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.