Cardio Diagnostics Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company develops AI-driven genetic and epigenetic blood tests for cardiovascular disease, including Epi+Gen CHD and PrecisionCHD. The October 2022 business combination was accounted for as a reverse recapitalization; Legacy Cardio is the accounting predecessor.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,725 | $0 | $1,725 | $0 |
| Operating expenses | $2.555 million | $0.787 million | $4.258 million | $1.020 million |
| Operating loss | $2.553 million | $0.787 million | $4.256 million | $1.020 million |
| Net loss | $4.023 million | $0.842 million | $5.056 million | $1.132 million |
| Net loss per share | $0.39 | $0.16 | $0.51 | $0.23 |
- Q2 general and administrative expense rose to $2.506 million from $751,117, primarily reflecting personnel, financing and merger-related legal and accounting costs, and public-company expenses. Six-month R&D increased to $98,982 from $6,171, attributed to laboratory work on PrecisionCHD and pipeline products.
- Six-month operating cash use was $2.942 million; investing cash use was $140,273; financing cash provided was $4.009 million. Cash increased by $926,807 to $5.044 million from year-end 2022.
- At June 30, current assets were $6.255 million, including cash of $5.044 million; current liabilities were $3.848 million. Total assets were $6.757 million, and stockholders’ equity was $2.909 million.
- Current liabilities included $915,202 of convertible notes, net of debt discount, and a $1.999 million derivative liability. The company issued a $5.0 million-face Yorkville debenture in March for $4.5 million; $2.15 million of principal had converted into 1,474,703 shares by June 30. The debenture carries 0% interest unless an uncured default raises the rate to 15%.
Material changes and financing
- Net loss increased by $3.181 million year over year in Q2 and by $3.923 million for the first half. Higher G&A and debenture-related interest expense were major contributors. Six-month reported interest expense of $6.069 million was substantially offset by a $5.633 million noncash gain from the change in derivative fair value.
- In the business combination, approximately 99.5% of eligible Mana public shares were redeemed, leaving the company with only $4,021 from the trust account at closing. Management says the resulting capital shortfall has delayed or constrained planned growth initiatives.
- A second Yorkville debenture of $6.2 million face amount, for $5.58 million proceeds, was contemplated subject to closing conditions and scheduled for September 15, 2023, or another mutually agreed date. After quarter-end, Yorkville converted another $600,000 of principal into 586,049 shares by the filing date.
- Common shares outstanding were 11,178,455 at June 30, versus 9,514,743 at December 31, 2022. Outstanding warrants and options were 7,854,620 and 2,584,599, respectively; potentially dilutive securities were excluded from diluted loss per share as anti-dilutive.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management says 2023 revenue is expected to fall far short of projections and acknowledges an ongoing need to raise outside capital. It expects existing working capital, further advances and debt instruments, and anticipated cash flow to fund operations for the next 12 months, while noting long-term needs for additional capital and revenue.
- Management’s strategy includes developing tests for stroke, heart failure and diabetes; building clinical and health-economic evidence for reimbursement; expanding laboratory capacity and distribution channels; and considering synergistic acquisitions. The company cautions that limited capital may delay or reduce the scale of these plans.
- The company had no material litigation as of June 30 but disclosed disputed potential placement-agent fees, Benchmark’s claim to a right of first refusal and possible compensation related to the Yorkville financing, and a demand-letter dispute concerning merger disclosures. The company disputes the claims and says no lawsuit had been filed on the demand letter as of the report date; outcomes remain uncertain.
- Management concluded disclosure controls and procedures were not effective at period-end. It performed additional analysis and states the financial statements fairly present the company’s financial position and results.
- Post-quarter leases add operating commitments: Iowa laboratory/office space for five years and four months, with initial rent of $8,505 monthly from December 2023; and Chicago office space through November 2026, with initial rent of about $12,847 monthly from December 2023, subject to increases and operating costs.
- Cash-flow figures differ within the filing: the statement reports $4.009 million of financing cash provided, while MD&A gives $4.509 million in one passage and $4.009 million in its cash-flow table. The statements report Q2 net loss of $4,022,905, while one MD&A summary shows $4,022,902.
Key facts for investors to verify
- Whether the second Yorkville debenture closed, on what terms, and how subsequent conversions affected share count, dilution and liquidity.
- Cash runway, actual operating cash burn, and the company’s ability to obtain additional capital without substantial dilution or restrictive financing terms.
- Progress toward meaningful test volumes, reimbursement, laboratory expansion and product commercialization; reported revenue to date was only $1,725 for the first half.
- Resolution and potential financial exposure from the disclosed placement-agent, Benchmark and demand-letter matters, along with the remaining investment-banker obligations.
- Remediation of ineffective disclosure controls and clarification of the inconsistent MD&A cash-flow and net-loss figures.