Cardio Diagnostics Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS CARDO DIAGNOSTICS HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) JUNE 30, DECEMBER 31, 2023 2022 ASSETS Current assets Cash $ 5,044,328 $ 4,117,521 Accounts receivable 1,050 — Prepaid expenses and other current assets 1,209,340 1,768,366 Total current assets 6,254,718 5,885,887 Long-term assets Property and equipment 26,019 — Intangible assets, net 29,333 37,333 Deposits 12,850 4,950 Patent costs, net 433,984 321,308 Total assets $ 6,756,904 $ 6,249,478 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 651,415 $ 1,098,738 Convertible notes payable, net 915,202 — Derivative liability 1,998,752 — Finance agreement payable 283,011 849,032 Total liabilities 3,848,380 1,947,770 Stockholders' equity Preferred stock, $ .00001 par value; authorized - 100,000,000 shares; 0 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively — — Common stock, $ .00001 par value; authorized - 300,000,000 shares; 11,178,455 and 9,514,743 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 112 95 Additional paid-in capital 13,955,481 10,293,159 Accumulated deficit ( 11,047,069 ) ( 5,991,546 ) Total stockholders' equity 2,908,524 4,301,708 Total liabilities and stockholders' equity $ 6,756,904 $ 6,249,478 The accompanying notes are an integral part of these unaudited financial statements. 4 CARDIO DIAGNOSTICS HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2023 2022 2023 2022 Revenue $ 1,725 $ — $ 1,725 $ — Operating expenses Sales and marketing 31,608 26,806 81,159 49,204 Research and development 12,317 5,041 98,982 6,171 General and administrative expenses 2,506,148 751,117 4,068,276 956,144 Amortization 4,793 4,000 9,578 8,000 Total operating expenses 2,554,866 786,964 4,257,995 1,019,519 Loss from operations ( 2,553,141 ) ( 786,964 ) ( 4,256,270 ) ( 1,019,519 ) Other income (expenses) Change in fair value of derivative liability ( 53,816 ) — 5,633,085 — Interest income 263 — 484 — Interest expense ( 1,051,916 ) — ( 6,068,527 ) — Loss on extinguishment of debt ( 364,295 ) — ( 364,295 ) — Acquisition related expense — ( 55,034 ) — ( 112,534 ) Total other income (expenses) ( 1,469,764 ) ( 55,034 ) ( 799,253 ) ( 112,534 ) Loss before provision for income taxes ( 4,022,905 ) ( 841,998 ) ( 5,055,523 ) ( 1,132,053 ) Provision for income taxes — — — — Net loss $ ( 4,022,905 ) $ ( 841,998 ) $ ( 5,055,523 ) $ ( 1,132,053 ) Basic and fully diluted income (loss) per common share: Net loss per common share $ ( 0.39 ) $ ( 0.16 ) $ ( 0.51 ) $ ( .23 ) Weighted average common shares outstanding - basic and fully diluted 10,242,430 5,427,349 9,896,724 4,828,747 The accompanying notes are an integral part of these unaudited financial statements. 5 CARDIO DIAGNOSTICS HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Six Months Ended June 30, 2023 and 2022 (unaudited) Additional Stock Common Stock Paid-in Subscriptions Accumulated Shares Amount Capital Receivable Deficit Totals Balances, December 31, 2022 9,514,743 $ 95 $ 10,293,159 $ — $ ( 5,991,546 ) $ 4,301,708 Warrants converted to common stock 100,000 1 389,999 — — 390,000 Restricted stock awards vested 1,092 — 4,000 — — 4,000 Placement agent fee — — ( 315,000 ) — — ( 315,000 ) Adjustment to liabilities assumed in merger with Mana — — 74,025 — — 74,025 Net loss — — — — ( 1,032,618 ) ( 1,032,618 ) Balances, March 31, 2023 9,615,835 $ 96 $ 10,446,183 $ — $ ( 7,024,164 ) $ 3,422,115 Restricted stock awards vested 87,917 1 105,999 — — 106,000 Notes payable converted to common stock 1,474,703 15 2,368,026 — — 2,368,041 Compensation for vested stock options — — 1,035,273 — — 1,035,273 Net loss — — — — ( 4,022,905 ) ( 4,022,905 ) Balances, June 30, 2023 11,178,455 $ 112 $ 13,955,481 $ — $ ( 11,047,069 ) $ 2,908,524 Balances, December 31, 2021 4,223,494 $ 42 $ 2,398,628 $ — ( 1,330,561 ) $ 1,068,109 Net loss — — — — ( 290,055 ) ( 290,055 ) Balances, March 31, 2022 4,223,494 $ 42 $ 2,398,628 $ — $ ( 1,620,616 ) $ 778,054 Common stock and warrants issued for cash 2,291,445 23 10,963,014 ( 100,001 ) — 10,863,036 Placement agent fee — — ( 1,096,309 ) — — ( 1,096,309 ) Net loss — — — — ( 841,998 ) ( 841,998 ) Balances, June 30, 2022 6,514,939 $ 65 $ 12,265,333 $ ( 100,001 ) $ ( 2,462,614 ) $ 9,702,783 The accompanying notes are an integral part of these unaudited financial statements. 6 CARDIO DIAGNNOSTICS HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 5,055,523 ) $ ( 1,132,053 ) Adjustments to reconcile net loss to net cash used in operating activities Amortization 9,578 8,000 Acquisition related expense — 112,534 Stock-based compensation expense 1,145,273 — Non-cash interest expense 6,050,785 — Change in fair value of derivative liability ( 5,633,085 ) — Loss on extinguishment of debt 364,295 — Changes in operating assets and liabilities: Accounts receivable ( 1,050 ) 901 Prepaid expenses and other current assets 559,026 ( 69,089 ) Deposits ( 7,900 ) ( 4,950 ) Accounts payable and accrued expenses ( 373,298 ) 503,795 NET CASH USED IN OPERATING ACTIVITIES ( 2,941,899 ) ( 580,862 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 26,019 ) — Patent costs incurred ( 114,254 ) ( 38,606 ) NET CASH USED IN INVESTING ACTIVITIES ( 140,273 ) ( 38,606 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from convertible notes payable, net of original issue discount of $ 500,000 4,500,000 — Proceeds from exercise of warrants 390,000 — Payments of placement agent fee ( 315,000 ) ( 1,096,309 ) Proceeds from sale of common stock and warrants — 10,863,036 Payments of finance agreement ( 566,021 ) — NET CASH PROVIDED BY FINANCING ACTIVITIES 4,008,979 9,766,727 NET INCREASE (DECREASE) IN CASH 926,807 9,147,259 CASH - BEGINNING OF PERIOD 4,117,521 512,767 CASH - END OF PERIOD $ 5,044,328 $ 9,660,026 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 17,742 $ — Non-cash investing and financing activities: Common stock issued for subscriptions receivable $ — $ 100,001 Debt discount related to derivative liability 5,000,000 — Notes payable converted to common stock 2,150,000 — Adjustment to liabilities assumed in acquisition 74,025 The accompanying notes are an integral part of these unaudited financial statements. 7 CARDIO DIAGNOSTICS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Organization and Basis of Presentation The unaudited condensed consolidated financial statements presented are those of Cardio Diagnostics Holdings, Inc., (the “Company”) and its wholly-owned subsidiary, Cardio Diagnostics, Inc. (“Legacy Cardio”). The Company was incorporated as Mana Capital Acquisition Corp. (“Mana”) under the laws of the state of Delaware on May 19, 2021, and Legacy Cardio was formed on January 16, 2017 as an Iowa limited liability company (Cardio Diagnostics, LLC) and was subsequently incorporated as a Delaware C-Corp on September 6, 2019 (Legacy Cardio) . The Company was formed to develop and commercialize a patent-pending Artificial Intelligence (“AI”)-driven DNA biomarker testing technology (“Core Technology”) for cardiovascular disease invented at the University of Iowa by the Company’s Founders, with the goal of becoming one of the leading medical technology companies for enabling precision prevention, early detection and treatment of cardiovascular disease. The Company is transforming the approach to cardiovascular disease from reactive to proactive. The Core Technology is being incorporated into a series of products for major types of cardiovascular disease and associated co-morbidities including coronary heart disease (“CHD”), stroke, heart failure and diabetes. Interim Financial Statements The unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2023. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023. Business Combination On May 27, 2022, Mana, Mana Merger Sub, Inc. (“Merger Sub”), Meeshanthini Dogan, the Shareholders’ Representative and Legacy Cardio entered into the Business Combination Agreement (the “Merger Agreement”). On October 25, 2022, pursuant to the Merger Agreement, Legacy Cardio merged with and into Merger Sub, with Legacy Cardio surviving as the wholly-owned subsidiary of Mana. Subsequent to the merger, Mana changed its name to Cardio Diagnostics Holdings, Inc. Note 2 – Merger Agreement and Reverse Recapitalization As discussed in Note 1, on October 25, 2022, the Company (formerly known as Mana) and Legacy Cardio 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 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 June 30, 2023, the remaining post-merger 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 8. Transactions costs incurred in connection with the recapitalization totaled $ 1,535,035 and were recorded as a reduction to additional paid in capital. 8 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 six months ended June 30, 2023 and 2022. Schedule of fair value measurements 2023 2022 Liabilities: Balance of derivative liabilities - beginning of period $ — $ — Issued 9,192,672 — Converted ( 1,560,835 ) — Change in fair value recognized in operations ( 5,633,085 ) — Balance of derivative liabilities - end of period $ 1,998,752 $ — The following table represents the Company’s derivative instruments that are measured at fair value on a recurring basis as of June 30, 2023, for each fair value hierarchy level: Schedule of fair value hierarchy level June 30, 2023 Derivative Liabilities Total Level I $ — $ — Level II $ — $ — Level III $ 1,998,752 $ 1,998,752 9 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 hosts its products, Epi+Gen CHD™ and PrecisionCHD™ on InTeleLab’s Elicity platform (the “Provider”). The Provider collects payments from patients upon completion of eligibility screening. Upon receiving a sample collection kit from the Company, patients send their samples to MOgene (the “Lab”), a high complexity CLIA lab, which performs the biomarker assessments. Upon receipt of the raw biomarker data from the Lab, the Company performs all quality control, analytical assessments and report generation and shares test reports with the Provider via their platform. Revenue is recognized upon receipt of payments from the Provider for each completed 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. Research and Development Research and development costs are expensed as incurred. Research and development costs charged to operations for the six months ended June 30, 2023 and 2022 were $ 98,982 and $ 6,171 , respectively. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs of $ 81,159 and $ 49,204 were charged to operations for the six months ended June 30, 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 no t have any cash equivalents as of June 30, 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. 10 Property and Equipment and Depreciation Property and equipment are stated at cost. Maintenance and repairs are charged to expense when incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is credited or charged to income. Depreciation for both financial reporting and income tax purposes is computed using combinations of the straight line and accelerated methods over the estimated lives of the respective assets as follows: Schedule of estimated lives Office and computer equipment 5 years Furniture and fixtures 7 years 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. 11 Note 4 – Property and Equipment Property and equipment are carried at cost and consist of the following at June 30, 2023 and December 31, 2022: Schedule of property and equipment 2023 2022 Office and computer equipment $ 11,683 $ — Furniture and fixtures 14,336 — Less: Accumulated depreciation — — Total $ 26,019 $ — Note 5 – Intangible Assets The following tables provide detail associated with the Company’s acquired identifiable intangible assets: Schedule of intangible assets As of June 30, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Useful life (in years) Amortized intangible assets: Know-how license $ 80,000 $ ( 50,667 ) $ 29,333 5 Total $ 80,000 $ ( 50,667 ) $ 29,333 Amortization expense charged to operations was $ 8,000 for the six months ended June 30, 2023 and 2022, respectively. Note 6 – Patent Costs As of June 30, 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 $ 433,984 and $ 321,308 , net of accumulated amortization of $ 1,578 and $ 0 as of June 30, 2023 and December 31, 2022, respectively, and are presented in the balance sheet as patent costs. Amortization expense charged to operations was $ 1,578 for the six months ended June 30, 2023. Note 7 – 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 $ 283,011 and $ 849,032 at June 30, 2023 and December 31, 2022, respectively. $ 363,822 has been recorded in prepaid expenses and is being amortized over the life of the policy. Note 8 - 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 six months ended June 30, 2023 and 2022 as the result would be anti-dilutive. Schedule of anti dilutive earning per share Six Months Ended June 30, 2023 2022 Stock warrants 7,854,620 1,809,003 Stock options 2,584,599 1,759,599 Total shares excluded from calculation 10,439,219 3,568,602 12 Note 9 – 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 through 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 six months ended June 30, 2023, the Company issued 4,977 common shares to a consultant for services pursuant to vesting of Restricted Stock Units granted, valued at $ 10,000 . During the six months ended June 30, 2023, the Company issued 84,032 common shares to the board of directors for services pursuant to vesting of Restricted Stock Units granted, valued at $ 100,000 . In connection with the convertible notes payable (see Note 10 below) the noteholders converted $ 2,150,000 of principal balance to 1,474,703 shares of common stock during the six months ended June 30, 2023. The number of shares of common stock issued was determined based on the terms of the convertible notes. 13 Warrants On October 1, 2019, Legacy Cardio issued warrants to a seed funding firm equivalent to 2% of the fully-diluted equity of Legacy Cardio, 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, Legacy Cardio issued fully vested warrants to investors as part of private placement subscription agreements pursuant to which Legacy Cardio 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, Legacy Cardio issued fully vested warrants to investors as part of an additional private placement subscription agreements pursuant to which Legacy Cardio 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 six months ended June 30, 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 Warrants granted 1,593,349 — Warrants outstanding at June 30, 2022 1,809,003 $ 15.85 5.07 Warrants outstanding at December 31, 2022 7,954,620 9.63 4.46 Warrants exercised ( 100,000 ) 13.35 Warrants outstanding at June 30, 2023 7,854,620 $ 9.70 3.97 Options In May 2022, Legacy Cardio 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 Company’s 2022 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 closing of the merger. Option activity during the six months ended June 30, 2023 and 2022 follows: Schedule of option activity Weighted Average Remaining Options Outstanding Average Exercise Price Contractual Life (Years) Options outstanding at December 31, 2021 — $ — Options granted 1,759,599 3.90 Options outstanding at June 30, 2022 1,759,599 $ 15.85 9.86 Options outstanding at December 31, 2022 1,759,599 3.90 9.35 Options granted 825,000 1.26 Options outstanding at June 30, 2023 2,584,599 $ 3.06 9.38 Note 10 – 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. 14 The Company recorded a debt discount related to identified embedded derivatives relating to the conversion features (see Note 11) 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 $ 915,202 at June 30, 2023 is presented net of debt discount of $ 1,934,798 . At a special meeting of stockholders held on May 26, 2023, the Company obtained stockholder approval to issue and sell the second Convertible Debenture to Yorkville. On June 2, 2023, the Company entered into a Letter of Agreement with Yorkville pursuant to which Yorkville and the Company agreed that the date of the Second Closing shall be September 15, 2023 (or such other date that is mutually agreed by the Company and Yorkville). Note 11 – Derivative Liability The Company has determined that the conversion features embedded in the convertible notes described in Note 10 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 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 Six months ended June 30, 2023 Annual dividend yield — Expected life (years) 1.0 Risk-free interest rate 4.89 % - 5.45 % Expected volatility 164 % - 176 % Exercise price $ 1.10 - 3.53 Stock price $ 1.19 - 5.32 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 12 – 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. 15 The Benchmark Company, LLC Right of First Refusal As noted in Note 1, the Company completed the business combination 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, Legacy Cardio assumed the contractual engagement entered into by Mana. On November 14, 2022, the Company 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 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, the Company 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 13 – Subsequent Events The Company evaluated its June 30, 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 an additional $ 600,000 of principal amount of convertible debentures into 586,049 shares of the Company’s common stock. Subsequent to the end of the period through the date of this report, $ 14,000 in consulting Restricted Stock Units (RSUs) issued to Company advisors vested into 11,709 shares of the Company’s common stock. Operating Leases On July 20, 2023, the Company entered into an operating lease agreement (the “Iowa Lease”) for the lease of approximately 5,060 rentable square feet of medical laboratory and office space (the “Iowa Premises”) located in Iowa City, Iowa. The Iowa Premises is in addition to the new Chicago premises described below. The term of the Iowa Lease is for five years and four months commencing on August 1, 2023 and terminating on November 30, 2028. The Company will initially pay $ 8,505 per month ($ 102,060 on an annualized basis and approximately $20.17 per square foot) in rent commencing on December 1, 2023, which includes its pro rata share of property taxes, insurance and common area maintenance, common area utilities and water. Of the approximate $20.17 per square foot initial rent, $5.17 per square foot yearly rent shall be subject to an annual adjustment after the first 12 months of the Iowa Lease. The first month’s rent was paid at the time of execution of the Iowa Lease. The Company entered into an operating lease effective August 1, 2023 to move its operations and executive offices to a new office space in Chicago, Illinois. The initial monthly base rent is $ 12,847 with annual 2% increases until expiration of the lease on November 20, 2026 . The first 4 months of rent was abated by the landlord. Right-of-use (“ROU”) assets and operating lease liabilities will be recorded upon commencement of the operating leases. 16