HeartBeam, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following management’s discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our condensed unaudited financial statements and the notes presented herein included in this Form 10-Q and the audited financial statements and the other information set forth in the 2022 Form 10-K. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties including, but not limited to, those set forth below under “Risk Factors” and elsewhere herein, and those identified under Part I, Item 1A of our 2022 Form 10-K. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

Overview

We are a medical technology company primarily focusing on developing and commercializing higher resolution ambulatory Electrocardiogram (“ECG”) solutions that enable the detection and monitoring of cardiac disease outside a healthcare facility setting. Our ability to develop higher resolution ECG solutions is achieved through the development of our proprietary and patented Vector Electrocardiography (“VECG”) technology platform. Our VECG technology is capable of developing three-dimensional (3D) images of cardiac electrical activity by displaying the spatial locations of ECG waveforms and has demonstrated in early studies to deliver diagnostic capability equal or superior to traditional hospital-based ECG systems.

Our aim is to deliver ambulatory cardiac health monitoring technologies that can be used for patients anywhere, especially where critical cardiac care decisions need to be made on a more timely basis. Our products (hereinafter “Product” or “Products”) require Food and Drug Administration (“FDA”) clearance and have not been cleared for marketing.

We believe our Products and services will benefit many stakeholders, including patients, healthcare providers, and healthcare payors. We are developing our telehealth Product (“HeartBeam AIMIGoTM”) to address the rapidly growing field of ambulatory cardiac health monitoring. HeartBeam AIMIGo is comprised of a credit card sized ECG device and powerful cloud-based diagnostic expert software systems. We believe that we are uniquely positioned to play a central role in remote monitoring of high-risk coronary artery disease patients, as initial studies have shown that our ischemia detection system may be more accurate than existing ambulatory cardiac health monitoring solutions.

To date, we have developed a working prototype for HeartBeam AIMIGo. We recently filed a 510(k) submission for our HeartBeam AIMIGo device with the FDA. Following the FDA clearance of the AIMIGo device, we plan to file a submission for the software algorithms that synthesize a 12L ECG from the HeartBeam AIMIGo device. The result of these two 510(k) submissions, once cleared by the FDA, will be an ambulatory device, carried by patients, which can synthesize a 12L ECG for physician review.

The custom software and hardware of our Products are classified as Class II medical devices by the FDA, running on an FDA registered Class I software platform. Premarket review and clearance by the FDA for Class II devices is generally accomplished through the 510(k) premarket notification process or De Novo process. Given the proposed intended use of our device, the 510(k) submission would require clinical data to support FDA clearance.

HeartBeam has eleven issued U.S. patents (U.S. 10,433,744, U.S. 10,117,592, U.S. 11,071,490, U.S. 11,419,538, U.S. 11,445,963, U.S. 11,701,049, U.S. 11,529,085, U.S. 10,980,433, U.S. 11,412,972, U.S. 11,234,658 and U.S. 11,793,444), and eight pending U.S applications. Three of the pending applications have been published, the remaining five pending cases are unpublished. Outside of the U.S., HeartBeam has four issued patents in Germany, France, Netherlands and United Kingdom and twelve pending applications in Canada, China, the European Union, Japan and Australia. HeartBeam has two pending Patent Cooperation Treaty applications. The issued patents are predicted to expire between April 11, 2036 and April 21, 2042.

As of September 30, 2023, we had 13 employees. We intend to hire or engage additional full-time professionals, employees, and / or consultants in alignment with our growth strategy. Although the market is highly competitive for attracting and retaining highly qualified professionals in our industry, we continue our endeavor to find such candidates for our Company. Our management team and additional personnel that we may hire in the future will be primarily responsible for executing and implementing growth opportunities, making tactical decisions related to our strategy and pursuing opportunities to invest in new technologies through strategic partnerships and acquisitions.

Recent Developments

At the July 7, 2023 Annual Shareholders’ Meeting, the proposal to amend the 2022 Equity Incentive Plan to increase the number of authorized shares from 1,900,000 shares to 5,900,000 shares was approved.

In August 2023, we announced our first peer-reviewed publication based on our novel VECG technology. We believe this is a foundational study demonstrating the ability of our VECG platform to detect the presence of coronary artery occlusions. The publication, entitled “Coronary Artery Occlusion Detection Using 3-Lead ECG System Suitable for Credit Card-Size Personal Device Integration,” appeared in JACC: Advances, a journal of the American College of Cardiology.

Other Transactions and Events:

ATM Program

On February 10, 2023, we entered into a sales agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners as placement agent pursuant to which the Company may issue and sell, from time to time, shares of our common stock having an initial aggregate offering price of up to $13.0 million in at-the-market offerings (“ATM”) sales. The issuance and sale of these placement shares are made under the Sales Agreement pursuant to our effective “shelf” registration statement on Form S-3 (Registration No. 333-269520). There were 0 and 6,184 shares issued under the ATM during the three and nine months ended September 30, 2023, respectively. As of September 30, 2023 there was approximately $11.0 million available for issuance under the ATM following the use of the shelf registration on Form S-3 for the Agreements and the ATM during the period.

Results of operations

The following table summarizes our results of operations for the periods presented on our statement of operations data.

(In thousands, except percentages)

Summary of Statements of Operations for the three and nine months ended September 30, 2023 compared with the three and nine months ended September 30, 2022:

General and administrative expenses during the three and nine months ended September 30, 2023, were $2.1 million and $6.4 million, respectively, representing an increase of $0.07 million, or 3%, and $1.2 million, or 22%, when compared to the same periods in 2022.

The change in general and administrative expense during the three months ended September 30, 2023 compared to September 30, 2022 is immaterial. There was an increase in general and administrative expense during the three months ended September 30, 2023, primarily related to non-cash stock-based compensation expense amounting to $0.5 million associated with additional awards granted since September 30, 2022, primarily offset by costs associated with our commercial team during the quarter ended September 30, 2022, and lower investor relation costs incurred in this quarter compared to the prior period.

The $1.2 million increase in general and administrative expense during the nine months ended September 30, 2023, is primarily related to non-cash stock-based compensation expense associated with additional awards granted since September 30, 2022 and costs associated with transitioning our commercial team.

Research and development expenses (“R&D”) are primarily from internally developed software and our credit-card sized collection device. R&D expenses were $1.6 million and $4.8 million for the three and nine months ended September 30, 2023, respectively, representing an increase of $0.06 million, or 4%, and an increase of $0.8 million, or 19%, respectively, when compared to the same periods in 2022.

The change in research and development expense during the three months ended September 30, 2023 compared to September 30, 2022 is immaterial. There was an increase in research and development expense during the three months ended September 30, 2023, primarily related to non-cash stock-based compensation expense of $0.1 million primarily offset by our spending decrease in consulting services provided by an outside service provider in relation to developing the initial AIMIGo platform during the prior period.

The $0.8 million in research and development expense during the nine months ended September 30, 2023, is primarily due to the increase in headcount, when compared to September 30, 2022.

Interest income during the three and nine months ended September 30, 2023, and 2022 is related to interest earned on our investments. The increase is primarily related to our increased cash balance coupled with higher interest rates following the May 2023 $26.5 million financing.

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 and go to market strategies.

As of September 30, 2023, we had approximately $19.2 million in cash and cash equivalents, an increase of $15.6 million from $3.6 million as of December 31, 2022.

During the nine months ended September 30, 2023, we raised $24.8 million from the sale of securities.

Our cash is as follows (in thousands):

Cash flows for the nine months ended September 30, 2023 and 2022 (in thousands):

Operating Activities:

Net cash used by our operating activities of $9.2 million during the nine months ended September 30, 2023, is primarily due to our net loss of $10.8 million less $2.0 million in non-cash expenses and $0.4 million of net changes in operating assets and liabilities.

Net cash used by our operating activities of $7.0 million during the nine months ended September 30, 2022, is primarily due to our net loss of $9.3 million less $0.8 million in non-cash expenses and $1.5 million of net changes in operating assets and liabilities.

Investing Activities:

Net cash used in investing activities during the nine months ended September 30, 2023, of $0.1 million, is primarily due to purchase of property and equipment.

Financing Activities:

Net cash provided by financing activities during the nine months ended September 30, 2023, of $24.9 million, is primarily from the issuance of common stock.

Net cash provided by financing activities during the nine month ended September 30, 2022, of $0.3 million, is primarily from the issuance of common stock.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2022 Annual Report.

Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based upon the most recent evaluation of internal controls over financial reporting, our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer) identified material weaknesses in our internal control over financial reporting. The material weaknesses identified to date include (i) policies and procedures which are not yet adequately documented, (ii) lack of proper approval processes and review processes and documentation for such reviews, (iii) insufficient GAAP experience regarding complex transactions and reporting, and (iv) insufficient number of staff to maintain optimal segregation of duties and levels of oversight. As of September 30, 2023, based on evaluation of our disclosure controls and procedures, management concluded that our disclosure controls and procedures were not effective.

Notwithstanding the material weaknesses described above, our management, including the Chief Executive Officer and Chief Financial Officer, have concluded that the condensed unaudited financial statements, and other financial information included in this quarterly report, fairly presents in all material respects our financial condition, results of operations, and cash flows as of and for the periods presented in this quarterly report.

During the third quarter of 2023, we have undertaken specific remediation actions to address the material weaknesses in our financial reporting. We are establishing more robust processes related to the review of complex accounting transactions, the preparation of account reconciliations and the review of journal entries. These remediation actions included hiring a Controller in July 2023, who has extensive experience in developing and implementing internal controls and executing plans to remediate control deficiencies. We will continue to assess the weaknesses as this individual progress through our onboarding process and as we continue to implement and refine control policies and procedures.

Changes in Internal Control

Although, we have hired personnel with sufficient GAAP experience to address the material weaknesses, there has been no change in our internal control procedures over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.