Cardio Diagnostics Holdings, Inc. — Q1 2023 Form 10-Q
Period: Three months ended March 31, 2023. The company develops AI-driven genetic and epigenetic diagnostic tests for cardiovascular disease. Its financial statements reflect the October 2022 business combination with Mana, accounted for as a reverse recapitalization.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.70 million | $232,555 |
| Net loss | $1.03 million | $290,055 |
| Operating cash flow | $(1.65) million | $(186,090) |
| Investing cash flow | $(52,674) | $(16,436) |
| Financing cash flow | $4.29 million | $0 |
| Cash | $6.71 million | $4.12 million at Dec. 31, 2022 |
| Current assets | $8.14 million | $5.89 million at Dec. 31, 2022 |
| Current liabilities | $5.13 million | $1.95 million at Dec. 31, 2022 |
| Stockholders’ equity | $3.42 million | $4.30 million at Dec. 31, 2022 |
No revenue means gross margin is not meaningful. Net loss per share was $0.11 versus $0.07. The 2023 results included a $5.69 million gain from a decrease in the fair value of the derivative liability and $5.02 million of interest expense, substantially offsetting one another. The derivative liability was $3.51 million at quarter-end and is Level 3 fair value.
Material changes and financing
- Operating expenses rose substantially year over year, especially general and administrative expense, which increased to $1.56 million from $205,027. Management attributed the increase to public-company costs, personnel, and financing and merger-related legal and accounting expenses. R&D rose to $86,665, primarily for laboratory runs on pipeline products.
- Q1 financing included $4.5 million net proceeds from a Yorkville convertible debenture with $5.0 million principal and a $500,000 original issue discount, plus $390,000 from warrant exercises. The debenture bears 0% interest unless an event of default occurs, when the rate rises to 15%. Its conversion price is based on 92% of the two lowest VWAPs during the preceding seven trading days, subject to contractual terms.
- The company agreed to a potential additional $6.2 million Yorkville debenture, subject to conditions including stockholder approval. Management said the resale registration statement became effective April 11, 2023 and a stockholder meeting was scheduled for May 26, 2023.
- Cash increased despite operating cash burn, largely because of the financing. The company paid Ladenburg $419,475 in March using an early-payment discount; $435,000 of assumed banker liabilities remained at quarter-end. Management elsewhere described original assumed obligations of $928,500 due October 25, 2023.
- After quarter-end, Yorkville converted $700,000 of principal into 361,094 common shares through the report date. The filing reported 9,977,791 common shares outstanding as of May 15, 2023.
Outlook, risks, and unusual items
- Management said existing working capital, anticipated cash flow, and further financing were expected to fund operations for the next 12 months, but also stated that the company has an ongoing need to raise outside capital. It expects 2023 revenue to fall short of prior projections; it reported no Q1 revenue and nominal revenue of $950 in 2022.
- Management attributed limited growth capacity to the business combination’s approximately 99.5% public-share redemption rate and higher-than-expected transaction costs; the company received only $4,021 from the trust account at closing. It said this could delay or limit acquisitions and product expansion.
- Potential dilution is significant: debenture conversions, warrants, options, equity-plan awards, and resale-registered shares could increase the public float. The company disclosed that the debentures could convert into as many as 20,363,637 shares at the $0.55 floor price, although it said it did not expect conversion at that price.
- Disclosure controls and procedures were assessed as not effective as of March 31, 2023. Management said it performed additional analysis in preparing the financial statements; it reported no material change in internal control over financial reporting during the quarter.
- Contingencies include disputed potential fees involving Boustead Securities, a discussion with Benchmark about possible compensation relating to the Yorkville financing, and a demand letter alleging deficiencies in the business-combination registration statement. No lawsuit had been filed in the demand-letter matter as of the report date; management believed the matters would not materially harm financial condition but acknowledged possible management distraction and defense costs.
- The reported Q1 derivative fair-value gain and large noncash interest expense materially affected earnings. The company also cautioned that its Level 3 derivative valuation depends on significant unobservable assumptions.
Important facts for investors to verify
- Whether the additional Yorkville debenture was issued, its final terms, and subsequent conversions and share issuance.
- Cash runway and the company’s ability to secure additional capital while funding operations and product development.
- Actual product adoption and revenue generation, given zero Q1 revenue and management’s expectation that 2023 revenue would miss projections.
- Potential dilution from debentures, registered resale shares, warrants, options, and equity awards, including the conversion-price floor.
- Resolution and potential financial impact of the banker-fee disputes and securities-law demand letter.
- Remediation of ineffective disclosure controls. Also reconcile the MD&A statement that the year-over-year net loss increase was $1,921,721 with the financial statements, which show an increase of $742,563 (from $290,055 to $1,032,618).