WHEREAS, pursuant to the terms of that certain Underwriting Agreement (“Underwriting Agreement”), dated [•] [•], 2022, by and between the Company and The Benchmark Company, LLC, as representative of the underwriters set forth therein, the Company is engaged in a public offering (the “Offering”) of up to [•] units (the “Units”), each unit consisting of one share, (each, a “Share” and collectively, the “Shares”) of common stock, par value $0.001 per share (the “Common Stock”) of the Company, and one Warrant (each, a “Warrant” and collectively the “Warrants”) to purchase one share of Common Stock (each, a “Warrant Share” and collectively the “Warrant Shares”), including up to [•] Shares and Warrants to purchase up to [•] Warrant Shares issuable pursuant to the underwriters’ over-allotment option;
WHEREAS, the Company has filed with the Securities and Exchange Commission (the “Commission”) a Registration Statement Form S-1 (File No. 333-265024) (as the same may be amended from time to time, the “Registration Statement”), for the registration under the Securities Act of 1933, as amended (the “Securities Act”), of Units, the Shares, the Warrants, and the Warrant Shares, and such Registration Statement was declared effective by the Commission on [•] [•], 2022;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in accordance with the terms set forth in this Warrant Agreement in connection with the issuance, registration, transfer, exchange and exercise of the Warrants;
WHEREAS, the Company desires to provide for the provisions of the Warrants, the terms upon which they shall be issued and exercised, and the respective rights, limitation of rights, and immunities of the Company, the Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which are necessary to make the Warrants the valid, binding and legal obligations of the Company, and to authorize the execution and delivery of this Warrant Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company with respect to the Warrants, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with the express terms and conditions set forth in this Warrant Agreement (and no implied terms or conditions).
2. Warrants.
2.1 Form of Warrants. The Warrants shall be registered securities and shall be initially evidenced by a global Warrant certificate (“Global Certificate”) in the form of Annex A to this Warrant Agreement, which shall be deposited on behalf of the Company with a custodian for The Depository Trust Company (“DTC”) and registered in the name of Cede & Co., a nominee of DTC. If DTC subsequently ceases to make its settlement system available for the Warrants, the Company may instruct the Warrant Agent regarding making arrangements for book-entry settlement. In the event that the Warrants are not eligible for registration, or it is no longer necessary to have the Warrants available, in the name of Cede & Co., a nominee of DTC, the Company may instruct the Warrant Agent to provide written instructions to DTC to deliver to the Warrant Agent for cancellation the Global Certificate, and the Company shall instruct the Warrant Agent to deliver to each Holder (as defined below) separate certificates evidencing Warrants (“Definitive Certificates” and, together with the Global Certificate, “Warrant Certificates”), in the form of Annex C to this Warrant Agreement. The Warrants represented by the Global Certificate are referred to as “Global Warrants.”
2.2 Issuance and Registration of Warrants.
2.2.1 Warrant Register. The Warrant Agent shall maintain books (the “Warrant Register”) for the registration of original issuance and the registration of transfer of the Warrants.
2.2.2 Issuance of Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue the Global Certificate and deliver the Warrants in the DTC settlement system in accordance with written instructions delivered to the Warrant Agent by the Company. Ownership of beneficial interests in the Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained (i) by DTC and (ii) by institutions that have accounts with DTC (each, a “Participant”), subject to a Holder’s right to elect to receive a Warrant in certificated form in the form of Annex C to this Warrant Agreement. Any Holder desiring to elect to receive a Warrant in certificated form shall make such request in writing delivered to the Warrant Agent pursuant to Section 2.2.8, and shall surrender to the Warrant Agent the interest of the Holder on the books of the Participant evidencing the Warrants which are to be represented by a Definitive Certificate through the DTC settlement system. Thereupon, the Warrant Agent shall countersign and deliver to the person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested.
2.2.3 Beneficial Owner; Holder. Prior to due presentment for registration of transfer of any Warrant, the Company and the Warrant Agent may deem and treat the person in whose name that Warrant shall be registered on the Warrant Register (the “Holder”) as the absolute owner of such Warrant for purposes of any exercise thereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Warrant Agent or any agent of the Company or the Warrant Agent from giving effect to any written certification, proxy or other authorization furnished by DTC governing the exercise of the rights of a holder of a beneficial interest in any Warrant. The rights of beneficial owners in a Warrant evidenced by the Global Certificate shall be exercised by the Holder or a Participant through the DTC system, except to the extent set forth herein or in the Global Certificate.
2.2.4 Execution. The Warrant Certificates shall be executed on behalf of the Company by any authorized officer of the Company (an “Authorized Officer”), which need not be the same authorized signatory for all of the Warrant Certificates, either manually or by facsimile signature. The Warrant Certificates shall be countersigned by an authorized signatory of the Warrant Agent, which need not be the same signatory for all of the Warrant Certificates, and no Warrant Certificate shall be valid for any purpose unless so countersigned. In case any Authorized Officer of the Company that signed any of the Warrant Certificates ceases to be an Authorized Officer of the Company before countersignature by the Warrant Agent and issuance and delivery by the Company, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be an Authorized Officer of the Company authorized to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such an Authorized Officer.
2.2.5 Registration of Transfer. At any time at or prior to the Expiration Date (as defined below), a transfer of any Warrants may be registered and any Warrant Certificate or Warrant Certificates may be split up, combined or exchanged for another Warrant Certificate or Warrant Certificates evidencing the same number of Warrants as the Warrant Certificate or Warrant Certificates surrendered. Any Holder desiring to register the transfer of Warrants or to split up, combine or exchange any Warrant Certificate shall make such request in writing delivered to the Warrant Agent, and shall surrender to the Warrant Agent the Warrant Certificate or Warrant Certificates evidencing the Warrants the transfer of which is to be registered or that is or are to be split up, combined or exchanged. Thereupon, the Warrant Agent shall countersign and deliver to the person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested. The Warrant Agent may require reasonable and customary payment, by the Holder requesting a registration of transfer of Warrants or a split-up, combination or exchange of a Warrant Certificate (but, for purposes of clarity, not upon the exercise of the Warrants and issuance of Warrant Shares to the Holder), of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with such registration of transfer, split-up, combination or exchange, together with reimbursement to the Warrant Agent of all reasonable expenses incidental thereto.
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2.2.6 Loss, Theft and Mutilation of Warrant Certificates. Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security in customary form and amount (which shall in no event include the posting of any bond by any institutional investor that holds a Definitive Certificate), and reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto, and upon surrender to the Warrant Agent and cancellation of the Warrant Certificate if mutilated, the Warrant Agent shall, on behalf of the Company, countersign and deliver a new Warrant Certificate of like tenor to the Holder in lieu of the Warrant Certificate so lost, stolen, destroyed or mutilated. The Warrant Agent may charge the Holder an administrative fee for processing the replacement of lost Warrant Certificates, which shall be charged only once in instances where a single surety bond obtained covers multiple certificates. The Warrant Agent may receive compensation from the surety companies or surety bond agents for administrative services provided to them.
2.2.7 Proxies. The Holder of a Warrant may grant proxies or otherwise authorize any person, including the Participants and beneficial holders that may own interests through the Participants, to take any action that a Holder is entitled to take under this Agreement or the Warrants; provided, however, that at all times that Warrants are evidenced by a Global Certificate, exercise of those Warrants shall be effected on their behalf by Participants through DTC in accordance the procedures administered by DTC.
2.2.8 Warrant Certificate Request. A Holder has the right to elect at any time or from time to time a Warrant Exchange (as defined below) pursuant to a Warrant Certificate Request Notice (as defined below). Upon written notice by a Holder to the Warrant Agent for the exchange of some or all of such Holder’s Global Warrants for a Definitive Certificate evidencing the same number of Warrants, which request shall be in the form attached hereto as Annex E (a “Warrant Certificate Request Notice” and the date of delivery of such Warrant Certificate Request Notice by the Holder, the “Warrant Certificate Request Notice Date” and the deemed surrender upon delivery by the Holder of a number of Global Warrants for the same number of Warrants evidenced by a Definitive Certificate, a “Warrant Exchange”), the Warrant Agent shall promptly effect the Warrant Exchange and shall promptly issue and deliver to the Holder a Definitive Certificate for such number of Warrants in the name set forth in the Warrant Certificate Request Notice. Such Definitive Certificate shall be dated the original issue date of the Warrants, shall be manually executed by an authorized signatory of the Company, shall be in the form attached hereto as Annex C, and shall be reasonably acceptable in all respects to such Holder. In connection with a Warrant Exchange, the Company agrees to deliver, or to direct the Warrant Agent to deliver, the Definitive Certificate to the Holder within three (3) Trading Days of the Warrant Certificate Request Notice pursuant to the delivery instructions in the Warrant Certificate Request Notice (“Warrant Certificate Delivery Date”). If the Company fails for any reason to deliver to the Holder the Definitive Certificate subject to the Warrant Certificate Request Notice by the Warrant Certificate Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares evidenced by such Definitive Certificate (based on the VWAP (as defined in the Warrants) of the Common Stock on the Warrant Certificate Request Notice Date), $10 per Business Day for each Business Day after such Warrant Certificate Delivery Date until such Definitive Certificate is delivered or, prior to delivery of such Warrant Certificate, the Holder rescinds such Warrant Exchange. The Company covenants and agrees that, upon the date of delivery of the Warrant Certificate Request Notice, the Holder shall be deemed to be the holder of the Definitive Certificate and, notwithstanding anything to the contrary set forth herein, the Definitive Certificate shall be deemed for all purposes to contain all of the terms and conditions of the Warrants evidenced by such Warrant Certificate and the terms of this Agreement, other than Sections 3(c) and 9 herein, shall not apply to the Warrants evidenced by the Definitive Certificate.
2.2.9 Terms of the Warrant. The terms of the Warrants are set forth in the form of the Definitive Certificate attached hereto as Annex C, which form is incorporated by reference into this Warrant Agreement. If there is any discrepancy between any Section of this Warrant Agreement or the Global Certificate applicable to the Warrants and the form of Definitive Certificate attached hereto as Annex C, the form of Definitive Certificate shall govern and control.
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3. Terms and Exercise of Warrants.
3.1 Exercise Price. Each Warrant shall entitle the Holder, subject to the provisions of the applicable Warrant Certificate and of this Warrant Agreement, to purchase from the Company the number of shares of Common Stock stated therein, at the price of $[•] per whole share, subject to the subsequent adjustments provided by Section 3 of the Warrant Certificate. The term “Exercise Price” as used in this Warrant Agreement refers to the price per share at which shares of Common Stock may be purchased at the time a Warrant is exercised.
3.2 Duration of Warrants. Warrants may be exercised only during the period (“Exercise Period”) commencing on the Issuance Date and terminating at 5:00 P.M., New York City time (the “close of business”) on [•][•], 2027 (“Expiration Date”), unless the Expiration Date is not a Business Day, in which case the Expiration Date will be the next Business Day. Each Warrant not exercised on or before the Expiration Date shall become void, and all rights thereunder and all rights in respect thereof under this Warrant Agreement shall cease at the close of business on the Expiration Date.
3.3 Exercise of Warrants.
3.3.1 Exercise and Payment. Subject to the provisions of this Warrant Agreement, a Holder (or a Participant or a designee of a Participant acting on behalf of a Holder) may exercise the purchase rights represented by the Warrants, in whole or in part, at any time or times on or before the Expiration Date by delivering to the Warrant Agent, a duly executed facsimile copy or PDF copy submitted by e-mail (or e-mail attachment) of the Notice of Exercise in the form annexed as Annex B hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 3.3.7 below is specified in the applicable Notice of Exercise. Notwithstanding any other provision in this Agreement, a holder whose interest in a Global Warrant is a beneficial interest in a Global Certificate held in book-entry form through the DTC (or another established clearing corporation performing similar functions), shall effect exercises by delivering to the DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, and complying with the procedures to effect exercise that are required by the DTC (or such other clearing corporation, as applicable). The Company acknowledges that the bank accounts maintained by the Warrant Agent in connection with the services provided under this Agreement will be in its name and that the Warrant Agent may receive investment earnings in connection with the investment at the Warrant Agent’s sole risk and for its sole benefit of funds held in those accounts from time to time. Neither the Company nor the Holders will receive interest on any deposits or Exercise Price. The “Exercise Date” will be the first Business Day on which the materials in the foregoing sentence are received by the Warrant Agent (if by 5:00 P.M., New York City time), or the following Trading Day (if after 5:00 P.M., New York City time), regardless of any earlier date written on the materials. If the materials discussed in this Section 3.3.1 are received or deemed to be received after the Expiration Date, the exercise thereof will be null and void and any funds delivered to the Company will be returned to the Holder or Participant, as the case may be, as soon as practicable. In no event will interest accrue on any funds deposited with the Warrant Agent or the Company in respect of an exercise or attempted exercise of the Warrants.
3.3.2 Issuance of Warrant Shares.
(a) The Warrant Agent shall on the Trading Day following the Exercise Date of any Warrant, advise the Company, the transfer agent and registrar for the Company’s Common Stock, in respect of (i) the number of Warrant Shares indicated on the Notice of Exercise as issuable upon such exercise with respect to such exercised Warrants, (ii) the instructions of the Holder or Participant, as the case may be, provided to the Warrant Agent with respect to the delivery of the Warrant Shares and the number of Warrants that remain outstanding after such exercise and (iii) such other information as the Company or such transfer agent and registrar shall reasonably request.
(b) Upon the Warrant Agent’s receipt, at or prior to the close of business on the Expiration Date, of the executed Notice of Exercise, accompanied by payment of the Exercise Price pursuant to Section 2(b) of the Warrant Certificate (other than in the case of a Cashless Exercise), the Warrant Agent shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company
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through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise no later than the Warrant Share Delivery Date.
3.3.3 Valid Issuance. All Warrant Shares issued by the Company upon the proper exercise of a Warrant in conformity with this Warrant Agreement shall be validly issued, fully paid and non-assessable.
3.3.4 No Fractional Exercise. No fractional Warrant Shares will be issued upon the exercise of the Warrant. As to any fraction of a share which a Holder would otherwise be entitled to purchase upon such exercise, the Company shall round up or down, as applicable, to the nearest whole Warrant Share to be issued to such Holder.
3.3.5 Charges, Taxes, and Expenses. Issuance of Warrant Shares shall be made without charge to a Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of a Holder or in such name or names as may be directed by a Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of a Holder, the Warrant, when surrendered for exercise, shall be accompanied by the Assignment Form attached to the Warrant duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to DTC (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
3.3.6 Date of Issuance. The Company will treat an exercising Holder as a beneficial owner of the Warrant Shares as of the Exercise Date of any Warrant, except that, if such date is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the open of business on the next succeeding date on which the stock transfer books are open.
3.3.7 Restrictive Legend Events; Cashless Exercise Under Certain Circumstances.
(a) The Company shall use its reasonable best efforts to maintain the effectiveness of the Registration Statement and the current status of the prospectus included therein or to file and maintain the effectiveness of another registration statement and another current prospectus covering the Warrants and the Warrant Shares at any time that the Warrants are exercisable. The Company shall provide to the Warrant Agent and each Holder prompt written notice of any time that the Company is unable to deliver the Warrant Shares via DTC transfer or otherwise without restrictive legend because (A) the Commission has issued a stop order with respect to the Registration Statement, (B) the Commission otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, (C) the Company has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, (D) the prospectus contained in the Registration Statement is not available for the issuance of the Warrant Shares to the Holder or (E) otherwise (each a “Restrictive Legend Event”). To the extent that the Warrants cannot be exercised as a result of a Restrictive Legend Event or a Restrictive Legend Event occurs after a Holder has exercised Warrants in accordance with the terms of the Warrants but prior to the delivery of the Warrant Shares, the Company shall, at the election of the Holder, upon five (5) days of receipt of such notice of the Restrictive Legend Event, either (A) rescind the previously submitted Election to Purchase and the Company shall return all consideration paid by such Holder upon such rescission or (B) treat the attempted exercise as a cashless exercise as described in paragraph (b) below and refund the cash portion of the exercise price to the Holder.
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(b) If a Restrictive Legend Event has occurred, the Warrant may be exercisable on a cashless basis pursuant to Section 2(c) of the Warrant Certificate. Notwithstanding anything herein to the contrary, the Company shall not be required to make any cash payments or net cash settlement to the Holder in lieu of delivery of the Warrant Shares. If the Warrant Shares are issued in such a cashless exercise, the Company acknowledges and agrees that, in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised and the Company agrees not to take any position contrary thereto. Upon receipt of a Notice of Exercise for a cashless exercise, the Warrant Agent will promptly deliver a copy of the Notice of Exercise to the Company to confirm the number of Warrant Shares issuable in connection with the cashless exercise. The Company shall promptly calculate and transmit to the Warrant Agent in a written notice, and the Warrant Agent shall have no duty, responsibility or obligation under this section to calculate, the number of Warrant Shares issuable in connection with any cashless exercise. The Warrant Agent shall be entitled to rely conclusively on any such written notice provided by the Company, and the Warrant Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with such written instructions or pursuant to this Warrant Agreement.
3.3.8 Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the number of Warrant Shares issuable in connection with any exercise, the Company shall promptly deliver to the Holder the number of Warrant Shares that are not disputed.
3.3.9 Beneficial Ownership Limitation. The Company and Warrant Agent shall not effect any exercise of a Warrant, and a Holder shall not have the right to exercise any portion of a Warrant, pursuant to Section 3 or otherwise, in contravention of the Beneficial Ownership Limitation set forth in Section 2(e) of the Warrant Certificate.
4. Adjustments. The Exercise Price, the number of Warrant Shares issuable upon exercise of each Warrant and the number of Warrants outstanding are subject to adjustment from time to time as provided in Section 3 of the Warrant Certificate. Upon every adjustment of the Exercise Price or the number of Warrant Shares issuable upon exercise of a Warrant, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event causing any such adjustment, the Company shall give written notice to each Holder, at the last address set forth for such holder in the Warrant Register, as of the record date or the effective date of the event. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event. The Warrant Agent shall be entitled to rely conclusively on, and shall be fully protected in relying on, any certificate, notice or instructions provided by the Company with respect to any adjustment of the Exercise Price or the number of shares issuable upon exercise of a Warrant, or any related matter, and the Warrant Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with any such certificate, notice or instructions or pursuant to this Warrant Agreement. The Warrant Agent shall not be deemed to have knowledge of any such adjustment unless and until it shall have received written notice thereof from the Company.
5. Restrictive Legends; Fractional Warrants. In the event that a Warrant Certificate surrendered for transfer bears a restrictive legend, the Warrant Agent shall not register that transfer until the Warrant Agent has received an opinion of counsel for the Company stating that such transfer may be made and indicating whether the Warrants must also bear a restrictive legend upon that transfer. The Company and the Warrant Agent shall not issue fractions of Warrants or distribute a Global Warrant or Warrant Certificates that evidence fractional Warrants. Whenever any fractional Warrant would otherwise be required to be issued or distributed, the actual issuance or distribution shall reflect a rounding of such fraction up or down, as applicable, to the nearest whole Warrant. The Warrant Agent shall not be required to effect any registration of transfer or exchange which will result in the transfer of or delivery of a Warrant Certificate for a fraction of a Warrant.
6. Other Provisions Relating to Rights of Holders of Warrants.
6.1 No Rights as Stockholder. Except as otherwise specifically provided herein and in accordance with Section 5(a) of the Warrant Certificate, a Holder, solely in its capacity as a holder of Warrants, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant Agreement be construed to confer upon a Holder, solely in its capacity as the registered holder of Warrants, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of share capital, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights or rights to participate in new issues of shares, or otherwise, prior to the issuance to the Holder of the Warrant Shares which it is then entitled to receive upon the due exercise of Warrants.
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6.2 Reservation of Common Stock. The Company shall at all times reserve and keep available a number of its authorized but unissued shares of Common Stock pursuant to Section 5(d) of the Warrant Certificate.
7. Concerning the Warrant Agent and Other Matters.
7.1 Any instructions given to the Warrant Agent orally, as permitted by any provision of this Warrant Agreement, shall be confirmed in writing by the Company as soon as practicable. The Warrant Agent shall not be liable or responsible and shall be fully authorized and protected for acting, or failing to act, in accordance with any oral instructions which do not conform with the written confirmation received in accordance with this Section 7.1
7.2 (a) Whether or not any Warrants are exercised, for the Warrant Agent’s services as agent for the Company hereunder, the Company shall pay to the Warrant Agent such fees as may be separately agreed between the Company and Warrant Agent and the Warrant Agent’s out of pocket expenses in connection with this Warrant Agreement, including, without limitation, the reasonable fees and expenses of the Warrant Agent’s counsel. While the Warrant Agent endeavors to maintain out-of-pocket charges (both internal and external) at competitive rates, these charges may not reflect actual out-of-pocket costs, and may include handling charges to cover internal processing and use of the Warrant Agent’s billing systems. (b) All amounts owed by the Company to the Warrant Agent under this Warrant Agreement are due within 30 days of the Company’s receipt of an invoice. Delinquent payments are subject to a late payment charge of one and one-half percent (1.5%) per month commencing 45 days from the invoice date. The Company agrees to reimburse the Warrant Agent for any reasonable attorney’s fees and any other costs associated with collecting delinquent payments. (c) No provision of this Warrant Agreement shall require Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under this Warrant Agreement or in the exercise of its rights.
7.3 As agent for the Company hereunder the Warrant Agent: (a) shall have no duties or obligations other than those specifically set forth herein or as may subsequently be agreed to in writing by the Warrant Agent and the Company; (b) shall be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value, or genuineness of the Warrants or any Warrant Shares; (c) shall not be obligated to take any legal action hereunder; if, however, the Warrant Agent determines to take any legal action hereunder, and where the taking of such action might, in its judgment, subject or expose it to any expense or liability it shall not be required to act unless it has been furnished with an indemnity reasonably satisfactory to it; (d) may rely on and shall be fully authorized and protected in acting or failing to act upon any certificate, instrument, opinion, notice, letter, telegram, telex, facsimile transmission or other document or security delivered to the Warrant Agent and believed by it to be genuine and to have been signed by the proper party or parties; (e) shall not be liable or responsible for any recital or statement contained in the Registration Statement or any other documents relating thereto; (f) shall not be liable or responsible for any failure on the part of the Company to comply with any of its covenants and obligations relating to the Warrants, including without limitation obligations under applicable securities laws; (g) may rely on and shall be fully authorized and protected in acting or failing to act upon the written, telephonic or oral instructions with respect to any matter relating to its duties as Warrant Agent covered by this Warrant Agreement (or supplementing or qualifying any such actions) of officers of the Company, and is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Company or counsel to the Company, and may apply to the Company, for advice or instructions in connection with the Warrant Agent’s duties hereunder, and the Warrant Agent shall not be liable for any delay in acting while waiting for those instructions; any applications by the Warrant Agent for written instructions from the Company may, at the option of the Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent under this Warrant Agreement and the date on or after which such action shall be taken or such omission shall be effective; the Warrant Agent shall not be liable for any action taken by, or omission of, the Warrant Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than five business days after the date such application is sent to the Company, unless the Company shall have consented in writing to any earlier date) unless prior to taking any such action, the Warrant Agent shall have received written instructions in response to such application specifying the action to be taken or omitted; (h) may consult with counsel satisfactory to the Warrant Agent, including its in-
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house counsel, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by it hereunder in good faith and in accordance with the advice of such counsel; (i) may perform any of its duties hereunder either directly or by or through nominees, correspondents, designees, or subagents, and it shall not be liable or responsible for any misconduct or negligence on the part of any nominee, correspondent, designee, or subagent appointed with reasonable care by it in connection with this Warrant Agreement; (j) is not authorized, and shall have no obligation, to pay any brokers, dealers, or soliciting fees to any person; and (k) shall not be required hereunder to comply with the laws or regulations of any country other than the United States of America or any political subdivision thereof.
7.4 (a) In the absence of gross negligence or willful or illegal misconduct on its part, the Warrant Agent shall not be liable for any action taken, suffered, or omitted by it or for any error of judgment made by it in the performance of its duties under this Warrant Agreement. Anything in this Warrant Agreement to the contrary notwithstanding, in no event shall Warrant Agent be liable for special, indirect, incidental, consequential or punitive losses or damages of any kind whatsoever (including but not limited to lost profits), even if the Warrant Agent has been advised of the possibility of such losses or damages and regardless of the form of action. Any liability of the Warrant Agent will be limited in the aggregate to the amount of fees paid by the Company hereunder. The Warrant Agent shall not be liable for any failures, delays or losses, arising directly or indirectly out of conditions beyond its reasonable control including, but not limited to, acts of government, exchange or market ruling, suspension of trading, work stoppages or labor disputes, fires, civil disobedience, riots, rebellions, storms, electrical or mechanical failure, computer hardware or software failure, communications facilities failures including telephone failure, war, terrorism, insurrection, earthquakes, floods, acts of God or similar occurrences. (b) In the event any question or dispute arises with respect to the proper interpretation of the Warrants or the Warrant Agent’s duties under this Warrant Agreement or the rights of the Company or of any Holder, the Warrant Agent shall not be required to act and shall not be held liable or responsible for its refusal to act until the question or dispute has been judicially settled (and, if appropriate, it may file a suit in interpleader or for a declaratory judgment for such purpose) by final judgment rendered by a court of competent jurisdiction, binding on all persons interested in the matter which is no longer subject to review or appeal, or settled by a written document in form and substance satisfactory to Warrant Agent and executed by the Company and each such Holder. In addition, the Warrant Agent may require for such purpose, but shall not be obligated to require, the execution of such written settlement by all the Holders and all other persons that may have an interest in the settlement.
7.5 The Company covenants to indemnify the Warrant Agent and hold it harmless from and against any loss, liability, claim or expense (“Loss”) arising out of or in connection with the Warrant Agent’s duties under this Warrant Agreement, including the costs and expenses of defending itself against any Loss, unless such Loss shall have been determined by a court of competent jurisdiction to be a result of the Warrant Agent’s gross negligence or willful misconduct.
7.6 Unless terminated earlier by the parties hereto, this Agreement shall terminate 90 days after the earlier of the Expiration Date and the date on which no Warrants remain outstanding (the “Termination Date”). On the business day following the Termination Date, the Agent shall deliver to the Company any entitlements, if any, held by the Warrant Agent under this Warrant Agreement. The Agent’s right to be reimbursed for fees, charges and out-of-pocket expenses as provided in this Section 7 shall survive the termination of this Warrant Agreement.
7.7 If any provision of this Warrant Agreement shall be held illegal, invalid, or unenforceable by any court, this Warrant Agreement shall be construed and enforced as if such provision had not been contained herein and shall be deemed an Agreement among the parties to it to the full extent permitted by applicable law.
7.8 The Company represents and warrants that: (a) it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation; (b) the offer and sale of the Warrants and the execution, delivery and performance of all transactions contemplated thereby (including this Warrant Agreement) have been duly authorized by all necessary corporate action and will not result in a breach of or constitute a default under the articles of association, bylaws or any similar document of the Company or any indenture, agreement or instrument to which it is a party or is bound; (c) this Warrant Agreement has been duly executed and delivered by the Company and constitutes the legal, valid, binding and enforceable obligation of the Company; (d) the Warrants will comply in all material respects with all applicable requirements of law; and (e) to the best of its knowledge, there is no litigation pending or threatened as of the date hereof in connection with the offering of the Warrants.
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7.9 In the event of inconsistency between this Warrant Agreement and the descriptions in the Registration Statement, as they may from time to time be amended, the terms of this Warrant Agreement shall control.
7.10 Set forth in Annex D hereto is a list of the names and specimen signatures of the persons authorized to act for the Company under this Warrant Agreement (the “Authorized Representatives”). The Company shall, from time to time, certify to you the names and signatures of any other persons authorized to act for the Company under this Warrant Agreement.
7.11 Except as expressly set forth elsewhere in this Warrant Agreement, all notices, instructions and communications under this Agreement shall be in writing, shall be effective upon receipt and shall be addressed, if to the Company, at 550 Reserve St, Suite 360, Southlake, Texas 76092, Attention: Chief Executive Officer, E-mail: [•], telephone number [•], or, if to the Warrant Agent, to American Stock Transfer & Trust Company, at [•], [•], a phone number of [•] and an email address of [• ], or to such other address of which a party hereto has notified the other party.
7.12 (a) This Warrant Agreement shall be governed by and construed in accordance with the laws of the State of New York. All actions and proceedings relating to or arising from, directly or indirectly, this Warrant Agreement may be litigated in courts located within the Borough of Manhattan in the City and State of New York. The Company hereby submits to the personal jurisdiction of such courts and consents that any service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder. Each of the parties hereto hereby waives the right to a trial by jury in any action or proceeding arising out of or relating to this Warrant Agreement; (b) This Warrant Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. This Warrant Agreement may not be assigned, or otherwise transferred, in whole or in part, by either party without the prior written consent of the other party, which the other party will not unreasonably withhold, condition or delay; except that (i) consent is not required for an assignment or delegation of duties by Warrant Agent to any affiliate of Warrant Agent and (ii) any reorganization, merger, consolidation, sale of assets or other form of business combination by Warrant Agent or the Company shall not be deemed to constitute an assignment of this Warrant Agreement; and (c) No provision of this Warrant Agreement may be amended, modified or waived, except in a written document signed by both parties. The Company and the Warrant Agent may amend or supplement this Warrant Agreement without the consent of any Holder for the purpose of curing any ambiguity, or curing, correcting or supplementing any defective provision contained herein or adding or changing any other provisions with respect to matters or questions arising under this Agreement as the parties may deem necessary or desirable and that the parties determine, in good faith, shall not adversely affect the interest of the Holders. All other amendments and supplements shall require the vote or written consent of Holders of at least 50.1% of the then outstanding Warrants, provided that adjustments may be made to the Warrant terms and rights in accordance with Section 4 without the consent of the Holders.
7.13 Payment of Taxes. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of Warrant Shares upon the exercise of Warrants, but the Company may, pursuant to the terms of the Warrant, require the Holders to pay any transfer taxes in respect of the Warrants or such shares. The Warrant Agent may refrain from registering any transfer of Warrants or any delivery of any Warrant Shares unless or until the persons requesting the registration or issuance shall have paid to the Warrant Agent for the account of the Company the amount of such tax or charge, if any, or shall have established to the reasonable satisfaction of the Company and the Warrant Agent that such tax or charge, if any, has been paid.
7.14 Resignation of Warrant Agent.
7.14.1 Appointment of Successor Warrant Agent. The Warrant Agent, or any successor to it hereafter appointed, may resign its duties and be discharged from all further duties and liabilities hereunder after giving thirty (30) days’ notice in writing to the Company and the Holders of the Warrants, or such shorter period of time agreed to by the Company. The Company may terminate the services of the Warrant Agent, or any successor Warrant Agent, after giving thirty (30) days’ notice in writing to the Warrant Agent or successor Warrant Agent and the Holders of the Warrants, or such shorter period of time as agreed. If the office of the Warrant Agent becomes vacant by resignation, termination or incapacity to act or otherwise, the
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Company shall appoint in writing a successor Warrant Agent in place of the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the Warrant Agent, then the Warrant Agent or any Holder may apply to any court of competent jurisdiction for the appointment of a successor Warrant Agent at the Company’s cost. Pending appointment of a successor to such Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent (but not including the initial Warrant Agent), whether appointed by the Company or by such court, shall be a person organized and existing under the laws of any state of the United States of America, in good standing, and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by federal or state authority. After appointment, any successor Warrant Agent shall be vested with all the authority, powers, rights, immunities, duties, and obligations of its predecessor Warrant Agent with like effect as if originally named as Warrant Agent hereunder, without any further act or deed, and except for executing and delivering documents as provided in the sentence that follows, the predecessor Warrant Agent shall have no further duties, obligations, responsibilities or liabilities hereunder, but shall be entitled to all rights that survive the termination of this Warrant Agreement and the resignation or removal of the Warrant Agent, including but not limited to its right to indemnity hereunder. If for any reason it becomes necessary or appropriate or at the request of the Company, the predecessor Warrant Agent shall execute and deliver, at the expense of the Company, an instrument transferring to such successor Warrant Agent all the authority, powers, and rights of such predecessor Warrant Agent hereunder; and upon request of any successor Warrant Agent the Company shall make, execute, acknowledge, and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such authority, powers, rights, immunities, duties, and obligations.
7.14.2 Notice of Successor Warrant Agent. In the event a successor Warrant Agent shall be appointed, the Company shall give notice thereof to the predecessor Warrant Agent and the transfer agent for the Common Stock not later than the effective date of any such appointment.
7.14.3 Merger or Consolidation of Warrant Agent. Any person into which the Warrant Agent may be merged or converted or with which it may be consolidated or any person resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party or any person succeeding to the shareowner services business of the Warrant Agent or any successor Warrant Agent shall be the successor Warrant Agent under this Warrant Agreement, without any further act or deed. For purposes of this Warrant Agreement, “person” shall mean any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust or other entity, and shall include any successor (by merger or otherwise) thereof or thereto.
8. MISCELLANEOUS PROVISIONS.
8.1 Persons Having Rights under this Warrant Agreement. Nothing in this Warrant Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the parties hereto and the Holders any right, remedy, or claim under or by reason of this Warrant Agreement or of any covenant, condition, stipulation, promise, or agreement hereof.
8.2 Examination of the Warrant Agreement. A copy of this Warrant Agreement shall be available at all reasonable times at the office of the Warrant Agent designated for such purpose for inspection by any Holder. Prior to such inspection, the Warrant Agent may require any such holder to provide reasonable evidence of its interest in the Warrants.
8.3 Counterparts. This Warrant Agreement may be executed in any number of original, facsimile or electronic counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
8.4 Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant Agreement and shall not affect the interpretation thereof.
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9. Certain Definitions. As used herein, the following terms shall have the following meanings:
(a) “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed; provided that banks shall not be deemed to be authorized or obligated to be closed due to a “shelter in place,” “non-essential employee” or similar closure of physical branch locations at the direction of any governmental authority if such banks’ electronic funds transfer systems (including for wire transfers) are open for use by customers on such day.
(b) “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.
(c) “Trading Day” means any day on which the Common Stock is traded on the Trading Market.
(d) “Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange (or any successors to any of the foregoing).
(e) “Warrant Share Delivery Date” means the date that is the earliest of: (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise, and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise, all subject to receipt of any cash payments required by the Holder.
[Signature Page to Follow]
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IN WITNESS WHEREOF, this Warrant Agent Agreement has been duly executed by the parties hereto as of the day and year first above written.
| HEART TEST LABORATORIES, INC. | ||
| By: |
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| Name: | Andrew Simpson | |
| Title: | Chief Financial Officer | |
| AMERICAN STOCK TRANSFER & TRUST COMPANY | ||
| By: |
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| Name: | ||
| Title: | ||
Annex A - Form of Global Certificate
Annex B – Notice of Exercise
Annex C - Form of Certificated Warrant
Annex D - Authorized Representatives
Annex E - Form of Warrant Certificate Request Notice
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ANNEX A
[FORM OF GLOBAL CERTIFICATE]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
HEART TEST LABORATORIES, INC.
GLOBAL WARRANT CERTIFICATE
NOT EXERCISABLE AFTER [•] [•], 2027
This certifies that the person whose name and address appears below, or registered assigns, is the registered owner of the number of Warrants set forth below. Each Warrant entitles its registered holder to purchase from HEART TEST LABORATORIES, INC., a Texas corporation (the “Company”), at any time prior to 5:00 P.M. (New York City time) on [•][•], 2027 (the “Expiration Date”) (unless such date is not a Business Day, in which case the Expiration Date will be the next Business Day), one share of common stock, par value $0.001 per share, of the Company (each, a “Warrant Share” and collectively, the “Warrant Shares”), at an exercise price of $[•] per share, subject to possible adjustments as provided in the Warrant Agreement (as defined below).
This Warrant Certificate, with or without other Warrant Certificates, upon surrender at the designated office of the Warrant Agent, may be exchanged for another Warrant Certificate or Warrant Certificates evidencing the same number of Warrants as the Warrant Certificate or Warrant Certificates surrendered. A transfer of the Warrants evidenced hereby may be registered upon surrender of this Warrant Certificate at the designated office of the Warrant Agent by the registered holder in person or by a duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer, a signature guarantee, and such other and further documentation as the Warrant Agent may reasonably request and duly stamped as may be required by the laws of the State of New York and of the United States of America.
The terms and conditions of the Warrants and the rights and obligations of the holder of this Warrant Certificate are set forth in the Warrant Agent Agreement dated as of [•] [•], 2022, including, but not limited to, the terms set forth in the Definitive Certificate in the form attached thereto as Annex C (the “Warrant Agreement”) by and between the Company and American Stock Transfer & Trust Company (the “Warrant Agent”). A copy of the Warrant Agreement is available for inspection during business hours at the office of the Warrant Agent.
This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by an authorized signatory of the Warrant Agent.
WITNESS the facsimile signature of a proper officer of the Company.
| HEART TEST LABORATORIES, INC.
| ||
| By: |
| |
| Name: | ||
| Title: | ||
Dated: [•] [•], 2022
Countersigned:
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| AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent | ||
| By: |
| |
| Name: | ||
| Title: | ||
PLEASE DETACH HERE
| Certificate No.: 1 |
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Number of Warrants |
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WARRANT CUSIP NO.: [ ]
| HEART TEST LABORATORIES, INC. | ||
| Cede & Co. | AMERICAN STOCK TRANSFER & TRUST COMPANY
By Mail:
[_]
By hand or overnight courier: | |
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ANNEX B
NOTICE OF EXERCISE
TO: HEART TEST LABORATORIES, INC.
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
The Warrant Shares shall be delivered to the following DWAC Account Number:
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[SIGNATURE OF HOLDER]
| Name of Investing Entity: |
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Signature of Authorized Signatory of Investing Entity: |
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| Name of Authorized Signatory: |
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| Title of Authorized Signatory: |
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| Date: |
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ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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[Signature Guarantee]
Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Warrant Agent, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Warrant Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.
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ANNEX D
AUTHORIZED REPRESENTATIVES
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| Andrew Simpson | Chief Executive Officer | |||
| Danielle Watson | Chief Financial Officer |
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ANNEX E
Form of Warrant Certificate Request Notice
WARRANT CERTIFICATE REQUEST NOTICE
To: American Stock Transfer & Trust Company, as Warrant Agent for Heart Test Laboratories, Inc. (the “Company”)
The undersigned Holder of Common Stock Purchase Warrants (“Warrants”) in the form of Global Warrants issued by the Company hereby elects to receive a Definitive Certificate evidencing the Warrants held by the Holder as specified below:
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| 3. | Number of Warrants in name of Holder in form of Global Warrants |
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| 5. | Number of Warrants in name of Holder in form of Global Warrants after issuance of Definitive Certificate, if any: |
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| 6. | Definitive Certificate shall be delivered to the following address: |
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The undersigned hereby acknowledges and agrees that, in connection with this Warrant Exchange and the issuance of the Definitive Certificate, the Holder is deemed to have surrendered the number of Warrants in form of Global Warrants in the name of the Holder equal to the number of Warrants evidenced by the Definitive Certificate.
[SIGNATURE OF HOLDER]
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Exhibit 4.10
FORM OF CERTIFICATED WARRANT
COMMON STOCK PURCHASE WARRANT
HEART TEST LABORATORIES, INC.
| Warrant Shares: _______ | Original Issuance Date: [_] [_], 2022 |
THIS COMMON STOCK PURCHASE WARRANT (this “Warrant”) certifies that, for value received, _____________ or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Original Issuance Date”) and on or prior to 5:00 p.m. (New York City time) [_] [_], 2027 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Heart Test Laboratories, Inc., a Texas corporation (the “Company”), up to [___] shares (as subject to adjustment hereunder, the “Warrant Shares”) of common stock of the Company, par value $0.001 per share (“Common Stock”). The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b). This Warrant shall initially be issued and maintained in the form of a security held in book-entry form and the Depository Trust Company or its nominee (“DTC”) shall initially be the sole registered holder of this Warrant, subject to the Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agent Agreement, in which case this sentence shall not apply.
Section 1. Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed; provided that banks shall not be deemed to be authorized or obligated to be closed due to a “shelter in place,” “non-essential employee” or similar closure of physical branch locations at the direction of any governmental authority if such banks’ electronic funds transfer systems (including for wire transfers) are open for use by customers on such day.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Registration Statement” means the Company’s registration statement on Form S-1, as amended (File No. 333-265024).
”Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Trading Day” means a day on which the Common Stock is traded on a Trading Market.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange (or any successors to any of the foregoing).
“Transfer Agent” means American Stock Transfer & Trust Company, LLC, the current transfer agent of the Company, with a mailing address of [__________________] and a facsimile number of [__________________], and any successor transfer agent of the Company.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the Common Stock is quoted on OTCQB or OTCQX, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the OTC Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the reasonable fees and expenses of which shall be paid by the Company.
“Warrant Agent Agreement” means that certain warrant agent agreement, dated on or about the Original Issuance Date, between the Company and the Warrant Agent.
“Warrant Agent” means the Transfer Agent and any successor warrant agent of the Company.
“Warrants” means this Warrant and other Common Stock purchase warrants issued by the Company and delivered to the purchasers thereof pursuant to the Registration Statement.
Section 2. Exercise.
a) Exercise of Warrant. Subject to the provisions of Section 2(e) herein, exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Original Issuance Date and on or before close of business on the Termination Date by delivery to the Company or Warrant Agent (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy or PDF copy submitted by e-mail (or e-mail attachment) of the Notice of Exercise in the form annexed hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined in Section 2(d)(i) herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the Warrant Shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company or the Warrant Agent until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company or Warrant Agent for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company or Warrant Agent shall deliver any objection to any Notice of Exercise within one (1) Trading Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
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Notwithstanding the foregoing in this Section 2(a), a Holder whose interest in this Warrant is a beneficial interest in certificate(s) representing this Warrant held in book-entry form through DTC (or another established clearing corporation performing similar functions), shall effect exercises made pursuant to this Section 2(a) by delivering to DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by DTC (or such other clearing corporation, as applicable), subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agent Agreement, in which case this sentence shall not apply.
b) Exercise Price. The exercise price per share of Common Stock under this Warrant shall be $[_____], subject to adjustment hereunder (the “Exercise Price”).
c) Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = the last VWAP immediately preceding the time of delivery of the Notice of Exercise giving rise to the applicable “cashless exercise”, as set forth in the applicable Notice of Exercise (to clarify, the “last VWAP” will be the last VWAP as calculated over an entire Trading Day such that, in the event that this Warrant is exercised at a time that the Trading Market is open, the prior Trading Day’s VWAP shall be used in this calculation);
(B) = the Exercise Price of this Warrant, as adjusted hereunder; and
(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised. The Company agrees not to take any position contrary to this Section 2(c).
d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earlier of: (i) two (2) Trading Days after the delivery to the Company or the Warrant Agent of the Notice of Exercise, and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company or the Warrant Agent of the Notice of Exercise, all subject to receipt of any cash payments required by the Holder (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of
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Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth (5th) Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until the earlier of the date (i) such Warrant Shares are delivered or (ii) Holder rescinds such exercise. Notwithstanding the forgoing, the Warrant Agent shall not, in any event, be subject to, or responsible for, liquidated damages as contemplated by this Section 2(d)(i). The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.
ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date (other than any such failure that is solely due to any action or inaction by the Holder with respect to such exercise), and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. Notwithstanding the forgoing, the Warrant Agent shall not, in any event, be subject to, or responsible for, Buy-In penalties contemplated by this Section 2(d)(iv).
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall round up or down, as applicable, to the nearest whole share.
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vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
vii. Closing of Books. The Company will not close its share transfer books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder (including, without limitation , Rule 13d-3, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% (or, upon written election by a Holder prior to the issuance of any Warrants in accordance with this Section 2(e), 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon at least 30 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after
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such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. Without limiting anything set forth in this Sections 2(e) the limitations contained in this paragraph shall also apply to a successor holder of this Warrant.
Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time after the issuance of this Warrant the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to all of the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
c) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to all of the holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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d) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person as a result of which the Company is not the surviving corporation, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction). Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein. For the avoidance of doubt, if, at any time while this Warrant is outstanding, a Fundamental Transaction occurs, pursuant to the terms of this Section 3(d), the Holder shall not be entitled to receive more than one of (i) the consideration receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction, or (ii) the assumption by the Successor Entity of all of the obligations of the Company under this Warrant and the option to receive a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant.
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e) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
f) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any shareholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least ten (10) calendar days prior to the applicable record or effective date hereinafter specified, a notice (unless such information is filed with the Commission, in which case a notice shall not be required) stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
Section 4. Transfer of Warrant.
a) Transferability. This Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant Agent may require a medallion guarantee (or other type of guarantee or notarization) to effectuate an assignment or transfer of this Warrant. In order to effectuate a transfer (in whole or in part) of this Warrant, the Holder shall surrender this Warrant to the Company or the Warrant Agent within three (3) Trading Days of the date on which the Holder delivers an assignment form to the Company assigning this Warrant in full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
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b) New Warrants. If this Warrant is not held in global form through DTC (or any successor depository), this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c) Warrant Register. The Warrant Agent shall register this Warrant, upon records to be maintained by the Warrant Agent for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company and the Warrant Agent may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
Section 5. Miscellaneous.
a) No Rights as Stockholder Until Exercise; No Settlement in Cash. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3. Without limiting the rights of a Holder to receive Warrant Shares on a “cashless exercise,” and to receive the cash payments contemplated pursuant to Sections 2(d)(i) and 2(d)(iv), in no event, including if the Company is for any reason unable to issue and deliver Warrant Shares upon exercise of this Warrant as required pursuant to the terms hereof, shall the Company be required to net cash settle an exercise of this Warrant or cash settle in any other form.
b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. The Company agrees to secure a bond on behalf of the Holder (at the Holder’s cost and expense) in connection with the replacement of such Warrant Certificates, if requested by the Warrant Agent.
c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
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Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of formation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or their respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action, suit or proceeding to enforce any provisions of this Warrant, the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for their reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by applicable state and federal securities laws.
g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by facsimile or e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at [__________________], Attention: [__________________], E-mail: [__________________], or such other facsimile number, email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, e-mail address or address of such Holder appearing on the books of the Warrant Agent. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via facsimile at the facsimile number or
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via e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number or via e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Notwithstanding any other provision of this Warrant, where this Warrant provides for notice of any event to the Holder, if this Warrant is held in global form by DTC (or any successor depositary), such notice shall be sufficiently given if given to DTC (or any successor depositary) pursuant to the procedures of DTC (or such successor depositary), subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agent Agreement, in which case this sentence shall not apply. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K.
i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company, on the one hand, and either: (i) the Holder or the beneficial owner of this Warrant, on the other hand, or (ii) the vote or written consent of the Holders of at least 50.1% of the then outstanding Warrants issued pursuant to the Warrant Agent Agreement, on the other hand, provided that adjustments may be made to the Warrant terms and rights of this Warrant in accordance with Section 3 of this Warrant without the consent of any Holder or beneficial owner of the Warrants.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
o) Warrant Agent Agreement. If this Warrant is held in global form through DTC (or any successor depositary), this Warrant is issued subject to the Warrant Agent Agreement. To the extent any provision of this Warrant conflicts with the express provisions of the Warrant Agent Agreement, the provisions of this Warrant shall govern and be controlling.
********************
(Signature Page Follows)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
| HEART TEST LABORATORIES, INC. | ||
| By: |
| |
| Name: |
| |
| Title: |
| |
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NOTICE OF EXERCISE
TO: HEART TEST LABORATORIES, INC.
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
________________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
________________________
________________________
________________________
[SIGNATURE OF HOLDER]
| Name of Investing Entity: | ________________________ |
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| Signature of Authorized Signatory of Investing Entity: | ________________________ |
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| Name of Authorized Signatory: | ________________________ |
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| Title of Authorized Signatory: | ________________________ |
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| Date: | ________________________ |
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ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
| Name: | ||||
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| (Please Print) | ||||
| Address: | ||||
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| (Please Print) |
Phone Number:
Email Address:
Dated:
Holder’s Signature:
Holder’s Address:
[Signature Guarantee]
Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Warrant Agent, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Warrant Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.
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Exhibit 5.1
June 10 , 2022
Heart Test Laboratories, Inc.
500 Reserve St, Suite 360
Southlake, Texas 76092
Registration Statement on Form S-1
Ladies and Gentleman:
We have acted as counsel to Heart Test Laboratories, Inc., a Texas corporation (the “Company”), in connection with the Registration Statement on Form S-1 (Reg. No. 333-265024), including a related prospectus filed with the Registration Statement and any subsequent registration statement on Form S-1 filed pursuant to Rule 462(b) (as amended, the “Registration Statement”) being filed by the Company on the date of this opinion letter with the Securities and Exchange Commission (the “SEC”) in connection with the registration under the Securities Act of 1933, as amended (the “Securities Act”), of the public offering of (i) up to 1,750,000 units (the “Units”), each consisting of one share of the Company’s Common Stock, par value $0.001 per share (the “Common Stock,” and such shares, the “Shares”) and a warrant to purchase one share of Common Stock (the “Unit Warrants”) to be sold to The Benchmark Company, LLC, as representative (the “Representative”) of the several underwriters (collectively, the “Underwriters”) pursuant to the underwriting agreement to be entered into by and among the Company and the Underwriters (the “Underwriting Agreement”), the form of which has been filed as Exhibit 1.1 to the Registration Statement, and (ii) a warrant (the “Representative’s Warrant”) entitling the Representative to purchase a number of shares of the Common Stock equal to 7% of the number of Shares sold to the public pursuant to the Underwriting Agreement (such shares, the “Representative’s Warrant Shares,” and collectively with the Unit Warrants, the Unit Warrant Shares (as defined below), the Representative’s Warrant and the Shares, the “Securities”). The term “Shares” includes up to 262,500 shares issuable upon exercise of an over-allotment option granted to the Underwriters by the Company and shall include any additional shares of Common Stock the offering of which is registered by the Company pursuant to Rule 462(b) under the Securities Act in connection with the offering contemplated by the Registration Statement. The term “Unit Warrants” includes warrants to purchase up to 262,500 shares of Common Stock issuable upon exercise of an over-allotment option granted to the Underwriters by the Company and shall include any additional warrants and underlying shares of Common Stock the offering of which is registered by the Company pursuant to Rule 462(b) under the Securities Act in connection
JW | DALLAS 2323 Ross Avenue, Suite 600 • Dallas, Texas 75201 | www.jw.com | Member of GLOBALAW™
Heart Test Laboratories, Inc.
June 10, 2022
Page 2
with the offering contemplated by the Registration Statement. The shares underlying the Unit Warrants (including any Unit Warrants issued upon exercise of the Underwriters’ over-allotment option) are referred to herein collectively as the “Unit Warrant Shares.” This opinion letter is being furnished in accordance with the requirements of Item 16 of Form S-1 and Item 601(b)(5)(i) of Regulation S-K promulgated under the Securities Act.
In connection with this opinion letter, we have examined the following documents:
| (a) | the Registration Statement, including the exhibits being filed therewith; |
| (b) | the prospectus contained in the Registration Statement (the “Prospectus”); |
| (c) | the form of Underwriting Agreement; |
| (d) | the form of Warrant Agent Agreement for the Unit Warrants; |
| (e) | the form of Unit Warrant; and |
| (f) | the form of Representative’s Warrant Agreement setting forth the terms of the Representative’s Warrant. |
Also, we have examined and relied upon the following:
(i) (A) true and correct copies of the amended and restated Certificate of Formation and amended and restated Bylaws of the Company, each as in effect the date hereof and as amended, supplemented or modified to date, and (B) the resolutions and/or written consent(s) of the Board of Directors of the Company and the Pricing Committee of the Board of Directors of the Company authorizing (1) the filing of the Registration Statement by the Company and (2) the issuance of the Securities by the Company, subject to (x) specific further authorization for the issuance, execution, delivery and performance by proper action of the Company’s Board of Directors or a pricing committee thereof (the “Authorizing Resolutions”) with respect to such Securities and (y) the other qualifications set forth therein;
(ii) a Certificate of Fact dated June 3, 2022 issued by the Secretary of State of the State of Texas, attesting to the corporate status of the Company in the State of Texas;
(iii) a statement of Franchise Tax Account Status dated June 7, 2022 printed from the official website of the Comptroller of Public Accounts of the State of Texas; and
(iv) originals, or copies identified to our satisfaction as being true copies, of such other records, documents and instruments as we have deemed necessary for the purposes of this opinion letter.
Heart Test Laboratories, Inc.
Heart Test Laboratories, Inc.
June 10, 2022
Page 3
For all purposes of the opinions expressed herein, we have assumed, without independent investigation, the following:
(a) Factual Matters. To the extent that we have reviewed and relied upon certificates of the Company or authorized representatives thereof and certificates and assurances from public officials, all of such certificates, representations and assurances are accurate with regard to factual matters.
(b) Signatures. The signatures of individuals who have signed the documents we have reviewed are genuine and authorized.
(c) Authentic and Conforming Documents. All documents submitted to us as originals are authentic, complete and accurate, and all documents submitted to us as copies conform to authentic original documents.
(d) Organizational Status, Power and Authority and Legal Capacity of Certain Parties. All parties to the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement are or will be, as of the date the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement is executed and delivered, validly existing and in good standing in their respective jurisdictions of formation and have or will have, as of the date each of the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement is executed and delivered, the capacity and full power and authority to execute, deliver and perform the Underwriting Agreement, the Warrant Agent Agreement, the Representative’s Warrant Agreement and the documents required or permitted to be delivered and performed thereunder, except that no such assumption is made as to the Company as of the date hereof. All individuals who have signed the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement will have, as of the date each of the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement is executed and delivered, the legal capacity to execute the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement.
(e) Authorization, Execution and Delivery of the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement. The Underwriting Agreement, the Warrant Agent Agreement, the Representative’s Warrant Agreement and the documents required or permitted to be delivered thereunder will have been duly authorized by all necessary corporate, limited liability company, business trust, partnership or other action on the part of the parties thereto and have been or will be, as of the date each of the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement is executed and delivered, duly executed and delivered by such parties, except that no such assumption is made as to the Company.
(f) Registration. The Registration Statement shall have been declared effective under the Securities Act and such effectiveness shall not have been terminated or rescinded.
Heart Test Laboratories, Inc.
June 10, 2022
Page 4
(g) No Mutual Mistake, Amendments, etc. There has not been, and will not be, as of the date of each of the Underwriting Agreement, the Warrant Agent Agreement and the Representative’s Warrant Agreement, any mutual mistake of fact, fraud, duress or undue influence in connection with the issuance of the Shares, the Unit Warrants, the Unit Warrant Shares and the Representative’s Warrant Shares as contemplated by the Registration Statement, the Prospectus and the Underwriting Agreement. There are and will be no oral or written statements or agreements that modify, amend or vary, or purport to modify, amend or vary, any of the terms of the Underwriting Agreement.
Based on and subject to the foregoing and the exclusions, qualifications, limitations and other assumptions set forth in this opinion letter, we are of the opinion that:
1. The Shares, when (a) Authorizing Resolutions with respect to the Shares have been adopted, (b) the terms for the issuance and sale of the Shares have been established in conformity with such Authorizing Resolutions, (c) the Shares have been issued and sold as contemplated by the Underwriting Agreement, (d) the Company has received the consideration provided for in the Underwriting Agreement and (e) such consideration for the Shares is not less than the amount specified in the applicable Authorizing Resolutions, such Shares will be validly issued, fully paid and non-assessable.
2. When (a) Authorizing Resolutions with respect to the Unit Warrants have been adopted, (b) the terms of the Unit Warrants have been established in conformity with such Authorizing Resolutions, (c) the Unit Warrants have been issued and sold as contemplated by the Underwriting Agreement and Warrant Agent Agreement and (d) the Unit Warrants have been authenticated or countersigned in accordance with the provisions of the Underwriting Agreement and the Warrant Agent Agreement, the Unit Warrants will constitute the valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, under the laws of the State of New York.
3. When (a) Authorizing Resolutions with respect to the Representative’s Warrant Agreement have been adopted, (b) the terms of the Representative’s Warrant Agreement have been established in conformity with such Authorizing Resolutions, (c) the Representative’s Warrant has been issued as contemplated by the Underwriting Agreement and the Representative’s Warrant Agreement and (d) the Representative’s Warrant Agreement has been authenticated or countersigned in accordance with the provisions of the Underwriting Agreement, the Representative’s Warrant Agreement will constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with their terms, under the laws of the State of New York.
4. When (a) Authorizing Resolutions with respect to the Representative’s Warrant Shares issuable upon the exercise of the Representative’s Warrant Agreement have been adopted, (b) the terms of the issuance and sale of the Representative’s Warrant Shares issuable upon the exercise of the Representative’s Warrant have been established in conformity with such Authorizing Resolutions, (c) the Representative’s Warrant Shares issuable upon the exercise of the Representative’s Warrant Agreement have been issued and sold as contemplated by the Representative’s Warrant Agreement, (d) the Company has received the consideration provided for in the Representative’s Warrant Agreement and (e) such consideration for the Representative’s Warrant Shares issuable upon exercise of the Representative’s Warrant Agreement is not less than the amount specified in the applicable Authorizing Resolutions, such Representative’s Warrant Shares will be validly issued, fully paid and non-assessable.
Heart Test Laboratories, Inc.
June 10, 2022
Page 5
The opinions set forth above are subject to the following qualifications and limitations:
(a) Applicable Law. Our opinions are limited to the laws of the State of Texas and the laws of the State of New York, and we do not express any opinion concerning any other law.
(b) Bankruptcy. Our opinions are subject to the effect of any applicable bankruptcy, insolvency (including, without limitation, laws relating to preferences, fraudulent transfers and equitable subordination), reorganization, moratorium and other similar laws affecting creditors’ rights generally.
(c) Equitable Principles. Our opinions are subject to the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing.
The foregoing opinions are being furnished only for the purpose referred to in the first paragraph of this opinion letter. Our opinions are based on statutes, regulations and administrative and judicial interpretations which are subject to change. We undertake no responsibility to update or supplement these opinions subsequent to the effective date of the Registration Statement. Headings in this opinion letter are intended for convenience of reference only and shall not affect its interpretation. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to our firm in the Registration Statement under the caption “Legal Matters.” In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act or the rules and regulations of the SEC promulgated thereunder.
| Very truly yours, |
| /s/ Jackson Walker L.L.P. |
| JACKSON WALKER L.L.P. |
SRJ/JMM
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the inclusion in Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-265024) of Heart Test Laboratories, Inc. dba HeartSciences (the “Company”) of our audit report dated February 25, 2022, except for Note 12, as to which the date is June 3, 2022, relating to the financial statements of the Company as of and for each of the years ended April 30, 2021 and 2020, appearing in the Prospectus, which is a part of this Registration Statement.
Our report dated February 25, 2022, except for Note 12, as to which the date is June 3, 2022, contains an explanatory paragraph that states the Company has experienced recurring losses, negative cash flows from operations, significant debt due in the near term, and has limited capital resources. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We also consent to the reference to us under the heading “Experts” in such Prospectus.
/s/ Haskell & White LLP
HASKELL & WHITE LLP
Irvine, California
June 10, 2022