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, 2023
and 2022 and for each of the two years in the period ended December 31, 2023 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.
Cardio
believes that 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 launched its first clinical test, Epi+Gen
CHD, in 2021 during the Covid-19 pandemic. As a result, the initial strategy for commercialization involved launching the test via telemedicine
and in smaller provider practices such as concierge medicine practices. The volume of tests through these channels were minimal, and as
the circumstances around Covid-19 pandemic improved, management re-vamped the Company’s go-to-market strategy to include other healthcare
verticals and stakeholders beyond patients and small providers, including larger provider organizations, group purchasing organizations,
employers, payors and life insurers. This new approach allowed Cardio to expand the reach of our solutions beyond the initial focus areas.
Despite long partnership and sales cycles, in some instance as long as 14 months, Cardio in 2023 generated revenue from patient(s), small
provider(s), larger provider(s) and employer(s) and has developed a more robust sales and partnership pipeline. In addition to revenue,
other key developments since our last Form 10-Q filing as of September 30, 2023, include:
· Planned launch of a new lab and fulfillment center to expand
testing capacity, reduce costs, reduce turnaround time and improved margins.
· Entering into a Supply and Distribution Agreement with one
of India’s premier organizations, Aimil Ltd, to lay the pre-marketing groundwork via Aimil’s extensive healthcare network.
· Receiving an Innovative Technology Contract from Vizient,
the largest group purchasing organization with a customer base encompassing 60% of hospitals and 97% of academic medical centers in the
US.
· Publication of a key peer-reviewed study on PrecisionCHD
development and validation for the detection of coronary heart disease in the Journal of American Heart Association.
· An agreement with Family Medicine Specialists to test at
least 1,200 of their BlueCross BlueShield and other health plan patients
across four locations.
· Obtained two Current Procedural Terminology (CPT) Proprietary
Laboratory Analysis (PLA) codes from the American Medical Association, 0440U for PrecisionCHD and 0439U for Epi+Gen CHD.
· The launch of HeartRisk, a cardiovascular risk intelligence
platform, initially for employers to provide insights that combine HIPAA-compliant anonymized and aggregated clinical cardiovascular risk
data with industry and geographic data, with the aim of helping employers understand the cardiovascular risks in their workforce compared
to population and industry benchmarks.
Cardio expects that sales and partnership
cycles will continue to be long. Our ongoing strategy for expanding our business operations and increasing revenue generation include
the following:
·
Develop additional products, including clinical tests for stroke, congestive heart failure and diabetes;
·
Expand clinical and health economics evidence portfolio to continue to demonstrate value of products and increase reach;
·
Leverage our newly awarded CPT PLA codes;
·
Expand the adoption of our products across key channels, including health systems and self-insured employers, including for HeartRisk, Cardio’s new SaaS product;
·
Scale our internal operations capabilities with a focus on improving efficiency
and reducing our cost of goods sold; and
·
Pursue
potential strategic partnership(s) and acquisition(s)
of one or more synergistic companies.
Recent Developments
At the Market Sales Agreement
On January
26, 2024, the Company entered into an At-the-Market Issuance Sales Agreement (the “Sales Agreement”) with Craig-Hallum
Capital Group LLC (“Craig-Hallum”). Pursuant to the Sales Agreement, the Company may sell, at its option, up to an aggregate
of $17 million in shares of its Common Stock through Craig-Hallum, as sales agent. Sales of the Common Stock made pursuant to the
Sales Agreement have been or will be made under the Company’s Registration Statement on Form S-3 filed on January 26,
2024 (File No. 333-276725) (the “Registration Statement”), which was declared effective by the Securities and Exchange Commission
on February 1, 2024. Subject to the terms and conditions of the Sales Agreement, Craig-Hallum may sell the shares, if any, only by methods
deemed to be an “at the market” offering as defined in Rule 415 promulgated under the Securities Act. The Company has
agreed to pay Craig-Hallum a sales commission of 2.5% of the gross proceeds for sales under the Sales Agreement and to provide Craig-Hallum
with customary indemnification and contribution rights, including for liabilities under the Securities Act. In addition, the Company is
required to reimburse Craig-Hallum for certain specified expenses in connection with entering into the Sales Agreement.
As of April 1, 2024, the Company
has sold 487,083 shares of its common stock under the Sales Agreement resulting in proceeds to the Company of $855,922, net of
offering costs. The Company has paid Craig-Hallum $ 21,947 in sales commissions.
52
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, 2023 and 2022:
Years Ended December 31,
2023
2022
Revenue
Revenue
$ 17,065
$ 950
Operating Expenses
Sales and marketing
158,514
92,700
Research and development
145,182
40,448
General and administrative expenses
6,936,646
4,400,253
Amortization
19,182
16,000
Total operating expenses
(7,259,524 )
(4,549,401 )
Other (expense) income
(1,134,375 )
(112,534 )
Net (loss)
$ (8,376,834 )
$ (4,660,985 )
Net Loss
Cardio’s net loss
for the year ended December 31, 2023, was $8,376,834 as compared to $4,660,985 for the year ended December 31, 2022, an increase of $3,715,849
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, 2023, was $17,065 compared to $950 for the year ended
December 31, 2022. Revenue was generated through multiple revenue channels,
including, telemedicine platform, provider organizations, and employers.
Sales and Marketing
Expenses related
to sales and marketing for the year ended December 31, 2 023,
were $158,514 as compared to $92,700 for the year ended December 31, 2022,
an increase of $65,814. The overall increase was due to an increase in sales and marketing campaign efforts in 2023.
Research and Development
Research and development expense for the
year ended December 31, 2023, was $145,182 as compared to $40,448 for year ended December 31, 2022, an increase of $104,734. The
increase was attributable to increased laboratory runs performed in the 2023, as compared to laboratory runs performed in 2022.
General and Administrative Expenses
General and
administrative expenses for the year ended December 31, 2023, were $6,936,646 as compared to $4,400,253 for the
year ended December 31, 2022, an increase of $2,536,393. The overall increase is primarily due to a stock compensation of $1,035,273,
an increase in rent, personnel, and office and software expenses related to new offices and the new internal lab setup.
Amortization
Amortization expense for the year ended December 31,
2023, was $19,182, as compared to $16,000 for the year ended December 31, 2022. The total amortization expense for the year ended December
31, 2023 includes the amortization of intangible assets of $16,000 and patent costs of $3,182, respectively.
53
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.
Historically, 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 (the “Securities Purchase Agreement”), we issued and sold to YA II PN, Ltd. (“Yorkville”) a Convertible
Debenture in the principal amount of $5,000,000 for a purchase price of $4,500,000 to provide additional liquidity. Yorkville fully converted
the $5,000,000 Convertible Debenture into an aggregate of 10,622,119 common shares during the year ended December 31, 2023. The Securities
Purchase Agreement contemplated the issuance of a second convertible debenture in the amount of $6,200,000. However, prior to the issuance
of the second convertible debenture, the Company and Yorkville terminated the Securities Purchase Agreement by the mutual consent of the
parties, effective as of January 4, 2024.
On February 2, 2024, we closed a private placement
with seven accredited investors, whereby we issued a total of 561,793 units (“Units”), with each Unit consisting of (i) one
share of our Common Stock and (ii) one six-year Common Stock purchase warrant having an exercise price of $1.78 per share, subject to
adjustment (the “Private Placement”). The Private Placement resulted in the issuance to investors of 561,793 shares of Common
Stock and 561,793 warrants in an unregistered offering of securities. The purchase price of the securities was $1.78 per Unit, resulting
in gross proceeds to the Company of $1,000,000, before deducting placement agent fees (10% or $100,000) and other offering expenses. We
intend to use the net proceeds from the Private Placement for working capital and general corporate purposes.
As noted in Recent Developments, above, we
entered into an At-the Market Sales Agreement with Craig-Hallum on January 26, 2024. As of April 1, 2024, we have received $877,869 in
gross proceeds from the ATM sales, and we have available up to $16.1 million in future sales of our Common Stock that we may elect to
make under the Sales Agreement.
We expect that our primary cash needs in 2024 will
be for day-to-day operations, funding working capital requirements, funding our growth strategy, paying the setup expenses of our internal
laboratory and paying expenses incurred in connection with our ongoing FDA submission activities. On March 22, 2023, Ladenburg, one of
Mana’s investment bankers, offered us a 15% early pay discount on the balance due. On March 27, 2023, we accepted Ladenburg’s
early pay discount offer and paid Ladenburg the net balance due and payable of $419,475. The remaining assumed liabilities balance of
$435,000 was paid in full in October 2023. Accordingly, as of the date of this report, the Company has paid in full all of the liabilities
it assumed in the Business Combination.
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 continue
to explore our financing options, such as equity private placement transactions. However, given recent stock prices and the extreme volatility
of our stock, it continues to be challenging to balance cash that could be raised and the dilution that might be required to close a particular
transaction. We expect that for the remainder of 2024, we will rely on the ongoing ATM offering, provided that market conditions are favorable.
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 $1.78 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 $1.42 on March 28, 2024. 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.
54
Cash
at December 31, 2023 totaled $1,283,523 as compared to $4,117,521
at December 31, 2022, a decrease of $2,833,998. The
following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
2023
2022
Net cash used in operating activities
$ 5,672,175
$ 5,090,968
Net cash used in investing activities
794,291
368,001
Net cash provided by financing activities
3,632,468
9,063,723
Cash Used in Operating Activities
Cash used in operating activities for the year
ended December 31, 2023, was $5,672,175, as compared to $5,090,968 for the year ended December 31, 2022. The cash used in operations during
the year ended December 31, 2023, is a function of net loss of $8,376,834, adjusted for the following non-cash operating items: depreciation
of $3,790, amortization of $107,830, stock based compensation of $1,279,273, and non-cash interest expense of $6,704,522, offset by a
change in fair value of derivative liability of $5,406,220, a gain on extinguishment of debt of $193,350, an increase in accounts receivable
of $4,960, a decrease of $758,669 in prepaid expenses and other current assets, an increase in deposits of $7,900, a decrease of $781,500
in accounts payable and accrued expenses and an increase in lease liability of $244,505.
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, 2023, was $794,291 compared to $368,001 for the year ended December 31, 2022. The cash used in investing activities for the
year ended December 31, 2023, was due to $575,663 for purchase of property and equipment, $21,352 payments for lease and $197,276 in patent
and trademark costs incurred. 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, 2023, was $3,632,468 as compared to $9,063,723 for the year ended December 31, 2022. This change was due to $4,500,000
in proceeds from convertible note, $390,000 in proceeds from the exercise of warrants offset by $942,532 in payments pursuant to a finance
agreement, and $315,000 in placement agent fees during the year ended December 31, 2023. Cash provided by financing activities for the
year ended December 31, 2022 was due to $11,986,036 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 payments of placement agent fees, during the
year ended December 31, 2022.
Going Concern
The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has generated only nominal revenue in the past two years. The Company had a net loss
of $8,376,834 for the year ended December 31, 2023 and an accumulated deficit of $14,368,380 at December 31, 2023. These factors, among
others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The
Company’s continuation as a going concern is dependent upon its ability to obtain necessary equity financing and ultimately from
generating revenues to continue operations. The Company expects that working capital requirements will continue to be funded through
a combination of its 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 twelve months. The Company has no lines of credit or other bank financing arrangements.
Additional issuances of equity or convertible debt securities will result in dilution to current stockholders. Further, such securities
might have rights, preferences or privileges senior to common stock. Additional financing may not be available upon acceptable terms,
or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to take advantage
of prospective new business endeavors or opportunities, which could significantly and materially restrict business operations.
The consolidated financial statements do
not include any adjustments that might result from the outcome of this uncertainty relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
Off-Balance Sheet Financing Arrangements
We did not have any off-balance sheet arrangements
as of December 31, 2023.
Contractual Obligations
As of December 31, 2023, we do not have
any ongoing contractual obligations that would have a negative impact on liquidity and cash flows. However, if one or more of the following
potential claims that arise from contracts we have entered into were pursued against us, there is the potential that we could see a negative
impact on liquidity and cash flows, depending on the outcome.
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.
55
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. Based on the right of first refusal, Benchmark alleges that it is
owed damages because the Company entered into the Yorkville Convertible Debenture Transaction (see Note 11 to Notes to Consolidated Financial
Statements) without first offering Benchmark the right to serve as the lead or joint-lead placement agent for the transaction. The Company
is evaluating the claim. No legal proceedings have been instigated.
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 2022, 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 believes 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 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.
Northland Securities, Inc.
In January 2024, following the Company’s
termination of its agreement with Yorkville and in connection with the Company’s recent at the market offering and/or its February
2024 private placement, a managing director of Northland Securities, Inc. (“Northland”) contacted the Company claiming the
right to be paid a fee of approximately $150,000 pursuant to the agreement of March 1, 2023 between the Company and Northland regarding
the Yorkville financing. Subsequently, the Company has been advised by another representative of Northland that Northland would not proceed
with any such claim. The Company does not believe that it owes Northland any sum based on the termination of the Yorkville Securities
Purchase Agreement and the subsequent financing transactions.
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 3 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.
56
Principles of Consolidation
The consolidated
financial statements include the
accounts of the Company and its wholly owned-subsidiary, Legacy Cardio. 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 receivable, 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 offers its products, Epi+Gen CHD and PrecisionCHD,
via telemedicine providers, provider organizations such as concierge practices, longevity clinics, and risk-bearing provider organizations,
and employer organizations. The Company is continuing to expand its markets and payment optionality, and therefore, other organization
types not listed below may be added, and from time-to-time, there may be additional payment options.
•
Telemedicine
For telemedicine, the telemedicine provider collects
payments from patients upon completion of eligibility screening and test order. Patients then send their samples to the lab for biomarker
assessments. The Company performs all quality control, analytical assessments and report generation and shares test reports with the ordering
healthcare provider. Revenue is recognized upon invoicing the telemedicine providers. Telemedicine providers are invoiced at the end of
each month for all tests completed since prior invoicing.
•
Provider organizations
For provider organizations, the cost of each test
is negotiated prior to testing commencing. Pricing is determined based largely on the provider organization type and testing volume commitment.
Upon ordering a test, a patient’s sample is sent to the lab for biomarker assessments. The Company performs all quality control,
analytical assessments and report generation and shares test reports with the ordering healthcare provider. Revenue is recognized upon
invoicing the provider organization. The provider organization is invoiced the agreed upon pricing at the end of each month for all samples
accepted or tests completed since prior invoicing.
•
Employer organizations
For employer organizations, the cost of each test is negotiated prior
to testing commencing. Pricing is determined based largely on testing volume commitment. Patient samples are sent to the lab for biomarker
assessments. The Company performs all quality control, analytical assessments and report generation and shares test reports with the
ordering healthcare provider. Revenue is recognized upon invoicing the employer organization. The employer organization is invoiced the
agreed upon pricing once a heart disease fair is completed or all testing is completed.
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
evaluates its patents’ estimated useful life and begins amortizing the patents when they are brought to the market or otherwise
commercialized.
57
Leases
The Company accounts
for leases under ASC 842, “Leases”. The Company determines if an arrangement
is a lease or contains a lease at inception of the arrangement. Operating lease liabilities are recognized based on the present value
of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the
lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information
available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use assets (“ROU
assets”) represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities
represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on
the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term.
The Company elected to keep leases with an initial term of 12 months or less off the balance sheet.
ROU assets are reviewed
for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment
guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets. ROU assets are tested for impairment
individually or as part of an asset group if the cash flows related to the ROU assets are not independent from the cash flows of other
assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest
level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
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, 2023, we were not subject
to any market or interest rate risk.