Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes ☒ No ☐
Indicate by check mark whether
the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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 13(a) of the Exchange Act.
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
Note 2 – Merger Agreement and Reverse Recapitalization
As
discussed in Note 1, on October 25, 2022, the Company and Mana entered into the Merger Agreement, which has been accounted for as a
reverse recapitalization in accordance with US Generally Accepted Accounting Principles (GAAP). Pursuant to the Merger Agreement, the
Company acquired cash of $4,021 and
assumed liabilities of $928,500 from
Mana. The liabilities assumed of $854,775, net of an early payment discount of $74,025 issued by a vendor on March 22, 2023, are
payable to two investment bankers and due on October 25, 2023. On March 27, 2023, the Company accepted the early pay discount
and paid Ladenburg the net balance due and payable of $419,475. As of March
31, 2023, the remaining assumed liabilities balance was $435,000.
Mana’s common stock had a redemption
right in connection with the business combination. Mana’s stockholders exercised their right to redeem 6,465,452 shares of common
stock, which constituted approximately 99.5% of the shares with redemption rights, for cash at a redemption price of approximately $10.10
per share, for an aggregate redemption amount of $65,310,892. In accounting for the reverse recapitalization, the Company’s legacy
issued and outstanding 1,976,749 shares of common stock were reversed, and the Mana shares of common stock totaling 9,514,743 were
recorded, as described in Note 7. Transactions costs incurred in connection with the recapitalization totaled $1,535,035 and were recorded
as a reduction to additional paid in capital.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Cardio Diagnostics, Inc. All intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those estimates.
Fair Value Measurements
The Company adopted the provisions of ASC Topic 820, Fair Value
Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements, establishes a framework for
measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including
cash and cash equivalents, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values
because of the short-term nature of these instruments. The carrying amounts of our short- and long-term credit obligations approximate
fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features
such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar
credit risk.
ASC 820 defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes
three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets
for identical assets or liabilities
Level 2 – quoted prices for similar assets
and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable
(for example cash flow modeling inputs based on assumptions)
The estimated fair value of the derivative liability
was calculated using the Black-Scholes option pricing model. The Company uses Level 3 inputs to value its derivative liabilities. The
following table provides a reconciliation of the beginning and ending balances for the major classes of assets and liabilities measured
at fair value using significant unobservable inputs (Level 3) and reflects gains and losses for the three months ended March 31, 2023
and 2022.
| Schedule of fair value measurements | |
| | |
| |
| | |
2023 | | |
2022 | |
| Liabilities: | |
| | | |
| | |
| Balance of derivative liabilities - beginning of period | |
$ | — | | |
$ | — | |
| Issued | |
| 9,192,672 | | |
| — | |
| Converted | |
| — | | |
| — | |
| Change in fair value recognized in operations | |
| (5,686,901 | ) | |
| — | |
| Balance of derivative liabilities - end of period | |
$ | 3,505,771 | | |
$ | — | |
The following
table represents the Company’s derivative instruments that are measured at fair value on a recurring basis as of March 31, 2023,
for each fair value hierarchy level:
| Schedule of fair value hierarchy level | |
| |
|
| March 31, 2023 | |
Derivative Liabilities | |
Total |
| Level I | |
$ | — | | |
$ | — | |
| Level II | |
$ | — | | |
$ | — | |
| Level III | |
$ | 3,505,771 | | |
$ | 3,505,771 | |
Convertible Instruments
The Company evaluates and accounts for conversion options embedded
in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities.
Applicable GAAP requires companies to bifurcate conversion options
from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The
criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly
and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings
as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument.
The Company accounts for convertible instruments (when it has been
determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records,
when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the
differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion
price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date
of redemption.
The Company accounts for the conversion of convertible debt when a conversion
option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying
amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment
of the two separate accounting liabilities.
Revenue Recognition
The Company will host its product, Epi+Gen CHD on InTeleLab’s
Elicity platform (the “Lab”). The Lab will collect payments from patients upon completion of eligibility screening. Patients
then send their samples to MOgene, a high complexity CLIA lab, which perform the biomarker assessments. Upon receipt of the raw biomarker
data from MOgene, the Company performs all quality control, analytical assessments and report generation and shares test reports with
the Elicity healthcare provider via the Elicity platform. Revenue is recognized upon receipt of payments from the Lab for each test at
the end of each month.
The Company will account for revenue under (“ASU”) 2014-09,
“Revenue from Contracts with Customers (Topic 606)”, using the modified retrospective method. The modified retrospective adoption
used by the Company did not result in a material cumulative effect adjustment to the opening balance of accumulated deficit.
The Company determines the measurement of revenue and the timing of revenue
recognition utilizing the following core principles:
1. Identifying the contract with a customer;
2. Identifying the performance obligations in the contract;
3. Determining the transaction price;
4. Allocating the transaction price to the performance obligations in the
contract; and
5. Recognizing revenue when (or as) the Company satisfies its performance
obligations.
Research and Development
Research and development costs are expensed as incurred. Research and development
costs charged to operations for the three months ended March 31, 2023 and 2022 were $86,665 and $1,130, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs of
$49,551 and $22,398 were charged to operations for the three months ended March 31, 2023 and 2022, respectively.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and highly liquid
investments with original maturities of 90 days or less at the date of purchase. The Company does not have any cash equivalents as of
March 31, 2023 and December 31, 2022. Cash is maintained at a major financial institution. Accounts held at U.S. financial institutions
are insured by the FDIC up to $250,000. The Company is exposed to credit risk in the event of default by the financial institutions or
the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured.
Patent Costs
The Company accounts for patents in accordance with ASC 350-30, General
Intangibles Other than Goodwill. The Company capitalizes patent costs representing legal fees associated with filing patent applications
and amortize them on a straight-line basis. The Company is in the process of evaluating its patents' estimated useful life and will begin
amortizing the patents when they are brought to the market or otherwise commercialized.
Long-Lived Assets
The Company assesses the valuation of components of long-lived assets whenever
events or circumstances dictate that the carrying value might not be recoverable. The Company bases its evaluation on indicators such
as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other
external market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset or asset group
may not be recoverable, the Company determines whether an impairment has occurred by analyzing an estimate of undiscounted future cash
flows at the lowest level for which identifiable cash flows exist. If the estimate of undiscounted cash flows during the estimated useful
life of the asset is less than the carrying value of the asset, the Company recognizes a loss for the difference between the carrying
value of the asset and its estimated fair value, generally measured by the present value of the estimated cash flows.
Stock-Based Compensation
The Company accounts for its stock-based awards granted under its employee
compensation plan in accordance with ASC Topic No. 718-20, Awards Classified as Equity, which requires the measurement of compensation
expense for all share-based compensation granted to employees and non-employee directors at fair value on the date of grant and recognition
of compensation expense over the related service period for awards expected to vest. The Company uses the Black-Scholes option
pricing model to estimate the fair value of its stock options and warrants. The Black-Scholes option pricing model requires the input
of highly subjective assumptions including the expected stock price volatility of the Company’s common stock, the risk free interest
rate at the date of grant, the expected vesting term of the grant, expected dividends, and an assumption related to forfeitures of such
grants. Changes in these subjective input assumptions can materially affect the fair value estimate of the Company’s
stock options and warrants.
Income Taxes
The Company accounts for income taxes using the asset and liability method
in accordance with ASC Topic No. 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
The Company applies the provisions of ASC Topic No. 740 for the financial
statement recognition, measurement and disclosure of uncertain tax positions recognized in the Company’s financial statements.
In accordance with this provision, tax positions must meet a more-likely-than-not recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position.
Recent Accounting Pronouncements
We have reviewed other recent accounting pronouncements and concluded they
are either not applicable to the business, or no material effect is expected on the condensed consolidated financial statements as a result
of future adoption.
Note 4 – Intangible Assets
The following tables provide detail associated
with the Company’s acquired identifiable intangible assets:
| Schedule of intangible assets | |
| | |
| | |
| | |
| |
| | |
As of March 31, 2023 | |
| | |
| Gross Carrying
Amount | | |
| Accumulated Amortization | | |
| Net Carrying Amount | | |
| Weighted Average Useful life (in years) | |
| Amortized intangible assets: | |
| | | |
| | | |
| | | |
| | |
| Know-how license | |
$ | 80,000 | | |
$ | (46,667 | ) | |
$ | 33,333 | | |
| 5 | |
| Total | |
$ | 80,000 | | |
$ | (46,667 | ) | |
$ | 33,333 | | |
| | |
Amortization expense charged to operations was $4,000 for the three months
ended March 31, 2023 and 2022, respectively.
Note 5 – Patent Costs
As of March 31, 2023, the Company has three pending patent applications.
The initial patent applications consist of a US patent and international patents filed in six countries. The US patent was granted on
August 16, 2022. The EU patent was granted on March 31, 2021. The validation of the EU patent in each of the six countries is pending.
Legal fees associated with the patents totaled $373,197, net of accumulated amortization of $785 and $321,308 as of March 31, 2023 and
December 31, 2022, respectively and are presented in the balance sheet as patent costs. Amortization expense charged to operations was
$785 for the three months ended March 31, 2023.
Note 6 – Finance Agreement Payable
On October 31, 2022, the Company entered into an agreement with a premium
financing company to finance its Directors and Officers insurance premiums for 12-month policies effective October 25, 2022. The amount
financed of $1,037,706 is payable in 11 monthly installments plus interest at a rate of 6.216% through September 28, 2023. Finance agreement
payable was $566,022 and $849,032 at March 31, 2023 and December 31, 2022, respectively. $646,795 has been recorded in prepaid expenses
and is being amortized over the life of the policy.
Note 7 - Earnings (Loss) Per Common Share
The Company calculates net income (loss) per common share in accordance
with ASC 260 “Earnings Per Share” (“ASC 260”). Basic and diluted net earnings (loss) per common share was
determined by dividing net earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding
during the period. The Company’s potentially dilutive shares, which include outstanding common stock options, common stock warrants,
and convertible debt have not been included in the computation of diluted net loss per share for the three months ended March 31, 2023
and 2022 as the result would be anti-dilutive.
| Schedule of anti dilutive earning per share | |
| | |
| |
| | |
Three Months
Ended | |
| | |
March
31, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| Stock warrants | |
| 7,854,620 | | |
| 215,654 | |
| Stock options | |
| 1,759,599 | | |
| — | |
| Total shares excluded from calculation | |
| 9,614,219 | | |
| 215,654 | |
Note 8 – Stockholders’ Equity
Stock Transactions
Pursuant to the Business Combination
Agreement on October 25, 2022, the Company issued the following securities:
Holders of conversion rights issued
as a component of units in Mana’s initial public offering (the “Public Rights”) were issued an aggregate of 928,571
shares of the Company’s common stock;
Holders of existing shares of common
stock of Legacy Cardio and the holder of equity rights of Legacy Cardio (together, the “Legacy Cardio Stockholders”) received
an aggregate of 6,883,306 shares of the Company’s Common Stock, calculated based on the exchange
ratio of 3.427259 pursuant to the Merger Agreement (the “Exchange Ratio”) for each share of Legacy Cardio Common
Stock held or, in the case of the equity rights holder, that number of shares of the Company’s Common Stock equal to 1% of the Aggregate
Closing Merger Consideration, as defined in the Merger Agreement;
The Legacy Cardio Stockholders received,
in addition, an aggregate of 43,334 shares of the Company’s Common Stock (“Conversion Shares”) upon conversion of an
aggregate of $433,334 in principal amount of promissory notes issued by Mana to Legacy Cardio in connection with its loan of such amount
in order to extend Mana’s duration through October 26, 2022 (the “Extension Notes”), which Conversion Shares were distributed
to the Legacy Cardio Stockholders in proportion to their respective interest in Legacy Cardio.
Mana public stockholders (excluding
Mana Capital, LLC, the SPAC sponsor (the “Sponsor”), and Mana’s former officers and directors) own 34,548 shares of
the Company’s Common Stock and the Sponsor, Mana’s former officers and directors and certain permitted transferees own 1,625,000
shares of the Company’s Common Stock.
Immediately after giving effect to
the Business Combination, there were 9,514,743 issued and outstanding shares of the Company’s Common Stock.
On October 25, 2022, in connection with the approval of the Business Combination,
the Company’s stockholders approved the Cardio Diagnostics Holdings, Inc. 2022 Equity Incentive Plan (the “2022 Plan”).
The purpose of the 2022 Plan is to promote the interests of the Company and its stockholders by providing eligible employees, officers,
directors and consultants with additional incentives to remain with the Company and its subsidiaries, to increase their efforts to make
the Company more successful, to reward such persons by providing an opportunity to acquire shares of Common Stock on favorable terms and
to attract and retain the best available personnel to participate in the ongoing business operations of the Company. The 2022 Plan permits
the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights,
Performance Units and Performance Shares.
The 2022 Plan, as approved, permits the issuance of up to 3,256,383
shares of Common Stock (the “Share Reserve”) upon exercise or conversion of grants and awards made from time to time to officers,
directors, employees and consultants, however that the Share Reserve will increase on January 1st of each calendar year and ending on
and including January 1, 2027 (each, an “Evergreen Date”), in an amount equal to the lesser of (i) 7% of the total number
of shares of Common Stock outstanding on the December 31st immediately preceding the applicable Evergreen Date and (ii) such lesser number
of shares of Common Stock as determined to be appropriate by the Compensation Committee, which administers the 2022 Plan, in its sole
discretion. There was no increase in the Share Reserve on January 1, 2023.
Common Stock Issued
On March 2, 2023, a stockholder exercised warrants in exchange for
100,000 common shares for proceeds of $390,000.
During the three months ended March 31, 2023, the Company issued 1,092
common shares to a consultant for services pursuant to vesting of Restricted Stock Units granted, valued at $4,000.
Warrants
On October 1, 2019, the Company issued warrants to a seed funding firm
equivalent to 2% of the fully-diluted equity of the Company, or 22,500 common shares at the time of issuance. The warrant is exercisable
on the earlier of the closing date of the next Qualified Equity Financing occurring after the issuance of the warrant, and immediately
before a Change of Control. The exercise price is the price per share of the shares sold to investors in the next Qualified Equity Financing,
or if the warrant becomes exercisable in connection with a Change in Control before the next Qualified Equity Financing, the greater of
the quotient obtained by dividing $150,000 by the Pre-financing Capitalization, and the price per share paid by investors in the then-most
recent Qualified Equity Financing, if any. The warrant will expire upon the earlier of the consummation of any Change of Control, or 15
years after the issuance of the warrant.
In April 2022, the Company issued fully vested warrants to investors as
part of private placement subscription agreements pursuant to which the Company issued common stock. Each stockholder received warrants
to purchase 50% of the common stock issued at an exercise price of $3.90 per share with an expiration date of June 30, 2027.
As of May 23, 2022, the Company issued fully vested warrants to investors
as part of an additional private placement subscription agreements pursuant to which the Company issued common stock. Each stockholder
received warrants to purchase 50% of the common stock issued at an exercise price of $6.21 per share with an expiration date of five years
from the date of issue.
All of the warrants issued by Legacy Cardio were exchanged in the Business
Combination for warrants of the Company based on the merger exchange ratio.
Warrant activity during the three months ended March 31, 2023 and 2022
follows:
| Schedule of warrant activity | |
| | |
| | |
| |
| | |
| | |
Weighted | | |
Average Remaining | |
| | |
Warrants Outstanding | | |
Average Exercise Price | | |
Contractual
Life (Years) | |
| Warrants outstanding at December 31, 2021 | |
| 215,654 | | |
$ | 13.35 | | |
| 5.90 | |
| No warrant activity | |
| — | | |
| — | | |
| | |
| Warrants outstanding at March 31, 2022 | |
| 215,654 | | |
$ | 13.35 | | |
| 5.07 | |
| Warrants outstanding at December 31, 2022 | |
| 7,954,620 | | |
| 9.63 | | |
| 4.46 | |
| Warrants exercised | |
| (100,000 | ) | |
| 13.35 | | |
| | |
| Warrants outstanding at March 31, 2023 | |
| 7,854,620 | | |
$ | 9.70 | | |
| 4.22 | |
Options
In May 6, 2022, the Company granted 513,413 stock options to the board
of directors pursuant to the Cardio Diagnostics, Inc. 2022 Equity Incentive Plan. All of the options granted under this legacy plan were
exchanged for options under the Plan adopted by the Company’s stockholders on October 25, 2022, and based on the exchange ratio
for the merger, resulted in a total of 1,759,599 options issued upon closing. Each exchanged option has an exercise price of $3.90 per
share with an expiration date of May 6, 2032. The exchanged options fully vested upon the merger with Mana.
Note 9 – Convertible Notes Payable
On March 8, 2023, the Company entered into a securities purchase agreement
(“Securities Purchase Agreement”) with YA II PN, Ltd., an investment fund managed by Yorkville Advisors Global, LP (“Yorkville”)
under which the Company agreed to sell and issue to Yorkville convertible debentures (“Convertible Debentures”) in a gross
aggregate principal amount of up to $11.2 million (“Subscription Amount”). The Convertible Debentures are convertible into
shares of common stock of the Company and are subject to various contingencies being satisfied as set forth in the Securities Purchase
Agreement. The notes are convertible at any time through the maturity date, which, in each case, is one year from the
date of issuance. The conversion price shall be determined on the basis of 92% of the two lowest VWAP (Volume Weighted Average Prices)
of the Common Stock during the prior seven (7) trading day period. On March 8, 2023, the Company issued and sold to Yorkville a Convertible
Debenture in the principal amount of $5.0 million, for which it received $4.5 million, with a $500,000 original issue discount (“OID”). Interest on the outstanding principal balance accrues at a rate of 0% and will increase to 15% upon
an Event of Default for so long as it remains uncured
The Company recorded a debt discount related to identified embedded
derivatives relating to the conversion features (see Note 10) based on fair values as of the inception date of the Note. The calculated
debt discount, including the OID equaled the face of the Note and is being amortized over the term of the note.
Convertible notes payable of $315,068 at March 31,
2023 is presented net of debt discount of $4,684,932.
Note 10 – Derivative Liability
The Company has determined that the conversion
feature embedded in the convertible notes described in Note 9 contain a potential variable conversion amount which constitutes a
derivative which has been bifurcated from the note and recorded as a derivative liability at fair value, with a corresponding
discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded
immediately to interest expense at inception which aggregated $4,692,672. The Company used the Binomial Black-Scholes
Option Pricing model to value the conversion features. The Company used the Binomial Option Pricing model to value the conversion
features.
The Company used Level 3 inputs for its valuation
methodology for the conversion option liability in determining the fair value using a Black-Scholes option-pricing model with the following
assumption inputs:
| Schedule of option liability | |
| |
|
| | |
March
8, | |
March
31, |
| | |
2023 | |
2023 |
| Annual dividend yield | |
| — | | |
| — | |
| Expected life (years) | |
| 1.0 | | |
| 1.0 | |
| Risk-free interest rate | |
| 5.28 | % | |
| 4.89 | % |
| Expected volatility | |
| 164 | % | |
| 169 | % |
| Exercise price | |
$ | 2.20 | | |
$ | 3.53 | |
| Stock price | |
$ | 5.32 | | |
$ | 3.91 | |
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph
11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes. Pursuant
to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.
Note 11 – Commitments and Contingencies
Prior Relationship of Cardio with Boustead Securities, LLC
At the commencement of efforts to pursue what ultimately ended in
the terminated business acquisition, Legacy Cardio entered into a Placement
Agent and Advisory Services Agreement (the “Placement Agent Agreement”), dated April 12, 2021, with Boustead Securities, LLC
("Boustead Securities”). This agreement was terminated in April 2022, when Legacy Cardio terminated the underlying agreement
and plan of merger and the accompanying escrow agreement relating to that proposed business acquisition after efforts to complete the
transaction failed, despite several extensions of the closing deadline.
Under the terminated Placement Agent Agreement, Legacy Cardio agreed
to certain future rights in favor of Boustead Securities, including (i) a two-year tail period during which Boustead Securities would
be entitled to compensation if Cardio were to close on a transaction (as defined in the Placement Agent Agreement) with any party that
was introduced to Legacy Cardio by Boustead Securities; and (ii) a right of first refusal to act as the Company’s exclusive placement
agent for 24-months from the end of the term of the Placement Agent Agreement (the “right of first refusal”). Cardio has taken
the position that due to Boustead Securities’ failure to perform as contemplated by the Placement Agent Agreement, these provisions
purporting to provide future rights are null and void.
Boustead Securities responded to the termination of the Placement
Agent Agreement by disputing Legacy Cardio’s contention that it had not performed under the Placement Agent Agreement because, among
other things, Boustead Securities had never sought out prospective investors. In its response, Boustead Securities included a list of
funds that they had supposedly contacted on Legacy Cardio’s behalf. While Boustead Securities’ contention appears to contradict
earlier communications from Boustead Securities in which they indicated that they had not made any such contacts or introductions, Boustead
Securities is currently contending that they are due success fees for two years following the termination of the Placement Agent Agreement
on any transaction with any person on the list of supposed contacts or introductions. Legacy Cardio strongly disputes this position. Notwithstanding
the foregoing, the Company has not consummated any transaction, as defined, with any potential party that purportedly was a contact of
Boustead Securities in connection with the Placement Agent Agreement and has no plans to do so at any time during the tail period. No
legal proceedings have been instigated by either party, and Cardio believes that the final outcome will not have a material adverse impact
on its financial condition.
The Benchmark Company, LLC Right of First Refusal
As noted in Note 1, the Company
completed a business combination with Mana on October 25, 2022. In connection with the proposed business combination, by agreement dated
May 13, 2022, Mana engaged The Benchmark Company, LLC (“Benchmark”) as its M&A advisor. Upon closing of the business
combination, Cardio assumed the contractual engagement entered into by Mana. On November 14, 2022, Cardio and Benchmark entered into
Amendment No. 1 Engagement Letter (the “Amendment Engagement”). Pursuant to the Amendment Engagement, Benchmark has been
granted a right of first refusal to act as lead or joint-lead investment banker, lead or joint-lead book-runner and/or lead or joint-lead
placement agent for all future public and private equity and debt offerings through October 25, 2023. In this regard, the Company and
Benchmark are in discussions regarding the convertible debenture financing the Company entered into in March 2023 whether Benchmark might
be entitled to compensation arising from the Company having entered into the convertible debenture financing in March 2023 without first
consulting Benchmark. No legal proceedings have been instigated, and the parties are continuing to discuss a resolution to this matter.
Demand Letter and Potential Mootness Fee Claim
On June 25, 2022, a plaintiffs’ securities law firm sent a
demand letter to the Company alleging that the Company’s Registration Statement on Form S-4 filed (the “S-4 Registration Statement”)
with the Securities and Exchange Commission (“SEC”) on May 31, 2022 omitted material information with respect to the Business
Combination and demanding that the Company and its Board of Directors immediately provide corrective disclosures in an amendment or supplement
to the Registration Statement. Subsequent thereto, the Company filed amendments to the S-4 Registration Statement on July 27, 2022, August
23, 2022, September 15, 2022, October 4, 2022 and October 5, 2022 in which it responded to various comments of the SEC staff and otherwise
updated its disclosure. In October 2023, the SEC completed its review and declared the S-4 registration statement on October 6, 2022.
On February 23, 2023 and February 27, 2023, plaintiffs’ securities law firm contacted the Company’s counsel asking who will
be negotiating a mootness fee relating to the purported claims set forth in the June 25, 2022 demand letter. The Company vigorously
denies that the S-4 Registration Statement, as amended and declared effective, is deficient
in any respect and that no additional supplemental disclosures are material or required. The Company believes that the claims asserted
in the Demand Letter are without merit and that no further disclosure is required to supplement the S-4 Registration Statement under applicable
laws. As of the date of filing of this Quarterly Report on Form 10-Q, no lawsuit has been filed against the Company by that firm.
The firm has indicated its willingness to litigate the matter if a mutually satisfactory resolution cannot be agreed upon; however, Cardio
believes that the final outcome will not have a material adverse impact on its financial condition. The Company cannot preclude the possibility
that claims or lawsuits brought relating to any alleged securities law violations or breaches of fiduciary duty could potentially require
significant time and resources to defend and/or settle and distract its management and board of directors from focusing on its business.
Note 12 – Subsequent Events
The Company evaluated its March 31, 2023 consolidated financial statements
for subsequent events through the date the consolidated financial statements were issued.
Common Stock Issued
Subsequent to the end of the period through the date of this report, Yorkville
converted $700,000 of principal to 361,094 shares of the Company’s common stock.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of the closing of the Business
Combination, which was accounted for as a reverse recapitalization in accordance with U.S. GAAP as discussed in Note 2 – Merger
Agreement and Reverse Recapitalization, the consolidated financial statements of Cardio Diagnostics, Inc., a Delaware corporation and
our wholly owned subsidiary, are now the financial statements of the Company.
The following discussion and analysis provide information that
Cardio’s management believes is relevant to an assessment and understanding of Cardio’s results of operations and financial
condition. You should read the following discussion and analysis of Cardio’s results of operations and financial condition together
with its unaudited consolidated financial statements and related notes to those statements included elsewhere in this Quarterly Report
on Form 10-Q, and its audited consolidated financial statements and related notes to those statements included in the Company’s
2022 Form 10-K. In addition to historical financial information, this discussion contains forward-looking statements based upon Cardio’s
current expectations that involve risks and uncertainties, including those described in the section titled, “Special Note Regarding
Forward-Looking Statements.” Cardio’s actual results could differ materially from such forward-looking statements as a result
of various factors, including those set forth under “Risk Factors” in this Quarterly Report on Form 10-Q and in the 2022 10-K.
Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Unless
the context requires otherwise, references to “Cardio,” the “Company,” “we,” “us” and
“our” refer to Cardio Diagnostics Holdings,
Inc., a Delaware corporation, together with its consolidated subsidiary.
Overview
Cardio was formed to further develop and commercialize
a series of products for major types of cardiovascular disease and associated co-morbidities, including coronary heart disease (“CHD”),
stroke, heart failure and diabetes, by leveraging our Artificial Intelligence (“AI”)-driven Integrated Genetic-Epigenetic
Engine™. As a company, we aspire to give every American adult insight into their unique risk for various cardiovascular diseases.
Cardio aims to become one of the leading medical technology companies for enabling improved prevention, early detection and treatment
of cardiovascular disease. Cardio is transforming the approach to cardiovascular disease from reactive to proactive and hope to accelerate
the adoption of Precision Medicine for all. We believe that incorporating Cardio’s solutions into routine practice in primary care
and prevention efforts can help alter the trajectory that nearly one in two Americans is expected to develop some form of cardiovascular
disease by 2035.
Cardio
believes it is the first company to develop and commercialize epigenetics-based clinical tests for cardiovascular disease that have clear
value propositions for multiple stakeholders including (1) patients, (2) clinicians, (3) hospitals/health systems, (4) employers and (5)
payors. According to the CDC, epigenetics is the study of how a person’s
behaviors and environment can cause changes that affect the way a person’s genes work. Unlike genetic changes,
epigenetic changes are reversible and do not change one’s DNA sequence, but they can change how a person’s body reads a DNA
sequence.
Cardio’s ongoing strategy for expanding
its business operations includes the following:
| |
• |
Develop blood-based and saliva-based products for stroke, congestive heart failure and diabetes; |
| |
• |
Build out clinical and health economics evidence in order to obtain payer reimbursement for Cardio’s tests; |
| |
• |
Expand its testing process outside of a single high complexity CLIA laboratory to multiple laboratories, including hospital laboratories; |
| |
• |
Introduce the test across several additional key channels, including health systems and self-insured employers; and |
| |
• |
Pursue the potential acquisition of one or more laboratories and/or synergistic companies in the telemedicine, AI or remote patient monitoring space. |
Recent Developments
The Business Combination
On October 25, 2022, we consummated the Business
Combination. Pursuant to the Business Combination Agreement, Merger Sub merged with and into Legacy Cardio, with Legacy Cardio surviving
the merger and becoming a wholly-owned direct subsidiary of Mana. Thereafter, Merger Sub ceased to exist, and Mana was renamed Cardio
Diagnostics Holdings, Inc.
The Business Combination
was accounted for as a reverse recapitalization, in accordance with GAAP. Under the guidance in ASC 805, Mana was treated as the “acquired”
company for financial reporting purposes. Legacy Cardio was deemed the accounting predecessor of the combined business, and Cardio Diagnostics
Holdings, Inc., as the parent company of the combined business, was the successor SEC registrant, meaning that our financial statements
for previous periods will be disclosed in the registrant’s periodic reports filed with the SEC.
The Business Combination had a significant
impact on the Company’s reported financial position and results as a consequence of the reverse recapitalization. As noted in Note
1 to the Company’s consolidated financial statements, the Company’s financial position reflects current liabilities that
include existing, deferred liabilities originally incurred by Mana that are payable by the Company to Ladenburg Thalmann & Co., Inc.
(“Ladenburg”) and I-Bankers Securities, Inc. (“I-Bankers”), the underwriters of Mana’s initial public offering,
and The Benchmark Company, LLC (“Benchmark”), the M&A
advisor Mana retained in connection with the Business Combination. The aggregate amount of the liabilities owed to these investment bankers,
as assumed by the Company in connection with the Business Combination, totals $928,500. This sum reflects a decrease in the amount of
the original liabilities incurred by Mana, including a 30% decrease in the liability owed to Ladenburg and I-Bankers and a 46% decrease
in the original liability incurred by Mana to Benchmark. The $928,500
is due and payable to the investment bankers on October 25, 2023. On March 25, 2023, Ladenburg offered the Company a 15% early pay discount
on the balance due. On March 27, 2023, the Company accepted the early pay discount and paid Ladenburg the net balance due and payable
of $419,475. As of March 31, 2023, the remaining assumed liabilities balance
was $435,000.
In addition, the Company acquired only $4,021
in cash after the payment of transaction costs and outstanding accounts payable, primarily as a result of a redemption rate of over 99%
by the holders of Mana’s publicly-traded Common Stock, which shares had a redemption right in connection with the Business Combination.
Specifically, Mana’s public stockholders exercised their right to redeem 6,465,452 shares of Common Stock, which constituted approximately
99.5% of the shares with redemption rights, for cash at a redemption price of approximately $10.10 per share, for an aggregate redemption
amount of $65,310,892. In accounting for the reverse
recapitalization, Legacy Cardio’s 1,976,749 issued and outstanding shares of common stock were reversed, and the Mana shares of
common stock, totaling 9,514,743, were recorded, as described in Note 2.
As a result of the Business Combination, Cardio
became an SEC-registered and Nasdaq-listed company, which will require the Company to hire additional personnel and implement procedures
and processes to address public company regulatory requirements and customary practices. The Company expects to incur additional annual
expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional
internal and external accounting, legal and administrative resources.
COVID-19 Impact
The global COVID-19 pandemic continues to evolve.
The extent of the impact of the COVID-19 pandemic on Cardio’s business, operations and development timelines and plans remains uncertain
and will depend on certain developments, including the duration and spread of the outbreak and its impact on Cardio’s development
activities, third-party manufacturers, and other third parties with whom Cardio does business, as well as its impact on regulatory authorities
and Cardio’s key scientific and management personnel.
The ultimate impact of the COVID-19 pandemic
is highly uncertain and subject to change. To the extent possible, Cardio is conducting business as usual, with necessary or advisable
modifications to employee travel and with certain of its employees working remotely all or part of the time. Cardio will continue to actively
monitor the evolving situation related to COVID-19 and may take further actions that alter our operations, including those that federal,
state or local authorities may require, or that we determine in the best interests of our employees and other third parties with whom
we do business. At this point, the extent to which the COVID-19pandemic may affect our future business, operations and development timelines
and plans, including the resulting impact on Cardio’s expenditures and capital needs, remains uncertain.
Results of Operations
The results of operations presented below should
be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q.
The following table sets forth Cardio’s results of operations data for the periods presented:
Comparisons for the three months ended March 31, 2023 and
2022:
| | |
Three
Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| Revenue | |
| | |
| |
| Revenue | |
$ |
— | | |
$ |
— | |
| | |
| | |
| |
| Operating Expenses | |
| | | |
| | |
| Sales and marketing | |
| 49,551 | | |
| 22,398 | |
| Research and development | |
| 86,665 | | |
| 1,130 | |
| General and administrative expenses | |
| 1,562,128 | | |
| 205,027 | |
| Amortization | |
| 4,785 | | |
| 4,000 | |
| Total operating expenses | |
| (1,703,129 | ) | |
| (232,555 | ) |
| Other (expense) income | |
| 670,511 | | |
| (57,500 | ) |
| Net (loss) | |
$ | (1,032,618 | ) | |
$ | (290,055 | ) |
Net Loss Attributable to Legacy Cardio
Cardio’s net loss
for the three months ended March 31, 2023, was $1,032,618 as compared to $290,055 for the three months ended March 31, 2022,
an increase of $1,921,721, primarily as a result of an increase in General and Administrative expenses.
Revenue
Cardio had no revenue three months ended March
31, 2023 and 2022, respectively.
Sales and Marketing
Expenses related to sales and marketing for
three months ended March 31, 2023 were $49,551 as compared to $22,398 three
months ended March 31, 2022, an increase of $27,153. The overall increase was due to an increase in sales and marketing efforts
after the Business Combination.
Research and Development
Research and development expense three months
ended March 31, 2023 was $86,665 as compared to $1,130 for three months ended March 31, 2022, an increase of $85,535. The increase was
attributable to laboratory runs performed in the 2023 period on new product offerings in the pipeline.
General and Administrative Expenses
General
and administrative expenses for the three months ended March 31, 2023 were $1,562,128 as compared to $205,027 for the
three months ended March 31, 2022, an increase of $1,357,101. The overall increase is primarily due to an increase in personnel and legal
and accounting expenses related to financing and merger transactional activity, increased expenses associated with being a publicly traded
company and some increase in personnel.
Amortization
Amortization expense for the three months ended
March 31, 2023 was $4,785 as compared to $4,000 for the three months ended March 31, 2022. The total amortization expense includes the
amortization of intangible assets.
Other Income (expenses)
Total other income for
the three months ended March 31, 2023, was $670,511 as compared to total other expenses of $57,500 for the three months ended March 31,
2022. The total other income for the three months ended March 31, 2023, is due to a gain on the change in fair value of derivative liability
of $5,686,901 and interest income of $221 offset by interest expense of $5,016,611. Interest expense includes the amortization of $31,506
of the original issuance discount, $283,561 amortization of the debt discount
related to the derivative liability, and $4,692.672 related to the excess fair value of the derivative liability in excess of the book
value of the convertible note at inception.
Liquidity and Capital Resources
Liquidity describes the ability of a company
to generate sufficient cash flows in the short- and long-term to meet the cash requirements of its business operations, including working
capital needs, debt service, acquisitions and investments, and other commitments
and contractual obligations. We consider liquidity in terms of cash flows from operations and other sources, and their sufficiency to
fund our operating and investing activities.
Our
principal sources of liquidity have been proceeds from the issuance of equity and warrant exercises. More recently, upon signing
the YA Securities Purchase Agreement on March 8, 2023, we issued and sold to YA II PN, Ltd. (“Yorkville”) a Convertible Debenture
in the principal amount of $5.0 million for a purchase price of $4.5 million (the “First Convertible Debenture”) to provide
additional liquidity. Pursuant to the YA Securities Purchase Agreement, the parties further agreed that we will issue and sell to Yorkville,
and Yorkville will purchase from us, a second Convertible Debenture in the principal amount of $6.2 million for a purchase price of $5.58
million, subject to the satisfaction or waiver of the conditions set forth in the YA Securities Purchase Agreement. The conditions include,
but are not limited to: (i) the SEC shall have declared effective a resale registration statement covering shares of Common Stock issuable
upon conversion of the First Convertible Debenture; and (ii) we shall have obtained stockholder approval for the issuance of the shares
of Common Stock issuable upon conversion of the Debentures that would be in excess of the “Exchange Cap” (as defined in the
YA Securities Purchase Agreement). The SEC declared effective the resale registration statement on April 11, 2023. We have noticed a
special meeting of stockholders to be held on May 26, 2023 where we will seek to satisfy the stockholder approval condition needed to
issue and sell the second Convertible Debenture to Yorkville.
Our
primary cash needs are for day-to-day operations, to fund working capital requirements, to fund our growth strategy, including investments
and acquisitions, and to pay $928,500 of deferred contractual obligations originally incurred by Mana to its investment bankers, which
is payable on October 25, 2023, as well as other accounts payable. On March 25, 2023, Ladenburg offered the Company a 15% early
pay discount on the balance due. On March 27, 2023, the Company accepted the early pay discount and paid Ladenburg the net balance due
and payable of $419,475. As of March 31, 2023, the remaining assumed liabilities
balance was $435,000.
Our principal uses of cash in recent periods
have been funding operations and paying expenses associated with the Business Combination. Our long-term future capital requirements will
depend on many factors, including revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales
and marketing activities, the timing and extent of spending to support investments, including research and development efforts, and the
continuing market adoption of our products.
In
each fiscal year since our inception, we have incurred losses from operations and generated negative cash flows from operating
activities. Our total current liabilities as of March 31, 2023 are $5,129,496. As noted above, on March 8, 2023, we issued and sold
the First Convertible Debenture, thereby increasing our current liabilities by $5.0 million, with the expectation that we will issue and
sell the Second Convertible Debenture in the principal amount of $6.2 million in the second quarter of 2023.
We received less proceeds from the Business
Combination than we initially expected. The projections that we prepared in June 2022 in connection with the Business Combination assumed
that we would receive at least an aggregate of $15 million in capital from the Business Combination and the Legacy Cardio private placements
conducted in 2022 prior to the Business Combination. This base amount anticipated at least $5.0 million in proceeds remaining in the Trust
Account following payment of the requested redemptions. At Closing, we received only $4,021 in cash from the Trust Account due to higher
than expected redemptions by Mana public stockholders and higher than expected expenses in connection with the Business Combination and
residual Mana expenses. Accordingly, we have less cash available to pursue our anticipated growth strategies and new initiatives than
we projected. This has caused, and may continue to cause, significant delays in, or limit the scope of, our planned acquisition strategy
and our planned product expansion timeline. Our failure to achieve our projected results could harm the trading price of our securities
and our financial position, and adversely affect our future profitability and cash flows.
Because of the extremely high rate of redemptions
by Mana public stockholders in connection with the Business Combination and higher than anticipated transaction costs, we have almost
no Trust fund proceeds available to pursue our anticipated growth strategies and new initiatives, including our acquisition strategy.
This has had a material impact on our projected estimates and assumptions and actual results of operations and financial condition. We
recorded nominal revenue in 2022 of $950. We expect that revenue in 2023 will also fall short of the projections. Nevertheless, we believe
that the fundamental elements of our business strategy remain unchanged, although the scale and timing of specific initiatives have been
temporarily negatively impacted as a result of having significantly less than anticipated capital on hand following the Business Combination.
We have had,
and expect that we will continue to have, an ongoing need to raise additional cash from outside sources to fund our operations and expand
our business. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would
be harmed. Successful transition to attaining profitable operations depends upon achieving a level of revenue adequate to support the
post-merger company.
We
expect that working capital requirements will continue to be funded through a combination of existing funds and further issuances of securities.
Working capital requirements are expected to increase in line with the growth of the business. Existing working capital, further advances
and debt instruments, and anticipated cash flow are expected to be adequate to fund operations over the next 12 months. We have no lines
of credit or other bank financing arrangements. In connection with our business plan, management anticipates additional increases
in operating expenses and capital expenditures relating to: (i) developmental expenses associated with a start-up business and (ii) marketing
expenses. Cardio intends to finance these expenses with further issuances of securities and debt issuances. Thereafter, we expect we will
need to raise additional capital and generate revenues to meet long-term operating requirements. If we raise additional funds through
the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted,
and these newly-issued securities may have rights, preferences or privileges senior to those of existing equity holders. If we raise additional
funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions
on our business that could impair our operating flexibility and also require us to incur interest expense.
The exercise prices of our currently outstanding
warrants range from a high of $11.50 to a low of $3.90 per share of Common Stock. We believe the likelihood that warrant holders will
exercise their Warrants and therefore the amount of cash proceeds that we might receive, is dependent upon the trading price of our Common
Stock, the last reported sales price for which was $1.72 on May 11, 2023. If the trading price of our Common Stock is less than the respective
exercise prices of our outstanding Warrants, we believe holders of our Public Warrants, Sponsor Warrants and Private Placement Warrants
will be unlikely to exercise their Warrants. There is no guarantee that the Warrants will be in the money prior to their respective expiration
dates, and as such, the Warrants may Expire worthless, and we may receive no proceeds from the exercise of Warrants. Given the current
differential between the trading price of our Common Stock and the Warrant exercise prices and the volatility of our stock price, we are
not making strategic business decisions based on an expectation that we will receive any cash from the exercise of Warrants. However,
we will use any cash proceeds received from the exercise of Warrants for general corporate and working capital purposes, which would increase
our liquidity. We will continue to evaluate the probability of Warrant exercises and the merit of including potential cash proceeds from
the exercise of the Warrants in our future liquidity projections.
Cash at March
31, 2023 totaled $6,707,770 as compared to $4,117,521 at December 31, 2022, an increase of $2,590,249. The
following table shows Cardio’s cash flows from operating activities, investing activities and financing activities for the stated
periods:
| | |
Three
Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| Net cash used in operating activities | |
$ | 1,649,067 | | |
$ | 186,090 | |
| Net cash used in investing activities | |
| 52,674 | | |
| 16,436 | |
| Net cash provided by financing activities | |
| 4,291,990 | | |
| — | |
Cash Used in Operating Activities
Cash used in operating
activities for the three months ended March 31, 2023 was $1,649,067, as compared to $186,090 for the three months ended March 31, 2022.
The cash used in operations during the three months ended March 31, 2023, is a function of net loss of $1,032,618 adjusted for the following
non-cash operating items: amortization of $4,785, $4,000 in stock based compensation, $5,007,740 in non-cash interest expense offset by
$5,686,901 in change in fair value of derivative liability, , a decrease of $338,105 in prepaid expenses and other current assets, an
increase in deposits of $2,100 and a decrease of $282,078 in accounts payable and accrued expenses.
Cash Used in Investing Activities
Cash used in investing activities for the three
months ended March 31, 2023, was $52,674 compared to $16,436 for the three months ended March 31, 2022. The cash used in investing activities
for the three months ended March 31, 2023 was due to patent costs incurred.
Cash Provided by Financing Activities
Cash provided by
financing activities for the three months ended March 31, 2023, was $4,291,990 as compared to $0 for the three months ended March
31, 2023. This change was due to $4,500,000 in proceeds from convertible notes payable, net of original issue discount (“OID”) of
$500,000, $390,000 in proceeds from exercise of warrants, offset by $283,000 in payments of finance agreement and $315,000 in
placement agent fees, during the three months ended March 31, 2023.
Off-Balance Sheet Financing Arrangements
We
did not have any off-balance sheet arrangements as of March 31, 2023.
Contractual Obligations
The following summarizes Cardio’s
contractual obligations as of March 31, 2023 and the effects that
such obligations are expected to have on its liquidity and cash flows in future periods:
Prior Mana Obligations
to its Investment Bankers
See “Recent Developments
– Business Combination” above for a discussion of the contractual obligations due and payable on October 25, 2023 to
Ladenburg/I-Bankers and Benchmark in the aggregate amount of $928,500 for deferred investment banking fees originally entered into by
Mana prior to the Business Combination, as reduced at and after the closing of the Business Combination.
On March 25, 2023, Ladenburg
offered the Company a 15% early pay discount on the balance due. On March 27, 2023, the Company accepted the early pay discount and paid
Ladenburg the net balance due and payable of $419,475. As of March 31, 2023,
the remaining assumed liabilities balance was $435,000.
Prior Relationships of Cardio with Boustead
Securities, LLC
At the commencement of efforts to pursue what
ultimately ended in the terminated business acquisition referred to above under “Deposit for Acquisition,” Legacy Cardio entered
into a Placement Agent and Advisory Services Agreement (the “Placement Agent Agreement”), dated April 12, 2021, with Boustead
Securities, LLC (“Boustead Securities”). This agreement was terminated in April 2022, when Legacy Cardio terminated the underlying
agreement and plan of merger and the accompanying escrow agreement relating to that proposed business acquisition after efforts to complete
the transaction failed, despite several extensions of the closing deadline.
Under the terminated Placement Agent Agreement,
Legacy Cardio agreed to certain future rights in favor of Boustead Securities, including (i) a two-year tail period during which Boustead
Securities would be entitled to compensation if Cardio were to close on a transaction (as defined in the Placement Agent Agreement) with
any party that was introduced to Legacy Cardio by Boustead Securities; and (ii) a right of first refusal to act as the Company’s
exclusive placement agent for 24-months from the end of the term of the Placement Agent Agreement (the “right of first refusal”).
Cardio has taken the position that due to Boustead Securities’ failure to perform as contemplated by the Placement Agent Agreement,
these provisions purporting to provide future rights are null and void.
Boustead Securities responded to the termination
of the Placement Agent Agreement by disputing Legacy Cardio’s contention that it had not performed under the Placement Agent Agreement
because, among other things, Boustead Securities had never sought out prospective investors. In its response, Boustead Securities included
a list of funds that they had supposedly contacted on Legacy Cardio’s behalf. While Boustead Securities’ contention appears
to contradict earlier communications from Boustead Securities in which they indicated that they had not made any such contacts or introductions,
Boustead Securities is currently contending that they are due success fees for two years following the termination of the Placement Agent
Agreement on any transaction with any person on the list of supposed contacts or introductions. Legacy Cardio strongly disputes this position.
Notwithstanding the foregoing, the Company has not consummated any transaction, as defined, with any potential party that purportedly
was a contact of Boustead Securities in connection with the Placement Agent Agreement and has no plans to do so at any time during the
tail period. No legal proceedings have been instigated by either party, and Cardio believes that the final outcome will not have a material
adverse impact on its financial condition.
The Benchmark Company,
LLC Right of First Refusal
As noted in Note 1, the Company
completed a business combination with Mana on October 25, 2022. In connection with the proposed business combination, by agreement dated
May 13, 2022, Mana engaged The Benchmark Company, LLC (“Benchmark”) as its M&A advisor. Upon closing of the business combination,
Cardio assumed the contractual engagement entered into by Mana. On November 14, 2022, Cardio and Benchmark entered into Amendment No.
1 Engagement Letter (the “Amendment Engagement”). Pursuant to the Amendment Engagement, Benchmark has been granted a right
of first refusal to act as lead or joint-lead investment banker, lead or joint-lead book-runner and/or lead or joint-lead placement agent
for all future public and private equity and debt offerings through October 25, 2023. In this regard, the Company and Benchmark are in
discussions regarding whether Benchmark might be entitled to compensation arising from the Company having entered into the convertible
debenture financing in March 2023 without first consulting Benchmark. No legal proceedings have been instigated, and the parties are continuing
to discuss a resolution to this matter.
Demand Letter and
Potential Mootness Fee Claim
On June 25, 2022, a plaintiffs’ securities
law firm sent a demand letter to the Company alleging that the Company’s Registration Statement on Form S-4 filed (the “S-4
Registration Statement”) with the Securities and Exchange Commission (“SEC”) on May 31, 2022 omitted material information
with respect to the Business Combination and demanding that the Company and its Board of Directors immediately provide corrective disclosures
in an amendment or supplement to the Registration Statement. Subsequent thereto, the Company filed amendments to the S-4 Registration
Statement on July 27, 2022, August 23, 2022, September 15, 2022, October 4, 2022 and October 5, 2022 in which it responded to various
comments of the SEC staff and otherwise updated its disclosure. In October 2023, the SEC completed its review and declared the S-4 registration
statement effective on October 6, 2022. On February 23, 2023 and February 27, 2023, plaintiffs’ securities law firm contacted the
Company’s counsel asking who will be negotiating a mootness fee relating to the purported claims set forth in the June 25, 2022
demand letter. The Company vigorously denies that the S-4 Registration Statement, as amended
and declared effective, is deficient in any respect and that no additional supplemental disclosures
are material or required. The Company believes that the claims asserted in the Demand Letter are without merit and that no further disclosure
is required to supplement the S-4 Registration Statement under applicable laws. As of the date of filing of this Quarterly Report
on Form 10-Q, no lawsuit has been filed against the Company by that firm. The firm has indicated its willingness to litigate the matter
if a mutually satisfactory resolution cannot be agreed upon; however, Cardio believes that the final outcome will not have a material
adverse impact on its financial condition.
The Company cannot preclude the possibility
that claims or lawsuits brought relating to any alleged securities law violations or breaches of fiduciary duty could potentially require
significant time and resources to defend and/or settle and distract its management and board of directors from focusing on its business.
Critical Accounting Policies and Significant Judgments and Estimates
Cardio’s consolidated financial statements
are prepared in accordance with GAAP in the United States. The preparation of its consolidated financial statements and
related disclosures requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs
and expenses, and the disclosure of contingent assets and liabilities in Cardio’s financial statements. Cardio bases its estimates
on historical experience, known trends and events and various other factors that it believes are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Cardio evaluates its estimates and assumptions on an ongoing basis. Cardio’s actual results may differ from
these estimates under different assumptions or conditions.
While Cardio’s significant accounting
policies are described in more detail in Note 2 to its consolidated financial statements, Cardio believes that the following accounting
policies are those most critical to the judgments and estimates used in the preparation of its consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly owned-subsidiary, Cardio Diagnostics, LLC. All intercompany accounts and transactions have
been eliminated.
Use of Estimates in
the Preparation of Financial Statements
The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Fair Value Measurements
The Company adopted the provisions of ASC Topic
820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial
instruments, including cash and cash equivalents, accounts payable and accrued expenses are carried at historical cost basis, which approximates
their fair values because of the short-term nature of these instruments. The carrying amounts of our short- and long-term credit obligations
approximate fair value because the effective yields on these
obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or
embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value
hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for
identical assets or liabilities
Level 2 – quoted prices for similar assets
and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable (for
example cash flow modeling inputs based on assumptions)
Revenue Recognition
The Company hosts
its product, Epi+Gen CHD™ on InTeleLab’s Elicity platform (the “Lab”). The Lab collects payments from patients
upon completion of eligibility screening. Patients then send their samples to Mogene, a high complexity CLIA lab, which perform the biomarker
assessments. Upon receipt of the raw biomarker data from Mogene, the Company
performs all quality control, analytical assessments and report generation and shares test reports with the Elicity healthcare provider
via the Elicity platform. Revenue is recognized upon receipt of payments from the Lab for each test at the end of each month.
The
Company accounts for revenue under (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, using
the modified retrospective method. The modified retrospective adoption used by the Company did not result in a material cumulative effect
adjustment to the opening balance of accumulated deficit.
The Company determines the measurement of revenue
and the timing of revenue recognition utilizing the following core principles:
1. Identifying
the contract with a customer;
2. Identifying
the performance obligations in the contract;
3. Determining
the transaction price;
4. Allocating
the transaction price to the performance obligations in the contract; and
5. Recognizing
revenue when (or as) the Company satisfies its performance obligations.
Patent Costs
Cardio accounts for patents in accordance with
ASC 350-30, General Intangibles Other than Goodwill. The Company capitalizes patent costs representing legal fees associated
with filing patent applications and amortize them on a straight-line basis. The Company
are in the process of evaluating its patents’ estimated useful life and will begin amortizing the patents when they are brought
to the market or otherwise commercialized.
Stock-Based Compensation
Cardio accounts for its stock-based awards granted
under its employee compensation plan in accordance with ASC Topic No. 718-20, Awards Classified as Equity, which requires
the measurement of compensation expense for all share-based compensation granted to
employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service
period for awards expected to vest. The Company uses the Black-Scholes option pricing model to estimate the fair value of its stock
options and warrants. The Black-Scholes option pricing model requires the input of highly subjective assumptions including the expected
stock price volatility of the Company’s common stock, the risk-free interest rate at the date of grant, the expected vesting term
of the grant, expected dividends, and an assumption related to forfeitures of such grants. Changes in these subjective input assumptions
can materially affect the fair value estimate of the Company’s stock options and warrants.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item
305(e) of Regulation S-K, the Company is not required to provide the information required by this Item as it is a “smaller reporting
company.”
ITEM 4. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including our principal
executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period
covered by this Quarterly Report. Based on this evaluation, our principal executive officer and principal financial and accounting officer
have concluded that during the period covered by this Report, our disclosure controls and procedures are not effective. As a result, we
performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally
accepted accounting principles. Accordingly, management believes that the financial statements included in this Form 10-Q present
fairly in all material respects our financial position, results of operations and cash flows for the period presented.
Disclosure controls
and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls
and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls
and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints,
and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures,
no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies
and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions.
Changes in
Internal Control over Financial Reporting
There has not been any change in our
internal control over financial reporting that occurred during the three months ended March 31, 2023 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.
