UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________

 

FORM 10-Q

 

(Mark One)

 

 X .   

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the quarterly period ended June 30, 2011

     .   

TRANSITION REPORT PURSUANT TO 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)(Zip Code)

Registrant’s telephone number, including area code: (408) 516-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.  Yes      . No  X .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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). Yes      . No      .

 

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 of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

  

Large accelerated filer	.	Accelerated filer	.
Non-accelerated filer	. (Do not check if a smaller reporting company)	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)  Yes      . No  X .

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Shares Outstanding at August 15, 2011
Common Stock, $0.001 Par Value		32,563,356

  

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NEWCARDIO, INC.

INDEX

 

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PART I.

FINANCIAL INFORMATION

Item 1.   FINANCIAL STATEMENTS

NEWCARDIO, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
		June 30,		December 31,
		2011		2010
		(unaudited)
ASSETS
Current assets:
Cash	$	122,044	$	584,974
Accounts receivable, trade		47,811		42,905
Prepaid expenses		16,972		32,303
Prepaid commitment fees		550,910		1,958,654
Total current assets		737,737		2,618,836
Property, plant and equipment, net of accumulated depreciation of $200,067 and $158,950 as of June 30, 2011 and December 31, 2010, respectively		116,843		156,261
Other assets:
Patent costs, net		81,431		55,357
Deposits		22,600		22,600
Total other assets		104,031		77,957
	$	958,611	$	2,853,054
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	918,705	$	618,413
Unearned revenue		1,000		1,500
Line of credit, $2,200,000 and $1,900,000 to a related party as of June 30, 2011 and December 31, 2010, respectively		3,900,000		3,000,000
Total current liabilities		4,819,705		3,619,913
Warrant derivative liability		336,443		2,141,871
Preferred stock derivative liability		9,052		250,863
Long term liabilities		345,495		2,392,734
Total liabilities		5,165,200		6,012,647
Temporary equity:
Preferred shares subject to liability conversion		-		-
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; 12,116 and 12,250 shares issued and outstanding as of  June 30, 2011 and December 31, 2010, respectively		12		12
Preferred stock Series C, $0.001 par value; 7,000 shares designated; 2,295 shares issued and outstanding as of June 30, 2011 and December 31, 2010		2		2
Preferred stock Series D, $0.001 par value;  1,000 shares designated; 1,000 and 800 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively		1		1
Common stock, $0.001 par value, 500,000,000 shares authorized; 32,556,576 and 30,688,902 shares issued as of June 30, 2011 and December 31, 2010, respectively; 32,494,076 and 30,563,902 shares outstanding as of June 30, 2011 and December 31, 2010, respectively		32,557		30,689
Additional paid in capital		41,537,281		39,236,320
Deficit		(45,776,442)		(42,426,617)
Total stockholders' deficit		(4,206,589)		(3,159,593)
	$	958,611	$	2,853,054
See the accompanying notes to these unaudited condensed consolidated financial statements.

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See the accompanying notes to these unaudited condensed consolidated financial statements

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NEWCARDIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
		Six months ended June 30,
		2011		2010
Cash flows from operating activities:
Net loss for the period	$	(3,349,825)	$	(5,781,291)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		41,117		38,745
Amortization of commitment fees		1,425,502		781,443
Common stock issued for services rendered		104,408		119,122
Fair value of options issued for services rendered		1,799,763		1,739,291
Fair value of warrants issued as compensation for services		17,677		112,766
Fair value of restricted stock units issued for services rendered		199,846		476,282
Change in fair value of warrants derivative liability and preferred stock derivative liability		(2,084,270)		(614,233)
(Increase) decrease in:
Accounts receivable		(4,906)		(39,628)
Prepaid expenses		15,331		(46,828)
Increase (decrease) in:
Unearned revenue		(500)		9,450
Accounts payable and accrued liabilities		300,292		174,807
Net cash (used in) operating activities		(1,535,565)		(3,030,074)
Cash flows from investing activities:
Purchase of property plant and equipment		(1,699)		(21,051)
Payment of patent costs		(26,074)		(10,714)
Proceeds from short term investments		-		25,010
Net cash (used in)  investing activities		(27,773)		(6,755)
Cash flows from financing activities:
Proceeds from line of credit		900,000		1,816,667
Proceeds from exercise of common stock options		408		645
Proceeds from exercise of common stock warrants		-		14,000
Proceeds from sale of Series D preferred stock		200,000		-
Net cash provided by  financing activities		1,100,408		1,831,312
Net (decrease) in cash and cash equivalents		(462,930)		(1,205,517)
Cash and cash equivalents at beginning of period		584,974		1,386,007
Cash and cash equivalents at end of period	$	122,044	$	180,490
Supplemental disclosures of cash flow information:
Taxes paid	$	-	$	-
Interest paid	$	-	$	-
Non cash financing activities:
Fair value of warrants issued with redeemable preferred stock	$	-	$	1,647,771
Fair value of warrants issued as compensation for financing	$	17,759	$	1,953,228
See the accompanying notes to these unaudited condensed consolidated financial statements

5

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the presentation of the accompanying unaudited condensed consolidated financial statements follows:

General

The accompanying unaudited condensed consolidated financial statements of NewCardio, Inc., (the “Company”), have been prepared in accordance with the rules and regulations (S-X) of the Securities and Exchange Commission (the "SEC") and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  The results from operations for the six month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2010  financial statements and footnotes thereto included in the Company's SEC Form 10-K.

 

Basis and business presentation

NewCardio, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in September 2004 and was in the development stage through December 31, 2009.  The year 2010 was the first year during which the Company was considered an operating company and no longer in the development stage.

 

The Company is principally devoted to providing cardiac diagnostic technology with its proprietary 3-D ECG software platform technology products and services to significantly improve the non-invasive diagnosis and monitoring of cardiovascular disease, as well as the cardiac safety assessment of drugs under development. The Company’s 3-D ECG software platform’s objective is to reduce the time and expense involved in assessing cardiac status while increasing the ability to diagnose clinically significant conditions which were previously difficult to detect.

The unaudited condensed consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary NewCardio Technologies, Inc. (“NewCardio Technologies”).  All significant intercompany balances and transactions have been eliminated in consolidation.

Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  The most significant estimates are those used in determination of derivative liabilities and stock compensation. Accordingly, actual results could differ from those estimates.

Revenue Recognition

The Company recognizes 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. The Company recognizes revenues as it performs the services.

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

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 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.

 

The Company accounts for Multiple-Element Arrangements under ASC 605-10 which incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (“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.

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.

Cash

The Company considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.

Commitment Fees

 

The Company amortizes commitment fees paid in connection with establishment of a credit facility ratably over the term of the credit facility commitment. (See note 4)

Accounts Receivable

 

Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition.

As of June 30, 2011 and December 31, 2010, two customers represented 64% and 36% of the Company’s accounts receivable and two customers represented 60% and 40% of the Company’s accounts receivable, respectively.

 

Allowance for Doubtful Accounts

Any changes to the allowance for doubtful accounts on accounts receivable are charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of June 30, 2011 and December 31, 2010, there was no allowance for doubtful accounts recorded, as all of the Company’s receivables were considered collectible.

Property and Equipment

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

Long-Lived Assets

 

The Company follows Accounting Standards Codification 360-10-15-3, “Impairment or Disposal of Long-lived Assets,” which established a “primary asset” approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used.  Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.  

Intangibles

Intangible assets with finite lives are amortized over their estimated useful lives. Intangible assets with indefinite lives are not amortized, but are tested for impairment annually. The Company’s intangible assets with finite lives are patent costs, which are be amortized over their economic or legal life, whichever is shorter. To date, these patent costs are due to legal, filing issuance and maintenance fees associated with patents that have been applied for or are being prosecuted and there is no amortization at this time.

Income Taxes

The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Temporary differences between taxable income reported for financial reporting purposes and income tax purposes consist primarily of derivative liability and stock compensation accounting versus tax differences.

Comprehensive Income

The Company does not have any items of comprehensive income in any of the periods presented.

Net Loss per Common Share, basic and diluted

The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying the computation, presentation and disclosure requirements of earnings per share information. Basic loss per share has been calculated based upon the weighted average number of common shares outstanding. Stock options and warrants have been excluded as common stock equivalents in the diluted loss per share because their effect is anti-dilutive on the computation. Fully diluted shares outstanding were 51,180,936 and 59,654,922 for the six months ended June 30, 2011 and 2010, respectively.

Stock based compensation

The Company follows 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.  (See note 8)

As of June 30, 2011, there were outstanding stock options to purchase 11,929,252 shares of common stock, 7,405,641 shares of which were vested.

Concentrations of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions.  At times, such investments may be in excess of the FDIC insurance limit.

 

The Company’s revenues earned from sale of products and services for the three months ended June 30, 2011  included 67% and 33% of the Company’s total revenues from two customers; for the three months ended June 30, 2010, 58% and 42% of the Company’s total revenues was from two customers.

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

  

The Company’s revenues earned from sale of products and services for the six months ended June 30, 2011  included 72% and 26% of the Company’s total revenues from two customers; for the six months ended June 30, 2010, 85% and 15% of the Company’s total revenues was from two customers.

Reliance on Key Personnel and Consultants

 

The Company has 11 full-time employees and no part-time employees.  Additionally, there are approximately 15 consultants performing various specialized services.  The Company is heavily dependent on the continued active participation of these current executive officers, employees and key consultants. The loss of any of the senior management or key consultants could significantly and negatively impact the business until adequate replacements can be identified and put in place.

Research and Development

The Company accounts for research and development costs in accordance with Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred.  Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved as defined under the applicable agreement. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred research and development expenses of $692,568 and $1,417,186 for the three and six month periods ended June 30, 2011 and  $1,037,614 and $1,925,688 for the three and six month period ended June 30, 2010. 

Fair Value

Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying amount reported in the consolidated condensed balance sheets for accounts receivables, accounts payable and accrued expenses and put liability approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported in the accompanying condensed consolidated balance sheets for line of credit approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics.

 

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Short term investment and derivative liabilities are recorded at fair value on a recurring basis. In accordance with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. (See note 9)

Reclassification

Certain reclassifications have been made to prior periods’ data to conform with the current year’s presentation. These reclassifications had no effect on reported income or losses.

Recent Accounting Pronouncements

There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.

NOTE 2 – GOING CONCERN MATTERS

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed consolidated financial statements during six months ended June 30, 2011, the Company incurred net losses attributable to common shareholders of $3,349,825 and used $1,535,565 in cash for operating activities during six months ended June 30, 2011. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

 

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. Management is devoting substantially all of its efforts to the commercialization of its initial product solution, as well as raising additional debt or equity financing in order to accelerate the development and commercialization of additional products based on the Company’s 3-D ECG software platform technology.  The Company is continuing to explore potential strategic relationships to provide capital and other resources for the further development and marketing of its products.  The Company has obtained credit facilities from certain of its investors to support its operations and has also implemented expense management measures. There can be no assurance that the Company’s commercialization or financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

NOTE 3 – RELATED PARTY TRANSACTIONS

Effective July 30, 2009, a greater than 5% shareholder of the Company who also has current representation rights with respect to the Board of Directors entered into a credit facility that the Company utilized in 2010, borrowing $1,900,000 from this investor as of June 30, 2011. On July 29, 2010, the Company entered into a new credit facility that is available in 2011 and this investor committed $500,000 of this facility, of which $300,000 was drawn down during the six months ended June 30, 2011.  Both the debt and accrued interest are due and payable September 30, 2011. At June 30, 2011 the Company owes this investor $260,550 in accrued interest.   Interest expense in the three and six months ended June 30, 2011 was $63,800 and $121,533 compared to $25,967 and $28,183 in the three and six months ended June 30, 2010. (See note 4)

 

The Company has issued a total of 2.6 million warrants in association with both credit facilities and also the draw-downs under the July 2009 facility and these are being amortized as commitment fees over the life of the facilities (i.e. the months in which we can borrow under the facilities) and over the life of the debt (in regards to the draw-down warrants.)

The warrants were valued using Black Scholes and the cost amortized as a commitment fee as follows:

									Three months ended June 30, 2011				Three months ended June 30, 2010
		# of warrants			Total value				Amortization of commitment fees				Amortization of commitment fees
2009 commitment fee			475,000		$	592,680			$	-			$	132,258
2010 draw-down warrants			1,900,002		$	1,779,403			$	307,191			$	215,889
2010 commitment fee			250,000		$	165,128			$	73,308			$	-
Totals			2,625,002		$	2,537,211			$	380,499			$	348,147

 

  

									Six months ended June 30, 2011				Six months ended June 30, 2010
		# of warrants			Total value				Amortization of commitment fees				Amortization of commitment fees
2009 commitment fee			475,000		$	592,680			$	-			$	264,516
2010 draw-down warrants			1,900,002		$	1,779,403			$	611,007			$	235,710
2010 commitment fee			250,000		$	165,128			$	140,172			$	-
Totals			2,625,002		$	2,537,211			$	751,179			$	500,226

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

 

NOTE 4 – CREDIT FACILITIES

On July 30, 2009, the Company entered into a $3 million credit line arrangement (the “Credit Line”), pursuant to a Securities Purchase Agreement (the “SPA”), with purchasers signatory to the SPA, pursuant to which the purchasers will purchase 12% Secured Revolving Debentures Due September 30, 2011, as amended. In connection therewith, the Company issued 750,000 five-year common stock purchase warrants as commitment warrants with an exercise price of $0.01 per share. Subsequently the Company issued a total of 3,000,006 five-year common stock purchase warrants with an exercise price of $0.85 per share as of June 30, 2011, for the monies advanced under the Credit Line, (the “Draw-down Warrants”). The Draw-down Warrants have full-ratchet price protection (reduction in exercise price and increase in the number of common shares underlying the warrants for potential dilutive equity issuances, as defined) for future issuances of equity securities by the Company (subject to certain specific exceptions.) The warrants have cashless exercise provisions and the Draw-down Warrants are subject to forced cashless exercise in the event that the Company’s common stock is trading at three times the VWAP for the 20 trading days prior to conversion of the warrants.  All interest under the Debentures is accruing and is payable upon maturity.

As indicated above, in connection with the establishment of the Credit Line, the Company issued 750,000 warrants (no ratchet price protection) to purchase the Company’s common stock at $0.01 per share for five years.  The fair value was determined using the Black Scholes Option Pricing Model and included $25,000 paid toward availing the credit facility; it was amortized ratably to ‘amortization of commitment fee’ over the life of the Credit Line through August 2010.  The assumptions for fair value determination were as follows: Dividend yield: 0%; Volatility: 139.04%; Expected life: 5 years; Risk free rate: 2.66%.

During the year ended December 31, 2010, the Company borrowed an aggregate of $3,000,000 from the credit line.  As described above, the Company issued 3,000,006 Draw-down Warrants with exercise prices from $0.85 to $1.45 per share for five years with all warrants subsequently reset to $0.85 per share. The fair value of the warrants was determined using the Black Scholes Option Pricing Model and amortized ratably to operations over the life of the borrowing.  Assumptions for the fair value determination were as follows: Dividend yield: 0%; Volatility: 103.84% to 136.30%; Expected life: 5 years; Risk free rate: 1.19% to 2.62%.

In July 2010 the Company entered into a new $1.5 million credit line arrangement to issue 12% Revolving Debentures due September 30, 2011. The line may be accessed by the Company beginning January 2011.  In connection therewith, the Company issued 750,000 five year common stock purchase warrants with an exercise price of $1.00 per share, a cashless exercise provision and full ratchet price protection (reduction in exercise price and increase in the number of common shares underlying the warrants for potential dilutive equity issuances, as defined) for future issuances of equity securities by the Company (subject to certain specific exceptions.) The warrants were valued using the Black Scholes option pricing method with the following assumptions:  dividend yield: $-0-, volatility: 104.134%, expected life: 5 years and risk free rate: 1.75%.   

The warrants, valued using the Black Scholes assumptions above, and the costs amortized as a commitment fee are as follows:

 

										Three months ended June 30, 2011				Three months ended June 30, 2010
		June 30, 2011 # of warrants				June 30, 2011 Total value				Amortization of commitment fees				Amortization of commitment fees
2009 commitment fee			750,000			$	935,860			$	-			$	208,829
2010 draw-down warrants			3,000,006			$	2,807,240			$	487,740			$	332,490
2010 commitment fee			750,000			$	513,193			$	254,792			$	-
Totals			4,500,006			$	4,256,293			$	742,532			$	541,319

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

										Six months ended June 30, 2011				Six months ended June 30, 2010
		June 30, 2011 # of warrants				June 30, 2011 Total value				Amortization of commitment fees				Amortization of commitment fees
2009 commitment fee			750,000			$	935,860			$	-			$	417,657
2010 draw-down warrants			3,000,006			$	2,807,240			$	970,120			$	363,786
2010 commitment fee			750,000			$	513,193			$	455,382			$	-
Totals			4,500,006			$	4,256,293			$	1,425,502			$	781,443

No additional warrants are issuable as the Company draws down on the new credit line arrangement. All interest under the Debentures is accrued interest and is payable upon maturity on September 30, 2011.  Draws under this arrangement are subject to certain conditions as defined in the agreement and the advances hereunder would confer certain rights to the purchasers with regard to the Company’s board of directors. As of June 30, 2011 the lenders have not exercised this right.

In July 2010, in conjunction with the new credit line arrangement, participants in the Credit Line entered into an amendment with the Company pursuant to which, among other things, extended the maturity date of the debentures issued/issuable thereunder from May 31, 2011 to September 30, 2011 and permitted that any debentures issued under the new credit facility will rank pari passu with debentures issued under the Credit Line. The debt issued under the credit facilities is secured by all the assets of the Company.

Both Credit Lines are provided by three stockholders of the Company, one of which has representation rights with respect to the Board of Directors. (See note 3)

During the six months ended June 30, 2011, the Company canceled 250,000 warrants previously issued under the 2010 commitment fees due to a default of one of the lenders and accordingly wrote off the remaining amortization (included in table above).  Subsequent to the cancelation, the Company re-issued 250,000 replacement warrants once the default conditions were cleared under the same remaining terms and conditions of the previous canceled warrants.  The warrants were valued using the Black Scholes option pricing method with the following assumptions:  dividend yield: $-0-, volatility: 75.44%, expected life: 4.24years and risk free rate: 2.50%.   

During the six months ended June 30, 2011, the Company Draw-down totaled an aggregate of $500,000 from the new credit line arrangement.

NOTE 5 - WARRANT DERIVATIVE LIABILITY

In connection with issuance of Series C Preferred Stock in September 2009

The Company issued warrants in conjunction with the sale of Series C preferred stock.  These warrants contained certain reset provisions up to the first anniversary of date of the issuance. Therefore, in accordance with ASC 815-40, the Company reclassified the fair value of the warrant from equity to a liability at the date of issuance.  Subsequent to the initial issuance date, the Company is required to adjust to fair value the warrant as an adjustment to current period operations.

The Company estimated the fair value at date of issue of the warrants issued in connection with the issuance of the Series C preferred stock to be $2,052,181 using the Black-Scholes formula assuming no dividends, a risk-free interest rate of 2.41%, expected volatility of 131.04%, and expected warrant life of two years. Since the warrants have reset provisions for the first year, pursuant to ASC 815-40, the Company has recorded the fair value of the warrants as a derivative liability. The net value of the warrants at the date of issuance was recorded as a warrant liability in the amount of $2,052,181 and a reduction in value of the Series C preferred stock. Until conversion and expiration of the reset provisions of the warrants, changes in fair value were recorded as non-operating, non-cash income or expense at each reporting date. The Company adjusted the recorded fair values of the warrants to market resulting in a non-cash, non-operating loss of $0 and $70,571 for the six months ended June 30, 2011 and 2010, respectively.

As the warrant reset provisions expired in September 2010, the initial allocated fair value of the warrants of $1,483,201 are included in ‘Permanent Equity’ in the Condensed Consolidated Balance Sheets and charged to current period operations.

12

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

In connection with the Credit Lines

The Company issued (1) warrants in conjunction with the monthly Draw-downs under the Credit Line and (2) warrants as a commitment fee in conjunction with the new $1.5 million credit line arrangement.  These warrants contain certain reset provisions, which expire if the Company lists on a National stock exchange such as NASDAQ. Therefore, in accordance with ASC 815-40, the Company classifies the fair value of these warrants as a derivative liability at the date of issuance.  Subsequent to the initial issuance date, changes in fair value will be recorded as non-operating, non-cash income or expense at each reporting date. (See note 4).

 

The fair values of all above described warrants of $336,443 at June 30, 2011 were determined using the Black Scholes Option Pricing Model with the following assumptions: Dividend yield: 0%; Volatility: 85.81%; Expected life: 3.7 to 4.1 years and Risk free rate: 0.85% to 1.80%.

As of the date of the financial statements, the Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and has classified the obligation as a long term liability.

The Company adjusted the recorded fair values of the warrants to market resulting in a non-operating gain of $1,521,880 and $1,823,186 for the three and six months ended June 30, 2011 and a non-operating gain of $1,880,553 and $614,233 for the three and six month periods ended June 30, 2010, respectively.

 

NOTE 6 – PREFERRED STOCK DERIVATIVE LIABILITY

In connection with Series C preferred stock

The Series C preferred stock contained certain reset provisions related to common stock conversion during the first anniversary of date of the issuance and therefore, in accordance with ASC 815-40, the Company determined the fair value of the reset provision was $1,647,771 using the Black-Scholes formula assuming no dividends, a risk-free interest rate of 0.39%, expected volatility of 131.04%, and expected life of one year. Pursuant to ASC 815-40, the Company recorded the fair value of the reset provision as a preferred stock derivative liability. The net value of the reset provision at the date of issuance was recorded as a preferred stock derivative liability in the amount of $1,647,771 and a reduction in value of the Series C preferred stock. Until expiration of the reset provisions of the Series C preferred stock, changes in fair value were recorded as non-cash, non-operating income or expense at each reporting date. The Company adjusted the recorded fair values of the warrants to market resulting in a non-cash, non-operating gain of $0 and $134,361 for the six months ended June 30, 2011 and 2010, respectively. (See note 7)

As the reset provision contained in the Series C preferred stock expired in September 2010, the initial allocated fair value of the reset provisions of $1,190,916 is included in ‘Permanent Equity’ in the Condensed Consolidated Balance Sheets and charged to current period operations.

In connection with Series D preferred stock

The Series D preferred stock contains certain reset provisions related to common stock conversion subject to subsequent equity financing, therefore in accordance with ASC 815-40, the Company determined the initial allocated fair value of the reset provision using the Binomial Lattice formula at the dates of issuance assuming no dividends, a risk-free interest rate of 0.25%-0.30%, expected volatility of 73.15%-103.23%, and expected life of one year was $211,753 through June 30, 2011. Pursuant to ASC 815-40, the Company reclassified the initial allocated fair value of the reset provision as a reset derivative liability. The net value of the reset provision at the dates of issuance was recorded as a reset derivative liability and a reduction in value of the Series D preferred stock. 

The fair value of the described reset provision of $9,052 at June 30, 2011, determined using the Binomial Lattice Model assuming: Dividend yield: 0%; Volatility: 85.81%; and Risk free rate: 0.20%.

As of the date of the financial statements, the Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and has classified the obligation as a long term liability.

The Company adjusted the recorded fair value of the preferred stock derivative liability to market resulting in non-cash, non-operating gain of $186,407 and $261,084 for the three and six months ended June 30, 2011.

13

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

NOTE 7 – STOCKHOLDERS EQUITY

Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.001 per share.  The Company's preferred stock may be divided into such series as may be established by the Board of Directors. The Board of Directors may fix and determine the relative rights and preferences of the shares of any series established.

 

Series B – Preferred Stock

In December 2008, the Board of Directors authorized the issuance of up to 18,000 shares of Series B 0% convertible non-voting preferred stock (the “Series B preferred stock”).

The Series B preferred stock is not entitled to preference upon liquidation; not entitled to dividends unless declared by the Board of Directors and are nonvoting except the Corporation shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series B preferred stock, (a) alter or change adversely the powers, preferences or rights given to the Series B preferred stock or alter or amend the Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Series B preferred stockholders, (c) increase the number of authorized shares of Series B preferred stock, or (d) enter into any agreement with respect to any of the foregoing. Each share of Series B preferred stock is convertible, at any time at the option of the holder, into 1000 shares of Common Stock.

During the year ended December 31, 2010 and the six months ended June 30, 2011, 4,185 and 134 shares of Series B preferred stock was converted into 4,185,000 and 134,000 shares of the Company's common stock, respectively. As of June 30, 2011 and December 31, 2010, 12,116 and 12,250 shares of Series B preferred stock were issued and outstanding, respectively.

Series C - Preferred stock

In September 2009, the Board of Directors authorized the issuance of up to 7,000 shares of 0% convertible non-voting preferred stock (the “Series C preferred stock”) with warrants.

The Company issued an aggregate of 2,920 shares of preferred stock in September 2009 to accredited investors including Company officers, shareholders and directors at $1,000 per share. Each share of Series C preferred stock is convertible, at any time at the option of the holder, into 1,000 shares of common stock (for a total of 2,920,000 shares of common stock or the equivalent of $1.00 per common share.)

 

The Series C preferred stock is not entitled to preference upon liquidation; not entitled to dividends unless declared by the Board of Directors and are nonvoting except the Corporation shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of Series C preferred stock, (a) alter or change adversely the powers, preferences or rights given to the Series C preferred stock or alter or amend the Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Series C preferred stockholders, (c) increase the number of authorized shares of Series C preferred stock, or (d) enter into any agreement with respect of any of the forgoing.

 

Due to certain terms in the September 2009 financing and described below, the proceeds from the financing were allocated among three types of financial instruments. These terms include:

 

Dilutive issuance:  The Preferred C stock contained certain reset provisions relating to conversion of common stock up to the first anniversary of date of the issuance. In connection with the issuance of each share Series C preferred stock, the Company also issued 1,000 warrants to purchase the Company’s common stock at $1.20 per share for five years (2,920,000 warrants in total).  Prior to the first anniversary of the date of issuance, the warrants contained certain proportional reset provisions. The reset provisions expired in September 2010.

Exchange Right: Each holder of the Series C preferred stock had a one-time right to elect to exchange their Series C preferred stock (and all warrants issued to the holder in connection with the Series C preferred stock) for a debenture and warrants on the same terms and in the same dollar amount, as was issued to the purchasers of the Credit Facility debentures and warrants when the Company first accessed the Credit Line.  No investor exercised this one-time exchange right and in March 2010, the exchange right expired.

14

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

Warrant: The warrant is described in note 5, Warrant Liability, ‘In connection with issuance of Series C Preferred Stock in September 2009’.

 

In accordance with ASC 815-40, the Company was 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, determined using the Black Scholes Option Pricing Method, was charged as an allocated debt discount.

In connection with the issuance of the Series C preferred stock, the Company issued 2,920,000 warrants with similar reset provisions.  In accordance with ASC 815-40, the Company was required to record the fair value of the warrants outside of equity, as warrant liability, and mark to market each reporting period. The fair value of the warrants at the date of issuance, determined using the Black Scholes Option Pricing Method, was charged as an allocated debt discount.

The Company recorded a total debt discount of $2,674,117 from the reset and exchange provisions and related warrants and with the expiration of both the dilutive issuance rights and the exchange right during the year; the entire amount of the Series C preferred stock is now classified in ‘Permanent equity’.  

During the year ended December 31, 2010 and the six months ended June 30, 2011, 625 and 0 shares of Series C preferred stock was converted into 625,000 and 0 shares of the Company's common stock, respectively. As of June 30, 2011 and December 31, 2010, 2,295 shares of Series C preferred stock were issued and outstanding.

 

Series D - Preferred stock

 

In September 2010, the Board of Directors authorized the issuance of up to 1,000 shares of 0% convertible non-voting preferred stock (the “Series D preferred stock”)

 

The Company issued an aggregate of 800 shares of preferred stock during the year ended December 31, 2010 to accredited investors and additional 200 shares during the six months ended June 30, 2011, including 60 shares to an officer and a director of the Company. Each share was sold for $1,000 per share. Each share of Series D preferred stock is convertible, at any time at the option of the holder, into 1,000 shares of common stock (for a total of 1,000,000 shares of common stock or the equivalent of $1.00 per common share.)

In connection with the issuance of the Series D preferred stock, the Company issued an aggregate of 1,000,000 warrants to purchase the Company's common stock at $1.10 per share for five years from the date of issuance.

The Series D preferred stock is not entitled to preference upon liquidation; not entitled to dividends unless declared by the Board of Directors and are nonvoting except the Corporation shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of Series D preferred stock, (a) alter or change adversely the powers, preferences or rights given to the Series D preferred stock or alter or amend the Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Series D preferred stockholders, (c) increase the number of authorized shares of Series D preferred stock, or (d) enter into any agreement with respect to any of the foregoing.

The proceeds from the financing were allocated among two types of financial instruments described below. These terms include:

Dilutive issuance: (see the ‘Preferred stock derivative’ liability in the Condensed Consolidated Balance Sheets). Each share of Series D preferred stock share shall be convertible, at any time, at the option of the holder into 1,000 shares of common stock.  The Series D preferred stock automatically converts to the Company's common stock with the closing of an equity-based financing of not less than $1 million at a conversion ratio of the lesser of 1,000 shares of common stock for one share of Series D preferred stock or a ratio based on the per share purchase price for the common stock to be issued with subsequent equity financing. (See also note 10.)

Warrant: In connection with the issuance of each share Series D preferred stock, the Company issued 1,000 warrants to purchase the Company’s common stock at $1.10 per share for five years.  

In accordance with ASC 815-40, the Company was 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 initial allocated fair value of the reset provision at the date of issuance was recorded as a preferred stock derivative liability in the amount of $211,753 and a reduction in value of the Series D preferred stock. 

15

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

Common Stock

In September 2010, the Company issued an aggregate of 250,000 shares of common stock for consulting services rendered and to be rendered over the term of the agreement. The valuations of common stock issued for services were based upon the fair value of the common stock. As of June 30, 2011 75% of the shares were earned (i.e. were released); valued at $0.64 per share. The remainder of the shares will be determined with milestones met and are considered issued and not outstanding at June 30, 2011.

  

NOTE 8 -STOCK OPTIONS AND WARRANTS

 

Warrants

The following table summarizes in warrants outstanding and related prices for the shares of the Company’s common stock issued to shareholders at June 30, 2011:

 

								Warrants Outstanding Weighted Average												Warrants Exercisable
								Remaining				Weighted								Weighted
				Number				Contractual				Average				Number				Average
Exercise Price				Outstanding				Life (years)				Exercise price				Exercisable				Exercise Price
$	0.01				750,000				3.08			$	0.01				750,000			$	0.01
	0.85				3,000,006				3.90				0.85				3,000,006				0.85
	0.95				120,842				1.51				0.95				120,842				0.95
	0.96				203,385				1.00				0.96				203,385				0.96
	1.00				921,000				3.91				1.00				921,000				1.00
	1.10				1,250,000				4.06				1.10				1,187,500				1.10
	1.14				5,178,948				1.51				1.14				5,178,948				1.14
	1.15				162,709				1.00				1.15				162,709				1.15
	1.20				2,920,000				3.20				1.20				2,920,000				1.20
	1.50				350,000				2.70				1.50				350,000				1.50
Total					14,856,890				2.77								14,794,390

 

Transactions involving the Company’s warrant issuance are summarized as follows:

		Number of Shares				Weighted Average Price Per Share
Outstanding at December 31, 2009			11,247,083			$	1.08
Issued			5,000,006				0.94
Exercised			(915,199	)			0.10
Canceled or expired			(50,000	)			0.10
Outstanding at December 31, 2010			15,281,890				1.10
Issued			450,000				1.04
Expired			(625,000	)			(2.90	)
Canceled			(250,000	)			(1.00	)
Outstanding at June 30, 2011			14,856,890			$	1.03

 

During the six months ended June 30, 2011, the warrants totaling 200,000 were issued in connection with the sale of Series D preferred stock.  The warrants are exercisable for five years from the date of issuance at an exercise price of $1.10 per share.

16

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

During the six months ended June 30, 2011, the Company canceled 250,000 warrants previously issued under the 2010 commitment fees due to a default of one of the lenders and accordingly recognized as expense the remaining amortization (included in table above). Subsequent to the cancelation, the Company re-issued 250,000 replacement warrants once the default conditions were cleared under the same remaining terms and conditions of the previous canceled warrants.  The warrants were valued using the Black Scholes option pricing method with the following assumptions:  dividend yield: $-0-, volatility: 75.44%, expected life: 4.24years and risk free rate: 2.50%.   

Stock plans

 

The 2004 Equity Incentive Plan, initially established by NewCardio Technologies, Inc., was adopted by the Company in 2007, as amended, and 10.3 million shares were registered on SEC Form S-8 in the first quarter of 2008. At June 30, 2011 there are approximately 0.5 million shares available for grant.

The 2009 Equity Compensation Plan approved by the Board of Directors on April 15, 2009 and registered on SEC Form S-8 in June 2009, reserved 8.0 million shares of the Corporation’s common stock for the Plan, plus a number of shares annually as of April 15th of each year as initially equal to ten (10%) percent of the issued and outstanding common stock, on a fully diluted basis and effective April 15, 2011 a number equal to 10% of the then outstanding stock on a fully diluted basis (including warrants, options, RSUs, and Convertible Securities) but not less than 1 million over last year’s reserve. At June 30, 2011, the total reserve is approximately 13.6 million shares; approximately 8.5 million shares are available for grant.

 

The 2010 Restricted Equity Compensation Plan approved by the Board of Directors on September 13, 2010 reserved 1 million shares of the Corporation’s common stock for the Plan. At June 30, 2011, there are 750,000 shares available for grant.

 

The Company granted equity based compensation over the years under these equity plans.  The Company granted non-qualified stock options to purchase 2,402,398 and 1,100,000 shares of common stock during the six months ended June 30, 2011 and 2010, respectively, under the 2004 Equity Incentive Plan and the 2009 Equity Compensation Plan as well as -0- and 116,614 restricted stock units during the six months ended June 30, 2011 and 2010, respectively, under the 2009 Equity Compensation Plan. The Company granted no restricted shares during the six months ended June 30, 2011 and 2010 under the 2010 Restricted Equity Compensation Plan.

Non Employee Stock Options

The following table summarizes in options outstanding and the related prices for the shares of the Company's common stock issued to non employees at June 30, 2011:

				Options Outstanding												Options Exercisable
								Weighted Average				Weighted								Weighted
								Remaining				Average								Average
Exercise				Number				Contractual Life				Exercise				Number				Exercise
Prices				Outstanding				(Years)				Price				Exercisable				Price
$	0.01				309,417				6.15			$	0.01				128,625			$	0.01
	0.02				165,826				4.96				0.02				165,826				0.02
	0.22				768,611				6.61				0.22				759,236				0.22
	0.77				100,000				9.25				0.77				18,750				0.77
	0.80				429,000				7.12				0.80				302,379				0.80
	0.85				100,000				9.74				0.85				6,250				-
	0.90				3,000				9.06				0.90				689				0.90
	1.16				25,000				7.08				1.16				11,461				1.16
	2.25				150,000				6.68				2.25				121,875				2.25
Total					2,050,854				6.91								1,515,091

Transactions involving stock options issued to non employees are summarized as follows:

17

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

		Number of Shares				Weighted Average Price Per Share
Outstanding at December 31, 2009:			1,405,144			$	1.10
Granted			203,000				0.40
Employment status change			735,000				0.22
Exercised			(85,385	)			(0.14	)
Expired			(400,000	)			(2.00	)
Outstanding December 31, 2010			1,857,759				0.52
Granted			209,000				0.41
Exercised			(15,905	)			(0.01	)
Expired			-				-
Outstanding, June 30, 2011			2,050,854			$	0.51

During the six months  ended June 30, 2011,  the Company granted an aggregate of 209,000 non employee stock options in connection services rendered at the exercise prices from $0.01 to $0.85. 

The fair values of the vesting non employee options for the six months ended June 30, 2011 were determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 74.02% to 85.81%; and Risk free rate: 1.80%  to  3.47%.

 

The fair value of all non employee options vesting during the three and six months ended June 30, 2011 of $13,844 and $55,733, respectively, was charged to current period operations.

   

The fair value of all non-employee options vesting during the three and six  months ended June 30, 2010 of $49,447 and $110,380, respectively was charged to current period operations.

 

Employee Stock Options

The following table summarizes the options outstanding and the related prices for the shares of the Company's common stock issued to employees of the Company under a non-qualified employee stock option plan at June 30, 2011:

				Options Outstanding												Options Exercisable
								Weighted Average				Weighted								Weighted
								Remaining				Average								Average
Exercise				Number				Contractual Life				Exercise				Number				Exercise
Prices				Outstanding				(Years)				Price				Exercisable				Price
$	0.001				100,000				2.54			$	0.001				100,000			$	0.001
	0.01				1,778,214				8.74				0.01				497,381				0.01
	0.02				880,000				5.69				0.02				880,000				0.02
	0.22				1,000,000				6.40				0.22				1,000,000				0.22
	0.36				200,000				9.97
	0.69				105,000				9.36				0.69				67,500				0.69
	0.77				100,000				8.80				0.77				27,083				-
	0.78				40,000				8.38				0.78				15,833				0.78
	0.80				4,090,000				7.07				0.80				3,004,593				0.80
	0.81				185,184				9.51				0.81				23,148				9.76
	0.83				120,000				9.50				0.83				-				-
	0.85				330,000				9.74				0.85				-				-
	0.98				500,000				8.96				0.98				125,000				-
	1.32				450,000				8.90				1.32				150,012				1.32
Total					9,878,398				7.58								5,890,550

 

18

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

  Transactions involving stock options issued to employees are summarized as follows:

		Number of Shares				Weighted Average Price Per Share
Outstanding at December 31, 2009:			7,365,000			$	0.53
Granted			1,275,000				1.06
Employment status change			(735,000	)			(0.22	)
Exercised			-				-
Forfeitures			(101,256	)			(0.80	)
Outstanding at December 31, 2010			7,803,744				0.63
Granted			2,193,398				0.24
Exercised			(92,500	)			(0.80	)
Forfeitures			(26,244	)			(0.80	)
Outstanding at June 30, 2011:			9,878,398			$	0.54

During the six months ended June 30, 2011, the Company granted an aggregate of 2,193,398 stock options with an exercise prices of $0.01 to $0.85. The fair values were determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 72.17% to 91.09%; and Risk free rate: 2.94% to 3.58%.

 

The fair value of all employee options vesting in the three and six months ended June 30, 2011 of $950,405 and $1,744,030, respectively, was charged to current period operations.

 

The fair value of all employee options vesting in the three and six months ended June 30, 2010 of $828,820 and $1,628,912, respectively, was charged to current period operations.

Restrictive Stock Units (“RSUs”)

The Company has issued RSUs to certain employees and non employees under the 2009 Equity Compensation Plan.  RSUs issued to date vest in up to 24 months with certain acceleration clauses, as defined by the 2009 Equity Compensation Plan.

Employees

 

Transactions involving employee RSUs are summarized as follows: 

		Number of Shares				Weighted Average Price Per Share
Outstanding at December 31, 2009:			1,470,000			$	0.80
Granted			116,614				1.32
Exercised			(18,183	)			(1.32
Forfeitures			(65,810	)			(0.81	)
Outstanding at December 31, 2010			1,502,621				0.83
Granted			-				-
Exercised			(1,453,812	)			(0.82	)
Forfeitures			-
Outstanding at June 30, 2011:			48,809			$	1.32

 

The fair value of all employees RSUs vesting three and six months ended June 30, 2011 of $46,833 and $187,333, respectively, was charged to current period operations.

19

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

The fair value of all employees RSUs vesting three and six months ended June 30, 2010 of $147,000 and  $447,930, respectively, was charged to current period operations.

Non employees

Transactions involving non employee RSUs are summarized as follows:

		Number of Shares				Weighted Average Price Per Share
Outstanding at December 31, 2009:			105,000			$	0.80
Granted			-				-
Exercised			-				-
Outstanding at December 31, 2010:			105,000				0.80
Granted			-				-
Exercised			(105,000	)			-
Outstanding at June 30, 2011:			-			$	-

The fair value of all non employees RSUs vesting during the three and six months ended June 30, 2011 of $1,094 and $12,513 respectively was charged to current period operations. The fair value of all non employees RSUs vesting during the three and six months ended June 30, 2010 of $13,125 and $28,350 respectively was charged to current period operations.

NOTE 9 — FAIR VALUE

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, the Company considers the principal or most advantageous market in which it would transact and considers 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.

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.

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NEWCARDIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of June 30, 2011:

		Total				Quoted Prices in Active Markets for Identical Instruments Level 1				Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3 (A)
Liabilities
Preferred stock derivative		$	(9,052	)		$	-			$	-			$	(9,052	)
Warrant derivative		$	(336,443	)		$	-			$	-			$	(336,443	)
Total		$	(345,495	)		$	-			$	-			$	(345,495	)

(A)	Fair value is estimated based on internally-developed models or methodologies utilizing significant inputs that are unobservable from objective sources.

Level 3 Liabilities comprised of the fair value of issued warrants with reset provisions and the Series D preferred stock with reset provisions.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of June 30, 2011:

Six Months Ended  June 30, 2011:
		Warrant derivative liability				Preferred stock derivative liability
Balance, December 31, 2010		$	2,141,871			$	250,863
Series D preferred stock issuances during the six months ending June 30, 2011							19,273
Warrants issued in connection with credit facility			17,758
Mark-to-market at June 30, 2011:
-        - Series D preferred stock derivative liability							(261,084
- Warrants issued with Credit Facility Draw-downs and the new $1.5 million credit facility			(1,823,186	)
Transfers in and/or out of Level 3			-				-
Balance, June 30, 2011		$	336,443			$	9,052
Total gain for the period included in earnings relating to the liabilities held at June 30, 2011 of $2,084,270		$	1,823,186			$	261,084

 

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Management’s Discussion and Analysis 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 based 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 our Annual Report on Form 10-K for the year ended December 31, 2010 and Item 1A below 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.   Until we are able to generate sufficient liquidity from operations, if we are not able to raise sufficient additional capital, it 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.

Overview

 

Significant highlights for the second quarter of 2011 were as follows: 

Overview

 

In the second quarter of 2011 we continued to limit discretionary spending as we focus on completing a financing that would allow us to advance our solutions currently under development, primarily CardioBip, our telemedicine device. Together with the longer term payroll reductions implemented in March, our operating expenses decreased 54% from a year ago. While  our efforts to reduce spending have been significant to date, our sales continue to be small and we continue to require other sources of cash to support our operations.  We performed three studies during this quarter using QTinno, and while we continue to get interest for new studies, the market for early stage cardiac safety studies remains low at this time.

To date, we have funded our operations through sales of equity securities and loans under credit facilities.  We have a $1.5 million credit facility that is currently available.  During this second quarter of 2011 we received a $600,000 in advances under this credit facility and $600,000 is available under the line as of June 30, 2011. Borrowings under this facility, along with a current outstanding $3.0 million loan from the 2009 facility, mature on September 30, 2011. While we are exploring other sources of financing to meet our working capital requirements, there is no guarantee that such financing 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. See further discussions in the ‘Liquidity and Capital Resources’ section below.

In connection with our corporate governance practices, our board of directors periodically rotates the position of Chairman of the Board.  In June 2011, Dr. Patrick Maguire, a member of the Board, assumed the role of Chairman, a position that has been held since March 2008 by Dr. Mark Kroll.  Dr. Kroll continues to serve as a member of the Board.

 

 Comparison of Results of Operations for the Three and Six Months Ended June 30, 2011 and June 30, 2010

 

Selected results of operations for the three and six months ended June 30, 2011 and June 30, 2010 were as follows:

 

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Financial Condition and Results of Operations

		Three months ended June 30,				Six months ended June 30,
		2011		2010		2011		2010
Revenue	$	101,559	$	21,077	$	140,628	$	70,118
Cost of sales		35,933		44,823		97,645		63,307
Gross profit (loss)		65,626		(23,746)		42,983		6,811
Operating expenses:
Selling, general and administrative		1,095,513		1,645,112		2,305,467		3,547,122
Depreciation		11,927		11,496		24,246		21,969
Research and development		692,568		1,037,614		1,417,186		1,925,688
Total operating expenses		1,800,008		2,694,222		3,746,899		5,494,779
Net loss from operations		(1,734,382)		(2,717,968)		(3,703,916)		(5,487,968)
Other income (expense)
Gain on change in fair value of warrant derivative liability and preferred stock derivative liability		1,726,046		1,880,553		2,084,270		614,233
Amortization of commitment fees		(742,531)		(541,318)		(1,425,502)		(781,443)
Other financing costs		(75,202)		(60,000)		(100,438)		(85,000)
Interest, net		(109,061)		(27,408)		(204,239)		(41,113)
Total other income (expense):		799,252		1,251,826		354,091		(293,323)
Net loss before income taxes		(935,130)		(1,466,141)		(3,349,825)		(5,781,291)
Provision for income taxes		-		-		-		-
Net loss attributable to common shareholders	$	(935,130)	$	(1,466,141)	$	(3,349,825)	$	(5,781,291)

Quarter ended June 30, 2011 and 2010

Comparison of the quarters ended June 30, 2011 and June 30, 2010 were as follows:

Revenues were $102,000 for the three months ended June 30, 2011 compared to $21,000 for the three months ended June 30, 2010, an increase of $81,000 or 386% from the quarter ended June 30, 2010. 2011 revenues were largely comprised of ECGs processed using QTinno. In 2010, revenues represented initial sales of software kits and related professional services to one of our customers who also signed a Master Services Agreement for the deployment of QTinno.

 

Gross profit was $66,000 for a margin of 65% for the three months ended June 30, 2011 compared to a loss of $24,000 and a negative margin of 114% for the three months ended June 30, 2010. Cost of goods of $36,000 for the three months ended June 30, 2011 and $44,000 for the three months ended June 30, 2010 includes maintenance costs of our service center, labor costs associated with the services and depreciation of service center equipment (primarily servers) totaling $8,000, with labor costs associated with the professional services higher in 2010 due to additional service revenue a year ago.

 

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 and we implemented further cash expense measures in March 2011.  These changes are the primary cause of the decreases in operating expenses as noted below. Net cash used in operating activities decreased 54% to $683,000 during the quarter ended June 30, 2011 from $1,492,000 during the quarter ended June 30, 2010.

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The following table sets forth the March 2011 salary reductions and option issuances to our executive officers, who, as a result of these actions, received 50% of their initial salary in cash during the quarter-ended June 30, 2011:

 

		Options granted				March 2011 salary reduction				Change in salary vs. employment agreement
Vincent Renz, Chief Executive Officer, member of the Board of Directors			350,000			$	54,000			$	135,000; 50	%
Branislav Vajdic, Fellow, Vice Chairman of the Board of Directors			290,000			$	58,000			$	145,000; 50	%
Richard Brounstein, Executive Vice President, Chief Financial Officer, Secretary			240,000			$	48,000			$	120,000; 50	%
Totals			880,000			$	160,000			$	400,000

Selling, general and administrative (“SG&A”) expenses decreased 33% to $1,095,000 in the three months ended June 30, 2011, a decrease of $550,000 from $1,645,000 in the three months ended June 30, 2010. Stock based compensation represented $650,000 of SG&A expenses in 2011, a decrease of $161,000 from $811,000 in 2010. The $445,000 balance of 2011 SG&A expenses decreased $389,000 from $834,000 in 2010, primarily due to a $360,000 decline in payroll and consulting expenses.  This decline was attributable to three primary factors: (1) the expense management program, (2) the non-renewal of two consulting contracts involving strategic and business development services, resulting in a savings of approximately $120,000 from a year ago, and (3) the reduction in out of pocket investor relations programs, resulting in a savings of approximately $120,000 from a year ago.

Research and development (“R&D”) expenses decreased 33% to $693,000 in the three months ended June 30, 2011, a decrease of $345,000 from $1,038,000 in the three months ended June 30, 2010.  Stock based compensation represented $382,000 of R&D expenses in 2011, a decrease of $183,000 from $565,000 in 2010.The $311,000 balance of 2011 R&D expenses decreased $162,000 from $473,000 in 2010 primarily due to a reduction in consulting costs as we were developing the next generation of our telemedicine product, CardioBip, in 2010 that we demonstrated in a major trade show last May. There we no similar costs in 2011; plans are largely on hold pending the strategic financing discussed in the Liquidity section below. The $311,000, while continuing limited work on CardioBip and early research on my3KG in 2011, focused largely on QTinno as we largely wrapped up the next generation of this product.

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 (non-employees) 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 non-employee 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 quarters ended June 30, 2011 and 2010.  In the fourth quarter of 2010, we established a preferred stock derivative liability and warrant derivative liability related to the issuance of Series D Preferred stock with warrants. In 2010, we established both a warrant derivative liability and preferred stock derivative liability related to the 2009 Series C Preferred stock and related warrant financing. The Series C-related liabilities expired in September 2010. We also had warrants associated with credit facilities in both periods. We then marked the value of the liabilities outstanding at the end of the particular period to market quarterly, resulting in a non-cash net gain of $1,726,000 in the quarter ended June 30, 2011 and $1,881,000 in the quarter ended June 30, 2010 due primarily to changes in the underlying fair value assumptions including market value of our common stock during the periods, the volatility rate and the remaining life of the instruments.

 

The amortization of commitment fees of $743,000 in the quarter ended June 30, 2011 includes the non-cash cost of warrants issued in connection with our credit facilities and includes warrants subsequently issued as we drew down on the 2009 line during 2010.  There are no warrants associated with the 2011 draw downs. We recognized $541,000 of such fees a year ago. Other financing costs include related legal and accounting fees with financing activities.

  

We recognized interest expense of $109,000 in the quarter ended June 30, 2011 compared to $27,000 in the quarter ended June 30, 2010, primarily due to borrowings under our 12% credit facilities, which began in March 2010, offset by minor amounts of interest income on our cash balances. 

 

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Six months ended June 30, 2011 and 2010

 

Selected results of operations for the six months ended June 30, 2011 and June 30, 2010 were as follows:

Revenues were $141,000 for the six months ended June 30, 2011 compared to $70,000 for the three months ended June 30, 2010, an increase of $71,000 or 101% from the six months ended June 30, 2010. 2011 revenues were largely comprised of ECGs processed using QTinno. In 2010, revenues represented initial sales of software kits and related professional services to one of our customers who also signed a Master Services Agreement for the deployment of QTinno.

Gross profit was $43,000 for a margin of 30% for the six months ended June 30, 2011 compared to a gross profit of $7,000 and a margin of 10% for the six months ended June 30, 2010. The incremental margin of QTinno processing is greater than professional services; further the added volume absorbed fixed operating costs of the service center equipment in 2011. In both periods depreciation accounted for $17,000 of the total Cost of Goods.

Overall operating expenses have decreased due to the expense management programs discussed above.  These changes are the primary cause of the decreases in operating expenses as noted below. Net cash used in operating activities decreased 49% to $1,536,000 during the six months ended June 30, 2011 from $3,030,000 during the six months ended June 30, 2010.

Selling, general and administrative expenses decreased 35% to $2,305,000 for the six months ended June 30, 2011, a decrease of $1,242,000 from $3,547,000 in 2010.  The decrease is made up of both cash and stock-based compensation to key consultants and executives. In the first six months of 2011, $1,308,000 was non-cash expense, compared to $1,606,000 in 2010. For the first six months of 2011, general and administrative expense spending, primarily for human resources-related costs totaled $655,000 compared to $1,529,000 in 2010, a decrease of $874,000, reflecting the overall cutbacks due to the expense management control programs. 

 

Research and development expenses decreased 26% to $1,417,000 for the six months ended June 30, 2011, a decrease of $509,000 from $1,926,000 in 2010.  For the six months ended June 30, 2011, $822,000 was stock-based compensation, compared to $986, 000 in the same period a year ago. The balance of the expenses was primarily human resource-related, totaling $528,000 in the first six months of 2011, a decrease of $329,000 from $857,000 in the six months ended June 30, 2010. In 2010 we developed and introduced a new prototype of our telemedicine product, CardioBip, at one of the primary industry trade shows in May 2010. There we no similar costs in 2011; as noted above, plans are largely on hold pending the strategic financing discussed in the Liquidity section below. We have continued limited work on CardioBip and early research on my3KG in 2011 while largely completing a software enhancement release to QTinno.

 

Gain on change in fair value of warrant liability and reset derivative in the six months ended June 30, 2011 of $2,085,000 and $614,000 in the six months ended June 30, 2010 both represent a mark-to-market at June 30^th each year due primarily to the decrease in the market value of our common stock since December 31 of each period.

The amortization of commitment fees of $1,426,000 in the quarter ended June 30, 2011 includes the non-cash cost of warrants issued in connection with our credit facilities and includes warrants subsequently issued as we drew down on the 2009 line during 2010.  There are no warrants associated with the 2011 draw downs. We recognized $781,000 of such fees a year ago. Other financing costs include related legal and accounting fees with financing activities.

 

We recognized interest expense of $204,000 in the six months ended June 30, 2011 compared to $41,000 in the six months ended June 30, 2010, primarily due to borrowings under our 12% credit facilities, which began in March 2010, offset by minor amounts of interest income on our cash balances. 

Liquidity and Capital Resources

 

To date, we have funded our operations through sales of equity securities and loans under credit facilities.  We are currently accessing a $1.5 million credit facility to fund our operations while we continue to explore strategic financing options.  At June 30, 2011 we have accessed $900,000 under this credit facility.  Borrowings under this facility, along with the current outstanding $3,000,000 from the initial facility, mature on September 30, 2011. Interest accrues under both facilities at 12% and is also due September 30, 2011,

 

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As of June 30, 2011, we had $122,000 in cash and we currently have no commitments for any additional capital beyond the $600,000 remaining under the credit facility.  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.  We anticipate that we will need between $18 million and $21 million to develop and obtain FDA 510(k) clearance for the initial indications for these products and another $8 million to $12 million to achieve full commercialization. Depending on the size and timing of the traunche investments, as we would not plan to fund this entire amount today, we plan to initially focus on advancing CardioBip. 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.  Any disruptions in our ability to access the credit facility would materially and adversely impact our ability to continue our operations until such time, if ever, we were to obtain additional financing.  While we are exploring other sources of financing to meet our working capital requirements, there is no guarantee that such financing 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.

 

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 investments 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.

 

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 policy is 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.

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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.

 

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 and D Preferred Stock

In September 2009, we issued 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 and in 2011, we issued 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 September 2010 and, therefore, the Series C preferred stock and warrants has been reclassified to the equity section for balance sheet presentation.

 

Accounting for and Classifying Warrants

In September 2009, we issued 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 September 2010, and the warrant liability has been reclassified to the equity section for balance sheet presentation.

 

Beginning in March 2010 we issued warrants in conjunction with the monthly draw-downs under our 2009 credit facility and in July 2010 we also issued 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:

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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. 

 

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.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of June 30, 2011.

Disclosure controls and procedures and other procedures are designed to ensure that information required to be disclosed in our reports or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the second fiscal quarter of 2011 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings.

None.

Item 1A.

Risk Factors.

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

In April 2011, in conjunction with the exercise of 134 shares of Series B Preferred Stock, the Company issued 134,000 shares of its common stock.

 

In May 2011, following an initial default by a lender in the credit facility, subsequently cured, the Company reinstated the commitment fee warrant for 250,000 shares that lapsed by its terms when the default period expired.

Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

Removed and Reserved.

Item 5.

Other Information.

 

None.

29

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Item 6.  

Exhibits.

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 (17)
99.2	Charter of the Compensation Committee of the Board of Directors (17)
99.3	Charter of the Governance Committee of the Board of Directors (17)
99.4	Charter of the Nominating Committee of the Board of Directors (17)

30

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101

The following financial information from NewCardio, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2011 and 2010, (iii) Consolidated Statement of Cash Flows for the six-month periods ended June 30, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements.**

  ______________________________

 

*

Filed herewith

**

To be filed by amendment pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

 

(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.

(17)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

31

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	NEWCARDIO, INC.
Date:  August 15, 2011	By:	/s/ Richard D. Brounstein
		Richard D. Brounstein
		Executive Vice President and Chief Financial Officer

32