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EX-32.2 - EXHIBIT 32.2 - NewCardio, Inc.ex322.htm
EX-99.1 - EXHIBIT 99.1 - NewCardio, Inc.ex991.htm
EX-32.1 - EXHIBIT 32.1 - NewCardio, Inc.ex321.htm
EX-99.2 - EXHIBIT 99.2 - NewCardio, Inc.ex992.htm
EX-31.1 - EXHIBIT 31.1 - NewCardio, Inc.ex311.htm
EX-99.4 - EXHIBIT 99.4 - NewCardio, Inc.ex994.htm
EX-31.2 - EXHIBIT 31.2 - NewCardio, Inc.ex312.htm
EX-99.3 - EXHIBIT 99.3 - NewCardio, Inc.ex993.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
(Mark One)

x
Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 2010.

OR

o
Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________.

 
Commission File Number: 333-149166

NEWCARDIO, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
20-1826789
(State or other jurisdiction of
 
(I.R.S. Employer
Incorporation or organization)
 
Identification No.)

2350 Mission College Blvd., Suite 1175, Santa Clara CA 95054
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (408) 516-5000
 
Vincent W. Renz
Chief Executive Officer
NewCardio, Inc.
2350 Mission College Boulevard, Suite 1175
Santa Clara, California 95054
(408) 516-5000
(Name, address and telephone number of agent for service)
 
Copies of all communications to:
 
Fran Stoller, Esq.
Loeb & Loeb, LLP
345 Park Avenue
New York, New York 10154
Phone: (212) 407-4000\
Fax: (212) 407-4990
 
Securities Registered Pursuant to Section 12(b) of the Act: None
 
 
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Securities Registered Pursuant to Section 12(g) of the Act: Common Stock: NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act..     o Yes x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. x Yes o No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     o Yes x No
 
Indicate by check mark whether registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) x Yes   o No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o
Accelerated filer  o
   
Non-accelerated filer  o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).   o Yes x No
 
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant, based upon the last sale price of the Common Stock quoted on the OTC Bulletin Board as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2010), was approximately $20,102,000.
 
The number of shares of the registrant’s common stock outstanding as of March 28, 2011 was 30,831,428.


 
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TABLE OF CONTENTS
 
PART I      
 
Item 1.
Business.
4
 
Item 1A.
Risk Factors.
17
 
Item 1B.
Unresolved Staff Comments.
23
 
Item 2.
Properties.
23
 
Item 3.
Legal Proceedings.
23
 
Item 4.
(Removed and Reserved.)
23
       
PART II
     
 
Item 5.
Item 5.  Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
24
 
Item 6.
Selected Financial Data.
24
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
24
 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
30
 
Item 8.
Financial Statements and Supplementary Data.
30
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
30
 
Item 9A.
Controls and Procedures.
31
 
Item 9B.
Other Information.
31
       
PART III      
 
Item 10.
Directors, Executive Offices and Corporate Governance.
32
 
Item 11.
Executive Compensation.
37
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
44
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
45
 
Item 14.
Principal Accountant Fees and Services.
46
       
PART IV      
 
Item 15.
Exhibits and Financial Statement Schedules. 
47
       
SIGNATURES
  50
     
EX-31.1
   
EX-31.2
   
EX-32.1
   
EX-32.2
   
 
 
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PART I
 
Item 1.  
Business.
 
Background
 
We are a cardiac diagnostic and services company developing and marketing proprietary software platform technologies to provide higher accuracy to, and increase the value of, the standard 12-lead electrocardiogram, or ECG.  Our 3-D ECG software platform reduces the time and expense involved in assessing cardiac status while increasing the ability to diagnose clinically significant conditions which were previously difficult to detect.  Our software products and services significantly improve the diagnosis and monitoring of cardiovascular disease, as well as cardiac safety assessment of drugs under development.
 
NewCardio, Inc. was incorporated in the State of Delaware on September 2, 2003 under the name EP Floors, Inc. (“EP Floors”).  On November 16, 2006, in connection with the sale of substantially all of the shares of its common stock, EP Floors ceased operations and on November 20, 2006, changed its corporate name to Marine Park Holdings, Inc. (“Marine Park”).  From November 16, 2006 through December 27, 2007, Marine Park was a shell company.
 
NewCardio Technologies, Inc. (“NewCardio Technologies”) was incorporated in the State of Delaware on September 7, 2004 under the name NewCardio, Inc.  On December 27, 2007, NewCardio Technologies consummated a reverse merger with Marine Park by entering into a share exchange agreement (the “Share Exchange”) pursuant to which the stockholders of NewCardio Technologies exchanged all of their capital stock for 18,682,537 shares of common stock of Marine Park representing 92% of Marine Park’s outstanding capital stock, after the return to treasury and retirement of 9,445,015 shares of common stock held by certain stockholders of Marine Park concurrently with the Share Exchange.  As of December 27, 2007, Marine Park’s officers and directors resigned their positions and Marine Park changed its business to NewCardio Technologies’ business.  On January 17, 2008, Marine Park changed its corporate name to NewCardio, Inc.  References herein to “we,” “us,” “our,” “company,” “our company” or “NewCardio” refer to NewCardio, Inc., the parent corporation, and NewCardio Technologies, its wholly-owned subsidiary.
 
General
 
We are developing a 3-D cardiovascular diagnostic platform technology focused enhancing the clinical value of the ECG, and we initially intend to compete in two large segments of the cardiovascular disease (“CVD”) diagnostic market: (1) cardiac safety analysis for drug development, and (2) cardiovascular disease diagnostics and monitoring.
 
The 12-lead ECG is cardiology’s most frequently used screening and diagnostic tool, primarily due to the fact that it is a non-invasive, inexpensive, and highly versatile test which provides immediate availability for diagnosing arrhythmia, heart muscle diseases, or increased susceptibility to sudden cardiac arrest.  According to our current market estimates, there are more than 250 million ECGs taken annually in the developed countries of the world, including, but not limited to, in connection with drug development efforts, emergency room visits, ambulatory monitoring, hospital stays, periodic physicals and stress tests.  Our opportunities in this market are twofold; the first being our ability to add value to the current use of ECG as a diagnostic tool based on our ability to provide more accurate and timely diagnosis than is available today. The second is our ability to advance the use of the ECG as a diagnostic tool in replacing much more costly, and sometimes risky, diagnostic tests with a more cost effective and accurate procedure. We believe this could increase the number of ECGs performed annually.
 
Cardiac Safety Market for Drug Development
 
Unexpected cardiac toxicity is a common cause of delays in drug development, abandonment of otherwise-promising drug candidates, and/or withdrawal of previously approved drugs from the market.  One of the most important consequences of such toxicity is life-threatening arrhythmia, which usually results from drug-induced alterations in cardiac electrical activity and in some instances were implicated as causes of sudden cardiac death. Some drugs have recently been associated with a different kind of cardiac toxicity, that is, increased risk of myocardial infarction (“MI”), heart failure, and/or stroke.
 
 
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Such increased risk could go undetected during drug development. Clinical trials generally involve at most 10,000 patients, but drug-induced arrhythmia is usually a rare event, typically 1 in 100,000 patients or less. Similarly, drug-induced increases in MI and stroke are subtle and usually not appreciated from clinical trial data. Thus, cardiac toxicities of drugs in many cases become apparent only after a drug is marketed to millions of users.
 
Because of the difficulty in detecting cardiac toxicity, surrogate diagnostic markers are used during drug development to detect increased cardiac risk. The most important surrogate marker is the drug-induced changes in the QT interval on the ECG. “QT” is the time interval that is measured on the ECG signal from a part of the signal labeled “Q”, start of depolarization, through “T,” end of repolarization. The United States Food and Drug Administration, or FDA, and other drug regulatory bodies now require extensive ECG data on all drugs in clinical development, with a particular focus on drug-induced QT interval changes. Many of the new standards are set forth in the E14 Guidance for Industry published jointly by the FDA and the International Committee on Harmonisation in October 2005 (the E14 Guidance) at www.fda.gov/cder/guidance/6922fnl.htm. The primary focus of the E14 Guidance is a detailed assessment of a drug’s effects on ECG parameters, particularly the QT interval.
 
One of the most striking new standards in the E14 Guidance is the requirement for a single trial, called a “Thorough QT Study” (“TQTS”), the purpose of which is to define the drug’s effect on the QT interval.  The TQTS must assure regulators that the drug does not prolong QT interval more than a minimal amount.  A drug that “fails” this test may still be developed, but later phase trials now must include substantially more detailed cardiac safety data.  This may result in additional development costs and may add at least 1-2 years to the development process. In practice, a failed TQTS will often lead drug sponsors to abandon an otherwise-promising drug.
 
Meeting the standards of the E14 Guidance is made even more challenging by the difficulty of measuring drug-induced QT prolongation on an ECG.  At present, QT intervals are assessed by cardiac safety core labs in a manner that is labor-intensive, expensive and often of uneven quality.  Computerized algorithms have not been able to effectively solve this problem. Among other factors, such algorithms are limited by the same difficulties that human readers face, particularly precisely defining a low-amplitude event surrounded, and sometimes buried within, electrical noise.  At present, most expert observers regard them as unreliable for cardiac safety assessment in drug development, and the E14 Guidance unequivocally recommends manual assessment.
 
As a consequence of these developments, drug sponsors are devoting an increasing amount of time and resources to cardiac safety issues.  Currently, about 2000 new drugs (referred to herein as “New Chemical Entities” or “NCE”) are being studied as discussed forth at http://newmeds.phrma.org/.  Each NCE that reaches market will typically need 15,000 to 50,000 ECGs, and if the product is intended for treatment of a cardiovascular disease, possibly as many as 100,000 ECGs or more for analysis of cardiac safety. Indeed, depending upon the NCE, a single TQTS may require 20,000 ECGs or more.  What is needed is a reliable, accurate, precise and fully automated method of measuring drug effects on QT intervals and other ECG indicators of cardiac risk.
 
CVD Monitoring and Diagnostics Market
 
We intend to compete in a large segment of the CVD monitoring and diagnostic market, which is comprised of (i) point-of-care technologies and services, which account for approximately 65% of the total market, and (ii) ambulatory (outpatient) monitoring for cardiac disease, which accounts for approximately 35% of the total market.  Since cardiac disease is common, there are presently sizable markets in both categories.  For example, according to statistics published by the American Heart Association, approximately:
 
·  
81 million Americans have some form of cardiovascular disease;
 
·  
17.6 million Americans have coronary heart disease, which includes a history of myocardial infarction or angina pectoris;
 
·  
5.8 million Americans have heart failure; and
 
·  
2.7 million Americans have a history of atrial fibrillation or atrial flutter.
 
 
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A substantial portion of all of the above patient groups may benefit from the relatively inexpensive and convenient forms of cardiac monitoring and diagnostic tools being developed by our company.  Moreover, as the U.S. population ages, the number of patients in each category is expected to increase.  In the future, we expect that the ambulatory segment will see faster growth following the general trend of increased outpatient diagnosis procedures, as well as technological improvements that make remote digital monitoring more feasible.
 
While advanced CVD diagnostic testing (such as cardiac magnetic resonance imaging and multi-detector computed tomography) have important roles, they are not suited for initial screening of patients with suspected cardiac disease, and there remains an unmet need for better CVD diagnostic screening tools. We intend to provide such tools, targeted primarily to two sub-segments of the CVD diagnostic market:
 
·  
Stationary Cardiac Screening and Diagnostics, comprise of:
 
·  
patients who enter the emergency department or other acute care facilities must be quickly and accurately evaluated for potentially life-threatening acute cardiac disease, such as acute coronary syndrome; and
 
·  
other ambulatory or hospitalized patients with or without a cardiac disease diagnosis may need to be screened for their level of risk, the presence of disease, or disease progression.
 
·  
Ambulatory Cardiac Monitoring, comprised of:
 
·  
patients with difficult to assess or transient cardiac symptoms require long-term, real-time monitoring for diagnosis and evaluation; and
 
·  
patients with established cardiac disease, such as atrial fibrillation or coronary artery disease may need longer-term ambulatory monitoring to assess the effectiveness of therapy or establish the need for additional diagnostic tests or therapeutic interventions.
 
Principal Products and Applications
 
Our novel core platform technology provides real-time, 3-D analysis of the heart’s electrical activity, as detected at the body surface by standard 12-lead ECG electrodes. ECG input signals are typically sampled at 500 Hz (500 times per second).  Each signal is then normalized to present equidistant signal source representation from the body surface electrodes, and then mathematically processed to generate 3-D representations and other useful diagnostic 3-D proprietary markers. The ECG signal processing can be fully performed on a laptop computer so that the output is immediately available to the physician alongside the 12-lead standard ECG.  We have exploited our core technology platform to develop three initial products, QTinno, which was commercially released in 2009, and my3KG™ and CardioBip™, which are still in the initial research and development stage, as follows:
 
QTinno.  QTinno is an automated cardiac safety solution that streamlines the process for meeting the early phase cardiac safety analysis requirements as defined in ICH E14 guidance document.  It replaces the manual and/or semi-automated methodologies with algorithms that automatically measure, analyze and report on the ECGs collected for any early phase trial by a fully automating the evaluation of the QT and other timing intervals relevant for assessing drug cardiac toxicity (e.g. RR, PR, QRS, QT, QTcB, QTcF measurements).  It provides fast, accurate and precise QT data from a broad range of challenging ECGs, analyzing more than 10,000 ECGs within an hour.  The QTinno algorithm synthesizes information from all 12 leads into a 3-D representation of cardiac electrical activity over time.  From this representation, it then generates a “virtual” ECG lead, utilizing all available beats, that includes balanced and complete information from all parts of the heart.  This improves signal-to-noise ratio and shows difficult-to-detect events with substantially greater clarity than the standard 12-lead display.  This approach enables reliable, automated identification of key cardiac events – something no ECG provider has achieved to date.  In addition, QTinno incorporates novel curve fitting algorithms that ensure a high degree of accuracy, and a detailed “confidence factor” that flags the most difficult ECGs for recommended cardiologist over read.  This latter feature provides a fail-safe mechanism for ensuring all determinations are highly reliable.
 
 
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The QTinno user interface has been carefully designed to meet user needs, both in display and data analysis.   QTinno is a validated, 21CFR11 compliant software solution that supports the workflow for TQT and early phase automatic ECG analyses.  The system incorporates intuitive, user friendly interface summary screens containing real-time study metrics.   QTinno enables users, based on privileges assigned through the user profile, to efficiently manage the input, processing and output of the ECG data required in a TQT and/or early phase study.
 
When ECG processing has been completed, the results from QTinno can be provided back to the user in a number of different ways.  Cardiologists can view the ECGs that have been identified by the “confidence factor” for recommended review (generally no more than 2-4% of the ECGs processed) and adjudicate the results within QTinno (if required), specify ECG morphology findings and record any general comments.  Study results that contain the ECG measurements, morphology findings and processing details can be exported from the system.  Lastly, FDA XML files can be exported from QTinno for all ECGs that were processed, which can then be used by the drug sponsor as part of the upload to the FDA ECG warehouse or as part of a new drug application, or NDA, submission to the FDA.  All of these processing, review and reporting functions are available if QTinno is installed locally or if the user is accessing the application within the NewCardio hosted data center.
 
QTinno can be installed and used on any Windows-based personal computer.  It does not require a dedicated computer and no special hardware is required to operate the software.  In addition, there is no requirement for any new or unique procedures for capturing ECGs, enabling customers to continue to use their current ECG hardware and processes to obtain standard ECG recordings.  They will simply extract the digital files of these ECG recordings in order to import into the QTinno software.  QTinno will receive the ECG input signal via any standard means of transporting a digital computer file, such as a CD/DVD, USB drive or a network.  As noted above, QTinno can be delivered as “Software as a Service” (“SaaS”) through the 21CFR11 compliant NewCardio hosted data center or installed within our customers internal IT infrastructure, based on the requirements/preference of the customer.
 
CardioBip.  The prototype of CardioBip is a mobile ECG wireless transtelephonic system comprised of a mobile ECG recording and transmitting device, and web-enabled software which receives, processes and analyzes the data.  At present, there is no convenient and reliable method for remote monitoring and detection of either ischemic events or derangements of atrial electrical activity.  CardioBip is a convenient hand-held device that patients can carry with them and use to generate and transmit accurate and complete 12-lead ECGs during ordinary daily activity or when symptoms develop.  Such capabilities have the potential to significantly improve clinical outcomes for millions of patients with heart disease.
 
CardioBip will be placed on the patient’s chest, using three integrated electrodes to make contact.  The patient will touch two points on the recorder with each hand, thereby providing two additional electrodes.  No wires are required.  The recorder will wirelessly transmit data to the web-enabled software, through which a synthesized 12-lead ECG will be reconstructed from a calibrated, patient-specific transformation algorithm, proprietary to our company.  A clinician can then evaluate the information, enabling more accurate and timely diagnoses of acute cardiac events, and facilitating immediate intervention in life-threatening situations.
 
CardioBip is currently being developed beyond this prototype stage, although introduction of a commercial product is expected to take approximately 24 months, depending on the level of funding we can secure for this product.  We intend to file a first application for 510(k) premarket notification in support for generic cardiac rhythm remote monitoring.  We then plan to initiate a clinical study to document the performance of CardioBip for the remote monitoring of patients affected by atrial fibrillation.  Based on the outcomes of the clinical trial, we intend to file a second application for 510(k) premarket notification in support of remote monitoring of atrial fibrillation.  In 2010, we continued the maintenance of core CardioBip patents issued in several European countries and filed several U.S. and Patent Cooperation Treaty (“PCT”) patent applications intended to cover new system features.  See “Intellectual Property.”
 
my3KG.  my3KG is a software application we are developing to provide a comprehensive method to assess cardiac electrical activity in time and space.  my3KG extracts additional information from standard 12-lead ECG signals and uses it to generate 3-D ECG markers.  These markers are used in conjunction with proprietary statistical classifiers that render diagnostic decisions. We believe that this will enable my3KG to assess potentially fatal diseases and conditions, including acute coronary syndrome (“ACS”), with greater accuracy than possible by standard ECG.
 
 
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Importantly, my3KG would require no change in standard ECG practice.  The ECG would be obtained exactly as it is now, with the electrodes placed in the same locations with no need for additional electrodes. Moreover, my3KG provides the 12-lead display along with its novel diagnostic decisions.  We believe this will be highly important in promoting acceptance of my3KG by the medical community. In 2010, we completed internal validation of my3KG algorithms, conducted a study showing superior ACS detection results in a diabetes population and filed several U.S. and PCT patent applications intended to protect existing and new features.  See “Research and Development” and “Intellectual Property” sections below.
 
Depending on the level and timing of funding we are able to secure, my3KG is expected to be introduced concurrently with or following the introduction of CardioBip.  We intend to file an application for 510(k) premarket notification in support of an indication for detection of acute MI.  We anticipate that the application will be based on data from a retrospective clinical study, a study where one accesses patients’ ECGs that had been treated in the past.  At this time, we do not plan to conduct a prospective clinical trial in order to secure our first set of regulatory approvals.  A prospective trial is one in which my3KG would be run side by side with ECGs taken in real time as patients enter the emergency room in order to analyze the performance of my3KG compared to current practice.  A retrospective study is much more effective in time, cost and analysis than a prospective trial.
 
Marketing and Sales
 
QTinno. We are marketing QTinno as a fully automated software solution that provides:
 
·  
diagnostic accuracy and precision in assessing drug induced QT prolongation - with results comparable to the current gold standard manual read but with substantially less variance;
 
·  
diagnostic speed - requiring less than 2 hours to process a typical TQT study, substantially faster and less labor-intensive than the current gold standard manual read; and
 
·  
cost savings -by substantially reducing the amount of human labor and time required to conduct TQT studies and other drug cardiac safety studies, as well as being able to perform studies with less subjects while retaining the same study power.
 
Since the official launch of QTinno in August 2009, we have entered into seven master service agreements (“MSAs”) with customers for the use of QTinno to deliver cardiac safety analysis services.  These MSAs provide the general legal framework pursuant to which we may conduct business with potential customers, but do not contain any financial commitments nor do they indicate the level of business, if any, that may ultimately be generated by such potential customers.  Any services or studies that we may perform will generally be evidenced by a purchase order type of arrangement that will become an addendum to the MSA. During the year ended December 31, 2010, we generated over $250,000 of revenues from the sale of QTinno implementation kits and related professional services as well as from the processing of ECGs in our initial early phase QT studies.  We are currently involved in a growing number of study opportunities for QTinno, from both current and prospective customers.  We believe we are well positioned to be able to identify and capture a significant number of cardiac safety studies in the early phase market in 2011.
 
We believe the increasing success of our QTinno marketing efforts has been helped substantially by the extensive clinical validation work we have done with this product.  To date, we have completed 12 clinical validation studies involving over 100,000 ECGs, done in collaboration with partners from the pharmaceutical industry, clinical trial service providers, regulatory bodies and academia.  In all of these studies, QTinno returned results that were closely comparable to a variety of manual and semi-automated methods, but with lower measurement variability and substantially greater speed.
 
In addition to our collaborative validation studies, QTinno’s performance has also been comprehensively and independently evaluated by the Cardiac Safety Research Consortium (the “CSRC”), a public-private partnership of drug cardiac safety experts formed under the FDA Critical Path Initiative to support drug cardiac safety research.  To meet the need for reliable, objective assessment and validation of automated ECG analysis algorithms such as QTinno, the CSRC has set aside a “testing” ECG database, which it offers to developers under strict protocols designed to assure accurate and reliable assessment of the technology.  The results of NewCardio’s validation efforts with the CSRC “testing” dataset, which were presented at the CSRC annual meeting at the FDA White Oak Headquarters in December 2010, provided an independent and authoritative validation of QTinno measurement accuracy and low measurement variability.  We believe we are the only company that has agreed to the CSRC protocols, perhaps due to the reluctance of others to agree, prior to initiating the validation process that the results would be made public by the CSRC regardless of outcome.
 
 
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Our sales and marketing efforts for QTinno are focused on increasing the level of awareness and interest in automated cardiac safety solutions, and specifically in QTinno, throughout the clinical trial industry.  We are targeting three distinct customer groups who are involved in cardiac safety analysis in early phase QT studies.  The first group includes clinical trial service providers, such as clinical research organizations (“CROs”), ECG core labs, and clinical pharmacology units (“CPUs”) who would be our “direct” customers seeking to integrate QTinno into their current product and service offerings, enabling them to expand their revenue and profit potential through the delivery of automatic cardiac safety analysis in the early phase TQTS they are conducting for their Pharma sponsor customers.  The second group includes “indirect” customers, primarily Pharma sponsors and other drug development organizations, which will be looking to adopt the automated cardiac safety methodology for their early phase TQTS through our direct customers, their clinical trial service providers. The third group includes the regulatory authorities, in particular the FDA, as well as key industry groups, such as the CSRC, that we will work in collaboration with  to share both the current performance of QTinno, as well as the product’s future potential to advance the current state of cardiac safety analysis.
 
We believe the level of market awareness and adoption that we have realized to date through our validation efforts for QTinno provide solid proof of concept/validation for the potential of our 3-D ECG software platform technology that forms the basis of our other solutions under development, which we will seek to leverage in connection with any future marketing efforts for CardioBip in the emerging area of telemedicine and remote patient monitoring and for my3KG, the first deployment of which is expected to be in the emergency room
 
Research and Development
 
Our research and development efforts to date have focused on the development of the QTinno, CardioBip and my3KG solutions and the 3-D ECG software technology platform in general.  The timing and nature of our research and development activities is dependent upon our ability to raise the funding needed for these efforts.
 
CardioBip. Since 2004, we have been deploying prototype CardioBip units in Belgrade, Serbia and currently have 40 units collecting 3-D ECG data and wirelessly transmitting them to a 24-hour on-call cardiology center for review.  More than 5,000 successful ECG data transmissions from more than 120 patients have been completed to-date.
 
During 2010, we initiated a clinical study that used CardioBip for remote monitoring of patients that had undergone cardiac ablation procedures for the treatment of atrial fibrillation (“AF”).  This study compared standard follow-up procedures, such 24-hour Holter monitoring, to periodic remote and wireless monitoring conducted using CardioBip.  The study enrolled 21 patients and was completed in the fourth quarter of 2010.  All patients who underwent catheter ablation for AF were given CardioBip devices and asked to provide daily transmissions for 60 days and additional transmissions whenever symptoms (such as palpitations or dizziness) developed.  Patients also had 24-hour, continuous 12-lead ECG Holter recordings, a commonly-used method for AF surveillance, at 30 and 60 days post-procedure.  Both CardioBip and Holter data were reviewed by two independent, blinded cardiologists.  All 21 patients completed the full 60-day follow-up period and showed good compliance throughout, making an average of 2.2 transmissions per day.  Of the 21 patients, 20 had at least one episode of recurrent AF detected by CardioBip.  Most of these episodes were asymptomatic.  Six of the 20 patients also had occurrence of atrial flutter detected.  In contrast, only four and two patients had recurrent AF and atrial flutter detected by the Holter, respectively.  In all these six patients, AF and atrial flutter had already been detected by CardioBip – at an average of 27 days earlier than detection by the Holter.  All symptomatic CardioBip transmissions were correlated with at least one rhythm irregularity (e.g. AF, atrial flutter, or premature beats).  We believe that our working hypothesis that CardioBip monitoring allowed for early detection of clinically relevant post-procedure AF recurrences, as compared to using Holter devices, proved to be correct.  Additionally, CardioBip offered patients the convenience of having their rhythm monitored remotely from the comfort of their home.  Healthcare costs may have been saved, as the need for hospital/doctor’s office visits was reduced.  We have been invited by the Heart Rhythm Society (the “HRS”) to present this study results at its upcoming Annual Conference.  The presentation, entitled “Long-term Intermittent Wireless Remote Monitoring of Reconstructed 12-Lead ECG in Post-Ablation AF Patients Using the CardioBip System”, will be made at the 32nd Annual Scientific Sessions of the HRS, to be held in San Francisco, CA, May 4-7, 2011.
 
 
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A fully operational prototype version of the CardioBip system was successfully demonstrated at the 31st Annual Conference of the HRS in May 2010.  At the same conference, results from our first AF pilot study were discussed during an oral presentation as part of the scientific sessions.  We expect to use this version and create a fully functional, fully documented, verified and validated system that would constitute the basis of a filing for 510(k) premarket notification in the first half of 2012.  During 2010, we also presented the results from the first two CardioBip clinical studies at the 32nd Annual International Conference of the IEEE Engineering in Medicine and Biology Society, held in Buenos Aires, Argentina, August 31-September 4, 2010.
 
my3KG.  Our focus for my3KG is to create a software product that will offer significant improvements in sensitivity and preserve specificity as compared to the results of traditional 12-lead ECGs that do not use our 3-D platform.  We believe our primary advantage using the 3-D platform algorithm comes from our ability to analyze results occurring on the side and back of the heart.  We are initially focusing directly on the algorithmic work and the potential of the product for significantly improving the diagnosis of a heart attack, or acute MI.  Recent results from blinded tests conducted on newly acquired ECG databases confirmed my3KG’s increased performance in detecting MI.
 
During 2010, we validated the performance of my3KG algorithm using internal ECG databases with data from patients presenting with chest pain symptoms at two Emergency Departments located in the U.S.  In one such validation study, we analyzed the performance on my3KG in detecting acute MI in patients affected by diabetes.  Accurate and timely diagnosis of acute MI is notoriously difficult in diabetics, largely because the standard 12-lead ECG is often inaccurate, inconclusive or non-diagnostic in this patient group.  To address this problem, independent investigators at the University of Kansas Medical Center in collaboration with our physician-scientists, obtained detailed clinical and 12-lead ECG data on 155 consecutive diabetic patients with suspected acute MI, and evaluated the diagnostic performance of my3KG in this patient group.  The study, which was completed in October 2010, showed that my3KG had 42% greater sensitivity than expert cardiologist interpretation of 12-lead ECG for early detection of acute MI, with equal or better specificity.  Diabetics with acute MI represent a very large and growing patient group, currently over 10% of such adults in the U.S. Moreover, the incidence of acute MI is believed to be two to four times greater in diabetics than in the general population, according to the American Diabetes Association and the American Heart Association.  We believe use of my3KG in this patient group may facilitate more accurate and timely diagnosis of acute MI in diabetic patients, and may lead to improved clinical outcomes.  We have been invited by the American College of Cardiology (the “ACC”) to present the results of this key study at the 60th Annual ACC Scientific Meeting to be held in New Orleans, LA in April 2011.
 
In a second validation study, our hypothesis was that my3KG may improve the initial diagnosis of acute MI; by using quantitative 3-D analysis of various ECG angular and spatial velocity vectors, and morphology indices of ventricular repolarization.  This initial version of the algorithm was not designed to differentiate ST segment Elevation Myocardial Infarction (“STEMI”) from non-STEMI (“NSTEMI”).  Our objective was to compare the diagnostic accuracy of the algorithm with that of two blinded expert cardiologists.  First admission ECGs of consecutive patients presenting to the emergency department with chest pain or discomfort (n = 589) were blinded, randomly sorted, then coded by two cardiologists as STEMI, NSTEMI, or no-acute MI.  Digital ECG data was provided to the algorithm, which gave a diagnosis of acute MI or no-acute MI.  Outcome of any acute MI (STEMI or NSTEMI) vs. no acute MI were adjudicated by other physicians by chart review, including ECGs, troponin, consults, and imaging tests, and angiography.  Of 589 cases, there were 17 STEMI and 29 NSTEMI for 46  acute MIs in total, and 543 with no-acute MI.  On average, my3KG had an acute MI-detection sensitivity of 69% versus the average cardiologists’ sensitivity of  51%.  The algorithm specificity was 88% vs. 91% for the cardiologists.  The significant increase in sensitivity resulted in a higher negative predictive value for the algorithm.  We have been invited by the Society of Academic Emergency Medicine (the “SAEM”) to present the results of this study at the Annual SAEM Scientific Meeting to be held in Boston, MA, June 1-5, 2011.
 
We continue to study internally my3KG’s performance in ECGs from patients undergoing evaluation for acute chest pain in emergency rooms. Our objective continues to be the collection of data to help us refine the product and prepare it for an external clinical trial to support a filing for clearance with the FDA.
 
 
10

 
 
QTinno.  QTinno has been clinically validated at this time with both internal and external studies as previously reported.  Results showed that QTinno’s automated determination and the “gold standard” high quality manual measurement were virtually identical (less than 1 millisecond difference), and individual measurements showed a high degree of precision (standard deviation of well under 10 milliseconds between the two approaches).   Moreover, in every validation study done to date, QTinno has shown lower measurement variability – that is, lower standard deviations, narrower confidence intervals, and lower mixed-model covariance - than the comparator method.
 
Importantly, these observations from QTinno clinical validation studies were confirmed by the CSRC using their blinded “testing” ECG dataset.  In this rigorous independent study, conducted entirely by the CSRC without our involvement, QTinno returned an excellent moxifloxacin curve that met regulatory standards in every way.  Moreover, the independent CSRC results again showed that QTinno results had significantly and substantially lower measurement variability compared to the Sponsor-reported data.  These results were presented at a symposium sponsored by the FDA, Drug Information Association, and CSRC, held at the FDA’s White Oak Headquarters in Silver Spring MD, on December 9, 2010.
 
As we work with customers and sponsors, as part of their evaluation process, we continue to put QTinno through rigorous clinical validation exercises, as the consistent quality of results delivered continues to confirm the robustness of the underlying technology in addressing both the immediate and long term concerns of the current standard (i.e. QT interval measurement) for cardiac safety analysis/testing in drug development.  We believe that working in collaboration with potential customers and/or partners will help not only to accelerate their adoption of QTinno, but also will provide valuable input/feedback for continued enhancement of this solution.
 
One of the most significant results of our collaboration efforts has been the development of an engineering version of QTinno that was used to successfully process 24 hours of Holter data from a complete TQT study.  The data was provided to us by a global pharmaceutical company that we are collaborating with on this project.  The automatically-computed results for the study were available after approximately 36 hours of computer processing time and showed a good agreement with the original core lab data with significantly reduced variability.  We plan to add this enhancement to a future model of QTinno.
 
The current development work for QTinno primarily involves product enhancements as is typical with a released software product.  This is largely driven by our customers as they learn the full capabilities of the automated 3-D ECG software platform technology.  Our efforts are focusing on adding functionality and improving the quality of data provided by QTinno.  The most significant enhancement we are developing is the ability to automatically extract optimized ECG data from continuous recordings from devices such as a Holter recorder or a telemetry system.  Not only will QTinno automatically extract this data, but our clinical studies have shown that our extraction strategy provides lower variable data than if the extractions were performed manually by technicians.  In addition, we have added support for demography data management and the ability for QTinno to operate unattended, further streamlining the ECG analysis process.  The enhanced version of QTinno is expected to be made available to the market in the first half of 2011.  While we also expect to add capability to manage late stage drug studies and post-market surveillance studies, we believe the market opportunities of CardioBip and my3KG are larger and we are prioritizing those as our next research and development efforts for the 3-D ECG software platform technology.
 
Competition
 
QTinno.  QTinno currently competes with standard methodologies, manual and semi-automatic, for analyzing ECGs during drug development.  Competitors include several smaller, effectively startup, as well as GE Healthcare and Mortara, which have the predominant market share of the ECG equipment used during the course of clinical trials.  We believe our 3-D approach and novel analytical algorithms offer substantial competitive advantages over the currently available solutions from these providers, including increased accuracy, precision, and full automation in obtaining data on QT interval effects of drugs, which the FDA requires from all drug developers.  We cannot predict the timing of or extent to which potential customers will embrace our automated solution.  As it relates to the larger providers, we would face substantial competition if existing ECG core labs who utilize their equipment in conducting their studies, input their existing algorithms to the current standard and semi-automatic methodologies, and begin to market and use them as their automated solution.
 
 
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CardioBip. Companies such as CardioNet, LifeWatch and others provide products and services with similar indications for use as CardioBip. Because the CardioBip system provides 12-lead ECGs, we believe that our remote monitoring solution will offer competitive benefits to clinicians and patients.  Additionally, CardioBip’s high convenience factor, its integrated electrode configuration, its patient friendliness combined with the utility of our web-enabled data review software is expected to provide additional advantages for potential customers.  However, because several of these competitors have substantially greater resources than us, we may face challenges in gaining market acceptance for our product.
 
my3KG. Companies such as GE Healthcare, Phillips Medical Systems, Mortara, Medtronic, and others compete in the same space. We believe that the increased sensitivity in detecting acute MI offered by my3KG, built on the strength of our proprietary 3-D ECG software technology platform, will provide a competitive solution for Emergency Department acute-care applications. Nevertheless, these competitors today control over 90% of the U.S. market.  While these companies may provide potential partnership opportunities, if we were to compete against them, their widespread adoption by hospitals makes it difficult for smaller providers of ECG analysis software to gain market share.
 
Intellectual Property
 
The medical software and hardware technology products industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes.  Our success will depend, in part, on our ability to obtain patent protection for our products, to preserve our trade secrets and to avoid infringing the proprietary rights of third parties.
 
We hold certain patent rights, have certain patent applications pending and expect to seek additional patents in the future.  However, we cannot assure the success or timeliness in obtaining any such patents or the breadth or degree of protection that any such patents might afford us.  The patent position of medical software and hardware technology products is often highly uncertain and usually involves complex legal and factual questions.  There is a substantial backlog of patents at the United States Patent and Trademark Office.  No consistent policy has emerged regarding the breadth of claims covered in medical technology product patents.  Accordingly, we cannot assure that patent applications relating to our products or technology will result in patents being issued, that, if issued, such patents will afford adequate protection to our products or that our competitors will not be able to design around such patents. In that regard, a company’s research and development efforts, supplemented by the timing protection afforded by protective patents, are what leads to a competitive advantage.
 
In 2010, we were issued two fundamental U.S. patents for CardioBip and my3KG.  Additionally, we filed additional U.S. and PCT patent applications intended cover existing and new features of all three products, QTinno, CardioBip and my3KG. The following table summarizes the status of our patents and patent applications as of the date hereof:
 
 
 
 
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App Number/
Filing Date
Brief Summary
(Products Covered)
Status
PCT/
YU2004/
00020
08/20/04
Cordless recording and telecommunication of three special ECG leads and their processing (CardioBip)
US Patent No. 7,647,093 issued 01/12/10.
EU Certificate of Patent Grant EP1659936 issued 12/26/2007. EU Patent active in DE, ES, FI, FR, IT, GB, GR, PL. Other national phases are being processed.
International Application now being examined in China, Japan, Korea and the European Union (EU).
PCT/
US2005/
001239
01/16/ 05
Visual 3-D  presentation of ECG data (my3KG, QTinno)
International Application now being examined in the China, Japan, Korea and the European Union (EU)
US 11/
036,930
1/16/04
Visual 3-D  presentation of ECG data (my3KG, QTinno)
US Patent No. 7,266,408 issued 09/04/07.
PCT/US2005/001239 International Application.
US 11/
848,221
1/16/04
Visual 3-D  presentation of ECG data (my3KG, QTinno)
Filed as divisional US Patent Application on 08/30/07. Divisional with respect to 11/036,930, filed on 1/16/04.
US PTO notice of all-claim allowance on 1/28/10. US patent 7,751,875 issued on July 6, 2010.
PCT/
US2008/
009308
07/31/07
Quantitative assessment of cardiac electrical events (QTinno)
Priority to US Provisional Application filed 08/01/07.
US Patent
Application
Device and methods for evaluating cardiac electrical events (QTinno)
US Patent Application filed with US PTO on 07/31/08. Application # US 12/184,068. Priority to US Provisional Application filed 08/01/07.
US Patent
Application
System for quantitative assessment of cardiac electrical events (QTinno)
US Patent Application filed with US PTO on 06/12/09. Application # US 12/484,153.
US Patent
Application
Method for quantitative assessment of cardiac electrical events (QTinno)
US Patent Application filed with US PTO on 06/12/09. Application # US 12/484,156.
US Patent
Application
Electrocardiographic Monitoring System and Method Using Orthogonal Electrode Pattern (CardioBip)
US Patent Application filed with US PTO on 07/31/09. Application # US 12/534,064.
US Patent
Application
ECG Reconstruction For Atrial Activity Monitoring And Detection (CardioBip)
US Patent Application filed with US PTO on 11/05/09. Application # US 12/613,488.
US Patent
Application
Method for Automated EKG Analysis (my3KG)
US Patent Application filed with US PTO on 11/06/09. Application # US 12/614,352.
US Patent
Application
System for Automated EKG Analysis (my3KG)
US Patent Application filed with US PTO on 11/06/09. Application # US 12/614,354.
US Patent
Application
System and Method for Automated EKG Analysis (my3KG)
US Patent Application filed with US PTO on 11/06/09. Application # US 12/614,361.
US Provisional Patent Application
Alternative Markers For Quantitative Assessment of Cardiac Electrical Events (QTinno)
US Provisional Patent Application filed with US PTO on 12/15/09. Provisional Application # US 61/286,763.
 
US Patent Application
Atrial Fibrillation Detection based on Absence of Consistent P-Loops in Averaged Vectorcardiogram
(CardioBip)
US Patent Application filed with US PTO on 1/26/10. Application # US 12/694,236.
US Patent Application
Methods and apparatus for quantitative assessment of cardiac electrical events (QTinno)
US Patent Application filed with US PTO on 1/28/10. Application # US 12/695,128.
US Patent Application
Visual 3-D  presentation of ECG data (my3KG, QTinno)
Filed as divisional US Patent Application in 3/17/10. Divisional with respect to 11/036,930, filed on 1/16/04. Application # US 12/726,168.
PCT
Systems and Methods For Quantitative Assessment of Cardiac Electrical Events (QTinno)
Application No.:  PCT/US2010/036084
International Filing Date:  May 25, 2010
Priority of 12/484,153 and 12/484,156 filed 6/12/09
PCT
Electrocardiographic Monitoring System and Method Using Orthogonal Electrode Pattern (CardioBip)
Application No.:  PCT/US2010/44013
International Filing Date:  July 30, 2010
Priority to US Patent Application filed with US PTO on 07/31/09. Application # US 12/534,064.
PCT
Automated EKG Analysis (my3KG)
PCT/US2010/052373
Filed 10/12/10
Priority of: 12/614,352, 12/614,354  and 12/614,361
Title: AUTOMATED EKG ANALYSIS
PCT
ECG Reconstruction For Atrial Activity Monitoring And Detection (CardioBip)
Application No.:  PCT/US10/55174, Filed: 11/2/10
(Priority: U.S. Application No.  12/613,488; Filed: 11/5/09)
PCT
Alternative markers for quantitative assessment of cardiac electrical events (QTinno)
Application No.:  PCT/US10/60041, Filed: 12/13/10. Priority to divisional application # US 61/286,763 filed on 12/15/09.
US Patent Application
Method and apparatus for quantitative assessment of cardiac electrical events (QTinno)
US Patent Application filed with US PTO on 01/03/2011. Application # US 12/983,451. Divisional to application # US 12/184,068. Priority to US Provisional Application filed 08/01/07.
PCT
Methods and apparatus for quantitative assessment of cardiac electrical events (QTinno)
Application No.:  PCT/US2011/21739, Filed: 1/19/11. Priority of US Patent Application # US 12/695,128 filed 1/28/10.
PCT
Atrial Fibrillation Detection based on Absence of Consistent P-Loops in Averaged Vectorcardiogram
(CardioBip)
Application No.:  PCT/US2011/22455, Filed: 1/25/11. Priority of US Patent Application filed with US PTO on 1/26/10. Application # US 12/694,236.
 
 
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At present, our patents and patent applications are supplemented by substantial intellectual property we are currently protecting as trade secrets and proprietary know-how.  This includes matter related to all three product lines.
 
We believe that we own all our intellectual property and proprietary technology.  Most of our intellectual property and proprietary technology was developed by consultants who either developed such intellectual property and proprietary technology for us or assigned all rights to intellectual property and proprietary technology they had previously created to us, in both cases, pursuant to intellectual property invention and assignment agreements.  We believe these invention and assignment agreements are all valid and enforceable in accordance with their terms.  However, we cannot assure that they are valid and enforceable or that they will not be breached, and that we will have adequate remedies for any breach.
 
We also seek to protect our proprietary technology, including technology that may not be patented or patentable, in part through confidentiality agreements and inventors’ rights agreements with collaborators, advisors, employees and consultants.  We cannot assure that these agreements will not be breached, that we will have adequate remedies for any breach or that our trade secrets will not otherwise be disclosed to, or discovered by, competitors.
 
We have not been required to obtain licenses to patents or other proprietary rights of third parties to develop our products.  We cannot assure that licenses will not be required in the future for certain patents or proprietary rights or that such licenses would be made available on terms acceptable to us, if at all.  If we cannot obtain necessary licenses, we may encounter delays in product development and market introductions while we attempt to design around such patents or other rights, or we may be unable to develop, manufacture or sell such products in certain countries, or at all.
 
We believe that our intellectual property and expertise constitutes an important competitive resource, and we continue to evaluate the markets and products that are most appropriate to exploit this expertise. In addition, we maintain an active program of intellectual property protection, both to assure that the proprietary technology developed by us is appropriately protected and, where necessary, to assure that there is no infringement of our proprietary technology by competitive technologies.
 
Government Regulation
 
Our solutions include software, and potentially hardware, which will be used in clinical settings for drug development and patient diagnosis and, accordingly, are subject to regulation by the FDA and other regulatory agencies.  FDA regulations govern, among other things, the following activities that we perform and will continue to perform in connection with:
 
·  
product design and development;
 
·  
product testing;
 
·  
product manufacturing;
 
·  
product labeling and packaging;
 
·  
product handling, storage, and installation;
 
·  
pre-market clearance or approval;
 
·  
advertising and promotion; and
 
·  
product sales, distribution, and servicing.
 
FDA’s Pre-market Clearance and Approval Requirements.   The FDA classifies all medical devices into one of three classes.  Devices deemed to pose lower risks are placed in either Class I or II, which requires the manufacturer to submit to the FDA a pre-market notification, known as both a PMN and a 510(k) clearance, requesting clearance of the device for commercial distribution in the U.S.  Some low risk devices are exempted from this requirement.  Class III devices are devices which must be approved by the pre-market approval (“PMA”) process.  These tend to be devices that are permanently implanted into a human body or that may be necessary to sustain life.  For example, an artificial heart meets both these criteria.  We believe that our products do not fall into Class III categorization.
 
 
14

 
 
QTinno falls into the category of solutions that are exempt from requiring 510(k) pre-market clearance with the FDA.  This is because QTinno does not directly interact with a patient’s diagnosis and will be for use in drug safety applications.
 
We believe that my3KG and CardioBip fall into Class II, as they are both electrocardiographs and vectorcardiographs.  They must, therefore, first receive a 510(k) clearance from the FDA before we can commercially distribute them in the U.S.
 
For CardioBip, we intend to file a first application for 510(k) premarket notification in support for generic cardiac rhythm remote monitoring.  We will then initiate a clinical study to document the performance of CardioBip for the remote monitoring of patients affected by atrial fibrillation. Based on the outcomes clinical trial, we intend to file a second application for 510(k) premarket notification in support of remote monitoring of atrial fibrillation. Provided sufficient funding, we plan to have the first filing executed in 2012 and second one in 2013.
 
For my3KG, we intend to file an application for 510(k) premarket notification in support of an indication for detection of acute MI. We anticipate that the application will be based on data from a retrospective clinical study. At this time, we do not believe that it will be necessary to conduct a prospective clinical trial in order to secure our 510(k) clearance of my3KG.
 
510(k) Clearance Process. For each of my3KG and CardioBip, we must submit a pre-market notification to the FDA demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device, a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of pre-market approval applications, or is a device that has been reclassified from class III to either class II or I. If a device being submitted is significantly different than a previously cleared 510(k) device in terms of design, material, chemical composition, energy source, manufacturing process, or intended use, the device nominally must go through the pre-market approval (“PMA”) process.
 
The FDA’s 510(k) clearance process usually takes at least three months from the date the application is submitted and filed with the FDA, but it can take significantly longer. A device that reaches market via the 510(k) process is not considered to be “approved” by the FDA. They are generally referred to as “cleared” or “510(k) cleared” devices.  Nevertheless, it can be marketed and sold in the United States.
 
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance or could require a PMA, which requires more data and is generally a significantly longer process than is a 510(k.) The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or a PMA is obtained.
 
Pervasive and continuing FDA regulation. After a medical device is placed on the market, numerous FDA regulatory requirements apply, including, but not limited to the following:
 
·  
Quality System regulation, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process;
 
·  
Establishment Registration, which requires establishments involved in the production and distribution of medical devices, intended for commercial distribution in the U.S. to register with the FDA;
 
·  
Medical Device Listing, which requires manufacturers to list the devices they have in commercial distribution with the FDA;
 
·  
Labeling regulations, which prohibit “misbranded” devices from entering the market, as well as prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and
 
·  
Medical Device Reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.
 
 
15

 
 
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include one or more of the following sanctions:
 
·  
fines, injunctions, and civil penalties;
 
·  
mandatory recall or seizure of our products;
 
·  
administrative detention or banning of our products;
 
·  
operating restrictions, partial suspension or total shutdown of production;
 
·  
refusing our request for 510(k) clearance or pre-market approval of new product versions;
 
·  
revocation of 510(k) clearance or pre-market approvals previously granted; and
 
·  
criminal penalties.
 
Government regulation of QTinno for drug safety applications. The evaluation of ECGs from clinical trials for drug development is conducted under an Investigational New Drug or New Drug Application. As such, they are governed by The Food Drug and Cosmetic Act and regulations promulgated there under, primarily those set forth in Chapter 21 of the Code of Federal Regulations (21 CFR). Although no specific regulations govern use of electrocardiographic analytical tools in drug trials, QTinno must, nevertheless, be compliant with substantial portions of 21 CFR, particularly 21 CFR Part 11 regulating collection and submission of electronic data to the FDA.
 
In addition, the FDA must be familiar with QTinno performance and regard it as a validated methodology before drug sponsors will accept it for use in their QT studies..  On this note, the FDA deems a methodology to be valid if/when it consistently identifies the moxifloxicin profile/curve.  Moxifloxicin is typically the control drug for a TQTS as it have a known/expected profile/curve in prolonging the QT interval. We have had the opportunity to present QTinno validation results to the FDA, to include most recently at the annual CSRC meeting at the FDA Headquarters, and believe that both the technology and our clinical validation results were viewed favorably indicating that the FDA would accept data processed by QTinno in a prospective TQTS for review. We expect studies using QTinno will be presented to the FDA in 2011.
 
Further, we are a member of the CSRC, the broad-based collaboration of medical product safety experts from academia, industry, and the FDA. The CSRC was formed in 2005 in response to the Critical Path Initiative, the FDA’s effort to modernize the drug development process. The CSRC’s primary goal is to facilitate development of new tools to improve cardiac safety assessment of medical products, especially tools to quantify arrhythmia (abnormal heart beat) risk of new drugs in development.  We are an active participant in CSRC’s efforts, both providing expertise and technology as needed, and by conducting targeted research and development projects, as such projects are reviewed and approved by the CSRC’s Scientific Oversight Committee.  This intent is shown clearly in our recent participation, as the first and only participant, in the CSRC blinded “testing” dataset validation exercise.  The results of the collaboration were such that the CSRC asked, and NewCardio accepted, for an additional validation, this time on a cross-over TQTS (Please note: the initial blinded “testing” dataset was a parallel design TQTS).  We are currently reviewing the results of that validation with the CSRC team, and anticipate presenting those results in the first half of 2011.
 
In addition, we met with FDA representatives early in 2010, to review our concepts and programs in exploring new 3-D-based ECG markers for early assessment of cardiotoxicity of investigational drugs, beyond the current QT interval. At this meeting, the FDA confirmed its support and high interest in exploring additional cardiac safety markers. Subsequently, we presented data on these complementary markers in late February in London on the topic, “Three-dimensional Automated Algorithms in Continuous Quantitative Assessment of the Drug-induced Pattern of Ventricular Repolarization (Beyond QT/QTc)”.
 
 
16

 
 
International Regulation. International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ significantly.
 
The European Union has adopted legislation, in the form of directives to be implemented in each member state, concerning the regulation of medical devices within the European Union. The directives include, among others, the Medical Device Directive that establishes standards for regulating the design, manufacture, clinical trials, labeling, and vigilance reporting for medical devices. The my3KG and the CardioBip may be affected by this legislation, but we believe that it does not affect development or implementation of QTinno for pharmaceutical development purposes. Under the European Union Medical Device Directive, medical devices are classified into four classes, I, IIa, IIb, and III, with class I being the lowest risk and class III being the highest risk. Under the Medical Device Directive, a competent authority is nominated by the government of each member state to monitor and ensure compliance with the Directive. The competent authority of each member state then designates a notified body to oversee the conformity assessment procedures set forth in the Directive, whereby manufacturers demonstrate that their devices comply with the requirements of the Directive and are entitled to bear the CE mark. CE is an abbreviation for Conformitй Europйene (or European Conformity) and the CE mark, when placed on a product, indicates compliance with the requirements of the applicable directive. Medical devices properly bearing the CE mark may be commercially distributed throughout the European Union. Failure to obtain the CE mark will preclude us from selling the my3KG, CardioBip and related products in the European Union.
 
Employees
 
As of December 31, 2010 we had 11 full-time employees and no part-time employees.  Additionally, we have approximately 20 consultants who perform various specialized services for us.  We have four consultants in Belgrade, Serbia, who perform research and development for us.  We have approximately nine consultants who perform clinical and regulatory support and compliance for us.  We also engage consultants for investor relations, accounting, advisory and legal services.
 
Available Information
 
We file or furnish annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC. These reports will be available as soon as reasonably practical after such reports are electronically filed with, or furnished to, the SEC.  All of these documents are available in print without charge to stockholders upon request. Our SEC filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference rooms in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
 
Item 1A. 
Risk Factors.
 
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or which we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected
 
 
17

 
 
Risk Factors Related to Our Business.
 
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.
 
In their audit opinion issued in connection with our consolidated balance sheets as of December 31, 2010 and our related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2010, our auditors have expressed substantial doubt about our ability to continue as a going concern given our recurring net losses, negative cash flows from operations, planned spending levels and the limited amount of funds on our balance sheet.  We have prepared our financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  The consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue in existence.  Further, as a result of this audit opinion, it may be more difficult to obtain equity and debt financing on acceptable terms.
 
We need to raise substantial additional capital and if we are unable to obtain the requisite financing, our business may fail.
 
We had limited cash at December 31, 2010 totaling $0.6 million, which even after our current expense management program is not expected to last through the first quarter of 2011.  At present revenue levels, our current working capital is not sufficient to carry out all of our plans and to fund our operating losses.  Although we have access to a $1.5 million credit facility which is available through July 2011, we do not have the funds necessary to sustain our business or execute on our business plan.  We require substantial additional financing to meet our working capital requirements and to complete development of and commercialize the next two solutions, CardioBip and my3KG, based our 3-D ECG software platform technology.  We anticipate that we will need between $15 million and $20 million to develop and obtain FDA 510(k) clearance for the initial indications for these products and another $5 million to $10 million to achieve full commercialization.  Actual expenses could exceed these estimates in the event the FDA considers that any of the two products requires clearance via the longer and more costly FDA pre-market approval, or PMA, process or if we will be required to conduct larger clinical studies either for regulatory or for reimbursement approvals.  We have been exploring financing options during the last several months and are currently in discussions with respect to a potential equity financing; however, we have no agreement or commitment for any financing and there can be no assurance that we will be successful in obtaining such additional funding on favorable terms or at all.  If we are unable to obtain adequate funding we may be required to reduce, defer or discontinue one or more of our product development programs and our business may fail
 
If we are unable to repay our debt obligations, our equity holders will be adversely impacted.
 
At December 31, 2010, we had approximately $3.2 million in principal and interest outstanding under our initial credit facility that is due and payable on September 30, 2011.  Borrowings under the $1.5 million credit facility, which we intend to access, are also due and payable on such date.  If we are unable to repay or otherwise manage this liability on or before the due date, the holders or our common and preferred stock, as well as warrants, options and restricted stock units, may lose a significant portion of their investment and experience significant dilution.  In addition, we may also be required to agree to restrictions that limit our operating flexibility.
 
We may never earn a profit.
 
We have incurred losses since inception.  While we have initiated the commercialization of our first product, QTinno, we have generated only nominal revenue from operations and expect to incur substantial net losses for the foreseeable future to further develop and commercialize our technology.  We cannot predict the extent of these future net losses, or when we may attain profitability, if at all.  If we are unable to generate significant revenue or attain profitability, we will not be able to sustain operations and will have to curtail significantly or cease operations.
 
18

 
 
Our research and development efforts may not result in commercially viable products which could result in a decline of our stock price and a loss of your investment.
 
Further research and development efforts will be required to fully develop our 3-D ECG software platform technology and incorporate it into solutions that can be submitted for and obtain the regulatory approvals and/or compliance required to be commercially viable.  We may not succeed in developing commercially viable solutions from our 3-D ECG software platform technology.  If we are not successful in developing commercially viable solutions or, if such solutions become commercially obsolete, our ability to generate revenues will be severely limited.
 
The commercial success of our product solutions will depend on the degree of market acceptance among physicians, patients, drug developers, health care payors and the medical community.
 
Our cardiovascular diagnostic solutions have never been commercialized beyond QTinno, and there is no assurance that QTinno or the product solutions under development will receive the necessary level of acceptance from our direct or indirect customers to enable us to support our operations or achieve profitability.  In future applications of our 3-D ECG software platform technology, even if they are approved for sale by the appropriate regulatory authorities, there is a risk that physicians may not order diagnostic tests based on our 3-D ECG software platform technology, in which event we may be unable to generate significant revenue or become profitable. In addition, physicians and patients may not utilize these unless third-party payors, such as managed care organizations, Medicare and Medicaid, directly or indirectly pay a substantial portion of the test’s price. There is additional uncertainty regarding our markets as a result of recent legislative changes in the U.S. healthcare system that may adversely affect the demand for new drug development.
 
There is significant uncertainty concerning third-party reimbursement of any test incorporating new technology.  Reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that tests using our technologies are:
 
·  
not experimental or investigational,
 
·  
medically necessary,
 
·  
appropriate for specific patient,
 
·  
cost-effective, and
 
·  
supported by peer-reviewed publications.
 
Since each payor makes its own decision as to whether to establish a policy to reimburse for a test, seeking these approvals is a time-consuming and costly process, and we cannot be certain that coverage will be provided by any third-party payors, in which event we may be unable to generate significant revenue or become profitable.
 
Further, to the extent that a product participates in an area where the reimbursement encompasses an event rather than a specific product, such as is often the case in an emergency room, there is no guarantee that our product can achieve the necessary value relationship to achieve a reasonable payment rate, in which event we may also be unable to generate significant revenue or become profitable.
 
Our products are highly regulated, and we will not be able to commercialize our products if we cannot obtain the necessary regulatory approvals.
 
Our products are subject to extensive regulation by numerous governmental authorities in the U.S., including the FDA, and other countries.  Most of our products will require governmental clearance, and some may require governmental approval, before they can be commercialized in the U.S.  The regulatory clearance and approval process, which may include clinical validation of certain of our products to establish their safety and effectiveness, can take years and be very costly.  Data obtained from clinical validation activities are susceptible to varying interpretations that could delay, limit or prevent regulatory approval.  In addition, delays or rejection may be encountered based upon changes in, or additions to, regulatory policies for device marketing authorization during the period of product development and regulatory review.  Delays in obtaining such clearances or approvals could adversely affect our marketing of products developed and our ability to generate commercial product revenues.  Our failure to receive regulatory approvals in the U.S. in a timely manner or comply with newly enacted additional regulation could cause us to cease operations and go out of business.
 
 
19

 
 
If we desire to commercialize our products outside the U.S., we will be required to meet applicable foreign regulatory requirements , which can change rapidly with relatively short notice, resulting in our products being banned in certain countries and an associated loss of revenues and income.  Foreign regulatory agencies can also introduce test format changes which, if we do not quickly address, can result in restrictions on sales of our products.
 
Our inability to protect our intellectual property rights could allow competitors to use our proprietary rights and technologies in competition against our company, which would reduce our sales.
 
We rely on a combination of patent, patent pending, trademark and trade secret laws, proprietary rights agreements and non-disclosure agreements to protect our intellectual property.  We cannot give any assurance that these measures will prove to be effective in protecting our intellectual properties.  We also cannot give any assurance that our existing patents will not be invalidated, that any patents that we currently or prospectively apply for will be granted, or that any of these patents will ultimately provide significant commercial benefits.  Further, competing companies may circumvent any patents that we may hold by developing products which closely emulate but do not infringe our patents.  While we intend to seek patent protection for our products in selected foreign countries, those patents may not receive the same degree of protection as they would in the U.S.  We can give no assurance that we will be able to successfully defend our patents and proprietary rights in any action we may file for patent infringement.  Similarly, we cannot give any assurance that we will not be required to defend against litigation involving the patents or proprietary rights of others, or that we will be able to obtain licenses for these rights.  Legal and accounting costs relating to prosecuting or defending patent infringement litigation may be substantial.
 
We also rely on proprietary designs, technologies, processes and know-how not eligible for patent protection.  We cannot give any assurance that our competitors will not independently develop the same or superior designs, technologies, processes and know-how.
 
While we have and will continue to enter into proprietary rights and invention assignment agreements with our employees and consultants, we can give no assurance that courts of competent jurisdiction will enforce those agreements.
 
If we are unable to develop products to keep pace with rapid medical and scientific change, our operating results and competitive position would be harmed.
 
In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cardiac problems.  These advances require us continuously to develop new products and enhance existing products to keep pace with evolving standards of care.  Our solutions could become obsolete unless we continually innovate and expand our product solutions to meet the demands of new therapies.  If we are unable to demonstrate the applicability of our solutions to new treatments, then sales of our solutions could decline, which would reduce our revenues.
 
We are dependent upon key personnel and hiring and assimilating new key employees. The loss of key employees or the inability to attract new key employees could adversely impact our ability to implement our business plan and our operating results.
 
Our success is heavily dependent on the continued active participation of our current executive officers.  The loss of any of our senior management could significantly impact our business until adequate replacements can be identified and put in place.  In addition, as we grow we will need to hire additional key personnel.  We may not be able to identify and attract high quality employees or successfully assimilate new employees into our existing management structure, which could delay the development, commercialization, marketing or sales of our products.  
 
 
20

 
 
We may have difficulties managing growth which could lead to higher losses.
 
We have just started to realize revenue with QTinno in 2010 and have not begun selling any other products currently under development. Depending on market acceptance of these current and future products, we might not be in a position to rapidly commercialize our products.  Rapid growth would strain our human and capital resources, potentially leading to higher operating losses.  Our ability to manage operations and control growth will be dependent upon our ability to raise and spend capital to successfully attract, train, motivate, retain and manage new employees and continue to update and improve our management and operational systems, infrastructure and other resources, financial and management controls, and reporting systems and procedures.  Should we be unsuccessful in accomplishing any of these essential aspects of our growth in an efficient and timely manner, we may be forced to grow at a slower pace that could slow or eliminate our ability to achieve and sustain profitability.  Such slower than expected growth may require us to restrict or cease our operations and go out of business.
 
Lawsuits and legal proceedings.
 
From time to time, we may become involved in various lawsuits, disputes and claims (“Actions”), arising in the ordinary course of business.  These Actions may raise complex factual and legal issues and are subject to uncertainties.  Actions filed against us could include product liability, commercial, intellectual property, customer, employment and securities related claims, including class action lawsuits.  Plaintiffs in some Actions may seek unspecified damages or injunctive relief, or both.  Adverse results in Actions may harm our business and have material adverse effects on our business, results of operations, liquidity or financial position.
 
Risk Factors Related to Our Stock.
 
The price and trading volume of our common stock is subject to certain factors beyond our control that may result in significant price and volume volatility, which substantially increases the risk that you may not be able to sell your shares at or above the price that you pay for the shares.
 
Factors beyond our control, that may cause our share price to fluctuate significantly include, but are not limited to, the following:
 
·  
the development of a future market for our products;
 
·  
changes in market valuations of similar companies;
 
·  
announcement by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
·  
global economic conditions;
 
·  
developments in healthcare policies, including reimbursement;
 
·  
additions or departures of key personnel; and
 
·  
fluctuations in stock market price and volume.
 
Any of the foregoing factors could substantially increase the risk that you may not be able to sell your shares at or above the price that you pay for the shares.  Additionally, in recent years the stock market in general, and the Over-the-Counter Bulletin Board (the “OTCBB”) and technology stocks in particular, have experienced extreme price and volume fluctuations. In some cases these fluctuations are unrelated or disproportionate to the operating performance of the underlying company. These market and industry factors may materially and adversely affect our stock price regardless of our operating performance.
 
In the past, class action litigation has often been brought against companies following periods of volatility in the market price of those companies’ common stock. If we become involved in this type of litigation in the future it could result in substantial costs and diversion of management attention and resources, which could have a further negative effect on your investment in our stock.
 
 
21

 
 
Our stockholders may experience substantial dilution in the value of their investment if we issue additional shares of our capital stock.
 
Our charter allows us to issue up to 500,000,000 shares of our common stock and to issue and designate the rights of, without stockholder approval, up to 1,000,000 shares of convertible preferred stock. In the event we issue additional shares of our capital stock, dilution to our stockholders could result. In addition, if we issue and designate a class of convertible preferred stock, these securities may provide for rights, preferences or privileges senior to those of holders of our common stock.
 
Our issuance of common stock at a price below prevailing trading prices at the time of issuance may cause our stock price to decline.
 
As of December 31, 2010 there were outstanding 15,345 shares of convertible preferred stock convertible into 15.3 million shares of common stock, 1.6 million shares of common stock underlying outstanding restricted stock units (RSUs), warrants to purchase an aggregate of 15.3 million shares of common stock with a weighted average exercise price of $1.10 per share and 9.7 million options to purchase common stock with a weighted average exercise price of $0.61 per share.  Moreover, we intend to continue to minimize our use of cash for services by granting stock options and warrants to consultants and or employees at or below the then current market price.  These securities may result in shares of common stock being issued for consideration that is less than the trading price of our common stock at the time the shares are issued.  In connection with financing activities, we may also issue shares of common stock in the future at a discount to the trading price of our common stock.  Any such below market issuances, or the potential for such issuances, could cause our stock price to decline.  Moreover, if investors holding a significant number of these shares decided to sell them in a short period of time, such sales could contribute significant downward pressure on the trading price of our stock.
 
We may not be able to sustain a regular public trading market for our common stock, which would adversely affect the ability of investors in our company to sell their securities in the public markets.
 
Although our common stock trades on the OTCBB, a regular trading market for our common stock may not be sustained in the future.  The OTCBB is an inter-dealer market that provides significantly less liquidity than a national securities exchange or automated quotation system.  Quotes for stocks included on the OTCBB are not listed in the financial sections of newspapers as are those for stocks listed on national securities exchanges or automated quotation systems.  Therefore, prices for securities traded solely on the OTCBB may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price.
 
Our limited prior public market and trading market may cause volatility in the market price of our common stock.
 
Our common stock is currently traded on a limited basis on the OTCBB.  The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our common stock is thus subject to volatility. In the absence of an active trading market:
 
·  
investors may have difficulty buying and selling or obtaining market quotations;
 
·  
market visibility for our common stock may be limited; and
 
·  
lack of visibility for our common stock may have a depressive effect on the market for our common stock.
 
Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of our restricted stock in the public marketplace could reduce the price of our common stock.
 
From time to time, certain of our stockholders may be eligible to sell their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 of the Securities Act (“Rule 144”), subject to certain requirements.  In general, under Rule 144, unaffiliated stockholders (or stockholders whose shares are aggregated) who have satisfied a six month holding period may sell shares of our common stock, so long as we have filed all required reports under Section 13 or 15(d) of the Exchange Act during the 12-month period preceding such sale.  Holding periods are longer for an affiliate.  Any substantial sale of common stock pursuant to Rule 144 may have an adverse affect on the market price of our common stock.
 
 
22

 
 
Failure to achieve and maintain internal controls in accordance with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.
 
We are subject to the requirements of Section 404 (a) of the Sarbanes-Oxley Act.  If we fail to maintain adequate internal controls or fail to implement required new or improved controls, as such control standards are modified, supplemented or amended from time to time; we may not be able to assert that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud.  If we cannot produce reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and there could be a material adverse effect on our stock price.
 
Our common stock is a “penny stock.”
 
Our common stock is a “penny stock” under Section 15(g) of the Exchange Act. Our common stock: (i) trades at a price less than $5.00 per share; (ii) is not traded on a “recognized” national exchange; (iii) is not quoted on The NASDAQ Stock Market; and (iv) is issued by a company with net tangible assets less than $2,000,000, if in business more than a continuous three years, or with average revenues of less than $6,000,000 for the past three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend our common stock but can only trade in it on an unsolicited basis.
 
Resale restrictions on transferring “penny stocks” are sometimes imposed by some states, which may make transactions in our common stock more difficult and may reduce the value of the investment.  Various state securities laws impose restrictions on transferring “penny stocks” and as a result, investors in our common stock may have the ability to sell their shares of our common stock impaired.  Certain foreign countries also impose limitations and restrictions on the ability of their citizens to own stock that is not traded on a recognized exchange, which, in certain instances, does not include the OTCBB.
 
Broker-dealer requirements may affect trading and liquidity.
 
Section 15(g) of the Exchange Act and Rule 15g-2 promulgated there under by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.
 
Item 1B. 
Unresolved Staff Comments.
 
Not applicable.
 
Item 2.  
Properties.
 
Our principal executive offices are located at 2350 Mission College Boulevard, Suite 1175, Santa Clara, California, 95054, and consist of 2,000 square feet of space on a lease expiring April 30, 2011 at a cost of approximately $6,300 per month.  We also lease approximately 800 square feet of space in a Princeton, New Jersey office at $5,400 per month with the lease expiring June 30, 2011.  In addition, we work with a research team in Belgrade and reimburse them for space at an approximate cost of $400 per month.  We believe that our properties are adequate for our current and immediately foreseeable operating needs. We do not have any policies regarding investments in real estate, securities or other forms of property.
 
Item 3.  
Legal Proceedings.
 
None.
 
Item 4.  
(Removed and Reserved.)
 
 
23

 
 
PART II
 
Item 5.  
Item 5.  Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is traded on the OTCBB under the trading symbol “NWCI.OB.”  Trading commenced in our stock on January 4, 2008.  
 
The following table shows the high and low bid quotations for our common stock reported by the OTCBB during 2009 and 2010. The OTCBB quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Year Ended December 31,
   
First
   
Second
   
Third
   
Fourth
 
2010
High
  $ 2.17     $ 1.50     $ 1.00     $ 1.00  
 
Low
  $ 0.65     $ 0.81     $ 0.53     $ 0.56  
2009
High
  $ 1.90     $ 1.01     $ 1.49     $ 1.05  
 
Low
  $ 0.52     $ 0.55     $ 0.65     $ 0.37  
 
There were approximately 78 holders of record of our common stock as of March 28, 2010.
 
We have never declared or paid cash dividends on our common stock and do not expect to pay any dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings for our business. The payment of any future dividends on our common stock will be determined by our Board of Directors and will depend on business conditions, our financial earnings and other factors.
 
Recent Issuances Involving Unregistered Securities
 
We have issued the following securities that were not registered under the Securities Act of 1933, as amended and not reported in our reports on Form 10-Q or on Form 8-K, as applicable, filed with the SEC:
 
None.
 
Item 6.  
Selected Financial Data.
 
Not applicable.
 
Item 7.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K.
 
This MD&A contains forward-looking statements regarding our business development plans, clinical trials, regulatory reviews, timing, strategies, expectations, anticipated expense levels, projected profits, business prospects and positioning with respect to market, demographic and pricing trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions.  These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties.
 
Forward-looking statements are generally identifiable by the use of terms such as “anticipate,” “will,” “expect,” “believe,” “should” or similar expressions. Although we believe that the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.  Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including the potential risks and uncertainties set forth in Item 1A of this Form 10-K and relate to our business plan, our business strategy, development of our proprietary technology platform and our products, timing of such development, timing and results of clinical trials, level and timing of FDA regulatory clearance or review, market acceptance of our products, protection of our intellectual property, implementation of our strategic, operating and people initiatives, benefits to be derived from personnel and directors, ability to commercialize our products, our assumptions regarding cash flow from operations and cash on-hand, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure, implementation of marketing programs, our key agreements and strategic alliances, our ability to obtain additional capital as, and when, needed, and on acceptable terms and general economic conditions specific to our industry, any of which could impact sales, costs and expenses and/or planned strategies and timing.  If we are not able to generate sufficient liquidity from operations or raise sufficient additional capital, this could have a material adverse affect on our business, results of operations, liquidity and financial condition. We assume no obligation to, and do not currently intend to, update these forward-looking statements.
 
 
24

 
 
This MD&A should also be read in conjunction with the Item 1.A. “Risk Factors.”
 
Financial Condition and Results of Operations

   
Year ended
December 31, 2010
   
Year ended
December 31, 2009
   
Change
   
% Change
 
Revenue
  $ 257,399     $ -     $ 257,399       100.0 %
Cost of sales
    152,296       -       152,296       100.0 %
Gross profit
    105,103       -       105,103       100.0 %
                                 
Operating expenses:
                               
Selling, general and administrative
    5,916,092       6,904,521       (988,429 )     -14.3 %
Depreciation
    63,133       59,833       3,300       5.5 %
Research and development
    3,585,115       3,047,994       537,121       17.6 %
Total operating expenses
    9,564,340       10,012,348       (448,008 )     -4.5 %
                                 
Net loss from operations
    (9,459,237 )     (10,012,348 )     (553,111 )     5.5 %
                                 
Other income (expense):
                               
Gain on change in fair value of warrant derivative liability and preferred stock derivative liability
    194,553       907,866       (713,313 )     -78.6 %
Amortization of commitment fees
    (1,900,915 )     (378,985 )     (1,521,930 )     401.6 %
Other financing costs
    (119,183 )     (133,345 )     14,162       -10.6 %
Interest, net
    (211,475 )     26,199       (237,674 )     -907.2 %
Total other income (expense)
    (2,037,020 )     421,735       (2,458,755 )     -583.0 %
                                 
Net loss before income taxes
    (11,496,257 )     (9,590,613 )     (1,905,644 )     19.9 %
                                 
Provision for income taxes
    -       -       -       0.0 %
                                 
Net loss
    (11,496,257 )     (9,590,613 )     (1,905,644 )     19.9 %
                                 
Preferred stock dividend
    -       (784,010 )     784,010       -100.0 %
                                 
Net loss attributable to common shareholders
  $ (11,496,257 )   $ (10,374,623 )   $ (1,121,634 )     10.8 %
 
Comparison of the years ended December 31, 2010 and 2009 were as follows:
 
Revenues were $257,000 in the year ended December 31, 2010 and represented professional services associated with the deployment of QTinno for use in the cardiac safety component of a drug development study, as well as initial per ECG revenues from two such studies in the second half of the year. There were no revenues in 2009. Gross profit was $105,000 or 41% of revenue. Cost of goods of $152,000 includes maintenance costs of our service center, labor costs associated with the services and depreciation of service center equipment (primarily servers) totaling $17,000.
 
 
25

 
 
In June 2010, we implemented a succession plan designed to facilitate our continuing transition to a commercial enterprise, together with a company-wide expense management program that included salary reductions of up to 30%, similar reductions from our current external consultants and vendors, and limits on discretionary spending.  Net cash used in operating activities decreased 18% from $5.6 million during the year ended December 31, 2009 to $4.6 million in 2010.
 
Selling, general and administrative (“SG&A”) expenses decreased 14% to $5.92 million in the year ended December 31, 2010, a decrease of $0.98 million from $6.90 million in the year ended December 31, 2009. Stock based compensation represented $3.0 million of SG&A expenses in 2010, a decrease of $0.5 million from $3.5 million in 2009. The  $2.9 million balance of 2010 SG&A expenses decreased $0.5 million from $3.4 million in 2009,  primarily due to a $0.5 million decline in payroll expenses (of which $0.1 million reflects a reallocation of our founder’s compensation to research and development as a result of his shift in focus) and a $0.1 million decrease in travel and entertainment and other expenses attributable to an expense management program that was implemented in the second half of the year, which was offset in part by a $0.1 million increase in professional fees associated with our investor relations program.
 
Research and development (“R&D”) expenses increased 18% to $3.59 million in the year ended December 31, 2010, an increase of $0.54 million from $3.05 million in the year ended December 31, 2009.  Stock based compensation represented $1.8 million of R&D expenses in 2010, an increase of $0.4 million from $1.4 million in 2009. The $1.8 million balance of 2010 R&D expenses increased $0.2 million from $1.6 million in 2009 primarily due primarily to an increase in payroll as a result of the reallocation of our founder’s compensation from SG&A to R&D, reflecting the shift in his focus.
 
We have historically relied on the issuance of equity -based compensation, including options, share grants and restriction stock units (RSUs) to both our employees and outside consultants in exchange for services. Our management enters into equity compensation agreements with non-employees, if it is in our best interest, under terms and conditions consistent with the requirements of ASC 718-10. In order to conserve our limited operating capital resources, we anticipate equity -based compensation will continue to be a key element of employee and consultant compensation during the next 12 months
 
Gain on change in fair value of warrant derivative liability and preferred stock derivative liability is comprised of different elements during the years ended December 31, 3009 and 2010.  In the fourth quarter of 2010, we established a preferred stock derivative liability related to the September 2010 Series D Preferred stock. In 2009, we established both a warrant derivative liability and preferred stock derivative liability related to the September 2009 Series C Preferred stock and related warrant financing. We then marked the value of these liabilities to market quarterly, resulting in a non-cash net gain of $0.2 million in 2010 and $0.9 million in 2009 due primarily to changes in the market value of our common stock during the periods. The rights associated with the Series C Preferred stock derivative liability and related warrant derivative liability expired during 2010.
 
The amortization of commitment fees of $1.9 million in the year ended December 31, 2010 includes the non-cash cost of warrants issued in connection with our credit facilities of approximately $0.6 million and includes warrants subsequently issued as we drew down on the 2009 line during 2010 of approximately $1.3 million.  The initial facility began in September 2009 and we recognized $0.4 million of such fees a year ago. Other financing costs are approximately $0.1 million both years and include legal and accounting fees with our credit facility and equity transactions.
 
 
26

 
 
We recognized interest expense of $211,000 in the year ended December 31, 2010 compares to $26,000 in interest income in 2009 primarily due to borrowings under our 12% credit facility in 2010 which offset interest income on our cash balances.   .
 
The preferred stock dividend in 2009 is the non-cash value attributable to the Preferred C stock financing of September 2009.
 
Critical Accounting Policies
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. A summary of the critical accounting policies and the judgments that we make in the application of those policies is presented in Note 1 to our consolidated financial statements.
 
Our consolidated financial statements are based on the selection of accounting policies and the application of accounting estimates, some of which require management to make significant assumptions. Actual results could differ materially from the estimated amounts. The following accounting policies are critical to understanding and evaluating our reported financial results:
 
Revenue Recognition
 
We recognize revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
 
Revenues consist of cardiac safety software licenses provided on a fee for services basis and are recognized as the services are performed, as well as Cardiac Safety consulting services on a time and materials basis. We recognize revenues as we perform the services. At the time of each transaction, management assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured. The assessment of whether the fee is fixed or determinable is based upon the payment terms of the transaction. If a significant portion of a fee is due after our normal payment terms of not more than 180 days or upon implementation or client acceptance, the fee is accounted for as not being fixed or determinable and revenue is recognized as the fees become due or after implementation or client acceptance has occurred. Collectability is assessed based on a number of factors, including past transaction history with the client and the creditworthiness of the client.
 
ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing 605-25 on our financial position and results of operations was not significant.
 
Unbilled revenue is revenue that is recognized but is not currently billable to the customer pursuant to contractual terms. In general, such amounts become billable in accordance with predetermined payment schedules, but recognized as revenue as services are performed. Amounts included in unbilled revenue are expected to be collected within one year and are included within current assets.
 
Accounting for Stock-Based Compensation
 
We account for stock, stock options and warrants using the fair value method promulgated by Accounting Standards Codification subtopic 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Therefore, our results include non-cash compensation expense as a result of the issuance of stock, stock options and warrants and we expect to record additional non-cash compensation expense in the future
.
 
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We follow Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) which requires that all share-based payments to both employees and non employees be recognized in the income statement based on their fair values.
 
Accounting for Classifying Series C Stock
 
In September 2009, we issued 2,920 shares of our Series C Convertible Preferred Stock which contained certain reset and possible redemption provisions that required it to be classified as a liability in the balance sheet at redemption value net of discounts. In the fourth quarter of 2010, we issued 800 shares of our Series D Convertible Preferred Stock which contains certain reset provisions that require it to be classified as a liability in the balance sheet at redemption value net of discounts.
 
In accordance with Accounting Standards Codification subtopic 815-40, Derivatives and Hedging; Contracts in Entity’s Own Equity (“ASC 815-40”), we are required to bifurcate the fair value of the reset provision from the host contract and mark to market the reset provision each reporting period. The fair value of the reset provision at the date of issuance was charged as an allocated debt discount.  The fair value was determined using the Black Scholes Option Pricing Method, and beginning with new issuances in the fourth quarter of 2010, the Binomial Lattice formula.
 
All the Series C Convertible Preferred Stock derivative features described above expired in 2010 and, therefore, the Series C preferred stock and warrants was reclassified to the equity section for balance sheet presentation at December 31, 2010.
 
Accounting for and Classifying Warrants
 
In September 2009, we issued 2,920,000 warrants in connection with the issuance of our Series C Convertible Preferred Stock that contained certain reset provisions up to the first anniversary of date of the issuance. Therefore, in accordance with ASC 815-40, we reclassified the fair value of the warrant from equity to a liability at the date of issuance.  Subsequent to the initial issuance date, we are required to adjust to fair value the warrant as an adjustment to current period operations. As noted above, the reset provisions expired in 2010, and the warrant liability was reclassified to the equity section for balance sheet presentation at December 31, 2010.
 
Beginning in March 2010 we issued a total of 3.0 million warrants in conjunction with the monthly draw-downs under our 2009 credit facility and in July 2010 we also issued 750,000 warrants as a commitment fee in conjunction with a new 2010 credit line arrangement.  These warrants contain certain reset provisions, which expire if we list on a national stock exchange. Therefore, in accordance with ASC 815-40, we classified the fair value of these warrants as a liability at the date of issuance.  Subsequent to the initial issuance date, we are required to adjust to fair value the warrant as an adjustment to current period operations.
 
Financial Instruments Measured at Fair Value
 
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes 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 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
 
 
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To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
 
Level 3 Liabilities are comprised of the fair value of issued warrants with reset provisions and the Series D preferred stock with reset provisions.
 
Inflation
 
We believe that inflation has not had, and is not expected to have, a material effect on our operations.
 
Climate Change
 
We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
 
Liquidity and Capital Resources
 
To date, we have funded our operations through sales of equity securities and loans under credit facilities.  As of December 31, 2010, we had $0.6 million in cash. In July 2010, we implemented a company-wide expense management expense program and entered into a $1.5 million credit facility with the same entities that provided the initial $3.0 million credit facility in September 2009.  During 2010 we were fully drawn down under the initial facility. The 2010 facility is available beginning January 2011, as necessary, and draw-downs may occur through July 2011. In March 2011, we completed the initial draw down totaling $300,000. Additional draw downs will depend on our ability to obtain alternative sources of financing in the short term. Borrowings under the new facility, along with the current outstanding $3.0 million line of credit, mature on September 30, 2011.
 
We require substantial additional financing to meet our working capital requirements and to complete development of and commercialize the next two solutions, CardioBip and my3KG, based our 3-D ECG software platform technology.  We anticipate that we will need between $15 million and $20 million to develop and obtain FDA 510(k) clearance for the initial indications for these products and another $5 million to $10 million to achieve full commercialization. Actual expenses could exceed these estimates in the event the FDA considers that any of the two products requires clearance via the FDA PMA process or if we will be required to conduct larger clinical studies either for regulatory or for reimbursement approvals. We have been exploring financing options during the last several months and are currently in discussions with respect to a potential equity financing; however, we have no agreement or commitment for any financing and there can be no assurance that we will be successful in obtaining such additional funding, in which event we may be required to reduce, defer or discontinue one or more of our product development programs.
 
As a result of these actions, we reduced our net cash used in operations in the last two quarters ending December 31, 2010 to $1.5 million, a reduction of $1.1 million or 42% from $2.6 million in the last two quarters ending December 31, 2009 and 49% from $3.0 million in the first two quarters of 2010:

   
Year Ended December 31, 2010
   
Year Ended December 31, 2009
 
Three months ended March 31,
  $ 1,538,231     $ 1,588,097  
Three months ended June 30,
    1,491,843       1,412,102  
Three months ended September 30,
    852,049       1,482,860  
Three months ended December 31,
    677,310       1,166,428  
Totals
  $ 4,559,433     $ 5,649,487  
 
 
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We believe that we will continue to incur net losses and negative cash flow from operating activities in 2011. We are implementing additional cash expense management programs with a focus on equity incentives and we believe that these latest actions, together with the availability of the 2010 credit facility will provide resources to sufficiently fund our operations into the second half of 2011 as we focus on strategic funding opportunities.  In particular, effective March 1, 2011, we implemented a second salary reduction program, which included all our executive officers. These March salary reductions aggregate $0.2 million annually. In addition, on such date, we issued options to purchase an aggregate of approximately 1.5 million shares of our common stock at $0.01 per share, of which 880,000 were to executive officers.  Such options vest in 24 equal monthly installments beginning April 1 or May 1, 2011. The 2011 expense management actions are intended to be of a longer term nature so that we may extend any new resources as the team focuses on developing and implementing products and solutions beyond QTinno from our 3-D ECG software platform technology.
 
The following table sets forth the March 2011 salary reductions and option issuances to our executive officers:

   
Options granted
   
Salary reduction
 
Vincent Renz, Chief Executive Officer and member of the Board of Directors
    350,000     $ 54,000  
Branislav Vajdic, Fellow and Vice Chairman of the Board of Directors
    290,000       58,000  
Richard Brounstein, Executive Vice President, Chief Financial Officer and Secretary
    240,000       48,000  
                 
     Totals
    880,000     $ 160,000  
                 
 
We may experience fluctuations in operating results in future periods due to a variety of factors, including our ability to successfully develop our business model, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure and the implementation of marketing programs, key agreements and strategic alliances, and general economic conditions as well as those specific to our industry. This would also include our ability to obtain additional financing in a timely manner and on terms favorable to us. There can be no assurance that additional capital will become available or, if it does, that it will become available on acceptable terms, or that any additional capital we may obtain will be sufficient to meet our long-term needs. We currently have no commitments for any additional capital beyond the $1.5 million credit facility.
 
With the volatility in the recent trading price of our common stock and in the U.S. financial markets, it could be difficult to obtain additional investment or financing, strategic or otherwise. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek additional financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional capital is not available or is not available on acceptable terms, we will have to curtail our operations.
 
Our registered independent certified public accountants have stated in their report dated March 29, 2011 that we have incurred operating losses in the last two years, and that we are dependent upon the management’s ability to develop profitable operations. These factors among others may raise substantial doubt about our ability to continue as a going concern. This statement in the accountants’ report may make it more difficult to obtain future financing.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Item 7A. 
Quantitative and Qualitative Disclosures about Market Risk.
 
Not Applicable.
 
Item 8.   
Financial Statements and Supplementary Data.
 
The consolidated financial statements of NewCardio and NewCardio Technologies, including the notes thereto, together with the report thereon of RBSM LLP are presented beginning at page F-1.
 
Item 9.   
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
Not applicable.
 
 
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Item 9A. 
Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and Chief Financial Officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of December 31, 2010. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Based on that evaluation, our Chief Executive Officer, who is our principal executive officer,  and our Chief Financial Officer, who is our principal finacial officer, concluded that, as of December 31 2010, our disclosure controls and procedures were effective.
 
Management’s Annual Report on Internal Control over Financial Reporting
 
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a – 15(f).  Management conducted an assessment as of December 31, 2010 of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2010, based on criteria in Internal Control – Integrated Framework issued by the COSO.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the control procedure may deteriorate.
 
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company. Management’s report is not subject to attestation by our registered public accounting firm.
 
Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B. 
Other Information.
 
Not applicable.
 
 
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PART III
 
Item 10.  
Directors, Executive Offices and Corporate Governance.
 
Directors and Executive Officers
 
The following table and text sets forth the names and ages of all our directors and executive officers and our key management personnel as of March 28, 2011. All of our directors serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. Executive officers serve at the discretion of the Board of Directors (the “Board”), and are elected or appointed to serve until the next Board meeting following the annual meeting of stockholders. Also provided is a brief description of the business experience of each director and executive officer and the key management personnel during the past five years, the experience, qualifications, attributes and skills that led to the conclusion that each director should serve as a director on our Board, and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws.

Name of Individual
Age
Position with company and subsidiaries
Director or Officer since
Vincent W. Renz, Jr.
54
President and Chief Executive Officer
2008
Mark W. Kroll, Ph.D., FACC, FHRS
58
Chairman of the Board of Directors
2008
Branislav Vajdic, Ph.D.*
57
Vice Chairman of the Board of Directors and Fellow
2004
Robert N. Blair, M. Inst. P.*
68
Director
2006
James A. Heisch
67
Director
2008
Jess Jones, M.D.
32
Director
2008
Patrick Maguire, M.D., Ph.D.
58
Director
2008
Michael E. Hanson
63
Director
2009
Richard D. Brounstein
61
Executive Vice President, Chief Financial Officer and Secretary
2008
 
*
An officer or director of NewCardio Technologies prior to the December 2007 reverse merger with Marine Park Holdings, Inc.
 
Vincent W. Renz, Jr. joined us as President and Chief Operating Officer in August 2008 and assumed the role of Chief Executive Officer in June 2010. From October 2007 through August 2008, Mr. Renz was the Chief Operating Officer at ClinPhone, a United Kingdom-based clinical trial technology company recently acquired by Parexel. From May 1997 through February 2007, Mr. Renz was the Executive Vice President and Chief Technology Officer at eResearch Technology, Inc., a provider of technology-based products and services to the pharmaceutical, biotechnology and medical device industries. Mr. Renz holds a MBA in Management Information Systems from Indiana University and a BBA in Finance from the University of Notre Dame.
 
Mark W. Kroll, Ph.D., FACC, FHRS joined us as a member of our Board and Chairman of the Board of Directors in March 2008. Dr. Kroll is the named inventor on over 300 U.S. patents as well as numerous international patents and is one of the most prolific inventors of medical devices worldwide. He is co-author of four books: Implantable Cardioverter Defibrillator Therapy, Cardiac Bioelectric Therapy, Conducted Electrical Weapons, and Electrical Injuries, as well as numerous papers. Dr. Kroll served in various senior executive positions with St. Jude Medical Center Inc. in Sylmar California from 1995 through his retirement in 2005, including as the Senior Vice President and Chief Technology Officer for the Cardiac Rhythm Management division and as the Vice President of the Tachycardia Business division. Dr. Kroll has been named a Fellow of both the American College of Cardiology and the Heart Rhythm Society, and holds the positions of Adjunct Full Professor of Biomedical Engineering at California Polytechnic University-San Luis Obispo, California, and Adjunct Full Professor of Biomedical Engineering at the University of Minnesota. Dr. Kroll is also a director of Haemonetics Corporation in Braintree, Massachusetts, and Taser International, Inc. in Scottsdale AZ. Dr. Kroll is an experienced public Company director and medical device developer.
 
 
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Branislav Vajdic, Ph.D. is the founding stockholder of NewCardio Technologies.  He served as our President and Chief Executive Officer from October 2006 until August 2008, when he relinquished the title of President and in June 2010 transitioned to a Fellow position and was appointed Vice Chairman of the Board of Directors. Prior to October 2006, Dr. Vajdic was employed for 22 years at Intel Corporation, where he held various senior product development management positions. At Intel, he directed Pentium microprocessor and flash memory development teams, and was the inventor on several key flash memory design patents held by Intel. His responsibilities included product definition, setting the product development schedule as well as managing the executive phase of product design. Dr. Vajdic holds a Ph.D. in electrical engineering from the University of Minnesota.
 
Robert N. Blair served as a member of the Board of Directors of NewCardio Technologies from its inception in September 2004 through August 2005 and re-joined the Board in July 2006.  He served as the Chairman of the Board from July 2006 until March 2008 when his successor Mark Kroll, Ph.D.  FACC, FHRS was appointed.  Mr. Blair, an industry consultant, has 40 years of high technology business experience in both the US, Europe and Japan in both senior employee, board member and consulting roles.  Mr. Blair has experience with business, financial and legal corporate matters. Mr. Blair served as the Chief Executive Officer and director of LSI Logic Europe PLC in the UK, a manufacturer of semiconductors, from 1984 until 1989.  From 1995 through 1996, he served as the Chief Executive Officer and director of Crosspoint Solutions, Inc., a private semi-conductor company.  From 1999 through 2006 he was Co-founder, Chairman and Chief Executive Officer of VivoMedical Inc., a private medical device company in the area of non-invasive diabetes monitoring.  Mr. Blair also serves on the boards of private companies ArcticTek, Inc., Mobi33 Inc., SerraSolar Inc. and SolarAirPower Corp.  Mr. Blair has degrees in Applied Physics from the Anglia Ruskin University in the United Kingdom and from The London Institute of Physics in the United Kingdom.
 
James A. Heisch has been a member of our Board since May 2008.  Mr. Heisch has more than 40 years of senior level business experience including 17 years with Arthur Young & Company where he was an audit partner. Mr. Heisch served as the Chief Financial Officer for Atari, a video games manufacturer, from June 1982 until August 1983, Businessland, a personal computer reseller from August 1983 until June 1990, and Supermac Technology, a video graphics company from November 1990 until May 1995. Additionally, from June 1995 until December 1998, Mr. Heisch worked at VidaMed, Inc., a medical device company, where he was initially the CFO managing all financial and administrative functions, and later served as the President and CEO. He later joined Worldtalk Corporation, an Internet software security company, as CFO and later was promoted to President. Worldtalk was subsequently acquired by Tumbleweed Communications Corp. in 2000 and Mr. Heisch served as interim Chief Financial Officer during 2001. During the past five years, Mr. Heisch has been a private investor and served on the Board of Directors of Tumbleweed Communications, Inc. from 2006 until it was acquired in 2008.
 
Jess Jones, M.D. has been a member of our board since December 2008. Dr. Jones was designated by Vision Opportunity Master Fund to serve as a director, pursuant to the terms of the 2009 financing with Vision Opportunity Master Fund, Ltd. He is currently a consultant to Vision. From 2006 to December 2010 Dr. Jones worked with Vision Capital Advisors, LLC in New York City as the Director of Healthcare Investing, analyzing investment opportunities in the biotechnology, pharmaceutical, medical technology, and medical services fields, and assisted companies in implementing their business plans. From 2001 to 2007, Dr. Jones attended Columbia College of Physicians & Surgeons in New York City, where he received his medical degree in May 2007.  In 2005, while attending Columbia Medical School in New York City, Dr. Jones was awarded an American Heart Association –Medical Student Research Fellowship to study post-stroke inflammatory mediators in the Department of Neurosurgery. Additionally, Dr. Jones earned a BA degree from the University of Utah in 2001 and an MBA from Columbia Business School in May 2007.
 
Patrick Maguire, M.D., Ph.D.  has been a member of our Board since March, 2008. Dr. Maguire is an independent director and serves on the audit and monitoring and corporate governance committees of the Board.  Since 2006, Dr. Maguire has been the Chief Executive Officer, Director, and President of CyberHeart Inc., a venture backed medical device company focused on atrial fibrillation.  He joined CyberHeart following the acquisition of the oncology assets of Targent Incorporated in Princeton, NJ, where Dr. Maguire served as President, Chief Executive Officer and Director since 2002. Dr. Maguire oversaw the in-licensing of three compounds and the out-licensing of another compound, prior to the acquisition of the company.  Prior to joining Targent, Dr. Maguire was Vice President of Medical Affairs and Technology Development at VitaGen Incorporated, a medical device company, where he oversaw the preparation of IND’s, NDA’s, and IDE’s and managed VitaGen’s clinical trials in acute and chronic liver failure as well as medical and industry collaborations. He is a cardiovascular and thoracic surgeon and has acted as a principal investigator for medical devices and associated clinical trials. Dr. Maguire also serves as director of NovaRay Medical Inc. a medical device company in Newark, CA, where he is on the Compensation Committee.  He is also sits on the board of directors at Hemolife Medical Inc., a privately held medical device company. Dr. Maguire is a fellow of the American and Royal College of Surgeons and a member of more than 20 medical, academic and business societies. Dr. Maguire received a BA degree from Wesleyan University, an MD and PhD (Physiology and Biophysics) degrees from Georgetown University and an MBA degree from Pepperdine University. He completed surgical and cardiovascular fellowships at The Peter Bent Brigham Hospital, Harvard University, and Stanford University.
 
 
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Michael E. Hanson has been a member of our Board since 2009. Mr. Hanson is a founding partner of Barnard Life Sciences, a healthcare consulting company founded in 2001. From 2004 to 2009, Mr. Hanson was a member of the board of directors, compensation and audit committees, of Indevus Pharmaceuticals, a pharmaceutical company, which was acquired by Endo Pharmaceuticals Holdings, Inc. in 2009. From 2002 to 2006, Mr. Hanson was a member of the board of directors, compensation and audit committees, of GlycoGenesis, an oncology-focused company. From 1998 to 2001, he was a member of the board of directors, compensation and audit committees, of MGI Pharma, Inc., a pharmaceutical company, which was later purchased by Eisai Pharmaceuticals. Mr. Hanson also serves on the board of directors of Eleos, Inc., and is also a member of Pearl Street Ventures, a venture capital firm that specializes in healthcare companies and Cardinal Equity Partners, a private equity firm. Previously, Mr. Hanson spent 25 years in positions of increasing responsibility at Eli Lilly and Co. His roles at Lilly included sales, sales management, marketing and operations. He served as President and General Manager of Eli Lilly Japan KK from 1989 to 1992. He subsequently served as Vice President of Lilly Research Laboratories with responsibilities for the Medical Department, a global organization responsible for the clinical development of pipeline products from Phase 1 through Phase 4 post-marketing support and compliance studies. He culminated his Lilly career as President of the Internal Medicine Business Unit which included all cardiovascular and oncology products and became a member of the Lilly Operations Committee (the senior management group of the company at that time). Mr. Hanson received a B.S. in Pharmacy from North Dakota State University and an M.S. in Hospital Pharmacy Administration from the University of Minnesota, and attended the Advanced Management Program at Harvard Business School.
 
Richard D. Brounstein joined us as our principal financial officer and Secretary on a part-time basis in January 2008 and in March 2008 he took on his current role as Executive Vice-President, Chief Financial Officer and Secretary on a full-time basis.  From June 2001 through November 2007, Mr. Brounstein held several positions at Calypte Biomedical Corporation, a publicly traded medical device company, including Chief Financial Officer and Executive Vice President.  In January 2007, Mr. Brounstein was appointed as the National Member Representative for Financial Executives International (FEI) on the 2007 COSO Monitoring Project, which published new guidelines for monitoring internal financial controls in February 2009. In March 2005, Mr. Brounstein was appointed to the SEC Advisory Committee on Smaller Public Companies. Mr. Brounstein earned his Certified Public Accountant (CPA) certification while working at Arthur Andersen, formerly a public accounting firm. Mr. Brounstein holds a BA in Accounting and an MBA in Finance, from Michigan State University.
 
The Board of Directors and Its Committees
 
Our Board directs the management of our business and affairs as provided by Delaware law and conducts its business through meetings of the full Board.  At December 31, 2010, our Board of Directors consisted of eight directors, five of whom are independent, including our Chairman of the Board.  Prior to December 2010 we had three standing committees of our Board: an audit committee, a compensation committee and a corporate governance and nominating committee.  In December 2010 we split the corporate governance and nominating committee into two committees. The Audit and Compensation Committees adopted a charter that was approved by the entire Board on August 11, 2008 and amended February 23, 2010. The Governance and Nominating charters were adopted by the entire Board on December 9, 2010.  Each committee is comprised solely of independent directors.  The charters of all of our committees are filed herewith or incorporated by reference as noted in the Exhibits. The Audit Committee has an “audit committee financial expert” within the meaning of Item 407 of Regulation S-K. The audit committee financial expert is James A. Heisch, and he has been determined by the Board to be independent according to the NASDAQ Stock Market LLC rules.
 
There is no established procedure for stockholder communications with members of the Board or the entire Board.  However, stockholders may communicate with our investor relations department and such communications are either responded to immediately or are referred to the Chief Executive Officer or Chief Financial Officer for response.
 
 
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Board Meetings; Committee Meetings; and Annual Meeting Attendance
 
During 2009, the Board of Directors held 4 regular meetings in person and 13 special telephonic meetings.  Each regular meeting was attended by all of the members of the Board.
 
During 2009, the Audit Committee held 4 meetings.  These meetings were attended by all members of the Audit Committee.
 
During 2009, the Compensation Committee held 3 meetings.  These meetings were attended by all members of the Compensation Committee.
 
During 2009, the Corporate Governance and Nominating Committee held 1 meeting.  The meeting was attended by all members of the Corporate Governance and Nominating Committee. The two new committees, Corporate Governance and Nominating, were formed towards the end of 2010 and did not meet separately this year.
 
All of our directors attend at least 75% of the meetings and 75% of the meetings of the Board committees upon which each served as a member.  The Board does not have a policy regarding director attendance at annual meetings. We did not have an in person annual meeting in 2010.
 
Compensation of the Members of the Board of Directors
 
Directors who are also our employees do not receive additional compensation for serving on the Board.  Independent non-employee directors are paid a fee of $1,500 for in person meetings.  In two of the four in person meetings our independent directors received this payment in shares of our common stock, in lieu of cash. Our independent directors are reimbursed for their reasonable expenses for each meeting of the Board they attend in person.  Upon joining the Board of Directors, each independent director receives an initial stock option grant to purchase 100,000 shares of our common stock, with the exception of our Chairman who received options to purchase 400,000 shares of our common stock.  In February 2010 there was a Board refresh grant pursuant to which each independent director receiving a stock option grant to purchase 75,000 shares of our common stock, with the exception of our Chairman who received options to purchase 150,000 shares of our common stock. These option grants vest in 48 equal monthly installments commencing on the date of grant, subject to acceleration in full upon a change of control transaction.  Directors also receive annual option grants of 5,000 shares for each committee of the Board on which they serve or 10,000 shares if they serve as committee chairman, except for the Audit Committee Chairman who receives 15,000 shares.  Committee options vest in full on the date of grant.
 
 
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In November 2010, Mr. Hanson and Dr. Maguire received options to purchase 15,000 shares each, Mr. Heisch received options for 20,000 shares and Mr. Blair received options for 5,000 shares for their committee services during 2010, all of which options have an exercise price of $.69 per share. On April 15, 2009, we implemented a retention initiative for our employees and management.  In connection with this initiative, each of our employee and independent directors received 25,000 restricted stock units (“RSUs”), with the exception of our Chairman who received 50,000 RSUs.  The RSUs will vest in full in April 2011. In addition, as part of our retention initiative all previously granted options, including those held by our directors, were re-priced to $.80, which was the market value on the date of the re-pricing.
 
We maintain directors and officers liability insurance.
 
Limitation on Liability and Indemnification of Directors and Officers
 
Our certificate of incorporation provides that no director or officer shall have any liability to the company if that person acted in good faith and with the same degree of care and skill as a prudent person in similar circumstances.
 
Our certificate of incorporation and bylaws provide that we will indemnify our directors and officers and may indemnify our employees or agents to the fullest extent permitted by law against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices or positions with us.  However, nothing in our certificate of incorporation or bylaws protects or indemnifies a director, officer, employee or agent against any liability to which that person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of that person’s office or position.  To the extent that a director has been successful in defending any proceeding brought against him, the Delaware General Corporation Law provides that the director shall be indemnified against reasonable expenses incurred by him in connection with the proceeding.
 
Code of Ethics
 
Our board has adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller.  Our code of ethics can be found on our website at www.newcardio.com under the ‘Investors, Corporate Governance’ section.  We will provide to any person without charge, upon request, a copy of our code of ethics.  Such a request should be made in writing and addressed to NewCardio, Inc., Attention: Investor Relations, 2350 Mission College Boulevard, Suite 1175, Santa Clara, California 95054.

 
36

 
 
Item 11.  
Executive Compensation.
 
Summary Compensation Table
 
The following table sets forth all compensation we awarded or paid to all individuals serving as our principal executive officer, principal financial officer, and those individuals who received compensation in excess of $100,000 per year for the fiscal year ended December 31, 2010 (collectively, the “Named Executives”). Summary compensation is for the three fiscal years ended December 31, 2010.
 
SUMMARY COMPENSATION TABLE

Name and Principal Position
Year
 
Salary
($)
   
Bonus
($)
   
Stock/RSU
Awards
   
Option awards
($)
   
Total
($)
 
(a)
(b)
 
(c)
   
(d)
   
(e)(1)
   
(f)(1)
   
(j)
 
Vincent Renz, President and
2010
  $ 229,500     $     $     $ 490,000     $ 719,500  
CEO and Director (2)
2009
  $ 270,000     $ 32,000     $ 180,000     $     $ 482,000  
 
2008
  $ 101,250     $     $     $ 3,637,010     $ 3,738,260  
                                           
Branislav Vajdic, NewCardio
2010
  $ 246,500     $     $     $     $ 246,500  
Fellow and Director (3)
2009
  $ 290,000     $ 100,000     $ 160,000     $     $ 550,000  
(CEO through June 14, 2010)
2008
  $ 290,000     $     $     $     $ 290,000  
                                           
Richard Brounstein,
2010
  $ 204,000     $     $     $     $ 204,000  
Executive Vice President and
2009
  $ 240,000     $ 30,000     $ 100,000     $     $ 370,000  
Chief Financial Officer (4)
2008
  $ 212,903     $ 7,500     $     $ 1,139,569     $ 1,359,972  
                                           
Ihor Gussak,
2010
  $ 227,500     $     $ 31,937     $     $ 259,437  
Chief Medical Officer (5)
2009
  $ 260,000     $ 20,000     $ 180,000     $     $ 460,000  
 
2008
  $ 109,687     $ 65,000     $     $ 2,807,405     $ 2,982,092  
                                           
Dorin Panescu,
2010
  $ 250,000     $     $ 44,607     $     $ 294,607  
Chief Technical Officer (6)
2009
  $ 260,000     $ 16,600     $ 240,000     $     $ 516,600  
 
2008
  $ 70,143     $     $ 18,500     $ 1,247,961     $ 1,336,604  
 
 
37

 
____________
(1)
This dollar amount reflects the full fair value of the grant at the date of issuance and is recognized for financial statement reporting purposes with respect to each fiscal year over the vesting terms in accordance with ASC 718-10.  Mr. Renz was granted options to purchase 800,000 shares of common stock at $5.00 per share pursuant to his employment agreement dated August 18, 2008 and an additional 500,000 shares of common stock at $0.98 on June 14, 2010 in connection with his appointment to CEO. Mr. Brounstein was granted options to purchase 630,000 shares of common stock at $2.05 per share pursuant to his employment agreement dated March 1, 2008.  Dr. Gussak was granted options to purchase 700,000 shares of common stock at $4.30 per share pursuant to his employment agreement dated July 20, 2008.  On February 23, 2010, Dr. Gussak received a Restricted Stock Unit grant that will cliff vest over two years into 24,195 shares of common stock.  At grant the value of the common stock was $1.32 per share. Dr. Panescu was granted options to purchase 700,000 shares of common stock at $1.85 per share and a one-time stock award for 10,000 shares pursuant to his employment agreement dated October 20, 2008. On February 23, 2010, Dr. Panescu received a Restricted Stock Unit grant that will cliff vest over two years into 33,793 shares of common stock.  At grant the value of the common stock was $1.32 per share. On April 15, 2009 the Company granted Dr. Vajdic, Mr. Renz, Mr. Brounstein, Dr. Gussak and Dr. Panescu 200,000, 225,000, 125,000, 225,000 and 300,000 in restricted stock awards, respectively.  In addition, on April 15, 2009, the Company re-priced previously granted options to Mr. Renz, Mr. Brounstein, Dr. Gussak and Dr. Panescu from initial exercise prices of $5.00, $2.05, $4.30 and $1.85 (respectively) to $0.80.  The change in re-pricing did not exceed the initial full fair value previously determined.
(2)
Vincent Renz’s salary  was determined pursuant to his August 18, 2008 employment agreement which provides for an annual base salary of $270,000., Mr. Renz’s 2009 performance-based bonus payment was determined by the Compensation Committee of the Board based on reaching certain milestones during the year with a formula range of 0% to 45%. Mr. Renz’s salary was pro-rated for actual time worked during 2008. In 2010, the Company implemented a management expense program in July which reduced Mr. Renz’s salary by 30%.  Mr. Renz did not earn a bonus in 2010.
(3)
Branislav Vajdic’s 2009 and 2008 salary was determined pursuant to his November 1, 2007 employment agreement which provides for an annual base salary of $290,000. Dr. Vajdic’s 2009 performance-based bonus payment was determined by the Compensation Committee of the Board based on reaching certain milestones during the year, with a formula range of 0% to 50%. In 2010, the Company implemented a management expense program in July which reduced Dr. Vajdic’s salary by 30%.  Dr. Vajdic did not earn a bonus in 2010.
(4)
Richard Brounstein’s salary was determined pursuant to his March 1, 2008 employment agreement which provides for an annual base salary of $240,000. Mr. Brounstein’s 2009 performance-based bonus payment was determined by the Compensation Committee of the Board based on reaching certain milestones during the year, with a formula range of 0% to 25%. In 2008, he had a part-time employment agreement in effect for January and February of 2008 and received a $7,500 signing bonus upon joining full time March 1, 2008.  In 2008 the performance-based bonus was pro-rated for the period he was employed on a full-time basis. In 2010, the Company implemented a management expense program in July which reduced Mr. Brounstein’s salary by 30%.  Mr. Brounstein did not earn a bonus in 2010.
(5)
Ihor Gussak’s salary was determined pursuant to his July 20, 2008 employment agreement which provides for an annual base salary of $260,000.Mr. Gussak’s 2009 performance-based bonus payment was determined by the Compensation Committee of the Board based on reaching certain milestones during the year, with a formula range of 0% to 30%. The salary was pro-rated for actual time worked during 2008. In 2008 he also received a $65,000 signing bonus. In 2010, the Company implemented a management expense program in July which reduced Mr. Gussak’s salary by 25%.  Mr. Gussak did not earn a bonus in 2010.
(6)
Dorin Pansecu’s salary was determined pursuant to his October 20, 2008 employment agreement which provides for an annual base salary of $260,000. Mr. Pansecu’s 2009 performance-based bonus payment was determined by the Compensation Committee of the Board based on reaching certain milestones during the year, with a formula range of 0% to 35%. The salary was pro-rated for actual time worked during 2008. In 2008 he also received a signing bonus of 10,000 shares of common stock. In 2010, the Company implemented a management expense program in July which reduced Mr. Pansecu’s salary by $20,000 for the last six months of the year.  Mr. Pansecu did not earn a bonus in 2010.

 
38

 
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 
The following table sets forth information concerning equity awards granted to the Named Executive Officers that are outstanding at December 31, 2010.
 
OPTION AWARDS


Name
 
Number of securities underlying unexercised options (#) exercisable
     
Number of securities underlying unexercised options (#) unexercisable
   
Option Exercise Price
   
Option Expiration Date
(a)
 
(b)
     
(c)(i)
   
(e)
   
(f)(2)
Vincent Renz,
    466,667  
(D)
    333,333     $ 0.80  
(E)
8/17/18
President and CEO, Director
    -  
(D)
    500,000       0.98    
6/13/20
                               
Branislav Vajdic, NewCardio Fellow
    100,000  
(A)
    -     $ 0.001    
09/24/14
and Vice Chairman of the Board of Directors
    880,000  
(B)
    -     $ 0.02    
03/09/17
      1,000,000  
(C)
    -     $ 0.22    
10/31/17
                               
Richard Brounstein, Executive Vice President,
    30,000  
(B)
    -     $ 0.80  
(E)
3/17/18
Chief Financial Officer
    412,500  
(A)
    187,500     $ 0.80  
(E)
3/17/18
                               
Ihor Gussak, Chief Medical Officer
    422,917  
(D)
    277,083     $ 0.80  
(E)
7/29/18
                               
Dorin Panescu, Chief Technical Officer
    30,000  
(B)
          $ 0.01    
8/21/15 (F)
      379,167  
(D)
    320,833     $ 0.80  
(E)
10/19/18
______
 
(1)
All awards were made under our 2004 Equity Incentive Plan and/or 2009 Equity Compensation Plan.  The following footnotes set forth the vesting dates for the outstanding option awards (vesting generally depends upon continued employment and accelerates upon a change of control, as defined in the applicable plan):
 
A.           Options vest in equal monthly increments over 48 months or 1/48 per month
B.           Options are fully vested
C.           Options vest in equal monthly increments over 36 months or 1/36 per month
D.           Options vest over 48 months with a one year cliff
E.           Option re-priced to market on April 15, 2009
F.           Granted in 2005 in a consulting role
 
(2)
Dates reflect expiration 10-years after grant dates.

 
39

 
 
STOCK AWARDS

     
Number of securities underlying unvested Restricted Stock Units (#RSUs)(1)
     
Market value of securities underlying unvested RSUs
 
Vincent Renz Jr., President, Chief Executive Officer and Director
2010
    -          
 
2009
    225,000  
(A)
  $ 191,250  
                     
Branislav Vajdic, NewCardio Fellow and
2010
    -            
Vice Chairman of the Board of Directors
2009
    200,000  
(A)
  $ 170,000  
                     
Richard Brounstein, Executive Vice President and
2010
    -            
Chief Financial Officer
2009
    125,000  
(A)
  $ 106,250  
                     
Ihor Gussak, Chief Medical Officer
2010
    24,195  
(B)
  $ 20,566  
 
2009
    225,000  
(A)
  $ 191,250  
                     
Dorin Panescu, Chief Technology Officer
2010
    33,793  
(B)
  $ 28,724  
 
2009
    300,000  
(A)
  $ 255,000  
 
(1)
All awards were made under our 2009 Equity Compensation Plan.  The following footnote sets forth the vesting dates for the outstanding awards (vesting generally depends upon continued employment and accelerates upon a change of control that impacts employee’s status, as defined in the Plan):
 
A.           2009 RSUs cliff-vest in 24 months from the April 15, 2009 grant-date
B.           2010 RSUs cliff-vest 50% February 23, 2011 and 50% February 23, 2012
C.           Market value based on 12/31/10 value of $0.85 per underlying common share.
 
 
40

 
 
EQUITY COMPENSATION PLAN INFORMATION

Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
   
Weighted average exercise price of outstanding options, warrants and rights
   
Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders
                 
2004 Equity Incentive Plan and 2009 Equity Compensation Plan - Options
    9,661,503     $ 0.61       9,659,844  
2009 Equity Compensation Plan – Restricted Stock Units
    1,607,621     $ 0.00    
Included above
 
                         
Total
    11,269,124     $ 0.52       9,659,844  
Equity compensation plans not approved by security holders
                       
2010 Restricted Equity Compensation Plan
    -     $ -       875,000  
                         
Total
    -     $ -       875,000  
                         
Total
    11,269,124     $ 0.52       10,534,844  
 
 
41

 
 
DIRECTOR COMPENSATION

Name
Year
 
Cash compensation
(2)
   
Option, RSU and Stock
awards(3)
($)
   
Total
($)
 
(a)
         
(d)
   
(j)
 
Mark W. Kroll, Ph.D. FACC, FHRS, Chairman
2010
  $ 3,000     $ 201,000     $ 204,000  
 
2009
  $ 6,000     $ 40,000     $ 46,000  
                           
Vincent W. Renz, Jr., President, CEO (1)
    $     $     $  
                           
Branislav Vajdic, Ph.D., NewCardio Fellow and vice-chairman of the Board of Directors
    $     $     $  
                           
Jess Jones, M.D.
    $     $     $  
                           
Robert N. Blair, M.Inst.P
2010
  $ 3,000     $ 105,450     $ 108,450  
 
2009
  $ 6,000     $ 32,606     $ 38,606  
                           
Michael E. Hanson (1)
2010
  $ 3,000     $ 112,350     $ 115,350  
 
2009
  $ 4,500     $ 108,583     $ 113,083  
                           
James A. Heisch
2010
  $ 3,000     $ 115,800     $ 118,800  
 
2009
  $ 6,000     $ 32,606     $ 38,606  
                           
Patrick Maguire, M.D., Ph.D.
2010
  $ 3,000     $ 112,350     $ 115,350  
 
2009
  $ 6,000     $ 32,606     $ 38,606  
____________

 
(1)
Mr. Renz was appointed to the Board on June 14, 2010; Mr. Hanson was appointed to the Board on April 15, 2009.
 
(2)
We pay each independent director $1,500 for attending quarterly Board meetings in-person. Directors are also reimbursed for their out-of-pocket travel expenses associated with their attendance at these Board meetings. In 2010, the last two meetings were paid in shares of our common stock.
 
(3)
This dollar amount reflects the full fair value of the grant at the date of issuance and is recognized for financial statement reporting purposes with respect to each fiscal year over the vesting terms in accordance with ASC 718-10, plus $3,000 in common stock per director for the August and November 2010 in-person meetings.  Upon joining the Board of Directors, each independent director receives an initial stock option grant to purchase 100,000 shares of our common stock, and Mr. Hanson received this grant on April 15, 2009 at $0.80 per share. On April 15, 2009, the Company granted Dr. Kroll, Mr. Blair, Mr. Hanson, Mr. Heisch and Dr. Maguire 50,000, 25,000, 25,000, 25,000 and 25,000 restricted stock awards, respectively.  In addition, on April 15, 2009, the Company re-priced previously granted options to Mr. Knoll, Mr. Blair, Mr. Heisch and Dr. Maguire from  initial exercise prices of $2.05, $2.05, $3.27 and $2.40 (weighted average), respectively, to $0.80.  The change in re-pricing did not materially exceed the initial fair value previously determined. On February 23, 2010 there was a Board refresh grant pursuant to which each independent director received a stock option grant to purchase 75,000 shares of our common stock, with the exception of our Chairman who received options to purchase 150,000 shares of our common stock, all at an exercise price of $1.32 per share. Directors also receive annual option grants of 5,000 shares for each committee of the Board on which they serve or 10,000 shares if they serve as committee chairman, except for the Audit Committee Chairman who received 15,000 shares in 2010. In November 2010, Mr. Hanson and Dr. Maguire received options to purchase 15,000 shares each, Mr. Heisch received options for 20,000 shares and Mr. Blair received options for 5,000 shares for their committee services during 2010, all of which options have an exercise price of $.69 per share. The 2009 committee grants were 5,000 for Mr. Hanson and 15,000 each for Mr. Heisch, Mr. Blair and Dr. Maguire, all at an exercise price of $0.80 per share.
 
 
42

 
 
Potential Payments upon Termination
 
Branislav Vajdic
 
Under the terms of his employment agreement and a June 2010 Memorandum of Understanding, subject to the attainment of agreed development milestones, if Branislav Vajdic no longer continues to be an employee, he is entitled to a minimum of six-months severance compensation
 
Vincent Renz
 
Under the terms of his employment agreement, if Vincent Renz is “terminated other than for cause” (as that term is defined in his employment agreement), he is entitled to six-months of his then-base salary, and Cobra benefits as applicable.
 
Richard Brounstein
 
Under the terms of his employment agreement, if Richard Brounstein is “terminated other than for cause” (as that term is defined in his employment agreement), he is entitled to one year of his then-base salary, and Cobra benefits as applicable.
 
Ihor Gussak
 
Under the terms of his employment agreement, if Ihor Gussak is “terminated other than for cause” (as that term is defined in his employment agreement), he is entitled to six-months of his then-base salary, and Cobra benefits as applicable.
 
Dorin Panescu
 
Under the terms of his employment agreement, if Dorin Panescu is “terminated other than for cause” (as that term is defined in his employment agreement), he is entitled to six-months of his then-base salary, and Cobra benefits as applicable.
 
Restricted Stock Units (RSUs)
 
In 2009, all management, and in 2010, Drs. Gussak and Panescu, received RSUs all with the same terms on termination, vesting 100% on termination without cause or for good reason.
 
Compensation Committee Interlocks and Insider Participation
 
None of the members of our Compensation Committee has been an officer or employee of NewCardio, Inc. during years ending December 31, 2008, 2009 and 2010.  In addition, during the most recent fiscal year, no NewCardio executive officer served on the Compensation Committee (or equivalent), or the Board, of another entity whose executive officer(s) served on our Compensation Committee or Board.
 
 
43

 
 
Compensation Committee Report
 
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed that analysis with management.  Based on its review and discussions with management, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in our 10-K.  This report is provided by the following independent directors, who comprise the Compensation Committee:
 
Michael E. Hanson (Chairman, February 23, 2010 – year end)
Robert N. Blair (Chairman up through February 23, 2010)
James A. Heisch
 
Item 12.  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
The following table sets forth the number of shares of common stock beneficially owned as of March 21, 2011 (the “Beneficial Owner Date”) by (i) those persons or groups known to us to beneficially own more than 5% of our common stock; (ii) each director; (iii) each executive officer; and (iv) all directors and executive officers as a group. The information is determined in accordance with Rule 13d-3 promulgated under the Exchange Act based upon information furnished by persons listed or contained in filings made by them with the SEC or by information provided by such persons directly to us. Except as indicated below, each of the stockholders listed below possesses sole voting and investment power with respect to their shares and the address of each person is c/o NewCardio, Inc., 2350 Mission College Boulevard, Suite 1175, Santa Clara, California, 95054.

Name of Beneficial Owner
 
Common Stock Beneficially Owned
(1)
   
Percentage of Common Stock
(2)
 
Branislav Vajdic, Ph.D. (3)
    9,208,910       27.88  
Vincent W. Renz, Jr. (4)
    1,237,137       3.89  
Richard Brounstein (5)
    690,000       2.19  
Mark W. Kroll, Ph.D., FACC, FHRS (6)
    419,896       1.34  
Robert N. Blair, M.Inst.P. (7)
    830,843       2.67  
James A. Heisch (8)
    228,790       *  
Jess Jones, M.D.
    0       *  
Patrick Maguire, M.D., Ph.D. (9)
    177,956       *  
Michael Hanson (10)
    145,877       *  
Ihor Gussak (11)
    786,705       2.49  
Dorin Panescu (12)
    755,777       2.39  
Greg Sadowski (13)
    429,208       1.38  
                 
All officers and directors as a group (12 persons)
    14,911,099       39.48  
 
(1)
Includes stock option grants and restricted stock units (RSUs) made to officers, directors, employees and/or consultants under the 2004 Equity Incentive Plan and/or the 2009 Equity Compensation Plan.  All options and RSUs listed in this table were granted under the 2004 Equity Incentive Plan and/or the 2009 Equity Compensation Plan.
(2)
Applicable percentage ownership is based on 30,831,428 shares of common stock outstanding as of the Beneficial Owner Date, together with securities exercisable or convertible into shares of common stock within 60 days of the Beneficial Owner Date for each stockholder. Shares of common stock that are currently exercisable or exercisable within 60 days of the Beneficial Owner Date are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(3)
Includes options to purchase 1,992,083 shares of common stock, warrants to purchase 2,000 shares of common stock and 200,000 common shares underlying RSUs.
(4)
Includes options to purchase 564,590 shares of common stock, warrants to purchase 100,000 shares of common stock, 200,000 common shares underlying RSUs and Series D Preferred convertible into 50,000 shares of common stock. Reflects the purchase by Mr. Renz of 46,897 shares from Dr. Panescu in March 2011.
(5)
Includes options to purchase 515,000 shares of common stock, warrants to purchase 25,000 shares of common stock, 125,000 common shares underlying RSUs and Series C Preferred convertible into 25,000 shares of common stock.
(6)
Includes options to purchase 365,548 shares of common stock and 50,000 common shares underlying RSUs.
(7)
Includes options to purchase 229,454 shares of common stock, warrants to purchase 15,500 shares of common stock, 25,000 common shares underlying RSUs and Series C Preferred convertible into 10,000 shares of common stock.
(8)
Includes options to purchase 149,442 shares of common stock, warrants to purchase 25,000 shares of common stock, 25,000 common shares underlying RSUs and Series C Preferred convertible into 25,000 shares of common stock.
(9)
Includes options to purchase 148,608 shares of common stock and 25,000 common shares underlying RSUs.
(10)
Includes options to purchase 96,529 shares of common stock, warrants to purchase 10,000 shares of common stock, 25,000 common shares underlying RSUs and Series D Preferred convertible into 10,000 shares of common stock.
(11)
Includes options to purchase 489,576 shares of common stock and 225,000 common shares underlying RSUs.
(12)
Includes options to purchase 452,077 shares of common stock and 300,000 common shares underlying RSUs. Reflects the sale by Dr. Panescu of 46,897 shares to Mr. Renz in March 2011.
(13)
Includes options to purchase 272,493 shares of common stock and 140,000 common shares underlying RSUs.
 
 
44

 
 
Item 13.  
Certain Relationships and Related Transactions, and Director Independence.
 
In November 16, 2006, Peter Steiger, a former member of our board of directors, made a loan to us in the principal amount of $10,316 pursuant to the terms of a promissory note.  The promissory note has a two-year term and an annual interest rate of 4.9%.  Principal and interest accrued thereon were payable in full on the promissory note due date in November 15, 2008. This principal and interest was paid in January 2009.
 
During 2010 and 2009, we had a consulting agreement with Robert M. Blair, a current Board member, for corporate strategy and finance services. The agreement terminated in August 2010. During the year ended December 31, 2010 and 2009, we paid Mr. Blair $22,773 and $35,000, respectively and at December 31, 2010 there are no outstanding obligations under the agreement.
 
Effective October 31, 2009, Kenneth Londoner, a former member of our board of directors and a greater than 5% shareholder of the Company, resigned as a full time employee and signed a one-year, part time consulting agreement, continuing his business development responsibilities under this new arrangement. At this transition, the unvested portion of his 2007 option grant was accelerated.   During the year ended December 31, 2010 and 2009, we paid Mr. Londoner $164,277 and $28,600, respectively and at December 31, 2010 there are no outstanding obligations under the agreement.
 
DIRECTOR INDEPENDENCE
 
The Board of Directors has analyzed the independence of each director and has determined that the following directors are independent under the NASDAQ Stock Market LLC rules and have no direct or indirect material relationships with us:
 
·  
Mark W. Kroll, Ph.D. FACC, FHRS*
 
·  
Patrick Maguire, M.D., Ph. D.*
 
·  
James A. Heisch*
 
·  
Michael Hanson*
 
·  
Robert M. Blair**
 
*   Mark Kroll, Patrick Maguire, Michael Hanson and James A. Heisch would qualify as being independent for the Audit Committee, or any committee.
 
**   Robert M. Blair had a consulting agreement during a portion of 2010 and 2009 that would not qualify as independent for the Audit Committee under the NASDAQ Stock Market LLC rules. This agreement was not however a material agreement as defined by Item 404(a).
 
In particular, the Board of Directors has determined that these directors have no relationships, other than as described above, that would cause them not to be independent under the specific criteria of Section 4200(a) (15) of the NASDAQ Manual.
 
 
45

 
 
Item 14.  
Principal Accountant Fees and Services.
 
Summary of Principal Accountant Fees for Professional Services Rendered
 
The following table presents the aggregate fees for professional audit services and other services rendered by RBSM LLP, our independent registered public accountants in 2010 and 2009.

   
Year Ended
December 31, 2010
   
Year Ended
December 31, 2009
 
Audit Fees
  $ 85,000     $ 58,500  
Audit-Related Fees
    19,973       60,925  
Tax Fees
    -       -  
All Other Fees
    17,850       -  
    $ 122,823     $ 119,425  
 
____________
 
Audit Fees consist of fees billed for the annual audit of our financial statements and other audit services including the provision of consents and the review of documents filed with the SEC.
 
We have an independent audit committee for all purposes relating to communication with our auditors and responsibility for our audit. All engagements for audit services, audit- related services and tax services are approved in advance by our audit committee. Our audit committee has considered whether the provision of the services described above for the fiscal year ended December 31, 2010 s compatible with maintaining the auditor’s independence.
 
All audit and non-audit services that may be provided by our principal accountant to us shall require pre-approval by the audit committee. Further, our auditor shall not provide those services to us specifically prohibited by the SEC, including bookkeeping or other services related to the accounting records or financial statements of the audit client; financial information systems design and implementation; appraisal or valuation services, fairness opinion, or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions; human resources; broker-dealer, investment adviser, or investment banking services; legal services and expert services unrelated to the audit; and any other service that the Public Company Oversight Board determines, by regulation, is impermissible.
 
 
46

 
 
PART IV
 
Item 15.  
Exhibits and Financial Statement Schedules.
 
(a)(1)
Financial Statements:  See “Index to Consolidated Financial Statements” in Part II, Item 8 of the Form 10-K.
(a)(2)
Financial Statement Schedule:  Schedules are included in the Consolidated Financial Statements or notes of this Form 10-K or are not required.
(a)(3)
Exhibits: The exhibits listed in (b) below are filed or incorporated by reference as part of this Form 10-K.
(b)
 
3.1(a)
Certificate of Incorporation, as amended (1)
3.1(b)
Certificate of Designation, Rights, Preferences and Limitations of Series B Convertible Preferred Stock filed December 1, 2008 (2)
3.1(c)
Amended and Restated Certificate of Designation, Rights, Preferences and Limitations of Series C Convertible Preferred Stock filed September 14 2009 (3)
3.1(d)
Certificate of Amendment of Certificate of Incorporation filed July 23, 2010 (12)
3.1(e)
Certificate of Designation, Rights, Preferences and Limitations of Series D Convertible Preferred Stock filed October 1, 2010 (15)
3.2
Amended and Restated By-Laws (6)
4.1
Securities Purchase Agreement dated as of December 27, 2007 (4)
4.2
Amendment dated December 1, 2008 to Securities Purchase Agreement (2)
4.3
Put Agreement between the Registrant and Platinum-Montaur Life Sciences LLC dated December 1, 2008 (2)
4.4
Management Rights Agreement between the Registrant and Vision Capital Advantage Fund L.P. dated as of December 1, 2008 (2)
4.5
Amendment dated as of July 28, 2009 to Securities Purchase Agreement (5)
4.6
Amended and Restated Series A Common Stock Purchase Warrant (2)
4.7
Securities Purchase Agreement dated as of September 11, 2009 (3)
4.8
Form of Common Stock Purchase Warrant issued to purchasers of Series C Convertible Preferred Stock (3)
4.9
Form of Common Stock Purchase Warrant issued to the placement agent and the selected dealer in connection with the issuance of Series C Convertible Preferred Stock (3)
4.10
Securities Purchase Agreement dated as of October 1, 2010 (15)
4.11
Form of Common Stock Purchase Warrant issued to the placement agent and the selected dealer in connection with the issuance of Series D Convertible Preferred Stock (15)
4.12
December 20, 2010 Supplement to Securities Purchase Agreement dated as of October 1, 2010 (16)
10.1
Employment Agreement between the Registrant and Branislav Vajdic dated November 1, 2007 (1)
10.2
Employment Agreement between the Registrant and Richard Brounstein dated as of March 1, 2008 (6)
10.3
Consulting Agreement between the Registrant and E4 LLC dated as of September 13, 2007 (1)
10.4
Consulting Agreement between the Registrant and JFS Investments dated as of May 1, 2008 (1)
10.5
Consulting Agreement between the Registrant and First Montauk Securities Group dated as of July 27, 2009 (1)
10.6
Form of Master Services Agreement (13)
10.7
Employment Agreement between the Registrant and Vincent Renz dated as of August 18, 2008 (7)
10.8
Memoranda of Understanding dated June 14, 2010 amending the Employment Agreements of Branislav Vajdic and Vincent Renz (11)
10.9
Employment Agreement between the Registrant and Ihor Gussak dated July 30, 2008 (10)
10.10
Employment Agreement between the Registrant and Dorin Panescu dated October 20, 2008 (10)
10.11
2004 Equity Incentive Plan (8)
10.12
2009 Equity Compensation Plan (9)
10.13
Form of Restricted Stock Unit Grant Notice and Attachment (9)
10.14
Credit Facility Securities Purchase Agreement dated as of July 30, 2009 (5)
10.15
Amendment dated July 28, 2010 to Credit Facility Securities Purchase Agreement dated as of July 30, 2009 (12)
10.16
Credit Facility Securities Purchase Agreement dated as of July 28, 2010 (12)
10.17
Standard Office Lease between the Registrant and 2350 Mission Investors LLC dated February 6, 2008 (6)
10.18
Technology Assignment Agreement between the Registrant and Bosko Bojovic dated September 28, 2004 (1)
10.19
Settlement and Release Agreement between the Registrant and Samuel E. George, M.D. dated as of October 1, 2006 (1)
10.20
Form of Lock-Up Agreement (1)
14.1
Code of Ethics (14)
31.1
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act*
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act*
99.1
Charter of the Audit Committee of the Board of Directors *
99.2
Charter of the Compensation Committee of the Board of Directors *
99.3
Charter of the Governance Committee of the Board of Directors*
99.4
Charter of the Nominating Committee of the Board of Directors*
 
______________________________
 
* Filed herewith
 
 
47

 
 
 
(1)  
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-149166) declared effective on August 29, 2008.
 
(2)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 3, 2008.
 
(3)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 18, 2009.
 
(4)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 4, 2008.
 
(5)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 30, 2009.
 
(6)  
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2008.
 
(7)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on August 21, 2008.
 
(8)  
Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-149576) filed on March 7, 2008.
 
(9)  
Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-160004) filed on June 19, 2009.
 
(10)  
Incorporated by reference to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2009.
 
(11)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 18, 2010.
 
(12)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 29, 2010.
 
(13)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on August 5, 2010
 
(14)  
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q/A for the period ended September 30, 2010.
 
(15)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 7, 2010.
 
(16)  
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 23, 2010.
 
 
48

 
 
NEWCARDIO, INC.
 
INDEX TO FINANCIAL STATEMENTS
 
   
Page
     
Report of Independent Registered Public Accounting Firm
 
F-1
     
Consolidated Balance Sheets as of December 31, 2010 and 2009
 
F-2
     
Consolidated Statements of Operations for the years ended December 31, 2010 and  2009
 
F-3
     
Consolidated Statement of Stockholders’ (Deficit) Equity for the two years ended December 31, 2010
 
F-4 – F-8
     
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and  2009
 
F-9
     
Notes to Consolidated Financial Statements
 
F-10 – F-36
 
 
 
49

 
 
RBSM LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
NewCardio, Inc.
Santa Clara, California

We have audited the accompanying consolidated balance sheets of NewCardio, Inc. and its subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholder’s (deficit) equity and cash flows for each of the  years in the two year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NewCardio, Inc. and its subsidiary at December 31, 2010 and 2009 and the results of their operations and their cash flows for the each of the years in the two year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Note 1 to the financial statements, the Company is no longer in the development stage.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred significant losses. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans, with respect to these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
 
       
    /s/ RBSM LLP  
   
Certified Public Accountants
 
       

New York, New York
March 29, 2011
 
 
F-1

 

NEWCARDIO, INC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
             
   
2010
   
2009
 
ASSETS
       
Current assets:
           
Cash
  $ 584,974     $ 1,386,007  
Short term investment
    -       25,010  
Accounts receivable, trade
    42,905       -  
Prepaid expenses
    32,303       111,871  
Prepaid commitment fees
    1,958,654       556,875  
  Total current assets
    2,618,836       2,079,763  
                 
Property, plant and equipment, net of accumulated depreciation of $158,950 and $79,041 as of December 31, 2010 and 2009, respectively
    156,261       198,955  
                 
Other assets:
               
Patent costs
    55,357       -  
Deposits
    22,600       22,600  
                 
    $ 2,853,054     $ 2,301,318  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
         
Current liabilities:
               
Accounts payable and accrued expenses
  $ 618,413     $ 480,152  
Unearned revenue
    1,500       -  
Line of credit, including $1,900,000 to a related party as of December 31, 2010
    3,000,000       -  
Put liability
    -       744,280  
  Total current liabilities
    3,619,913       1,224,432  
                 
Warrant derivative liability
    2,141,871       1,078,292  
Preferred stock derivative liability
    250,863       687,958  
  Long term liabilities
    2,392,734       1,766,250  
                 
  Total liabilities
    6,012,647       2,990,682  
                 
Commitments and contingencies
               
                 
Temporary equity:
               
Preferred shares subject to liability conversion
    -       784,010  
                 
Permanent equity:
               
Stockholders' deficit:
               
Preferred stock, $0.001 par value; 1,000,000 shares authorized:
               
Preferred stock Series B, $0.001 par value; 18,000 shares designated; 12,250 and 16,435 shares issued and outstanding as of  December 31, 2010 and 2009, respectively
    12       16  
Preferred stock Series C, $0.001 par value; 7,000 shares designated; 2,295 and 2,920 shares issued and outstanding as of December 31, 2010 and 2009, respectively
    2       -  
Preferred stock Series D, $0.001 par value;  1,000 shares designated; 800 and -0- shares issued and outstanding as of December 31, 2010 and 2009
    1       -  
Common stock, $0.001 par value, 500,000,000 and 99,000,000 shares authorized as of December 31, 2010 and 2009, respectively; 30,688,902 and 24,290,279 shares issued as of December 31, 2010 and 2009, respectively; 30,563,902 and 24,290,279 shares outstanding as of December 31, 2010 and 2009, respectively
    30,689       24,290  
Additional paid in capital
    39,236,320       29,432,680  
Deficit
    (42,426,617 )     (30,930,360 )
  Total stockholders' deficit
    (3,159,593 )     (1,473,374 )
                 
    $ 2,853,054     $ 2,301,318  
                 
See the accompanying notes to these consolidated financial statements.
 

 
F-2

 

NEWCARDIO, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010 AND 2009
       
   
2010
   
2009
 
Revenue
  $ 257,399     $ -  
Cost of sales
    152,296       -  
Gross profit
    105,103       -  
                 
Operating expenses:
               
Selling, general and administrative
    5,916,092       6,904,521  
Depreciation
    63,133       59,833  
Research and development
    3,585,115       3,047,994  
 Total operating expenses
    9,564,340       10,012,348  
                 
Net loss from operations
    (9,459,237 )     (10,012,348 )
                 
Other income (expense)
               
Gain on change in fair value of warrant derivative liability and preferred stock derivative liability
    194,553       907,866  
Amortization of commitment fees
    (1,900,915 )     (378,985 )
Other financing costs
    (119,183 )     (133,345 )
Interest, net
    (211,475 )     26,199  
Total other income (expense):
    (2,037,020 )     421,735  
                 
Net loss before income taxes
    (11,496,257 )     (9,590,613 )
                 
Provision for income taxes
    -       -  
                 
Net loss
    (11,496,257 )     (9,590,613 )
                 
Preferred stock dividend
    -       (784,010 )
                 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
  $ (11,496,257 )   $ (10,374,623 )
                 
Net loss per share-basic and fully diluted
  $ (0.40 )   $ (0.44 )
                 
Weighted average number of shares-basic and fully diluted
    28,638,363       23,726,059  
                 
See the accompanying notes to these consolidated financial statements
 
 
 
F-3

 
NEWCARDIO, INC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
TWO YEARS ENDED DECEMBER 31, 2010
 
   
Preferred
               
Additional
                   
   
Preferred Series A
   
Preferred Series B
   
Preferred Series C
   
Preferred Series D
   
Common
    Paid in    
Stock