Item 7. Management’s Discussion and Analysis
Item 7. 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. You should read the following discussion and analysis of
our financial condition and results of operations together with our audited consolidated financial statements as of December 31, 2022
and 2021 and for each of the two years in the period ended December 31, 2022 and the related notes included in Part II, Item 8 of this
Annual Report.
Some of the information contained in this
discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans, estimates and strategy
for our business, includes forward-looking statements based upon current expectations that involve risks and uncertainties. You should
read the sections titled “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements” for a discussion
of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis. 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.
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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. However, on March 25, 2023, Ladenburg offered us a 15%
early pay discount on the balance due. On March 27, 2023, we accepted the early pay discount and paid Ladenburg the net balance due and
payable of $419,475. The balance of $435,000 owed to Benchmark remains due and payable on October 25, 2023.
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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 common shares were reversed, and the Mana common shares totaling
9,514,743 were recorded, as described in Note 7. As additional consideration for the transaction, Cardio will issue to each holder
who was entitled to merger consideration at the Closing, its pro rata proportion of up to 1,000,000 shares of our authorized
but unissued common stock (the “Earnout Shares” or “Contingently Issuable Common Stock”), if on or prior to the
fourth anniversary of the Closing Date (the “Earnout Period”), the VWAP of the Company’s Common Stock equals or exceeds
four different price triggers for 30 of any 40 consecutive trading days, as follows: (i) one-quarter of the Earnout Shares will be issued
if the VWAP equals or exceeds $12.50 per share for the stated period; (ii) one-quarter of the Earnout Shares will be issued if the VWAP
equals or exceeds $15.00 per share for the stated period; (iii) one-quarter of the Earnout Shares will be issued if the VWAP equals or
exceeds $17.50 for the stated period; and (iv) one-quarter of the Earnout Shares will be issued if the VWAP equals or exceeds $20.00 for
the stated period.
As an SEC-registered and Nasdaq-listed company,
post-merger, the Company will need 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 Annual Report on Form 10-K.
The following table sets forth Cardio’s results of operations data for the periods presented:
Comparisons for the years ended December 31, 2022 and 2021:
Years
Ended December 31,
2022
2021
Revenue
Revenue
$ 950
$ 901
Operating Expenses
Sales and marketing
92,700
103,318
Research and development
40,448
31,468
General and administrative expenses
4,400,253
470,563
Amortization
16,000
16,000
Total operating expenses
(4,549,401 )
(621,349 )
Other (expense) income
(112,534 )
—
Net (loss)
(4,660,985 )
$ (620,448 )
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Net Loss Attributable to Legacy Cardio
Cardio’s net loss
attributable for the year ended December 31, 2022, was $4,660,985 as compared to $620,448 for the year ended December 31, 2021, an increase
of $4,040,537 primarily as a result of an increase in General and Administrative expenses.
Revenue
Cardio has earned only nominal revenue since
inception. Revenue for the year ended December 31, 2022 was $950 compared to $901 for the year ended December 31, 2021. Revenue was generated
through the Elicity telemedicine platform.
Sales and Marketing
Expenses related to sales and marketing for
the year ended December 31, 2 022 were $92,700 as compared to $103,318 for
the year ended December 31, 2021, a decrease of $10,618. The overall decrease
was due to a decrease in outsourced sales and marketing contracting related to the launching of our first product, Epi+Gen CHD™
in January 2021 as opposed to an increase in 2022 of hiring of staff utilized for sale and marketing efforts.
Research and Development
Research and development expense for year ended
December 31, 2022, was $40,448 as compared to $31,468 for year ended December 31, 2021, an increase of $8,980. The increase was attributable
to laboratory runs performed in the 2022 period, whereas less laboratory runs were performed in the corresponding period in 2021.
General and Administrative Expenses
General
and administrative expenses for the year ended December 31,2022 were $4,400,253 as compared to $470,563 for the
year ended December 31, 2021, an increase of $3,929,690. The overall increase is primarily due to an increase in personnel and legal and
accounting expenses related to financing and merger transactional activity .
Amortization
Amortization expense for year ended December
31, 2022 was $16,000 as compared to $16,000 for the year ended December 31, 2021. The total amortization expense includes the amortization
of intangible assets.
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 $5.0million for a purchase price of $4.5 million (the “First YA 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 YA 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 YA Convertible Debenture; and (ii) we shall have obtained stockholder approval for
the issuance of the shares of Common Stock issuable upon conversion of the YA Convertible Debentures that would be in excess of the “Exchange
Cap” (as defined in the YA Securities Purchase Agreement).
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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 $435,000 of deferred
contractual obligations originally incurred by Mana to one of its investment bankers, which is payable on October 25, 2023, as well as
other accounts payable.
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. We also have negative working capital and stockholders’ deficit as
of December 31, 2022. Our total current liabilities as of December 31, 2022 are $1,947,770. As noted above, on March 8, 2023, we
issued and sold the First YA Convertible Debenture, thereby increasing our current liabilities by $5.0 million, with the expectation that
we will issue and sell the Second YA 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. It is likely 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.
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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 $4.25 on March 27, 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 December
31, 2022 totaled $4,117,521 as compared to $512,767 at December 31, 2021, an increase of $3,604,754. The
following table shows Cardio’s cash flows from operating activities, investing activities and financing activities for the stated
periods:
2022
2021
Net cash used in operating activities
$ 5,090,968
$ 585,291
Net cash used in investing activities
368,001
364,029
Net cash provided by financing activities
9,063,723
1,225,000
Cash Used in Operating Activities
Cash used in operating activities for the year
ended December 31, 2022 was $5,090,968, as compared to $585,291 for the year ended December 31, 2021. The cash used in operations during
the year ended December 31, 2022, is a function of net loss of $4,660,985, adjusted for the following non-cash operating items: amortization
of $16,000 and $112,534 in acquisition related expense, offset by a decrease in accounts receivable of $901, an increase of $690,821 in
prepaid expenses and other current assets, an increase in deposits of $4,950 and an increase of $136,353 in accounts payable and accrued
expenses.
Cash Used in Investing Activities
Cash used in investing activities for the year
ended December 31, 2022, was $368,001 compared to $364,029 for the year ended December 31, 2021. The cash used in investing activities
for the year ended December 31, 2022 was due to $4,021 cash acquired from acquisition, $137,466 repayment of deposit for acquisition,
$433,334 payments for notes receivable and $76,154 in patent costs incurred.
Cash Provided by Financing Activities
Cash provided by financing activities for the
year ended December 31, 2022 was $9,063,723 as compared to $1,225,000 for the year ended December 31, 2021. This change was due to $11,986,037
in proceeds from the sale of common stock, offset by $188,674 in payments of finance agreement, $1,535,035 in payments of recapitalization
transaction costs and $1,198,604 in placement agent fees, during the year ended December 31, 2022.
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Off-Balance Sheet Financing Arrangements
We
did not have any off-balance sheet arrangements as of December 31, 2022.
Contractual Obligations
The following summarizes Cardio’s
contractual obligations as of December 31 , 2022 and the effects that
such obligations are expected to have on its liquidity and cash flows in future periods:
Deposit for Acquisition
On April 14, 2021, Legacy Cardio deposited $250,000
with an escrow agent in connection with a planned business acquisition. Legacy Cardio subsequently decided to terminate the acquisition
and recorded expenses of $112,534 in connection with the termination, which amount is presented as other expenses in the consolidated
statements of operations. The remaining escrow balance of $137,466 was returned to Legacy Cardio on July 26, 2022.
Related Party Transactions
The Company reimburses Behavioral Diagnostic,
LLC (“BDLLC”), a company owned by its Chief Medical Officer for a portion of the salaries of
the Company’s Chief Executive Officer and its Chief Technology Officer, who is the husband of the CEO. Payments to BDLLC for salaries
totaled $83,767 and $0 for the years ended December 31 , 2021 and 2022,
respectively.
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, we accepted the early pay discount and paid Ladenburg the net balance due and payable
of $419,475. The balance of $435,000 owed to Benchmark remains due and payable on October 25, 2023.
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.
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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 have any rights arising from the Company having entered into the convertible debenture financing
in March 2023. 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. 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 Annual Report on Form 10-K, 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.
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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.
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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 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2022, we were not subject
to any market or interest rate risk.