UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





(Mark
One)





x
            Annual report under Section 13
      or 15(d) of the
      Securities Exchange Act of 1934. For the fiscal year ended December
      31, 2009.





OR





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





Commission
File Number: 333-149166





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





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





2350
      Mission College Blvd., Suite 1175, Santa Clara CA 95054(Address
      of principal executive offices)





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





Branislav
Vajdic


Chief
Executive Officer


NewCardio,
Inc.


2350
Mission College Boulevard, Suite 1175


Santa
Clara, California 95054


(408)
516-5000


(Name,
address and telephone number of agent for service)





Copies of
all communications to:


Marc
Ross, Esq.


Andrew
Smith, Esq.


Sichenzia
Ross Friedman Ference LLP


61
Broadway, 32nd
Floor


New York,
New York 10006


Phone:
(212) 930-9700


Fax:
(212) 930-9725





Securities
Registered Pursuant to Section 12(b) of the Act: None





Securities
Registered Pursuant to Section 12(g) of the Act: Common Stock: NONE





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. o Yes x No





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.     o Not
required





Indicate by check mark whether
registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files.) x
Yes    ̈No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.    x








1










Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):





Large
      accelerated filer   ̈
            Accelerated
      filer   ̈Non-accelerated
      filer   ̈
            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 x No










The number of shares of
the registrant’s common stock outstanding as of February 23, 2010 was
26,680,279.








2








TABLE OF
CONTENTS








PART
      I
            4Item
      1.
            Business
            4Item1A.
            Risk
      Factors
            15Item1B.
            Unresolved
      Staff Comments
            21Item
      2.
            Properties
            22Item
      3.
            Legal  Proceedings
            22Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            22PART
      II
            23Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            23Item
      6.
            Selected
      Financial Data
            24Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            24Item7A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            31Item
      8.
            Financial
      Statements and Supplementary Data
            31Item
      9.
            Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
            31Item9A.
            Controls
      and Procedures
            31Item9B.
            Other
      Information
            32PART
      IIIItem10.
            Directors,
      Executive Officers and Corporate Governance
            33Item11.
            Executive
      Compensation
            36Item12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            41Item13.
            Certain
      Relationships and Related Transactions and Director
      Independence
            43PART
      IVItem14.
            Principal
      Accountant Fees and Services
            44Item15.
            Exhibits,
      Financial Statement Schedules
            45SIGNATURES
            48EX-31.1EX-31.2EX-32.1EX-32.2








3








PART
I





Item
1.  Business.





Background





NewCardio,
Inc., a Delaware corporation (“NewCardio” or the “Company”), through its
wholly-owned subsidiary, NewCardio Technologies, Inc., a Delaware corporation
(“NewCardio Technologies”), is a development-stage cardiac diagnostic technology
provider focused on the research, development and commercialization of
proprietary software platform technology solutions for the non-invasive
diagnosis and monitoring of cardiovascular disease (“CVD”), as well as the
cardiac safety assessment of drugs under development.  Our proprietary
software platform technology solutions enhance the value of the standard 12-lead
electrocardiogram by adding a third dimension, space, to the current two
dimensional view, time and voltage, thereby enhancing the diagnostic value of
the 12-lead ECG in providing data that was previously unavailable to the human
eye.  Our solutions, which require no change in the current practice
for recording ECGs provide greater accuracy/sensitivity in much more timely and
cost effective manner in assessing cardiac status while increasing the ability
to diagnose clinically significant conditions which were previously difficult to
detect.




NewCardio
was incorporated in the State of Delaware on September 2, 2003, under the name
EP Floors, Inc. (“EP Floors”).  NewCardio Technologies was
incorporated in the State of Delaware on September 7, 2004 under the name
NewCardio, Inc.  On November 16, 2006, in connection with the sale of
substantially all of the shares of common stock, EP Floors ceased operations and
became a shell corporation.  On November 20, 2006, EP Floor’s
corporate name was changed to Marine Park Holdings, Inc. (“Marine
Park”).  From November 16, 2006 through December 27, 2007, Marine Park
was a shell company.




On
December 27, 2007, the Company consummated a reverse merger by entering into a
share exchange agreement (the “Share Exchange”) with the stockholders of
NewCardio Technologies, pursuant to which the stockholders of NewCardio
Technologies  exchanged all of the issued and outstanding capital
stock of NewCardio Technologies for 18,682,537 shares of common stock of the
Company representing 92% of the Company’s outstanding capital stock, after the
return to treasury and retirement of 9,445,015 shares of common stock of the
Company held by certain stockholders of the Company concurrently with the Share
Exchange. Prior to the Share Exchange, the Company was an inactive corporation
with no significant assets and liabilities and was considered as “Shell Company”
under the SEC guidelines.





As a
result of the Share Exchange, there was a change in control of the Company. In
substance, the Share Exchange is a recapitalization of the Company’s capital
structure rather than a business combination and accounted for as
such.




As of
December 27, 2007, Marine Park’s officers and directors resigned their positions
and Marine Park changed its business to NewCardio Technologies’
business.  As a result, the historical discussion and financial
statements for periods prior to December 28, 2007, included in this Annual
Report on Form 10-K are those of NewCardio Technologies.  On January
17, 2008, Marine Park’s corporate name was changed to NewCardio, Inc., resulting
in the current corporate structure in which NewCardio, Inc. is the parent
corporation, and NewCardio Technologies, Inc. is its wholly-owned
subsidiary.





General





NewCardio,
as a developer of a cardiovascular diagnostic platform technology focused
specifically on the ECG, initially intends to compete in two large segments of
the CVD diagnostic market: (1) cardiac safety services for drug
development, and (2) CVD diagnostics.





The
12-lead electrocardiograph, ECG, is cardiology’s most frequently used screening
and diagnostic tool, primarily due to the fact that it is a non-invasive,
inexpensive, and highly versatile test which provides immediate availability for
diagnosing arrhythmia, heart muscle diseases, or increased susceptibility to
sudden cardiac arrest.  Our opportunity in the CVD diagnostic test
market is based on our proprietary 3D platform technology’s ability to provide
significantly enhanced diagnostic information which allows for faster, more
accurate and less expensive assessment of cardiac status, and difficult to
diagnose conditions, without changing any of the established ECG
practices.





According
to our current market estimates, there are more than 250 million ECGs taken
annually in the developed countries of the world, be it in drug development,
emergency rooms, ambulatory monitoring, hospitals, office visits, stress tests,
etc.    Our opportunities in this market are twofold; the
first being our ability to add value to the current use of ECG as a diagnostic
tool based on our ability to provide more accurate and timely diagnosis than is
available today. The second is our ability to advance the use of the ECG as a
diagnostic tool in replacing much more costly, and sometimes risky, diagnostic
tests with a more cost effective and accurate procedure. We believe this could
increase the number of ECGs performed annually.










4







Cardiac
Safety Market for Drug Development





Unexpected
cardiac toxicity is a common cause of delays in drug development, abandonment of
otherwise-promising drug candidates, and/or withdrawal of previously approved
drugs from the market.  One of the most important consequences of such
toxicity is life-threatening arrhythmia, which usually results from drug-induced
alterations in cardiac electrical activity and in some instances were implicated
as causes of sudden cardiac death. Some drugs have recently been associated with
a different kind of cardiac toxicity, that is, increased risk of myocardial
infarction (“MI”), heart failure, and/or stroke.





Such
increased risk could go undetected during drug development. Clinical
trials generally involve at most 10,000 patients, but drug-induced arrhythmia is
usually a rare event, typically 1 in 100,000 patients or less. Similarly,
drug-induced increases in MI and stroke are subtle and usually not appreciated
from clinical trial data. Thus, cardiac toxicities of drugs in many
cases become apparent only after a drug is marketed to millions of
users.





Because
of the difficulty in detecting cardiac toxicity, surrogate diagnostic markers
are used during drug development to detect increased cardiac risk. The most
important such surrogate marker is the drug-induced changes in the QT
interval on the ECG. "QT" is the time interval that is measured on the ECG
signal from a part of the signal labeled "Q", start of depolarization, through
"T," end of repolarization. The United States Food and Drug Administration
(the “FDA”) and other drug regulatory bodies now require extensive ECG data on
all drugs in clinical development, with a particular focus on drug-induced QT
interval changes. Many of the new standards are set forth in the E14 Guidance
for Industry published jointly by the FDA and the International Committee on
Harmonisation in October 2005 (the E14 Guidance) at www.fda.gov/cder/guidance/6922fnl.htm
.. The primary focus of the E14 Guidance is a detailed assessment of a drug's
effects on ECG parameters, particularly the QT interval.





One of
the most striking new standards in the E14 Guidance is the requirement for a
single trial, called a “Thorough QT Study” (TQTS), whose purpose is to define
the drug’s effect on the QT interval. The TQTS must assure regulators that the
drug does not prolong QT interval more than a minimal amount. A drug that
“fails” this test may still be developed, but later phase trials now must
include substantially more detailed cardiac safety data. This may result in
additional development costs and may add at least 1-2 years to the development
process. In practice, a failed TQTS will often lead drug sponsors to abandon an
otherwise-promising drug.





Meeting
the standards of the E14 Guidance is made even more challenging by the
difficulty of measuring drug-induced QT prolongation on ECG. At present, QT
intervals are assessed by cardiac safety core labs in a manner that is
labor-intensive, expensive and often of uneven quality. Computerized algorithms
have not been able to effectively solve this problem. Among other factors, such
algorithms are limited by the same difficulties that human readers face,
particularly precisely defining a low-amplitude event surrounded, and sometimes
buried within, electrical noise. At present, most expert observers regard them
as unreliable for cardiac safety assessment in drug development, and the E14
Guidance unequivocally recommends manual assessment.





As a
consequence of these developments, drug sponsors are devoting an increasing
amount of time and resources to cardiac safety issues. Currently, about 2000 new
drugs (referred to herein as “New Chemical Entities” or “NCE”) are being studied
as discussed forth at http://newmeds.phrma.org/. Each NCE that reaches market
will typically need 15,000 - 50,000 ECGs, and if the product is intended for
treatment of a cardiovascular disease, possibly as many as 100,000 ECGs or more
for analysis of cardiac safety. Indeed, depending upon the NCE, a single TQTS
may require 20,000 ECGs or more. What is needed is a reliable, accurate, precise
and fully automated method of measuring drug effects on QT intervals and other
ECG indicators of cardiac risk.





CVD
Diagnostics Market




In the
CVD diagnostic market, NewCardio intends to compete in a large segment described
as Cardiac Monitoring and Diagnostic Services comprised of point-of-care
technologies and services, which account for approximately 65% of the total
available market, and ambulatory (outpatient) monitoring for cardiac disease,
which accounts for approximately 35% of the total available
market.   Since cardiac disease is common, there are presently
sizable markets in both categories.  For example, according to
statistics published by the American Heart Association:




·
            About
      80 million Americans have some form of cardiovascular
    disease;




·
            About
      16.8 million Americans have coronary heart disease, defined as a history
      of myocardial infarction or angina
pectoris;




·
            About
      5.7 million Americans have heart
failure;




·
            About
      2.3 million Americans have a history of atrial
  fibrillation






5










A
substantial portion of all of the above patient groups may benefit from the
relatively inexpensive and convenient forms of cardiac monitoring and diagnostic
tools being developed by NewCardio.  Moreover, as the US population
ages, the number of patients in each category is expected to
increase.  In the future, we expect that the ambulatory segment will
see faster growth following the general trend of increased outpatient diagnosis
procedures, as well as technological improvements that make remote digital
monitoring more feasible.




While
advanced CVD diagnostic testing (such as cardiac magnetic resonance imaging and
multi-detector computed tomography) have important roles, they are not suited
for initial screening of patients with suspected cardiac disease, and there
remains an unmet need for better CVD diagnostic screening tools. NewCardio
intends to provide such tools, targeted primarily to two sub-segments of the CVD
diagnostic market:




Stationary
Cardiac Screening and Diagnostics:




●
            patients
      who enter the emergency department or other acute care facilities must be
      quickly and accurately evaluated for potentially life-threatening acute
      cardiac disease, such as acute coronary syndrome;●
            other
      ambulatory or hospitalized patients with or without a cardiac disease
      diagnosis may need to be screened for their level of risk, the presence of
      disease, or disease progression.




Ambulatory
Cardiac Monitoring:




●
            patients
      with difficult to assess or transient cardiac symptoms require long-term,
      real-time monitoring for diagnosis and evaluation;●
            patients
      with established cardiac disease, such as atrial fibrillation or coronary
      artery disease, may need longer-term ambulatory monitoring to assess the
      effectiveness of therapy or establish the need for additional diagnostic
      tests or therapeutic interventions.





Principal
Products and Applications





Our novel
core technology platform provides real-time, 3-D analysis of the heart's
electrical activity, as detected at the body surface by standard 12-lead ECG
electrodes. ECG input signals are typically sampled at 500 Hz (500 times per
second). Each signal is then normalized to present equidistant signal source
representation from the body surface electrodes, and then mathematically
processed to generate 3-D visual representations and other useful diagnostic
tools on a high resolution time basis. The ECG signal processing can be fully
performed on a laptop computer so that the 3-D visual output is immediately
available to the physician alongside the 12-lead standard ECG.  We
have exploited our core technology platform to develop three initial products,
QTinno, Cardio3KG, and CardioBipTM, which are in various stages of development,
as follows:





QTinno





QTinno is
an automated cardiac safety solution that streamlines the process for meeting
the Phase I cardiac safety analysis requirements as defined in ICH E14 guidance
document.  It replaces the manual and/or semi-automated methodologies with
algorithms that automatically measure, analyze and report on the ECGs collected
for any Phase I trial by a fully automating the evaluation of the QT and other
timing intervals relevant for assessing drug cardiac toxicity (e.g. RR, PR, QRS,
QT, QTcB, QTcF measurements).  It provides fast, accurate and precise QT
data from a broad range of challenging ECGs, analyzing, greater than 10,000 ECGs
within an hour.  The QTinno algorithm synthesizes information from all 12
leads into a 3D representation of cardiac electrical activity over time. From
this representation, it then generates a “virtual” ECG lead, utilizing all
available beats, that includes balanced and complete information from all parts
of the heart. This improves signal-to-noise ratio and shows difficult-to-detect
events with substantially greater clarity than the standard 12-lead
display.  This approach enables reliable, automated identification of key
cardiac events – something no ECG provider has achieved to date.  In
addition, QTinno incorporates novel curve fitting algorithms that ensure a high
degree of accuracy, and a detailed "confidence factor" that flags the most
difficult ECGs for recommended cardiologist over read. This latter feature
provides a fail-safe mechanism for ensuring all determinations are highly
reliable.





The
QTinno user interface has been carefully designed to meet user needs, both in
display and data analysis.   QTinno is a validated, 21CFR11 compliant
software solution that supports the workflow for TQT and Phase I automatic ECG
analyses. The system contains an overall system Dashboard and Protocol summary
screens containing real-time study metrics.  QTinno enables users, based on
privileges assigned through the user profile, to efficiently manage the input,
processing and output of the ECG data required in a TQT and/or Phase I
study.




When ECG
processing has been completed, the results from QTinno can be provided back to
the user in a number of different ways.  Cardiologists can view the ECGs
that have been identified by the “confidence factor” for recommended review
(generally no more than 2-4% of the ECGs processed) and adjudicate the results
within QTinno (if required), specify ECG morphology findings and record any
general comments.  Study results that contain the ECG measurements,
morphology findings and processing details can be exported from the
system.  Lastly, FDA XML files can be exported from QTinno for all ECGs
that were processed which can then be used by the sponsor as part of the upload
to the FDA ECG warehouse or as part of an NDA submission to the FDA.  All
of these processing, review and reporting functions are available if QTinno is
installed locally or if the user is accessing the application within the
NewCardio hosted data center.







QTinno
can be installed and used on any Windows-based personal computer.  It
does not require a dedicated computer and no special hardware is required to
operate the software.  In addition, there is no requirement for any
new or unique procedures for capturing ECGs, as our customers will continue to
use their current ECG hardware and processes to obtain standard ECG
recordings.  They will simply extract the digital files of these ECG
recordings in order to import into the QTinno software.  QTinno will
receive the ECG input signal via any standard means of transporting a digital
computer file, such as a CD/DVD, USB drive or a network.  As noted
above, QTinno can be delivered as “Software as a Service” (SaaS) through the
21CFR11 compliant NewCardio hosted data center or installed within our customers
internal IT infrastructure, based on the requirements/preference of the
customer.













6













CardioBip





The
prototype of CardioBip is a mobile ECG transtelephonic system comprised of a
mobile ECG recording and transmitting device, and a diagnostic center which
receives, processes and analyzes the data. The purpose of CardioBip is to allow
a patient to record ECG data with a mobile recorder, by placing it on the
patient’s chest, using three integrated electrodes to make contact. The patient
would touch two points on the recorder with each hand, thereby providing two
additional electrodes.  No wires are required.





The
recorder will wirelessly transmit data to a diagnostic center, where a
synthesized 12-lead ECG will be reconstructed from a calibrated,
patient-specific transformation algorithm, proprietary to the
Company.   A physician will then evaluate the information, enabling
more accurate and timely diagnoses of acute cardiac events, and facilitating
immediate intervention in life-threatening situations or as part of a routine
remote checkup.





CardioBip
is now currently being developed beyond this prototype stage, although
introduction of a commercial product is still expected to be approximately two
years out, depending on the level of effort we can bring to this
product.  The next version is expected to include Bluetooth technology
and be the focus of clinical studies leading to the expected filing of 510 (k)
and CE mark applications as more fully discussed in the regulatory section
below. Our current strategy is to introduce this second product as a priority
now that QTinno is in its commercial phase. We also recently received a
fundamental patent for this product as well as preliminary positive results from
two internal studies.




The data
from CardioBip may also be analyzed with the Cardio3KG array of 3-D analytical
tools (see below). Cardio3KG is our other product under development, and is
expected to be introduced around or subsequent to the introduction of
CardioBip.




Cardio3KG





Cardio3KG
is a set of algorithms and tools that provide a comprehensive method to assess
cardiac electrical activity in time and space. Cardio3KG extracts additional
information from standard 12-lead ECG signals and uses it to generate a 3-D
representation of cardiac electrical activity. To further enhance understanding
and interpretation, the program superimposes the diagnostically relevant
electrical information on an intuitive, revolving 3-D anatomic model of the
heart. Cardio3KG also includes algorithms for real-time vectorial analysis and
normalization tools to ensure accurate representation of all heart regions. We
believe that this enables Cardio3KG to assess potentially fatal diseases and
conditions, including acute coronary syndrome, with greater accuracy than
possible by standard ECG.





Importantly,
Cardio3KG requires no change in standard ECG practice. The ECG is obtained
exactly as it is now, with the electrodes placed in the same locations and no
need for additional electrodes. Moreover, Cardio3KG provides the 12-lead display
along with its novel 3-D analytical presentations, to allow correlations between
displays and provide reassurance that no information has been lost. We believe
this will be highly important in promoting acceptance of Cardio3KG by the
medical community.











7








Clinical
Development




QTinno




QTinno has been clinically validated at
this time with both internal and external studies as previously reported.
Results showed that QTinno’s automated determination and the “gold standard”
high quality manual measurement were virtually identical (less than 1
millisecond difference), and individual measurements showed a high degree of
precision (standard deviation of well under 10 milliseconds between the two
approaches).  As we work customers and sponsors, as part of their
evaluation process, we continue to put QTinno through rigorous clinical
validation exercises, as the consistent quality of results delivered continues
to confirm the robustness of the underlying technology in addressing both the
immediate and long term concerns of the current standard (i.e. QT interval
measurement) for cardiac safety analysis/testing in drug
development.  We believe this approach in aggressively working in
collaboration with potential customers and/or partners will help not only to
accelerate their adoption of QTinno, but also provide valuable input/feedback
for its continued enhancement.




During the year ended December 31,
2009, we successfully launched our initial release of QTinno (Release 1.0) after
successfully completing our internal organizational
readiness.  Organizational readiness takes the solution well beyond
clinical validation, which is a core requirement for delivery to the market, to
ensure that we are able to fully support our going to market activities for a
regulatory, development, software validation and verification, professional
services and customer care perspective as well.  In addition, we have
initiated the development of the next release of QTinno (Release 1.1), which
will feature automated intelligent extractions, scalable networking
capabilities, improved study protocol database functionality, data inconsistency
alerts and an enhanced graphical user interface.




One of the most significant results of
our collaboration efforts has been the development of an engineering version of
QTinno was used to successfully process 24 hours of Holter data from a complete
TQT study.  The data was provided to us by a Top 5 Pharma Company who
we are collaborating with on this project. The automatically-computed results
for the whole study were available in about 36 hours of computer processing time
and they showed a good agreement with the original core lab data with
significantly reduced variability.  This enhancement will be delivered
as part of planned future releases of QTinno.




Additionally, we have taken advantage
of every opportunity to present the results of our clinical validation at
industry sponsored conferences and/or regulatory body meetings.  In
fact, recently presented our study results from QTinno 1.0 on moxifloxacin data
received from the Cardiac Safety Research Consortium (CSRC). Moxifloxacin data
is a required parameter for all TQT studies submitted to the FDA warehouse as
part of the Cardiac Safety drug evaluation process as required in Phase I drug
studies. The presentation was at a CSRC-sponsored symposium and included
representatives from the FDA. QTinno’s results showed good correlation with the
original core lab results on the standard moxifloxacin curve, again with
significantly reduced variability when compared to the core lab manual or
semi-automatic results.





CardioBip -Internal Research
Projects




We believe there is emerging
opportunity in remote patient monitoring, especially using a wireless device
that will provide information equivalent to a full 12-lead ECG machine.
CardioBip features fully integrated electrodes and requires no wires to acquire
the signal. The acquired signals are transmitted via wireless telephony to a
call center where 12-lead ECGs are reconstructed using NewCardio-proprietary
algorithms.




We have had 40 such prototype CardioBip
units operating in Belgrade, Serbia, collecting 3D ECG data and wirelessly
transmitting them to a 24-hour on-call cardiology center for review. More than
2,300 successful ECG data transmissions from more than 60 patients have been
completed to-date. We plan to summarize the goals and the results of this pilot
project to determine next steps. This solution will target the chronic care
market as a wireless data collection, transmission and interpretation platform
expected to provide results and analyses otherwise only available from a
traditional 12-lead ECG machine.




During 2009, as part of the Belgrade
pilot project, we completed a mini-study with the goal of assessing the
feasibility of 12-lead ECG reconstruction and transmission by the CardioBip
system in patients with coronary conditions. Particularly, the mini-study is
designed to help us understand whether changes in ECGs caused by transient
ischemic episodes are preserved during CardioBip reconstruction and
transmissions. 47 subjects with angiography-documented coronary artery disease
were monitored for ST-segment changes during exercise treadmill testing.We
also completed a second pilot-study targeted towards monitoring by CardioBip of
atrial fibrillation trends prior and post cardio version treatment. 18
patients with persistent AF undergoing elective electrical DC cardio version
were studied. These patients were scheduled for cardio version of atrial
fibrillation and transmitted their rhythm prior and post procedure. The study
determined success rates and rhythm trends based on analyses of the CardioBip
transmitted ECG data.




Both studies confirmed CardioBip’s
ability to accurately provide wireless remote patient monitoring. The study
results confirmed CardioBip’s ability to record, reconstruct and transmit an
accurate, high-resolution 12-lead ECG, thereby enabling not only rhythm
diagnosis, but also detection of ischemic ECG changes and precise reconstruction
of atrial activity. The Heart Rhythm Society Expert Consensus recommends ongoing
monitoring for up to two years following catheter or surgical atrial
fibrillation (AF) ablation procedures, and our results suggest that the
CardioBip may prove particularly useful in detecting AF recurrence after such
procedures.




At present there is no convenient and
reliable method for remote monitoring and detection of either ischemic events or
derangements of atrial electrical activity. CardioBip is a convenient hand-held
device that patients can carry with them and use to generate and transmit
accurate and complete 12-lead ECGs during ordinary daily activity or when
symptoms develop.  Such capabilities have the potential to
significantly improve clinical outcomes for millions of patients with heart
disease.




Cardio3KG




European pilot trial of
Cardio3KG diagnostic
sensitivity for angioplasty-induced ischemia. The study compared
sensitivity of the Cardio3KG to the standard ECG in detecting ischemia induced
by balloon coronary occlusion. Continuous ECG data was obtained from 51 patients
during 117 separate coronary balloon occlusions of at least 90 seconds. The
study revealed that the standard ECG became diagnostic for ischemia in 67% of
the occlusions, whereas the Cardio3KG TM was
diagnostic in 90%. The gain in sensitivity was most marked for occlusions in the
circumflex and right coronary artery distributions, the regions in which the
standard ECG has the lowest sensitivity due to sensor distance from the
heart.





Beth Israel Deaconess Medical Center
(BIDMC) - Harvard University Study of Cardio3KG in Acute MI. This study
addressed whether the standard ECG or the Cardio3KG TM
could more accurately detect early-stage acute MI.  The study included
133 consecutive BIDMC patients with clinically suspected acute MI, who were
admitted to the CCU, and who had coronary intervention within 6 hours of
admission.  The first ECG obtained in the BIDMC emergency department
was retrieved for each patient.  In each instance, this ECG data was
used to generate a Cardio3KG. The standard ECG and Cardio3KG were evaluated by
independent, blinded observers for indicators of acute MI and results were
compared.





The study
showed that the standard ECG in these patients was diagnostic of acute ischemia
for about 66% of patients, whereas the Cardio3KG was diagnostic in about 84% of
patients.  No material negative results were found.




We
continue to study internally Cardio3KG’s performance in ECGs from patients
undergoing evaluation for acute chest pain.  The focus is on the emergency
room. Our objective continues to be the collection of data to help us refine the
product and prepare it for an external clinical trial to support a filing for
clearance with the FDA.  We believe that Cardio3KG is eligible for 510(k)
premarket notification clearance procedure as a Class II device.  This
belief is supported by specific sections of 21 Code of Federal Regulations Part
870, identifying programmable diagnostic computers (21 CFR 870.1425),
electrocardiographs (21 CFR 870.2340), vectorcardiographs (21 CFR 870.2400), and
electrocardiographic monitoring devices (21 CFR 870.1425), as Class II
devices.




Our focus
for Cardio3KG is to create a software product that will offer improvements in
both sensitivity and specificity compared to the results of traditional ECGs
that do not use our 3D platform. We believe our primary advantage using the 3D
platform algorithm comes from our ability to analyze results occurring on the
side and back of the heart. We are initially focusing directly on the
algorithmic work and the potential of the product for significantly improving
the diagnosis of a heart attack (MI).




During 2009, we also presented results
on the performance of Cardio3KG at the 31st IEEE Engineering in Medicine
and Biology Annual International Conference (EMBC 2009). The paper included our
preliminary results from two studies that analyzed the sensitivity of Cardio3KG
in detecting acute coronary syndrome.







8








Marketing
and Sales





QTinno





We are
marketing QTinno as a fully automated software solution that
provides:





●
            diagnostic accuracy and
      precision in assessing drug induced QT prolongation - with results
      comparable to the current gold standard manual read but with substantially
      less variance; and





●
            diagnostic speed -
      requiring less than 2  hours to process a typical Thorough QT
      study, orders of magnitude, substantially faster and less labor-intensive
      than the current gold standard manual
read;





●
            cost savings - by substantially
      reducing amount of human labor and time required to conduct Thorough QT
      studies and other drug cardiac safety
studies.




With the official launch of the initial
release of QTinno in August, we have expanded our customer interactions,
focusing on all Clinical Research Organizations (CRO’s), ECG Core Labs, Clinical
Pharmacology Units (CPU’s), and Pharmaceutical Companies (Sponsors) in order to
effectively sell the solution in the marketplace by facilitating/expediting the
evaluation for use by the initial customers. Our plan is to license QTinno to
users on a per study basis based on the number of evaluations in the study. The
interactions have been focused on delivering our products to two distinct
audiences.  The first is those organizations that would be our direct
customers, specifically organizations, such as the CRO’s, ECG Core
Labs,  CPU’s and select Sponsors that will be utilizing QTinno to
deliver the automatic cardiac safety for Phase 1 TQT studies they are conducting
for their Sponsor customers.  The second would be indirect customers,
primarily Pharma sponsors, who will be looking to adopt the automated cardiac
safety methodology for their Phase 1 TQT studies through our direct customers.
The feedback from these interactions, particularly on the underlying technology,
the clinical validation results as well as the planned enhancements to the
solution has been very favorable, helping to establish significant
interest.




By the end of 2009 we signed three
master services agreements with Dedicated Phase 1 and two of the five largest
CROs; further we have been selected as the exclusive provider of automated
cardiac solutions by a top 5 pharmaceutical company. We are collaborating with
the sales teams of each of our customers in introducing the integrated solution
to their Sponsor customers, which will ultimately lead to an initial validation
collaboration on a previous QT/TQT study, and upon analysis of the results,
approval to work with the clinical teams to incorporate the automated analysis
into their planned Phase 1 QT/TQT studies for 2010.. QTinno is expected to
enable our CRO and CPU customers to capture additional revenue from previously
outsourced cardiac safety studies and from our ECG core lab and Sponsor
customers due to its ability to provide more robust services with increased
accuracy and efficiency. We anticipate that our customers will increasingly
deliver fully automated results through QTinno in all Phase 1QT/TQT studies
going forward.




Ultimately, the most important result
from these collaborations/interactions, in particular the securing of master
services agreements with CRO’s, Core Labs and CPU’s and the education of the
Pharma sponsors on the integrated QTinno solution will be our ability to turn
them into revenue generating customers by getting them to adopt QTinno to
replace the current cardiac safety manual and/or semi-automatic methodologies
for their TQT studies. We have seen an increase in the number of sponsor
requests for proposal being received by our customers.  In addition, the
increased exposure given to automated cardiac safety solutions at industry trade
shows has resulted in a growing number of requests for QTinno
presentations.  The result has been a much higher visibility on the
upcoming customer and/or study opportunities, which in the short term has
resulted in severalpromising
proposals and, in the long term, is expected to help establish a growing
pipeline of revenue generating studies.




We expect that the growing optimism
following the 2008/2009 economic slowdown will translate into a pent up demand
to conduct the studies that have been delayed, providing another potential
positive impact on our pipeline of opportunities. In summary, we have
completed all of the key tasks in our commercialization plan for the initial
release of QTinno (Release 1.0), thereby achieving organizational readiness to
support our customers in the implementation and utilization of QTinno in their
TQT studies.  As such, we have officially launched QTinno Release 1.0
for use by our customers in production environments for their TQT studies in
healthy volunteers in early phase drug development effective August 2009. We
have successfully facilitated customer readiness through field audits of our
operations and believe we are fully prepared for delivery of first studies in
the first part of 2010.





Research
and Development





We plan
to focus our short and medium term development efforts on solutions for Cardiac
Safety and Efficacy, Urgent Care and Chronic Care markets. In the longer term we
will pursue other key markets by researching ways to apply our 3-D ECG modeling
and interpretation technology to key cardiovascular conditions and
disease.





Cardiac
Safety: The first commercial version of our QTinno Solution is focused on
addressing Thorough QT (TQT) and Phase 1 studies. The solution is expected to be
delivered as Software as a Service (SaaS) in order to minimize
implementation/validation timelines at our customer’s end. We are focused on an
aggressive release strategy that will include enhancement, maintenance and
upgrade releases. Such releases will address customers’ needs for full database
functionality and for scalable architectures.  Ease of integration into
customers’ internal infrastructures will be among key benefits of our future
solution. The second version of the QTinno solution will improve multi-user
access to study data and will offer advanced features for Holter data extraction
and processing.










9












Chronic
Care: We are assessing the health care benefits and the role the wireless
monitoring capabilities of our CardioBip Solution could offer to patients and
their physicians. We believe that our solution for this market best represents
the capabilities of our Unified 3-D Platform. CardioBip specifications include
an efficient chronic-care patient monitoring solution, including that of
patients affected by atrial fibrillation, integrating the accuracy of fiducial
point measurements from QTinno with the condition detection performance of
Cardio3KG biomarkers. Our 2010 development efforts are focused on completing
product development activities anticipated for supporting US and CE regulatory
filings. Based on available funding, US FDA and CE approvals are not anticipated
before 2011.




Urgent
Care: We believe we have internally made significant progress in achieving
increased performance of the Cardio3KG System in detecting acute coronary
syndrome through the analysis and review of the results obtained in our
completed validation studies. The Solution will enable emergency room physicians
to obtain superior diagnostic value when compared with the standard 12-lead ECG.
Our 2010 development efforts are focused on completing preliminary validation
using internal ECG databases and on advancing formal software development. Once
formal software development is completed, additional formal clinical validation
will be performed. Both the formal software development and formal clinical
validation efforts are intended to support US and CE regulatory filings. Based
on available funding, US FDA and CE approvals are not anticipated before
2012.





Competition





We
have many competitors for all three of our main product lines. The largest of
these competitors, GE Healthcare, Phillips Medical Systems, CardioNet, Mortara,
and Welch-Allyn, have significant competitive advantages in ECG diagnostics and
currently control a combined 90+% of the US market. Market advantages of these
larger providers include widespread adoption by hospitals of complete ECG
recording, transmission, and data storage systems, of which ECG analysis
software is an integral part. This vertical integration makes it difficult for
smaller providers of ECG analysis software to gain market share. However, we
believe our 3-D approach and novel analytical algorithms offer substantial
competitive advantages over the analysis programs of larger ECG service
providers, including increases in diagnostic sensitivity, specificity and
predictive value for acute coronary syndromes (heart attacks and related
conditions), and increased accuracy, precision, and full automation in obtaining
data on QT interval effects of drugs, which the FDA requires from all drug
developers





Intellectual
Property





The
medical products industry, including medical software and  hardware
technology products, places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Our
success will depend, in part, on our ability to obtain patent protection for our
products, to preserve our trade secrets and to avoid infringing the proprietary
rights of third parties.





We hold
certain patent rights, have certain patent applications pending and expect to
seek additional patents in the future.  However, we cannot assure the
success or timeliness in obtaining any such patents or the breadth or degree of
protection that any such patents might afford us. The patent position of medical
software and hardware technology products is often highly uncertain and usually
involves complex legal and factual questions. There is a substantial backlog of
patents at the United States Patent and Trademark Office. No consistent policy
has emerged regarding the breadth of claims covered in medical technology
product patents. Accordingly, we cannot assure that patent applications relating
to our products or technology will result in patents being issued, that, if
issued, such patents will afford adequate protection to our products or that our
competitors will not be able to design around such patents. In that regard, a
company's research and development efforts, supplemented by the timing
protection afforded by protective patents, are what leads to a competitive
advantage.





We
believe that we own all our intellectual property and proprietary
technology.  Most of our intellectual property and proprietary
technology was developed by consultants who either developed such intellectual
property and proprietary technology for us or assigned all rights to
intellectual property and proprietary technology they had previously created to
us, in both cases, pursuant to intellectual property invention and assignment
agreements.  We believe these invention and assignment agreements are
all valid and enforceable in accordance with their terms.  However, we
cannot assure that they are valid and enforceable or that they will not be
breached, and that we will have adequate remedies for any breach.










10







We also
seek to protect our proprietary technology, including technology that may not be
patented or patentable, in part through confidentiality agreements and
inventors' rights agreements with collaborators, advisors, employees and
consultants.  We cannot assure that these agreements will not be
breached, that we will have adequate remedies for any breach or that our trade
secrets will not otherwise be disclosed to, or discovered by,
competitors.





We
have not been required to obtain licenses to patents or other proprietary rights
of third parties to develop our products. We cannot assure that licenses will
not be required in the future for certain patents or proprietary rights or that
such licenses would be made available on terms acceptable to us, if at
all.  If we cannot obtain necessary licenses, we may encounter delays
in product development and market introductions while we attempt to design
around such patents or other rights, or we may be unable to develop, manufacture
or sell such products in certain countries, or at all.





The
following table summarizes the status of our patents and patent applications as
of the date hereof:





App
      Number/
              Filing
      Date
            Brief
      Summary
              (Products
      Covered)
            StatusPCT/
              YU2004/
              00020
              08/20/04
            Cordless
      recording and telecommunication of three special ECG leads and their
      processing (CardioBip)
            US
      Patent No. 7,647,093issued
      01/12/10.
              
              EU
      Certificate of Patent Grant EP1659936 issued 12/26/2007. EU Patent active
      in DE, ES, FI, FR, IT, GB, GR, PL. Other national phases are being
      processed.
              
              International
      Application now being examined in China, Japan, Korea and the European
      Union (EU).PCT/
              US2005/
              001239
              01/16/
      05
            Visual
      3-D  presentation of ECG data (Cardio3KG,
QTinno)
            International
      Application now being examined in the China, Japan, Korea and the European
      Union (EU)US
      11/
              036,930
              1/16/04
            Visual
      3-D  presentation of ECG data (Cardio3KG,
QTinno)
            US
      Patent No. 7,266,408 issued 09/04/07.
              
              PCT/US2005/001239
      International Application.US
      11/
              848,221
              1/16/04
            Visual
      3-D  presentation of ECG data (Cardio3KG,
QTinno)
            Filed 
      as divisional US Patent Application on 08/30/07. Divisional with respect
      to 11/036,930, filed on 1/16/04
              
              US PTO notice of all-claim allowance on 1/28/10. US patent expected
      to issue in Q2PCT/
              US2008/
              009308
              07/31/07
            Quantitative
      assessment of cardiac electrical events (QTinno)
            Priority
      to US Provisional Application filed 08/01/07.US
      Patent Application
            Device
      and methods for evaluating cardiac electrical events
    (QTinno)
            US
      Patent Application filed with US PTO on 07/31/08. Application # US
      12/184,068. Priority to US Provisional Application filed
      08/01/07.US
      Patent Application
            System
      for quantitative assessment of cardiac electrical events
      (QTinno)
            US
      Patent Application filed with US PTO on 06/12/09. Application # US
      12/484,153.US
      Patent Application
            Method
      for quantitative assessment of cardiac electrical events
      (QTinno)
            US
      Patent Application filed with US PTO on 06/12/09. Application # US
      12/484,156.US
      Patent Application
            Electrocardiographic
      Monitoring System and Method Using Orthogonal Electrode Pattern
      (CardioBip)
            US
      Patent Application filed with US PTO on 07/31/09. Application # US
      12/534,064.US
      Patent Application
            ECG
      Reconstruction For Atrial Activity Monitoring And Detection
      (CardioBip)
            US
      Patent Application filed with US PTO on 11/05/09.US
      Patent Application
            Method
      for Automated EKG Analysis (Cardio3KG)
            US
      Patent Application filed with US PTO on 11/06/09. Application # US
      12/614,352.US
      Patent Application
            System
      for Automated EKG Analysis (Cardio3KG)
            US
      Patent Application filed with US PTO on 11/06/09. Application # US
      12/614,354.US
      Patent Application
            System
      and Method for Automated EKG Analysis (Cardio3KG)
            US
      Patent Application filed with US PTO on 11/06/09. Application # US
      12/614,361.US
      Provisional Patent Application
            Alternative
      Markers For Quantitative Assessment of Cardiac Electrical Events
      (QTinno)
            US
      Provisional Patent Application filed with US PTO on 12/15/09. Provisional
      Application # US 61/286,763.US
      Patent Application
            Atrial
      Fibrillation Detection based on Absence of Consistent P-Loops in Averaged
      Vectorcardiogram
              (CardioBip)
            US
      Patent Application filed with US PTO on 1/26/10. Application # US
      12/694,236.US
      Patent Application
            Methods
      and apparatus for quantitative assessment of cardiac electrical events
      (QTinno)
            US
      Patent Application filed with US PTO on
1/28/10.




At
present, our patents and patent applications are supplemented by substantial
intellectual property we are currently protecting as trade secrets and
proprietary know-how. This includes matter related to all three product lines.
We expect to file additional patent applications on a regular basis in the
future.





We
believe that our intellectual property and expertise constitutes an important
competitive resource, and we continue to evaluate the markets and products that
are most appropriate to exploit this expertise. In addition, we maintain an
active program of intellectual property protection, both to assure that the
proprietary technology developed by us is appropriately protected and, where
necessary, to assure that there is no infringement of our proprietary technology
by competitive technologies.








11







Government
Regulation





Our
solutions include software, and potentially hardware, which will be used in
clinical settings including drug development and patient diagnosis and, thus,
are subject to regulation by the FDA and other regulatory agencies. FDA
regulations govern, among other things, the following activities that we perform
and will continue to perform in connection with medical devices:





●
            product
      design and development;





●
            product
      testing;





●
            product
      manufacturing;





●
            product
      labeling and packaging;





●
            product
      handling, storage, and
installation;





●
            pre-market
      clearance or approval;





●
            advertising
      and promotion; and





●
            product
      sales, distribution, and servicing.





FDA’s Pre-market Clearance and
Approval Requirements. The FDA classifies all medical devices
into one of three classes. Devices deemed to pose lower risks are placed in
either class I or II, which requires the manufacturer to submit to the FDA a
pre-market notification, known as both a PMN and a 510(k) clearance, requesting
clearance of the device for commercial distribution in the U.S. Some low risk
devices are exempted from this requirement.  Class III devices are
devices which must be approved by the pre-market approval (“PMA”)
process.  These tend to be devices that are permanently implanted into
a human body or that may be necessary to sustain life.  For example,
an artificial heart meets both these criteria.  We believe that our
products do not fall into Class III categorization.





We
believe that QTinno falls into the category of devices that are exempt from
requiring 510(k) pre-market clearance with the FDA.  This is because
QTinno does not directly interact with a patient’s diagnosis and will be for use
in drug safety applications.




We
believe that Cardio3KG and CardioBip fall into Class II, as they are both
electrocardiographs and vectorcardiographs.  They must, therefore,
first receive 510(k) clearance or pre-market approval from the FDA before we can
commercially distribute them in the U.S.





510(k) Clearance Process.
 For each of Cardio3KG and CardioBip, we must submit a pre-market
notification to the FDA demonstrating that the proposed device is substantially
equivalent to a previously cleared 510(k) device, a device that was in
commercial distribution before May 28, 1976 for which the FDA has not yet called
for the submission of pre-market approval applications, or is a device that has
been reclassified from class III to either class II or I. If a device being
submitted is significantly different than a previously cleared 510(k) device in
terms of design, material, chemical composition, energy source, manufacturing
process, or intended use, the device nominally must go through PMA.





The FDA’s
510(k) clearance process usually takes at least three months from the date the
application is submitted and filed with the FDA, but it can take significantly
longer. A device that reaches market via the 510(k) process is not considered to
be "approved" by the FDA. They are generally referred to as "cleared" or "510(k)
cleared" devices.  Nevertheless, it can be marketed and sold in the
United States.





After a
device receives 510(k) clearance, any modification that could significantly
affect its safety or effectiveness, or that would constitute a major change in
its intended use, will require a new 510(k) clearance or could require
pre-market approval. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such decision and can
disagree with a manufacturer’s determination. If the FDA disagrees with a
manufacturer’s determination, the FDA can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance or pre-market
approval is obtained.










12







Pervasive and continuing FDA
regulation. After a medical device is placed on the market, numerous FDA
regulatory requirements apply, including, but not limited to the
following:





●
            Quality
      System regulation, which requires manufacturers to follow design, testing,
      control, documentation and other quality assurance procedures during the
      manufacturing process;





●
            Establishment
      Registration, which requires establishments involved in the production and
      distribution of medical devices, intended for commercial distribution in
      the U.S. to register with the FDA;





●
            Medical
      Device Listing, which requires manufacturers to list the devices they have
      in commercial distribution with the
FDA;





●
            Labeling
      regulations, which prohibit “misbranded” devices from entering the market,
      as well as prohibit the promotion of products for unapproved or
      “off-label” uses and impose other restrictions on labeling;
      and





●
            Medical
      Device Reporting regulations, which require that manufacturers report to
      the FDA if their device may have caused or contributed to a death or
      serious injury or malfunctioned in a way that would likely cause or
      contribute to a death or serious injury if it were to
    recur.





Failure
to comply with applicable regulatory requirements can result in enforcement
action by the FDA, which may include one or more of the following
sanctions:





●
            fines,
      injunctions, and civil penalties;





●
            mandatory
      recall or seizure of our products;





●
            administrative
      detention or banning of our
products;





●
            operating
      restrictions, partial suspension or total shutdown of
      production;





●
            refusing
      our request for 510(k) clearance or pre-market approval of new product
      versions;





●
            revocation
      of 510(k) clearance or pre-market approvals previously granted;
      and





●
            criminal
      penalties.





Government regulation of
QTinno for drug safety
applications . The evaluation of ECGs from clinical trials for drug
development are conducted under an Investigational New Drug or New Drug
Application. As such, they are governed by The Food Drug and Cosmetic Act and
regulations promulgated there under, primarily those set forth in Chapter 21 of
the Code of Federal Regulations (21 CFR). Although no specific regulations
govern use of electrocardiographic analytical tools in drug trials, QTinno must,
nevertheless, be compliant with substantial portions of 21 CFR, particularly 21
CFR Part 11 regulating collection and submission of electronic data to the
FDA.





In
addition, the FDA must be familiar with QTinno performance and regard it as
reliable before drug sponsors will accept it for use with trial validation. We
have had the opportunity to present QTinno to the FDA and believe that both the
technology and our clinical validation results were viewed favorably indicating
that the FDA would accept data processed by QTinno in a prospective TQT study
for review. Further, we are a member of the Cardiac Safety Research Consortium
(“CSRC”), a broad-based collaboration of medical product safety experts from
academia, industry, and the FDA. It was formed in 2005 in response to the
Critical Path Initiative, the FDA’s effort to modernize the drug development
process. The CSRC’s primary goal is to facilitate development of new tools to
improve cardiac safety assessment of medical products, especially tools to
quantify arrhythmia (abnormal heart beat) risk of new drugs in development. With
the FDA, the CSRC established a centralized ECG warehouse of ECGs obtained from
drug clinical research studies. We intend to be an active participant in CSRC
efforts, by providing expertise and technology as needed, and by conducting
targeted research and development projects, as such projects are reviewed and
approved by the CSRC’s Scientific Oversight Committee.  In this
regard, the Company met with FDA representatives on January 28, 2010, to review
NewCardio’s concepts and program in exploring new 3D-based ECG/VCG markers for
early assessment of cardiotoxicity of investigational drugs. At this meeting,
the FDA confirmed its support and high interest in exploring additional cardiac
safety markers. The Company intends to present data on complementary markers in
late February in London. The topic is “Three-dimensional Automated Algorithms in
Continuous Quantitative Assessment of the Drug-induced Pattern of Ventricular
Repolarization (Beyond QT/QTc)”.







13










International Regulation.
International sales of medical devices are subject to foreign government
regulations, which vary substantially from country to country. The time required
to obtain approval by a foreign country may be longer or shorter than that
required for FDA approval, and the requirements may differ
significantly.





The
European Union has adopted legislation, in the form of directives to be
implemented in each member state, concerning the regulation of medical devices
within the European Union. The directives include, among others, the Medical
Device Directive that establishes standards for regulating the design,
manufacture, clinical trials, labeling, and vigilance reporting for medical
devices. The Cardio3KG and the CardioBip may be affected by this legislation,
but we believe that it does not affect development or implementation of QTinno
for pharmaceutical development purposes. Under the European Union Medical Device
Directive, medical devices are classified into four classes, I, IIa, IIb, and
III, with class I being the lowest risk and class III being the highest risk.
Under the Medical Device Directive, a competent authority is nominated by the
government of each member state to monitor and ensure compliance with the
Directive. The competent authority of each member state then designates a
notified body to oversee the conformity assessment procedures set forth in the
Directive, whereby manufacturers demonstrate that their devices comply with the
requirements of the Directive and are entitled to bear the CE mark. CE is an
abbreviation for Conformité Européene (or European Conformity) and the CE mark,
when placed on a product, indicates compliance with the requirements of the
applicable directive. Medical devices properly bearing the CE mark may be
commercially distributed throughout the European Union. Failure to obtain the CE
mark will preclude us from selling the Cardio3KG, CardioBip and related products
in the European Union.





Employees





As
of December 31, 2009 we had 10 full-time employees and no part-time
employees.  Additionally, we have approximately 15 consultants who
perform various specialized services for us.  We have six consultants
in Belgrade, Serbia, who perform research and development for us.  We
have approximately six consultants who perform clinical and regulatory support
and compliance for us.  We have one consultant who advises us on sales
and marketing and the commercialization of our products.  We also
engage consultants for investor relations, accounting, business development and
legal services.





Available
Information





We file
or furnish annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), with the SEC. These reports will be available as
soon as reasonably practical after such reports are electronically filed with,
or furnished to, the SEC.  All of these documents are available in
print without charge to stockholders upon request. Our SEC filings are available
to the public over the Internet at the SEC’s web site at http://www.sec.gov. You
may also read and copy any document we file at the SEC’s public reference rooms
in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.







14








Item
1A.  Risk Factors.





The
following risk factors and other information included in this Annual Report on
Form 10-K should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or which we currently deem immaterial also may impair our
business operations. If any of the following risks occur, our business,
financial condition, operating results, and cash flows could be materially
adversely affected.





Risk
Factors Related to Our Business.





We
are a development stage company and may never commercialize any of our products
or earn a profit.





We
are a development stage company and have incurred losses since we were formed.
We have incurred operating losses of $10,000,157 during the year ended December
31, 2009 and incurred cumulative losses since our inception on September 7, 2004
through, December 31, 2009 of $17,976,465. While we have initiated the
commercialization of our first product, QTinno, we have not generated any
revenue from operations and expect to incur substantial net losses for the
foreseeable future to further develop and commercialize our technology. We
cannot predict the extent of these future net losses, or when we may attain
profitability, if at all. If we are unable to generate significant revenue or
attain profitability, we will not be able to sustain operations and will have to
curtail significantly or cease operations.





Our independent auditors have
expressed substantial doubt about our ability to continue as a going
concern.





In their
audit opinion issued in connection with our consolidated balance sheets as of
December 31, 2009 and our related consolidated statements of operations,
stockholders’ equity, and cash flows for the year ended December 31, 2009, our
auditors have expressed substantial doubt about our ability to continue as a
going concern given our recurring net losses, negative cash flows from
operations, planned spending levels and the limited amount of funds on our
balance sheet.  We have prepared our financial statements on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business.  The
consolidated financial statements do not include any adjustments that might be
necessary should we be unable to continue in existence. Further, as a result of
this audit opinion, it may be more difficult to obtain equity and debt
financing, or if financing is obtained, the terms may result in additional
dilution to existing shareholders.





We
may need to raise additional capital. If we are unable to raise additional
capital, our business may fail.





Because
we are a development stage company and have no revenues, we need to secure
on-going funding. Our current working capital is not expected to be sufficient
to carry out all of our plans and to fund our operating losses until we are
able to generate enough revenues to sustain our business.  If we are
unable to obtain adequate funding, we may not be able to successfully develop
and market our products and our business will most likely fail.  To
secure additional financing, we may need to borrow money or sell more
securities.  Under these circumstances, we may be unable to secure
additional financing on favorable terms or at all. We continue to fund our
operations from the proceeds of our equity financings from December 2007 through
September 2009; additionally we have access to a $3 million credit facility
which is available through August 2010.





Selling
additional stock, either privately or publicly, would dilute the equity
interests of our stockholders. If we borrow money, we will have to pay interest
and may also have to agree to restrictions that limit our operating flexibility.
If we are unable to obtain adequate financing, we may have to curtail business
operations which would have a material negative effect on operating results and
most likely result in a lower stock price.





We
may need to raise capital to fund our operations, and our failure to obtain
funding when needed may force us to delay, reduce or eliminate our product
development efforts.





If in the
future, until we are capable of generating sufficient revenues from operations
and our capital resources are sufficient to meet future requirements, we may
have to raise funds to continue the development, commercialization, marketing
and sale of our products.







15







We
cannot be certain that funding will be available on acceptable terms, or at all.
Our continued operations will depend on whether we are able to generate
sufficient liquidity from operations and/or raise additional capital through
such sources as equity and debt financings, collaborative and licensing
agreements and strategic alliances. To the extent that we raise additional funds
by issuing equity securities, our stockholders may experience significant
dilution. If we are unable to raise additional capital if required or on
acceptable terms, we may have to significantly delay, scale back or discontinue
the development and/or commercialization of one or more of our products, obtain
funds by entering into agreements on unattractive terms or restrict or cease our
operations and go out of business.





The
commercial success of our products will depend on the degree of market
acceptance of these products among physicians, patients, health care payors and
the medical community.





The use
of our heart diagnostic products has never been commercialized. Even if approved
for sale by the appropriate regulatory authorities, physicians may not order
diagnostic tests based on our heart diagnostic technology, in which event we may
be unable to generate significant revenue or become profitable. In addition,
physicians and patients may not utilize the heart diagnostic products unless
third-party payors, such as managed care organizations, Medicare and Medicaid,
pay a substantial portion of the test’s price.





There is
significant uncertainty concerning third-party reimbursement of any test
incorporating new technology. Reimbursement by a third-party payor may depend on
a number of factors, including a payor’s determination that tests using our
technologies are:





·
            not
      experimental or investigational,·
            medically
      necessary,·
            appropriate
      for specific patient,·
            cost-effective,
      and·
            supported
      by peer-reviewed publications.





Since
each payor makes its own decision as to whether to establish a policy to
reimburse for a test, seeking these approvals is a time-consuming and costly
process, we cannot be certain that coverage will be provided by any third-party
payors, in which event we may be unable to generate significant revenue or
become profitable.





Our
products are highly regulated, and we will not be able to commercialize our
products if we cannot obtain the necessary regulatory approvals.





Our
products are subject to extensive regulation and/or acceptance by numerous
governmental authorities in the United States and other countries, including the
FDA.  Most of our products will require governmental clearance before
they can be commercialized, and may even require governmental approval before
they can be commercialized.  If we are unable to obtain regulatory
clearances or approvals for our products at all or in a timely manner, we will
not be able to grow as quickly as expected, or at all, and the loss of
anticipated revenues will reduce our ability to fully fund our operations and to
otherwise execute our business plan.  Our failure to receive the regulatory
clearances or approvals in the United States would likely cause us to cease
operations and go out of business.





As
we develop additional new products we will be required to determine what
regulatory requirements, if any, we must comply with in order to market and sell
our products in the United States and worldwide.  The process of obtaining
regulatory clearance and approval could take years and be very costly, if
clearance or approval can be obtained at all.  If we fail to comply with
these requirements, we could be subjected to enforcement actions such as an
injunction to stop us from marketing the product at issue or a possible seizure
of our assets.  We intend to work diligently to assure compliance with all
applicable regulations that impact our business.  We can give no assurance,
however, that we will be able to obtain regulatory clearance or approval for our
products.  We also cannot assure that additional regulations will not be
enacted in the future that would be costly or difficult to
satisfy.  Our failure to receive regulatory approvals in the United
States in a timely manner or comply with newly enacted additional regulation
could cause us to cease operations and go out of business.







16










The
regulatory process, which includes clinical validation of many of our products
to establish their safety and effectiveness, can take many years and require the
expenditure of substantial financial and other resources. Data obtained from
clinical validation activities are susceptible to varying interpretations that
could delay, limit or prevent regulatory approval.  In addition,
delays or rejection may be encountered based upon changes in, or additions to,
regulatory policies for device marketing authorization during the period of
product development and regulatory review.  Delays in obtaining such
clearances or approvals could adversely affect our marketing of products
developed and our ability to generate commercial product revenues.





In
addition, if we desire to commercialize our products worldwide, we will be
required to meet regulatory requirements in countries outside the United States,
which can change rapidly with relatively short notice, resulting in our products
being banned in certain countries and an associated loss of revenues and
income.  Foreign regulatory agencies can also introduce test format
changes which, if we do not quickly address, can result in restrictions on sales
of our products.  Such changes are not uncommon due to advances in
basic research.





Our
inability to protect our intellectual property rights could allow competitors to
use our proprietary rights and technologies in competition against our company,
which would reduce our sales.





We rely
on a combination of patent, patent pending, trademark and trade secret laws,
proprietary rights agreements and non-disclosure agreements to protect our
intellectual property.  We cannot give any assurance that these measures
will prove to be effective in protecting our intellectual properties.  We
also cannot give any assurance that our existing patents will not be
invalidated, that any patents that we currently or prospectively apply for will
be granted, or that any of these patents will ultimately provide significant
commercial benefits.  Further, competing companies may circumvent any
patents that we may hold by developing products which closely emulate but do not
infringe our patents.  While we intend to seek patent protection for our
products in selected foreign countries, those patents may not receive the same
degree of protection as they would in the United States.  We can give no
assurance that we will be able to successfully defend our patents and
proprietary rights in any action we may file for patent infringement.
 Similarly, we cannot give any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights.  Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial.





We also
rely on proprietary designs, technologies, processes and know-how not eligible
for patent protection.  We cannot give any assurance that our competitors
will not independently develop the same or superior designs, technologies,
processes and know-how.





While we
have and will continue to enter into proprietary rights and invention assignment
agreements with our employees and consultants, we can give no assurance that
courts of competent jurisdiction will enforce those agreements.





If we are unable to develop products
to keep pace with rapid medical and scientific change, our operating results and
competitive position would be harmed.





In
recent years, there have been numerous advances in technologies relating to the
diagnosis and treatment of cardiac problems. These advances require us
continuously to develop new products and enhance existing products to keep pace
with evolving standards of care. Our solutions could become obsolete unless we
continually innovate and expand our product solutions to demonstrate recurrence
and treatment benefit in patients treated with new therapies. If we are unable
to demonstrate the applicability of our solutions to new treatments, then sales
of our solutions could decline, which would reduce our revenues.





We
are dependent upon key personnel and hiring and assimilating new key employees.
The loss of key employees or the inability to attract new key employees could
limit our ability to execute our growth strategy, resulting in lost sales and a
slower rate of growth.





Our
success is heavily dependent on the continued active participation of our
current executive officers, including Branislav Vajdic. Loss of the services of
Dr. Vajdic could have a material adverse effect upon our business, financial
condition or results of operations. Dr. Vajdic currently does not have any plans
to retire or leave us in the near future. We maintain $2 million in key life
insurance on Dr. Vajdic and nothing for any of our other executive officers or
other personnel. The loss of any of our senior management could significantly
impact our business until adequate replacements can be identified and put in
place. In addition, as we grow we will need to hire additional key personnel. We
may not be able to identify and attract high quality employees or successfully
assimilate new employees into our existing management structure, which could
delay the development, commercialization, marketing or sales of our
products.  This delay may cause a delay in revenues and profitability
that may require us to restrict or cease our operations and go out of
business.







17










We
may have difficulties managing growth which could lead to higher
losses.





While we
have not yet achieved any revenues through the sale or licensing of our
products, and depending on market acceptance and the timeliness of necessary
regulatory approvals, we might not be in a position to rapidly commercialize our
products. Rapid growth would strain our human and capital resources, potentially
leading to higher operating losses. Our ability to manage operations and control
growth will be dependent upon our ability to raise and spend capital to
successfully attract, train, motivate, retain and manage new employees and
continue to update and improve our management and operational systems,
infrastructure and other resources, financial and management controls, and
reporting systems and procedures. Should we be unsuccessful in accomplishing any
of these essential aspects of our growth in an efficient and timely manner,
then management may receive inadequate information necessary to manage our
operations, possibly causing additional expenditures and inefficient use of
existing human and capital resources or we otherwise may be forced to grow at a
slower pace that could slow or eliminate our ability to achieve and sustain
profitability.  Such slower than expected growth may require us to
restrict or cease our operations and go out of business.





Risk
Factors Related to Our Stock.





We
have a history of operating losses and expect to report future losses that may
cause our stock price to decline and a loss of your investment.





For the
operating period since inception (September 7, 2004) through December 31, 2009,
we have incurred a net cumulative loss of $28,112,650. We expect to continue to
incur losses as we spend additional capital to develop and market our
technologies and establish our infrastructure and organization to support
anticipated operations. We cannot be certain whether we will ever earn a
significant amount of revenues or profit, or if we do, that we will be able to
continue earning such revenues or profit. Also, any economic weakness or global
recession, including the current environment, may limit our ability to develop
and ultimately market our technologies. Any of these factors could cause our
stock price to decline and result in a loss of a portion or all of your
investment.





Our
research and development efforts may not result in commercially viable products
which could result in a decline of our stock price and a loss of your
investment.





Our
technologies are in the development stage. Further research and development
efforts will be required to develop these technologies and incorporate them in
products that can be submitted for and obtain the regulatory approvals and/or
compliance required to be commercially viable products. We may not succeed in
developing commercially viable products from our technologies. If we are not
successful in developing commercially viable products or, if such products
become commercially obsolete, our ability to generate revenues from our
technologies will be severely limited.  This could cause our stock
price to decline and result in the loss of a portion or all of your
investment.







18










The
price and trading volume of our common stock is subject to certain factors
beyond our control that may result in significant price and volume volatility,
which substantially increases the risk that you may not be able to sell your
shares at or above the price that you pay for the shares.




Factors
beyond our control, that may cause our share price to fluctuate significantly
include, but are not limited to, the following:





●
            the
      development of a future market for our products;●
            changes
      in market valuations of similar companies;●
            announcement
      by us or our competitors of significant contracts, acquisitions, strategic
      partnerships, joint ventures or capital commitments;●
            additions
      or departures of key personnel; and●
            fluctuations
      in stock market price and volume.





Additionally,
in recent years the stock market in general, and the Over-the-Counter Bulletin
Board (the "OTCBB") and technology stocks in particular, have experienced
extreme price and volume fluctuations. In some cases these fluctuations are
unrelated or disproportionate to the operating performance of the underlying
company. These market and industry factors may materially and adversely affect
our stock price regardless of our operating performance. The historical trading
of our common stock is not necessarily an indicator of how it will trade in the
future and our trading price as of the date of this prospectus is not
necessarily an indicator of what the trading price of our common stock might be
in the future.





The
average daily trading volume in 2009 was approximately 23.000 shares per day and
high and low sales in 2009 were $1.90 and $0.37 per share
respectively.





In the
past, class action litigation has often been brought against companies following
periods of volatility in the market price of those companies' common stock. If
we become involved in this type of litigation in the future it could result in
substantial costs and diversion of management attention and resources, which
could have a further negative effect on your investment in our
stock.





Our
issuance of common stock at a price below prevailing trading prices at the time
of issuance may cause our stock price to decline.





As of
December 31, 2009 there were outstanding 19,355 shares of Convertible Preferred
Stock that is convertible into 19,355,000 shares of common stock, 1,575,000
restricted stock units (RSUs) convertible into 1,575,000 shares of common stock,
warrants to purchase an aggregate of 11,247,000 shares of common stock with a
weighted average exercise price of $1.08 per share and 8,770,000 options to
purchase common stock with a weighted average exercise price of $0.62 per
share.  These, as well as those we may issue in the future, may
result in shares of common stock being issued for consideration that is less
than the trading price of our common stock at the time the shares are
issued.  We may also issue shares of common stock in the future at a
discount to the trading price of our common stock.  Any such below
market issuances, or the potential for such issuances, could cause our stock
price to decline.  Moreover, if investors holding a significant number
of these shares decided to sell them in a short period of time, such sales could
contribute significant downward pressure on the trading price of our
stock.





Our
issuance of shares of preferred stock, warrants, RSUs and stock options may have
a negative effect on the trading price of our common stock.





We
currently have a large number of shares of preferred stock, RSUs, stock options
and warrants outstanding.  The conversion and exercise of these shares
of preferred stock, RSUs, stock options and warrants could cause significant
dilution to our stockholders.  Moreover, we intend to continue to
minimize our use of cash for consulting services by granting stock options and
warrants to consultants at or below the current market price, which will cause
additional dilution to our stockholders.  In addition to the potential
dilutive effect of issuing a large number of stock options and warrants, there
is the potential that a large number of the shares may be sold in the public
market at any given time, which could place additional downward pressure on the
trading price of our common stock.





There
is no assurance of an established public trading market, which would adversely
affect the ability of investors in our company to sell their securities in the
public markets.





Although
our common stock trades on the OTCBB, a regular trading market for our common
stock may not be sustained in the future. The National Association of Securities
Dealers (the “NASD”) limits quotation on the OTCBB to securities of issuers that
are current in their reports filed with the SEC. If we fail to be current in the
filing of our reports with the SEC, our common stock will not be able to be
traded on the OTCBB.  The OTCBB is an inter-dealer market that
provides significantly less liquidity than a national securities exchange or
automated quotation system. Quotes for stocks included on the OTCBB are not
listed in the financial sections of newspapers as are those for stocks listed on
national securities exchanges or automated quotation systems. Therefore, prices
for securities traded solely on the OTCBB may be difficult to obtain and holders
of common stock may be unable to resell their securities at or near their
original offering price or at any price.








19










Market
prices for our common stock may be influenced by a number of factors,
including:





●
            the
      issuance of new equity securities;●
            changes
      in interest rates;●
            competitive
      developments, including announcements by competitors of new products or
      services or significant contracts, acquisitions, strategic partnerships,
      joint ventures or capital commitments;●
            variations
      in quarterly operating results;●
            change
      in financial estimates by securities analysts;●
            the
      depth and liquidity of the market for our common stock;●
            investor
      perceptions of our company and the technologies industries generally;
      and●
            general
      economic and other national
conditions.





Our
limited prior public market and trading market may cause volatility in the
market price of our common stock.





Our
common stock is currently traded on a limited basis on the OTCBB.  The
quotation of our common stock on the OTCBB does not assure that a meaningful,
consistent and liquid trading market currently exists, and in recent years such
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many smaller companies like us. Our
common stock is thus subject to volatility. In the absence of an active trading
market:





●
            investors
      may have difficulty buying and selling or obtaining market
      quotations;●
            market
      visibility for our common stock may be limited; and●
            lack
      of visibility for our common stock may have a depressive effect on the
      market for our common stock.





Our
common stock is a "penny stock."





Our
common stock is a "penny stock" under Section 15(g) of the Exchange Act. Our
common stock: (i) trades at a price less than $5.00 per share; (ii) is not
traded on a "recognized" national exchange; (iii) is not quoted on The NASDAQ
Stock Market; and (iv) is issued by a company with net tangible assets less than
$2,000,000, if in business more than a continuous three years, or with average
revenues of less than $6,000,000 for the past three years. The principal result
or effect of being designated a "penny stock" is that securities broker-dealers
cannot recommend our common stock but can only trade in it on an unsolicited
basis.





Resale
restrictions on transferring “penny stocks” are sometimes imposed by some
states, which may make transactions in our common stock more difficult and may
reduce the value of the investment. Various state securities laws impose
restrictions on transferring “penny stocks” and as a result, investors in our
common stock may have the ability to sell their shares of our common stock
impaired. Certain foreign countries also impose limitations and restrictions on
the ability of their citizens to own stock that is not traded on a recognized
exchange, which, in certain instances, does not include the OTCBB.





Broker-dealer
requirements may affect trading and liquidity.





Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the SEC require broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of
penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account.










20










Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.





Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of our restricted stock in the
public marketplace could reduce the price of our common stock.





From time
to time, certain of our stockholders may be eligible to sell their shares of
common stock by means of ordinary brokerage transactions in the open market
pursuant to Rule 144 of the Securities Act (“Rule 144”), subject to certain
requirements.  In general, under Rule 144, unaffiliated stockholders
(or stockholders whose shares are aggregated) who have satisfied a six month
holding period may sell shares of our common stock, so long as we have filed all
required reports under Section 13 or 15(d) of the Exchange Act during the
12-month period preceding such sale.  Once a period of six months has
elapsed since the date the common stock was acquired from us or from an
affiliate of ours, unaffiliated stockholders can freely sell shares of our
common stock.  12 months after acquiring shares from us or an
affiliate, unaffiliated stockholders can freely sell their shares without any
restriction or requirement that we are current in our SEC filings.  
Any substantial sale of common stock pursuant to Rule 144 may have an adverse
affect on the market price of our common stock.





Failure
to achieve and maintain internal controls in accordance with Sections 302 and
404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on
our business and stock price.





We are
examining and evaluating our internal control procedures to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act, as required for our
Annual Report on Form 10-K for the year ending December 31, 2009. If we fail to
maintain adequate internal controls or fail to implement required new or
improved controls, as such control standards are modified, supplemented or
amended from time to time; we may not be able to assert that we can conclude on
an ongoing basis that we have effective internal controls over financial
reporting. Effective internal controls are necessary for us to produce reliable
financial reports and are important in the prevention of financial
fraud.  If we cannot produce reliable financial reports or prevent
fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and there could be a material
adverse effect on our stock price.





Lawsuits
and legal proceedings.





From time
to time, we may become involved in various lawsuits, disputes and claims
(“Actions”), arising in the ordinary course of business.  These
Actions may raise complex factual and legal issues and are subject to
uncertainties.  Actions filed against us could include product
liability, commercial, intellectual property, customer, employment and
securities related claims, including class action
lawsuits.  Plaintiffs in some Actions may seek unspecified damages or
injunctive relief, or both.  Adverse results in Actions may harm our
business and have material adverse effects on our business, results of
operations, liquidity or financial position any or all of which could adversely
affect our stock price.





Item
1B.  Unresolved Staff Comments.





Not
applicable.







21










Item
2.  Properties.





Our
principal executive offices are located at 2350 Mission College Boulevard, Suite
1175, Santa Clara, California, 95054, and consist of 2,000 square feet of
space.  We entered into a 38-month lease for this facility, which
commenced in March 2008, with an average cost of approximately $5,800 per month.
We also lease approximately 900 square feet of space in Princeton New Jersey in
a ‘suites’ environment.  This is a renewable lease effective October
1, 2009 at a cost of $5,200 per month. In addition, we work with a research team
in Belgrade and reimburse them for space at an approximate cost of $500 per
month. We believe that our properties are adequate for our current and
immediately foreseeable operating needs. We do not have any policies regarding
investments in real estate, securities or other forms of property.





Item
3.  Legal Proceedings.





None.





Item
4.  Submission of Matters to a Vote of Security Holders.





Not
applicable.







22








PART
II





Item
5.  Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.





Our
common stock is traded on the OTCBB under the trading symbol
"NWCI.OB."  Trading commenced in our stock on January 4,
2008.  The following table sets forth, for the period indicated, the
range of the high and low sales prices of our common stock, as reported by the
OTCBB.  The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions.





Year
      Ended December 31,
            
            
            First
      (1)
            
            
            Second
            
            
            Third
            
            
            Fourth2009
            High
            
            $
            1.90
            
            
            $
            1.01
            
            
            $
            1.49
            
            
            $
            1.05Low
            
            
            0.52
            
            
            
            0.55
            
            
            
            0.65
            
            
            
            0.372008
            High
            
            $
            2.42
            
            
            $
            3.89
            
            
            $
            5.08
            
            
            $
            2.59Low
            
            
            1.20
            
            
            
            1.81
            
            
            
            1.81
            
            
            
            0.70


(1) First
Quarter, 2008 is from January 4 - March 31





There
were approximately 78 holders of record of our common stock as of February
23, 2010.





We have
never declared or paid cash dividends on our common stock and do not expect to
pay any dividends on our common stock in the foreseeable future. We currently
intend to retain any future earnings for our business. The payment of any future
dividends on our common stock will be determined by our Board of Directors and
will depend on business conditions, our financial earnings and other
factors.





Recent
Issuances Involving Unregistered Securities





During
the three-month period ended December 31, 2009, we have issued the following
securities that were not registered under the Securities Act of 1933, as
amended:





In October, November and December of
2009, the Company issued a total of 90,000 shares of its common stock in
connection with the exercise of 101,524 warrants to purchase the Company’s
common stock at $0.10 per share.  The warrants were exercised on a
cashless basis.





In
December 2009, we issued 265,000 shares of our common stock, valued at $196,000,
to consultants involved in our investor relations aftermarket
programs.







23










Item
6.  Selected Financial Data.





Not
applicable.





Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.





The
following management’s discussion and analysis of financial condition and
results of operations (“MD&A”) should be read in conjunction with the
restatement of our consolidated financial statements and notes thereto which
appear elsewhere in this Annual Report on Form 10-K.





This
MD&A contains forward-looking statements regarding our business
development plans, clinical trials, regulatory reviews, timing, strategies,
expectations, anticipated expenses 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 this Form 10-K and relate
to our business plan, our business strategy, development of our proprietary
technology platform and our products, timing of such development, timing and
results of clinical trials, level and timing of FDA regulatory clearance or
review, market acceptance of our products, protection of our intellectual
property, implementation of our strategic, operating and people initiatives,
benefits to be derived from personnel and directors, ability to commercialize
our products, our assumptions regarding cash flow from operations and cash
on-hand, the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and infrastructure,
implementation of marketing programs, our key agreements and strategic
alliances, our ability to obtain additional capital as, and when, needed,
and on acceptable terms and general economic conditions specific to our
industry, any of which could impact sales, costs and expenses and/or planned
strategies and timing.  If we are not able to generate sufficient
liquidity from operations or raise sufficient additional capital, this could
have a material adverse affect on our business, results of operations, liquidity
and financial condition. We assume no obligation to, and do not currently
intend to, update these forward-looking statements.





This
MD&A should also be read in conjunction with the Item 1.A. “Risk
Factors.”











24










Financial
Condition and Results of Operations








Year ended December 31,2009
            
            
            2008
            
            
            Change
            
            
            % changeOperating
      expenses:Selling,
      general and administrative
            
            $
            6,904,521
            
            
            $
            5,684,723
            
            
            $
            1,219,798
            
            
            
            21
            %Depreciation
            
            
            59,833
            
            
            
            18,614
            
            
            
            41,219
            
            
            
            221
            %Research
      and development
            
            
            3,047,994
            
            
            
            2,126,084
            
            
            
            921,910
            
            
            
            43
            %Total
      operating expenses
            
            
            10,012,348
            
            
            
            7,829,421
            
            
            
            2,182,927
            
            
            
            28
            %Net
      loss from operations
            
            
            (10,012,348
            )
            
            
            ( 7,829,421
            )
            
            
            2,182,927
            
            
            
            28
            %Other
      income (expense)Gain
      (loss) on change in fair value of warrant liability and reset
      derivative
            
            
            907,866
            
            
            
            (5,012,875
            )
            
            
            5,920,741
            
            
            
            (118
            %)Financing
      costs
            
            
            (512,330
            )
            
            
            (1,495,044
            )
            
            
            982,714
            
            
            
            (66
            %)Interest
            
            
            26,199
            
            
            
            155,701
            
            
            
            (129,502
            )
            
            
            (83
            %)Net
      loss before income taxes
            
            
            (9,590,613
            )
            
            
            (14,181,639
            )
            
            
            4,591,026
            
            
            
            (32
            %)Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %Net
      loss
            
            
            (9,590,613
            )
            
            
            (14,181,639
            )
            
            
            4,591,026
            
            
            
            (32
            %)Preferred
      stock dividend
            
            
            (784,010
            )
            
            
            (754,328
            )
            
            
            (29,682
            )
            
            
            4
            %Net
      loss attributable to common shareholders
            
            $
            (10,374,623
            )
            
            $
            (14,935,967
            )
            
            $
            4,561,344
            
            
            
            (31
            %)





Selected
results of operations for the years ended December 31, 2009 and 2008 were as
follows:





We
continue to operate as a development stage company and, as such, we have limited
capital and limited capital resources and no revenues. As of December 31,
2009 we have $1.4 million in cash, the balance remaining from the financing we
completed in September 2009. We may supplement these funds with a $3 million
working capital credit facility that is available to us through August
2010. Any monies borrowed hereunder would be due and payable May 31,
2011.








25




In 2009,
we spent $5.65 million in operating activities, an increase of 20% from $4.69
million in 2008. We hired our initial commercialization team in the second half
of 2008 and have a full year of these expenses in 2009. Spending has been steady
over the 12 months of 2009.  In 2009 we released our first product,
QTinno, in August, signed three master service agreements, and are working with
our customers to obtain our first cardiac safety drug studies.





While we
expect significant gross profit margins selling software as a service, at this
time we continue as a development stage company, and as a result, have limited
capital and capital resources.  As we have not generated any revenues
from operations since our inception, we have not been able to meet our needs for
cash by generating cash.  If we are not successful in generating
sufficient liquidity from operations so as to become cash flow positive, or in
raising sufficient capital resources on terms acceptable to us, this could have
a material adverse affect on our business, results of operations, liquidity and
financial condition.





Selling,
general and administrative expenses increased 21% to $6.9 million at December
31, 2009 from $5.7 million at December 31, 2008, an increase of $1.2 million.
The primary components include:





·
            We
      began building a commercialization team in mid-2008 and invested $0.5
      million (plus stock-based compensation) in 2008 in that effort, increasing
      the spending by $1.0 million to $1.5 million in 2009 (plus stock-based
      compensation).  In 2009 we completed the standard software
      development quality control systems, defined under 21CFR11 guidelines, for
      QTinno, and successfully completed quality control audits by our first
      customers.  The product is ready for use on the first cardiac safety
      study as part of a drug trial that our customers are currently bidding on
      to manage for their pharmaceutical
customers.


·
            The
      general and administrative payroll levels remained steady and with the
      planned bonus levels for 2009 payable at a reduced level and in restricted
      stock units (non-cash), this payroll expense declined 22% or $0.21 million
      to $0.74 million in 2009 from $0.95 million in 2008. We hired a Chief
      Financial Officer in January 2008 and have not otherwise increased staff
      to date.


·
            Professional
      fees, including accounting, legal and investor relations decreased $0.7
      million to $0.8 million in 2009 from $1.5 million in 2008. We incurred the
      upfront costs of becoming a publicly traded company entering
      2008.  Many of the ongoing consulting costs in this area have a
      significant stock-based compensation element minimizing the cash outlay in
      these efforts.


·
            Selling,
      general and administrative stock-based compensation increased by $1.2
      million to $3.5 million in 2009 from $2.3 million in
  2008.





Research
and development expenses increased 43% to $3.0 million at December 31,
2009, an increase of $0.9 million from $2.1 million in 2008.  The
primary components include:





·
            We
      hired a Chief Technical Officer and Chief Medical Officer during 2008, and
      added a software director at the beginning of 2009.  Total
      payroll was $0.7 million in 2009, an increase of $0.4 million from $0.3
      million in 2008.


·
            Stock
      based compensation was $1.4 million in 2009, an increase of $0.5 million
      from $0.9 million in 2008.





Our
primary focus in 2010 will the continued and expanded commercialization in the
cardiac safety diagnostic market, and is expected to include enhancement
releases for QTinno. We also plan to release a next generation CardioBip that,
in addition to a redesign and enhanced features such as Bluetooth, will be
available for clinical trials leading the submission of an FDA 501(k) currently
planned for 2011.  We may also move forward to CE Mark CardioBip in
Europe. We continue to develop and refine the work on Cardio3KG as
well.





We
have historically relied on the services of consultants in addition to our
employees. We currently have ten full-time employees and approximately 15
consultants providing technical and clinical support.  We anticipate
that it may become desirable to add additional full- and/or part-time employees
and/or consultants to discharge certain critical functions during the next 12
months.  In order for us to attract and retain quality personnel, we
anticipate we will have to offer them competitive salaries.  This
projected increase in personnel could impact the speed at which we spend our
current cash reserves and our ability and timing in bringing products through
the research and development and commercialization stages.  While to
some degree we can manage our growth and control the level of new investment, as
we continue to expand, we will incur additional costs for
personnel.











26











We have
historically relied on the issuance of stock-based compensation, including
options, share grants and restriction stock units (RSUs) to both our employees
and outside consultants in exchange for services. Our management enters into
equity compensation agreements with non-employees, if it is in our best
interest, under terms and conditions consistent with the requirements of ASC
718-10. In order to conserve our limited operating capital resources, we
anticipate continuing to compensate certain non-employees for services using
stock-based compensation or a combination of cash and stock-based compensation
during the next 12 months. Further, stock-based compensation will continue to be
a key element of employee compensation. All of this is expected to have a
material effect on our results of operations during the next 12
months.





Financing
costs decreased $1.0 million or 66% to $0.5 million for the year ended December
31, 2009 from $1.5 million in 2008. We incurred $1.5 million in financing costs
related to the restructuring of the Preferred ‘A’ stock in December 2008.
Approximately $1.4 million of this is non-cash. The financing cost in 2009 of
$0.5 million is related to (1) establishing the July 2009 credit facility and
(2) the September 2009 private placement of Series “C” Preferred stock and
warrants.




Interest
income of $26,000 declined $130,000 or 83% for the year ended December 31, 2009
from interest of $156,000 in 2008.  We are a development stage company
and have been using the proceeds from our equity financings to fund operations.
Interest income is primarily a result of the investment interest income on the
net proceeds of the $8.2 million private placement financing that closed
December 2007, as well as the two smaller follow-on financings in December 2008
and September 2009.





Gain
(loss) on change in fair value of warrant liability and reset derivative is
comprised of different elements between years.  In 2009 we established
both a warrant liability and reset derivative related to the September 2009
Series C Preferred stock and related warrant financing of $2.9 million, and then
marked the value of the liabilities to market quarterly, resulting in a non-cash
net gain of $0.9 million in 2009 due primarily to changes in the market value of
our common stock during the period. In 2008 the expense is due to the warrants
issued in the December 2007 financing. The $5.0 million loss on change in fair
value of the warrant liability is the non-cash adjustment recognized during 2008
up to the December 2008 restructuring. We marked the value of the warrants to
market during 2008 and, at the then current market prices of our common stock,
the value and, thus, warrant expense increased substantially. There was no
warrant liability at December 31, 2008 due to the restructuring of the Preferred
A stock and related warrants in December 2008, whereby the balance met the
criteria and were classified as equity as part of this
restructuring.





The
preferred stock dividend in 2009 is the non-cash value attributable to the
Preferred C stock financing of September 2009. In 2008 it is the 10% dividend on
the Preferred A shares that was earned prior to the December 2008 restructuring
and was paid in NewCardio common stock.





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:





Accounting
for Stock-Based Compensation





We
account for our 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 options and warrants and we expect to record
additional non-cash compensation expense in the future.





Accounting for and Classifying
Series A Stock





At
December 31, 2007 until December 1, 2008 we may have been required to redeem the
Series A shares for cash in an amount equal to the stated value of the Series A
shares, plus accrued and unpaid dividends, upon the occurrence of certain
events. As the Series A shares redemption requirement may be triggered by events
that were outside of our control, in accordance with ASC 480-10, Classification
and Measurement of Redeemable Securities, we recorded the fair value of the
Series A shares outside of common shareholders’ equity in the consolidated
balance sheet. On December 1, 2008 as a result of the restructure, the Series A
Stock was entirely converted without triggering this event and the liability was
eliminated.








27





Accounting
for Classifying Series C Stock





In
September 2009, we issued 2,920 shares of our Series C Convertible Preferred
Stock which contains certain reset and possible redemption provisions which
require it to be classified as a liability in the balance sheet and is stated 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”),the Company is 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.  Each reporting period, we are required to
mark to market the reset provision.





Accounting
for and Classifying Warrants




At December 31, 2007 until December 1,
2008, the warrants we issued to the investors in the December 2007 private
placement contained a “fundamental transaction” clause that if, while the
warrants are outstanding, we effect a merger or consolidation, or similar
transactions as defined in the warrants, and the warrant holders could demand
net cash settlement. As the warrants contain a provision that could require cash
settlement, pursuant to Accounting Standards Codification subtopic 815-40,
Derivatives and Hedging; Contracts in Entity’s Own Equity (“ASC 815-40”), the
warrants were recorded as a derivative liability and valued at fair market value
until we meet the criteria under ASC 815-40 for permanent equity. The net value
of the warrants at the date of issuance was recorded as a warrant liability on
the balance sheet in 2007 and reduced the value of the shares of Series A Stock
subject to redemption. Subsequent to the initial issuance date, we are required
to adjust, and have been adjusting, the warrants to fair value through current
period operations. We made a final adjustment to fair value at December 1, 2008
when the warrants were exercised, settled or amended. The Series J and Series
J-Warrants were exercised and converted on December 1, 2008 and the Series A
Warrants were amended so that all warrants meet the ASC 815-40 criteria for
permanent equity and the liability has been eliminated. At December 31, 2008
there is no warrant liability.




In
September 2009, we issued 2,920,000 warrants in connection with the issuance of
our Series C Stock that contain 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.





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 considered
the principal or most advantageous market in which we would transact and
considered 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.









28







We
adopted the provisions of ASC 825-10 prospectively effective as of the beginning
of Fiscal 2008 with certain additional provision adopted prospectively as of the
beginning of Fiscal 2009.  The adoption of ASC 825-10 did not have a
material impact on our consolidated financial position or results of
operations.




The fair
value of the assets, short term investments, at December 31, 2009 was grouped as
Level 1 valuation as the market price was readily available, and there has been
no change to the fair value of the securities at December 31, 2009.





Level 3
Liabilities comprised of our bifurcated reset provision contained within our
Series C stock and the fair value of issued warrants with reset
provisions.





Inflation





Our
opinion is that inflation has not had, and is not expected to have, a material
effect on our operations.





Climate
Change




Our
opinion is that neither climate change, nor governmental regulations
related to climate change, have had, or are expected to have, any
material effect on our operations.





Liquidity
and Capital Resources





As a
development stage company, we have limited capital and limited capital
resources.  We have incurred a net loss of $28.1 million from our
inception in September 2004 through December 31, 2009 of which $11.6 million
represents cash used in operating activities.




As of
December 31, 2009, we had $1.4 million in cash, the balance remaining from the
financing we completed in September 2009. We may supplement these funds
with the funds available under our $3 million credit facility that is
available to us through June 2010. Any monies borrowed hereunder would be
due and payable May 31, 2011.  Under certain circumstances, the $2.9
million Preferred C financing in September 2009 may also convert to the terms of
the credit facility, at which time it would add to the amounts owing at May 31,
2011. Additionally there is an $800,000 put option expiring June 30. 2010; it
will expire if we have raised an additional $2.1 million in cash before June 30,
2010 or if it not exercised within 30 days of June 30, 2010. The put requires
the investor to return 1.9 million shares, allowing us to reacquire these shares
for a value of approximately $0.39 per share, net of unpaid transaction costs of
$56,000.




We
believe that we will continue to incur net losses and negative cash flow from
operating activities into 2011. We have met our cash requirements to date
through the private placement of common stock, the exercise of stock options,
the private placement of preferred stock and the issuance of convertible
notes.  We have raised a net amount of approximately $13 million since
inception, most of which was raised in our December 2007 private placement and
related 2008 warrant exercises as well as the September 2009 Series C Preferred
Stock financing.    We believe we have resources to
sufficiently fund our operations and business plan for most, if not all of
2010.








29








Until we
are able to generate sufficient liquidity from operations, we intend to continue
to fund operations from cash on-hand, through private debt or equity placements
of our securities. Our continued operations will depend on whether we are able
to generate sufficient liquidity from operations and/or raise additional capital
through such sources as equity and debt financings, collaborative and licensing
agreements and strategic alliances. There can be no assurance that additional
capital will become available or, if it does, that it will become available on
acceptable terms, or that any additional capital we may obtain will be
sufficient to meet our long-term needs. We currently have no commitments for any
additional capital beyond the working capital credit facility.





We may
experience fluctuations in operating results in future periods due to a variety
of factors, including our ability to obtain additional financing in a timely
manner and on terms favorable to us, our ability to successfully develop our
business model, the amount and timing of operating costs and capital
expenditures relating to the expansion of our business, operations and
infrastructure and the implementation of marketing programs, key agreements, and
strategic alliances, and general economic conditions as well as those specific
to our industry.





Due to
our brief history and historical operating losses, our operations have not been
a source of working capital. We will need to obtain additional capital in order
to continue and expand operations until we become profitable. This may include
the issuance of equity or debt securities, obtaining credit facilities, or other
business (e.g. licensing) or financing mechanisms. There can be no assurance
that we will be successful in obtaining additional funding.





We have
begun to formally explore strategic relationships, to provide capital and other
resources for the further development and marketing of our products, with a
primary focus on our 3-D software technology platform, and specifically our
products under development, CardioBip for cardiac monitoring applications and
Cardio3KG for the urgent care market. Though we contemplate that a strategic
relationship could involve a significant equity investment by the other party,
the structure of any potential strategic relationship as yet has not been
defined. The potential strategic partners that we will be approaching may have
products and sell into markets that compete with some of our products and
markets, so it is possible and even likely that we may enter into more than one
strategic relationship to help fund the development and marketing of our
products.





With the
volatility in the recent trading price of our common stock and in the U.S.
financial markets, it could be difficult to obtain additional investment or
financing, strategic or otherwise. Even if we are able to raise the funds
required, it is possible that we could incur unexpected costs and expenses, fail
to collect significant amounts owed to us, or experience unexpected cash
requirements that would force us to seek additional financing. Further, if we
issue additional equity or debt securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our common stock.
Non-strategic investments, if priced below the $1.00 per common share pricing
defined in the September 2009 financing on or before September 15, 2010 may
trigger dilutive reset features in the Series C Preferred Stock and related
warrants. 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 February 23, 2010, that we have incurred operating losses in the last two
years, and that we are dependent upon management's ability to develop profitable
operations. These factors among others may raise substantial doubt about our
ability to continue as a going concern.













30













Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.





Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk.





Not
Applicable.





Item
8.  Financial Statements and Supplementary Data.





The
consolidated financial statements of NewCardio and NewCardio Technologies,
including the notes thereto, together with the report thereon of RBSM LLP is
presented beginning at page F-1.





Item
9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.





Not
applicable.





Item 9A.  Controls and
Procedures .





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (“Exchange Act”), as of December 31, 2009.
Disclosure controls and procedures are those controls and procedures designed to
provide reasonable assurance that the information required to be disclosed in
our Exchange Act filings is (1) recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission’s rules
and forms, and (2) accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.





Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31 2009, our disclosure controls and procedures
were effective.





Management’s Annual Report on
Internal Control over Financial Reporting





Management,
including our Chief Executive Officer and Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a –
15(f).  Management conducted an assessment as of December 31, 2009 of
the effectiveness of our internal control over financial reporting based on the
framework in Internal Control
– Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).  Based on that
evaluation, management concluded that our internal control over financial
reporting was effective as of December 31, 2009, based on criteria in Internal Control – Integrated
Framework issued by the COSO.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements should they occur. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the control procedure may deteriorate.











31










This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this Annual
Report.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





Item
9B.  Other Information.





Not
applicable.








32








PART
III





Item
10.  Directors, Executive Offices and Corporate
Governance.





Directors
and Executive Officers





The
following table and text sets forth the names and ages of all our directors and
executive officers and our key management personnel as of February 12,
2010.  All of our directors serve until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. Executive officers
serve at the discretion of the Board of Directors, and are elected or appointed
to serve until the next Board of Directors meeting following the annual meeting
of stockholders.  Also provided is a brief description of the business
experience of each director and executive officer and the key management
personnel during the past five years and an indication of directorships held by
each director in other companies subject to the reporting requirements under the
Federal securities laws.





Name of Individual
            
            Age
            
            Position with company and subsidiaries
            
            Director or
              officer sinceBranislav
      Vajdic, Ph.D.*
            
            56
            
            Chief
      Executive Officer and Director
            
            2004Vincent
      W. Renz, Jr.
            
            53
            
            President
      and Chief Operating Officer
            
            2008Mark
      W. Kroll, Ph.D., FACC, FHRS
            
            57
            
            Chairman
      of the Board of Directors
            
            2008Robert
      N. Blair, M. Inst. P.*
            
            67
            
            Director
            
            2006James
      A. Heisch
            
            66
            
            Director
            
            2008Jess
      Jones, M.D.
            
            31
            
            Director
            
            2008Patrick
      Maguire, M.D., Ph.D.
            
            56
            
            Director
            
            2008Michael
      Hanson
            
            62
            
            Director
            
            2009Richard
      D. Brounstein
            
            60
            
            Executive
      Vice President, Chief  Financial Officer and
      Secretary
            
            2008





* Has
been an officer or director of NewCardio Technologies, prior to the December
2007 reverse merger with Marine Park Holdings, Inc.





Branislav Vajdic, Ph.D. -
Chief Executive Officer and Director.  Dr. Vajdic is the founding
stockholder of NewCardio Technologies.  He served as President and
Chief Executive Officer of NewCardio Technologies from October 2006, until
August 18, 2008, when he relinquished the title of President.  Prior
to October 2006, Dr. Vajdic was employed for 22 years at Intel. At Intel he held
various senior product development management positions. At Intel, he directed
Pentium microprocessor and flash memory development teams, and was the inventor
on several key flash memory design patents held by Intel. He holds a Ph.D. in
electrical engineering from the University of Minnesota.





Vincent W. Renz, Jr. –
President and Chief Operating Officer since August 18, 2008. From October 2007
through mid-August 2008, Mr. Renz was the Chief Operating Officer at ClinPhone,
a United Kingdom-based clinical trial technology company recently acquired by
Parexel.  From May 1997 through February 2007 Mr. Renz was the
Executive Vice President and Chief Technology Officer at eResearch Technology,
Inc., provider of technology-based products and services to the pharmaceutical,
biotechnology and medical device industries.  Mr. Renz holds a M.B.A.
in Management Information Systems from Indiana University and a B.B.A. in
Information Systems from University of Notre Dame.





Mark W. Kroll, Ph.D., FACC, FHRS
- Chairman of the Board of Directors.  Dr. Kroll became a
member of our Board and Chairman of the Board of Directors on March 18,
2008.  Dr. Kroll is the named inventor on over 300 U.S. patents as
well as numerous international patents and is the most prolific inventor of
medical devices worldwide.  He is co-author of 4 books: Implantable
Cardioverter Defibrillator Therapy, Cardiac Bioelectric Therapy, Conducted
Electrical Weapons, and Electrical Injuries as well as numerous
papers..  Dr. Kroll most recently served as the Senior Vice President
and Chief Technology Officer for the Cardiac Rhythm Management division of St.
Jude Medical Inc.  Prior to that, he served as Vice President of the
Tachycardia Business division and in various senior executive roles within St.
Jude from 1995 through his retirement in 2005. Dr. Kroll, has been named a
Fellow of both the American College of Cardiology and the Heart Rhythm Society,
and holds the positions of Adjunct Full Professor of Biomedical Engineering at
California Polytechnic University-San Luis Obispo, California, and Adjunct Full
Professor of Biomedical Engineering at the University of Minnesota. Dr. Kroll is
also a director of Haemonetics Corporation and Taser International,
Inc.








33










Robert N. Blair, Member of the
Institute of Physics (M.Inst.P.) - Director.  Mr. Blair served
as a member of the Board of Directors of NewCardio Technologies from its
inception in September 2004 through August 2005 and again since July
2006.  He was appointed Chairman of the Board of Directors in July
2006.  Mr. Blair was Chairman of the Board of Directors until his
successor Dr. Kroll, Ph.D. was appointed on March 18, 2008.  Mr. Blair
has over 35 years of high technology business experience. Most recently, in 2007
he served as the Chairman and Chief Executive Officer of Mobi33, Inc., a private
internet based advertising company that he co-founded in 2007. From 1999 through
2006 he was the Chairman and Chief Executive Officer of VivoMedical Inc., a
private medical device company, which he also co-founded. He served as the Chief
Executive Officer and director of Crosspoint Solutions Inc. from 1995 through
1996. Mr. Blair served as the Chief Executive Officer and director of LSI Logic
Europe PLC from 1984 until 1989. Mr. Blair has degrees in Applied Physics from
the Anglia Ruskin University in the United Kingdom and from The London Institute
of Physics in the United Kingdom.





James A. Heisch –
Director.  Mr. Heisch became a member of our Board of Directors on May
14, 2008.  Mr. Heisch has more than 40 years of senior level business
experience including 17 years with Arthur Young & Company where he was an
audit partner, and later as the Chief Financial Officer for technology companies
including Atari, Businessland and Supermac Technology. Additionally, Mr. Heisch
served five years with medical device company VidaMed, Inc., initially as CFO
managing all financial and administrative functions in the United States and
United Kingdom, and then as President and CEO responsible for worldwide
operations. He later joined Worldtalk Corporation as CFO and later was promoted
to President. Worldtalk was subsequently acquired by Tumbleweed Communications
Corp. in 2000 and Mr. Heisch served as interim Chief Financial Officer during
2001.   During the past five years, Mr. Heisch has been a private
investor and served on the Board of Directors of Tumbleweed Communications, Inc.
from 2006 until it was acquired in 2008.





Jess Jones, M.D. – Director
since December 1, 2008.  Dr. Jones was designated by Vision
Opportunity Master Fund to service as a director, pursuant to the terms of the
2009 financing with Vision Opportunity Master Fund, Ltd. From 2006 to present
Dr. Jones has worked with Vision Capital Advisors, LLC as the Director of
Healthcare Investing, analyzing investment opportunities in the biotech,
pharmaceutical, medical technology, and medical services fields, and assisted
companies in the implementation of their business plans. From 2001 to 2007, Dr.
Jones attended Columbia College of Physicians & Surgeons, where he received
his medical degree in May 2007.  In 2005, while attending Columbia
Medical School, Dr. Jones was awarded an American Heart Association –Medical
Student Research Fellowship to study post-stroke inflammatory mediators in the
Department of Neurosurgery. Additionally, Dr. Jones earned a BA degree from the
University of Utah in 2001 and an MBA from Columbia Business School in May
2007.





Patrick Maguire, M.D., Ph.D. –
Director.  Dr. Maguire became a member of our Board of Directors on
March 18, 2008.  Dr. Maguire has served as Chief Executive Officer and
President of CyberHeart Inc. since 2006.  He joined CyberHeart
following the acquisition of the oncology assets of Targent Incorporated, where
Dr. Maguire served as President, Chief Executive Officer and director since
2002.  Dr. Maguire oversaw the in-licensing of three compounds and the
out-licensing of another, prior to the acquisition of the
company.  Prior to joining Targent, Dr. Maguire was Vice President of
Medical Affairs and Technology Development at VitaGen Incorporated, where he
oversaw the preparation of IND’s, NDA’s, and IDE’s and managed VitaGen’s
clinical trials in acute and chronic liver failure as well as medical and
industry collaborations. He is a cardiovascular and thoracic surgeon and has
acted as a principal investigator for medical devices and associated clinical
trials. Dr. Maguire is a fellow of the American and Royal College of Surgeons
and a member of more than 20 medical, academic and business
societies.  Dr. Maguire received an AB degree from Wesleyan
University, an MD and PhD (Physiology and Biophysics) degrees from Georgetown
University and an MBA degree from Pepperdine University. He completed surgical
and cardiovascular fellowships at The Peter Bent Brigham Hospital, Harvard
University, and Stanford University.




Michael E. Hanson – Director.
Mr. Hanson is a founding partner of Barnard Life Sciences, a healthcare
consulting company founded in 2001. From 2004 to 2009, Mr. Hanson was a member
of the board of directors, compensation and audit committees, of Indevus
Pharmaceuticals, culminating with Indevus’ 2009 Definitive Merger Agreement with
Endo Pharmaceuticals Holdings, Inc. From 2002 to 2006, Mr. Hanson was a member
of the board of directors, compensation and audit committees, of GlycoGenesis,
an oncology-focused company. From 1998 to 2001, he was a member of the board of
directors, compensation and audit committees, of MGI Pharma, Inc., which was
later purchased by Eisai Pharmaceuticals. Mr. Hanson also serves on the board of
directors of Eleos, Inc., and is also a member of Pearl Street Ventures, a
venture capital firm that specializes in healthcare companies and Cardinal
Equity Partners, a private equity firm. Previously, Mr. Hanson spent 25 years in
positions of increasing responsibility at Eli Lilly and Co. His roles at Lilly
included sales, sales management, marketing and operations. He served as
President and General Manager of Eli Lilly Japan KK from 1989 to 1992. He
subsequently served as Vice President of Lilly Research Laboratories with
responsibilities for the Medical Department, a global organization responsible
for the clinical development of pipeline products from Phase 1 through Phase 4
post marketing support and compliance studies. He culminated his Lilly career as
President of the Internal Medicine Business Unit which included all
cardiovascular and oncology products and became a member of the Lilly Operations
Committee (the senior management group of the company at that time). Mr. Hanson
received a B.S. in Pharmacy from North Dakota State University and an M.S. in
Hospital Pharmacy Administration from the University of Minnesota, and attended
the Advanced Management Program at Harvard Business School.








34










Richard D. Brounstein –
Executive Vice President, Chief Financial Officer and Secretary.  Mr.
Brounstein became our principal financial officer and Secretary on a part-time
basis on January 23, 2008.  He took on his current role on a full-time
basis on March 1, 2008.  From June 2001 through November 2007, Mr.
Brounstein held several positions at Calypte Biomedical Corporation, a publicly
traded medical device company, including Chief Financial Officer and most
recently, Executive Vice President.   In January 2007, Mr.
Brounstein was appointed as the National Member Representative for Financial
Executives International (FEI) on the 2007 COSO Monitoring Project, which
published new guidelines for monitoring internal financial controls in February
2009.In March 2005, Mr. Brounstein was appointed to the SEC Advisory Committee
on Smaller Public Companies.  Mr. Brounstein earned his Certified
Public Accountant (CPA) certification while working at Arthur Andersen, formerly
a public accounting firm.  Mr. Brounstein holds a B.A. in Accounting
and an M.B.A. in Finance, both from Michigan State University.





The
Board of Directors and Its Committees





Our Board
of Directors directs the management of our business and affairs as provided by
Delaware law and conducts its business through meetings of the full board of
directors.  At December 31, 2009, our Board of Directors consisted of
seven directors, one was an independent Chairman of the Board of Directors and
four of the remaining six are independent directors.  By virtue of his
position as the CEO, Dr. Vajdic is not considered to be an independent
director.  The other Board member represents our largest Preferred
Series B investor. We have had three standing committees of our Board of
Directors since the first half of 2008, an audit committee, a compensation
committee and a corporate governance and nominating committee.  Each
of these three committees has adopted a charter that was approved by the entire
Board of Directors on August 11, 2008 and amended February 17, 2009, and only
independent directors serve on these committees.  The charters of
these three standing committees are filed herewith as Exhibits 5(a), (b) and
(c), respectively. The Audit Committee has an “audit committee financial expert”
within the meaning of Item 407 of Regulation S-K. The audit committee financial
expert is James A. Heisch, and he has been determined by the Board of Directors
to be independent according to the NASDAQ Stock Market LLC rules.





Actions
performed by our standing committees of the Board include the recent appointee
to the Board, executive compensation, the hiring of our independent public
accountants and the oversight of the independent auditor relationship, the
review of our significant accounting policies and our internal
controls.





There is
no established procedure for stockholder communications with members of the
Board or the entire Board.  However, stockholders may communicate with
our investor relations department and such communications are either responded
to immediately or are referred to the Chief Executive Officer or Chief Financial
Officer for response.





Board
Meetings; Committee Meetings; and Annual Meeting Attendance





During 2009, the Board of Directors
held 4 regular meetings in person and 8 special telephonic
meetings.  Each meeting was attended by all of the members of the
Board of Directors except one telephonic meeting.





During 2009, the Audit Committee held 4
meetings.  These meetings were attended by all members.





During 2009, the Compensation Committee
held 3 meetings.  These meetings were attended by all members.





During 2009, the Corporate Governance
and Nominating Committee held 2 meetings.  These meetings were
attended by all members.





No director failed to attend at least
75% of the meetings of the Board of Directors and 75% of the meetings of the
Board committees upon which he served as a member.  The Board of
Directors does not have a policy regarding director attendance at the annual
meeting.





Compensation
of the Members of the Board of Directors





Directors
who are also our employees do not receive additional compensation for serving on
the Board. Non-employee, independent directors are paid a director’s fee of
$1,500 for each meeting of the Board of Directors they attend in
person.  In addition, each such director receives a stock option
grant, pursuant to our 2004 Equity Incentive Plan or 2009 Equity Compensation
Plan, of 100,000 shares of our common stock, vesting in equal monthly increments
over 48 months.  The stock option is subject to full acceleration upon
a change of control transaction.  The Chairman of the Board receives a
stock option grant of 400,000 shares of our common stock, instead of the 100,000
shares granted to other members of our Board.  Additional stock option
grants will be granted to non-employee directors, other than the Chairman of the
Board, on an annual basis as compensation for their participation in committees
of the Board.  In addition, in April 2009 we re-priced all previous
granted stock options to $0.80, which was the market value at the
time.  We also granted restricted stock units, vesting in two years,
to all independent directors at this time. Directors received 25,000 RSUs each
and the Chairman 50,000. The RSUs are subject to 50% acceleration upon a change
of control transaction and the balance earlier than two years if ones services
as a Board member terminate.  All directors are reimbursed for their
reasonable expenses incurred in attending Board of Directors meetings. We
maintain directors and officers liability insurance.





On
December 21, 2009, the Board approved a grant of options for 15,000 shares of
common stock to Mr. Heisch, Mr. Blair and Dr. Maguire for their committee
services in 2009.  On May 12, 2009, Mr. Hanson received a 5,000 share
grant when joining the Board’s Audit Committee. Both the May and December
options are fully vested and have an exercise price of $0.80 per
share.





Limitation
on Liability and Indemnification of Directors and Officers





Our
certificate of incorporation provides that no director or officer shall have any
liability to the company if that person acted in good faith and with the same
degree of care and skill as a prudent person in similar
circumstances.





Our
certificate of incorporation and bylaws provide that we will indemnify our
directors and officers and may indemnify our employees or agents to the fullest
extent permitted by law against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices or
positions with us.  However, nothing in our certificate of
incorporation or bylaws protects or indemnifies a director, officer, employee or
agent against any liability to which that person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of that person’s office or
position.  To the extent that a director has been successful in
defense of any proceeding, the Delaware General Corporation Law provides that
the director shall be indemnified against reasonable expenses incurred in
connection with the proceeding.










35










Code
of Ethics





We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions because we just recently became subject to
this requirement on May 12, 2009.





Item
11.  Executive Compensation.





Summary
Compensation Table





The
following table sets forth all compensation we awarded or paid to all
individuals serving as our chief executive officer and those individuals who
received compensation in excess of $100,000 per year for the fiscal year ended
December 31, 2009 (collectively, the “Named Executives”). Summary compensation
is for the three fiscal years ended December 31, 2009.





SUMMARY
COMPENSATION TABLE





Name and Principal
              Position
            
            Year
            
            Salary
              ($)
            
            
            Bonus
              ($)
            
            
            Stock/RSU
              Awards
            
            
            Option
              awards
              ($)
            
            
            Total
              ($)(a)
            
            (b)
            
            (c)
            
            
            (d)
            
            
            (e)(1)
            
            
            (f)(1)
            
            
            (j)Branislav
      Vajdic, Chief
            
            2009
            
            $
            290,000
            
            
            $
            100,000
            
            
            $
            160,000
            
            
            $
            —
            
            
            $
            550,000Executive
      Officer, Director (2)
            
            2008
            
            $
            290,000
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            290,0002007
            
            $
            217,500
            
            
            $
            97,150
            
            
            $
            —
            
            
            $
            786,484
            
            
            $
            1,101,134Vincent
      Renz, President and
            
            2009
            
            $
            270,000
            
            
            $
            32,000
            
            
            $
            180,000
            
            
            $
            —
            
            
            $
            482,000President
      and
            
            2008
            
            $
            101,250
            
            
            $
            —
            
            
            $
            —
            
            
            $
            3,637,010
            
            
            $
            3,738,260Chief
      Operating Officer (3)
            
            2007
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Richard
      Brounstein,
            
            2009
            
            $
            240,000
            
            
            $
            30,000
            
            
            $
            100,000
            
            
            $
            —
            
            
            $
            370,000Executive
      Vice President and
            
            2008
            
            $
            212,903
            
            
            $
            7,500
            
            
            $
            —
            
            
            $
            1,139,569
            
            
            $
            1,359,972Chief
      Financial Officer (4)
            
            2007
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Ihor
      Gussak,
            
            2009
            
            $
            260,000
            
            
            $
            20,000
            
            
            $
            180,000
            
            
            $
            —
            
            
            $
            460,000Chief
      Medical Officer (5)
            
            2008
            
            $
            109,687
            
            
            $
            65,000
            
            
            $
            —
            
            
            $
            2,807,405
            
            
            $
            2,982,0922007
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Dorin
      Panescu,
            
            2009
            
            $
            260,000
            
            
            $
            16,600
            
            
            $
            240,000
            
            
            $
            —
            
            
            $
            516,600Chief
      Technical Officer (6)
            
            2008
            
            $
            70,143
            
            
            $
            —
            
            
            $
            18,500
            
            
            $
            1,247,961
            
            
            $
            1,336,6042007
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —


____________





(1)
            This
      is dollar amount reflects the full fair value of the grant at the date of
      issuance and is recognized for financial statement reporting purposes with
      respect to each fiscal year over the vesting terms in accordance with ASC
      718-10.  Dr. Vajdic was granted options to purchase 880,000
      shares of common stock at $0.02 per share pursuant to a consulting
      agreement we had with him dated March 1, 2007 and 1,000,000 at $0.22 per
      share pursuant to his employment agreement dated November 1,
      2007.  Mr. Renz was granted options to purchase 800,000 shares
      of common stock at $5.00 per share pursuant to his employment agreement
      dated August 18, 2008. Mr. Brounstein was granted options to purchase
      630,000 shares of common stock at $2.05 per share pursuant to his
      employment agreement dated March 1, 2008.  Dr. Gussak was
      granted options to purchase 700,000 shares of common stock at $4.30 per
      share pursuant to his employment agreement dated July 20,
      2008.  Dr. Panescu was granted options to purchase 700,000
      shares of common stock at $1.85 per share and a one-time stock award for
      10,000 shares pursuant to his employment agreement dated October 20,
      2008.On April 15, the Company granted Dr, Vajdic, Mr. Renz, Mr.
      Brounstein, Dr. Gussak and Dr. Panescu 200,000, 225,000, 125,000, 225,000
      and 300,000 in restricted stock awards, respectively.  In
      addition, on April 15, 2009, the Company re-priced previously granted
      options to Mr. Renz, Mr. Brounstein, Dr. Gussak and Dr. Panescu from
      initial exercise prices of $5.00, $2.05, $4.30 and $1.85 (respectively) to
      $0.80.  The change in re-pricing did not exceed the initial full
      fair value previously determined.











36








(2)
            Branislav
      Vajdic’s 2009 and 2008 salary is based on his November 1, 2007 employment
      agreement of $290,000 annually, and his performance-based bonus was
      determined by the Compensation Committee of the Board based on reaching
      certain milestones during the year, with a formula range of 0% to 50%.
      2007 salary includes the monthly salary of $12,000 he received from July
      1, 2007 through December 27, 2007, plus compensation he earned under his
      employment agreement with us dated November 1, 2007.  Under his
      employment agreement, Dr. Vajdic earned a mandatory bonus, which we have
      treated as salary (because he earned it in lieu of the annual salary of
      $290,000 he was entitled to under his employment agreement upon the
      closing of our December 27, 2007 PIPE financing).   Dr.
      Vajdic received a lump sum payment equal to $217,500, his annual salary
      prorated from April 1, 2007, minus the monthly salary he received from
      July 1, 2007.  Dr. Vajdic also received a performance-based
      bonus under his employment agreement based on reaching certain milestones
      enumerated in his employment agreement.  For 2007, the Board of
      Directors determined his bonus as a percentage of his base salary based on
      the formula set forth in his employment agreement.  His bonus
      equaled 33.5% of his base salary.  The 2007 bonus formula range
      was 0% to 37.5%.(3)
            Vincent
      Renz’s salary is based on his August 18, 2008 employment agreement of
      $270,000 annually, and his performance-based bonus was determined by the
      Compensation Committee of the Board based on reaching certain milestones
      during the year with a formula range of 0% to 45%. Both were pro-rated for
      actual time worked during 2008.(4)
            Richard
      Brounstein’s salary is based his March 1, 2008 employment agreement of
      $240,000 annually, and his performance-based bonus was determined by the
      Compensation Committee of the Board based on reaching certain milestones
      during the year, with a formula range of 0% to 25%. In 2008, he had a
      part-time employment agreement in effect for January and February of 2008
      and received a $7,500 signing bonus upon joining full time March 1,
      2008.  In 2008 the performance-based bonus was pro-rated for the
      period he was employed on a full-time
basis.(5)
            Ihor
      Gussak’s salary is based on his July 20, 2008 employment agreement of
      $260,000 annually, and his performance-based bonus was determined by the
      Compensation Committee of the Board based on reaching certain milestones
      during the year, with a formula range of 0% to 30%. The salary and
      performance-based bonus are pro-rated for actual time worked during 2008.
      In 2008 he also received a $65,000 signing bonus.(6)
            Dorin
      Pansecu’s salary is based on his October 20, 2008 employment agreement of
      $260,000 annually, and his 2008 performance-based bonus was determined by
      the Compensation Committee of the Board based on reaching certain
      milestones during the year, with a formula range of 0% to 35%. Both are
      pro-rated for actual time worked during 2008. In 2008 he also received a
      signing bonus of 10,000 shares of common
stock.











37








OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END





The
following table sets forth information concerning equity awards granted to the
Named Executive Officers that are outstanding at December 31, 2009.




OPTION
AWARDS





Name
            
            Number
      of
              securities
              underlying
              unexercised
              options
      (#)
              exercisable
            
            
            Number
      of
              securities
              underlying
              unexercised
              options
      (#)
              unexercisable
            
            
            Option
              Exercise
              Price
            
            Option
              Expiration
              Date(a)
            
            (b)
            
            
            (c)(1)
            
            
            (e)
            
            (f)
      (2)Branislav
      Vajdic, Chief Executive
            
            
            100,000
            (A)
            
            
            -
            
            
            $
            0.001
            
            09/24/14Officer
      and Director
            
            
            880,000
            (B)
            
            
            -
            
            
            $
            0.02
            
            03/09/17694,442
            (C)
            
            
            305,558
            
            
            $
            0.22
            
            10/31/17Vincent
      Renz
              President
      and Chief Operating Officer
            
            
            266,667
            (D)
            
            
            533,333
            
            
            $
            0.80
            (E)
            8/17/18Richard
      Brounstein, Executive Vice President,
            
            
            30,000
            (B)
            
            
            -
            
            
            $
            0.80
            (E)
            3/17/18Chief
      Financial Officer
            
            
            262,500
            (A)
            
            
            337,500
            
            
            $
            0.80
            (E)
            3/17/18Ihor
      Gussak, Chief Medical Officer
            
            
            247,917
            (D)
            
            
            452,083
            
            
            $
            0.80
            (E)
            7/29/18Dorin
      Panescu, Chief Technical Officer
            
            
            218,750
            (D)
            
            
            481,250
            
            
            $
            0.80
            (E)
            10/19/18


______





(1)
            All
      awards were made under our 2004 Equity Incentive Plan and/or 2009 Equity
      Compensation Plan.  The following footnotes set forth the
      vesting dates for the outstanding option awards (vesting generally depends
      upon continued employment and accelerates upon a change of control, as
      defined in the Plan):





A.
            Options
      vest in equal monthly increments over 48 months or 1/48 per
      month.B.
            Options
      are fully vested.C.
            Options
      vest in equal monthly increments over 36 months or 1/36 per
      month.D.
            Options
      vest over 48 months with a one year cliff.E.
            Option
      re-priced to market on April 15, 2009





(2)
            Dates
      reflect expiration 10-years after grant
dates.








38







STOCK
AWARDS


Number
      of
                securities
                underlying
                unvested
                Restricted
      Stock
                Units
      (# RSUs)(1)
              
              
              Market
      value of
                securities
                underlying
                unvested
                RSUs(A)
              
              
              (B)Branislav
      Vajdic,
                Chief
      Executive Officer and Director
              
              
              200,000
              
              
              $
              144,000Vincent
      Renz
                President
      and Chief Operating Officer
              
              
              225,000
              
              
              $
              162,000Richard
      Brounstein, Executive Vice President,
                Chief
      Financial Officer
              
              
              125,000
              
              
              $
              90,000Ihor
      Gussak, Chief Medical Officer
              
              
              225,000
              
              
              $
              162,000Dorin
      Panescu, Chief Technical Officer
              
              
              300,000
              
              
              $
              216,000
  (1)
            All
      awards were made under our 2009 Equity Compensation Plan.  The
      following footnote sets forth the vesting dates for the outstanding awards
      (vesting generally depends upon continued employment and accelerates upon
      a change of control that impacts employee’s status, as defined in the
      Plan):




A. RSUs
cliff-vest in 24 months from the April 15, 2009 grant-date.
 B. Market
value based on 12/31/09 value of $0.72 per underlying common
share.


EQUITY COMPENSATION PLAN
INFORMATION






Plan category
              
              Number of securities
                to be issued upon
                exercise of
                outstanding options,
                warrants and rights
              
              
              Weighted average
                exercise price of
                outstanding options,
                warrants and rights
              
              
              Number of securities
                remaining available for
                future
                issuance under equity
                compensation plans
                excluding securities
                reflected
                in column (a)(a)
              
              
              (b)
              
              
              (c)Equity
      compensation plans approved by security holders2004
      Equity Incentive Plan
              
              
              8,675,144
              
              
              $
              0.78
              
              
              
              26,230Equity
      compensation plans not approved by security holders2009
      Equity Compensation Plan-
      options
              
              
              95,000
              
              
              $
              0.79-
      RSUs
              
              
              1,575,000
              
              
              $
              0.00Total
              
              
              1,660,000
              
              
              
              -
              
              
              
              6,330,000Total
              
              
              10,335,144
              
              
              
              -
              
              
              
              6,356,230

















39








COMPENSATION
OF DIRECTORS


Name
            Year
            Cash
              compensation
              (2)
            
            
            Option/RSU
              awards (3)
              ($)
            
            
            Total
              ($)(a)
            
            
            
            
            (d)
            
            
            (j)Mark
      W. Kroll, Ph.D. FACC, FHRS, Chairman
            2009
            $
            6,000
            
            
            $
            40,000
            
            
            $
            46,0002008
            $
            3,000
            
            
            $
            723,934
            
            
            $
            726,934Branislav
      Vajdic, Ph.D., CEO
            
            $
            —
            
            
            $
            —
            
            
            $
            —Jess
      Jones, M.D.
            
            $
            —
            
            
            $
            —
            
            
            $
            —Robert
      N. Blair, M.Inst.P
            2009
            $
            6,000
            
            
            $
            32,606
            
            
            $
            38,6062008
            $
            4,500
            
            
            $
            64,431
            
            
            $
            68,931Michael
      E. Hanson (1)
            2009
            $
            4,500
            
            
            $
            108,583
            
            
            $
            113,083James
      A. Heisch
            2009
            $
            6,000
            
            
            $
            32,606
            
            
            $
            38,6062008
            $
            4,500
            
            
            $
            333,718
            
            
            $
            338,218Patrick
      Maguire, M.D., Ph.D.
            2009
            $
            6,000
            
            
            $
            32,606
            
            
            $
            38,6062008
            $
            4,500
            
            
            $
            245,415
            
            
            $
            249,915


____________





(1)
            Mr.
      Hanson received no compensation in 2008, as he first became a director in
      2009.(2)
            Since
      the May 2008 Board of Director’s meeting, we pay each independent director
      $1,500 for attending the quarterly Board of Directors’ meetings in-person.
      Directors are also reimbursed for their out-of-pocket travel expenses
      associated with their attendance at these Board of Directors’
      meetings.(3)
            This
      dollar amount reflects the full fair value of the grant at the date of
      issuance and is recognized for financial statement reporting purposes with
      respect to each fiscal year over the vesting terms in accordance with ASC
      718-10.  Dr. Kroll was granted options to purchase 400,000
      shares of common stock at $2.05 per share on March 18, 2008. Mr. Blair was
      granted options to purchase 250,000 shares of common stock at $0.01 per
      share in 2006, and options to purchase15,000 shares at $4.72 on August 11,
      2008. Mr. Heisch was granted options to purchase 100,000 shares of common
      stock at $3.05 per share on April 1, 2008 and options to purchase15,000
      shares at $4.72 on August 11, 2008. Dr. Maguire was granted options to
      purchase 100,000 shares of common stock at $2.05 per share on March 18,
      2008 and options to purchase15, 000 shares at $4.72 on August 11, 2008. On
      April 15, 2009, the Company granted Dr. Knoll, Mr. Blair, Mr. Hanson, Mr.
      Heisch and Dr. Maguire 50,000, 25,000, 25,000, 25,000 and 25,000
      restricted stock awards, respectively.  In addition, on April
      15, 2009, the Company re-priced previously granted options to Mr. Knoll,
      Mr. Blair, Mr. Heisch and Dr. Maguire from an initial exercise prices of
      $2.05, $2.05, $3.27 (weighted average) and $2.40 (weighted average);
      (respectively) to $0.80.  The change in re-pricing did not
      materially exceed the initial fair value previously
      determined.





Potential
Payments upon Termination





Branislav
Vajdic





Under the
terms of his employment agreement, if Branislav Vajdic is “terminated other than
for cause” or if he “voluntarily resigns for good reason” (as those terms are
defined in his employment agreement), he is entitled to three years of “total
cash compensation” less cash compensation he receives under the employment
agreement.  “Total cash compensation” includes his base salary plus
any cash bonuses, similar payments and benefits accrued to him.





Vincent
Renz





Under the
terms of his employment agreement, if Vincent Renz is “terminated other than for
cause” (as that term is defined in his employment agreement), he is entitled to
six-months of his then-base salary, and Cobra benefits as
applicable.





Richard
Brounstein





As of
March 1, 2009, under the terms of his employment agreement, if Richard
Brounstein is “terminated other than for cause” (as that term is defined in his
employment agreement), he is entitled to one year of his then-base salary, and
Cobra benefits as applicable.








40








Ihor
Gussak





Under the
terms of his employment agreement, if Ihor Gussak is “terminated other than for
cause” (as that term is defined in his employment agreement), he is entitled to
six-months of his then-base salary, and Cobra benefits as
applicable.





Dorin
Panescu





Under the
terms of his employment agreement, if Dorin Panescu is “terminated other than
for cause” (as that term is defined in his employment agreement), he is entitled
to six-months of his then-base salary, and Cobra benefits as
applicable.




Restricted
Stock Units (RSUs)




In 2009 all management received RSUs
with the same terms on termination, vesting 100% on termination without cause or
for good reason.




Compensation
Committee Interlocks and Insider Participation





None of
the members of our Compensation Committee has been an officer or employee of
NewCardio, Inc. during years ending December 31, 2007, 2008 and 2009.  In
addition, during the most recent fiscal year, no NewCardio executive officer
served on the Compensation Committee (or equivalent), or the Board, of another
entity whose executive officer(s) served on our Compensation Committee or
Board.





Compensation
Committee Report





The
Compensation Committee has reviewed the Compensation Discussion and Analysis and
discussed that analysis with management.  Based on its review and
discussions with management, the Compensation Committee recommended to the Board
that the Compensation Discussion and Analysis be included in our 10-K. 
This report is provided by the following independent directors, who comprise the
Compensation Committee:





Robert N.
Blair (Chairman)


James A.
Heisch




Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.







41











The
following table sets forth the number of shares of common stock beneficially
owned as of February 12, 2010 by (i) those persons or groups known to us to
beneficially own more than 5% of our common stock; (ii) each director; (iii)
each executive officer; and (iv) all directors and executive officers as a
group. The information is determined in accordance with Rule 13d-3 promulgated
under the Exchange Act based upon information furnished by persons listed or
contained in filings made by them with the SEC or by information provided by
such persons directly to us. Except as indicated below, each of the stockholders
listed below possesses sole voting and investment power with respect to their
shares and the address of each person is c/o NewCardio, Inc., 2350 Mission
College Boulevard, Suite 1175, Santa Clara, California, 95054.





Name of Beneficial Owner
            
            Common Stock
              Beneficially
              Owned (1)
            
            
            Percentage of
              Common Stock
              (2)Branislav
      Vajdic, Ph.D. (3)
            
            
            9,097,389
            
            
            
            31.96
            %Vincent
      W. Renz, Jr. (4)
            
            
            489,319
            
            
            
            1.81
            %Richard
      Brounstein (5)
            
            
            280,000
            
            
            
            1.04
            %Mark
      W. Kroll, Ph.D., FACC, FHRS (6)
            
            
            199,992
            
            
            
            *Robert
      N. Blair, M.Inst.P. (7)
            
            
            799,458
            
            
            
            2.96
            %James
      A. Heisch (8)
            
            
            125,826
            
            
            
            *Jess
      Jones, M.D.
            
            
            0
            
            
            
            *Patrick
      Maguire, M.D., Ph.D. (9)
            
            
            79,992
            
            
            
            *Michael
      Hanson (10)
            
            
            29,996
            
            
            
            *Ihor
      Gussak (11)
            
            
            312,914
            
            
            
            1.16
            %Dorin
      Panescu (12)
            
            
            257,915
            
            
            
            *Kenneth
      Londoner (13)
            
            
            1,801,584
            
            
            
            6.57
            %Milic
      Petkovic
            
            
            1,441,579
            
            
            
            5.40
            %All
      officers and directors as a group (11 persons)
            
            
            11,672,801
            
            
            
            38.44
            %





(1)
            Includes
      stock option grants and restricted stock units (RSUs) made to officers,
      directors, employees and/or consultants under the 2004 Equity Incentive
      Plan and/or the 2009Equity
      Compensation Plan.  All options and RSUs listed in this table
      were granted under the 2004 Equity Incentive Plan and/or the 2009Equity
      Compensation Plan.(2)
            Applicable
      percentage ownership is based on 26,680,279shares of common
      stock outstanding as of February 12, 2010, together with securities
      exercisable or convertible into shares of common stock within 60 days of
      February 12, 2010 for each stockholder. Shares of common stock that are
      currently exercisable or exercisable within 60 days of February 12, 2010
      are deemed to be beneficially owned by the person holding such securities
      for the purpose of computing the percentage of ownership of such person,
      but are not treated as outstanding for the purpose of computing the
      percentage ownership of any other person.(3)
            Includes
      options to purchase 1,785,562 shares of common stock and warrants to
      purchase 2,000 shares of common stock.(4)
            Includes
      options to purchase 316,669 shares of common stock, warrants to purchase
      50,000 shares of common stock and Series C Preferred convertible into
      50,000 shares of common stock.(5)
            Includes
      options to purchase 230,000 shares of common stock, warrants to purchase
      25,000 shares of common stock and Series C Preferred convertible into
      25,000 shares of common stock.(6)
            Includes
      options to purchase 199,992 shares of common stock.(7)
            Includes
      options to purchase 179,152 shares of common stock, warrants to purchase
      145,500 shares of common stock and Series C Preferred convertible into
      10,000 shares of common stock.(8)
            Includes
      options to purchase 75,826 shares of common stock warrants to purchase
      25,000 shares of common stock and Series C Preferred convertible into
      25,000 shares of common stock.(9)
            Includes
      options to purchase 79,992 shares of common stock.(10)
            Includes
      options to purchase 29,996 shares of common stock.(11)
            Includes
      options to purchase 291,664 shares of common stock.(12)
            Includes
      options to purchase 247,915 shares of common stock.(13)
            Includes
      options to purchase 750,000 shares of common
  stock.











42








Item
13.  Certain Relationships and Related Transactions, and Director
Independence.





In
November 16, 2006, Peter Steiger, a former member of our board of directors,
made a loan to us in the principal amount of $10,316 pursuant to the terms of a
promissory note.  The promissory note has a two-year term and an
annual interest rate of 4.9%.  Principal and interest accrued thereon
were payable in full on the promissory note due date in November 15, 2008. This
principal and interest was paid in January 2009.





In
September 2007, we entered into a three-year consulting agreement with E4, LLC.
We sold E4, LLC 1,475,631 shares of common stock valued at $0.10 per share, for
$0.02 per share for cash, or $29,513. The remaining $0.08 per share value was
issued to the consultant as compensation for services rendered, specifically
providing business guidance, and primarily in areas related to sales, marketing
and business strategy.  25% of the shares were fully vested at the
time of sale.  The remaining shares are subject to a repurchase right
that diminishes over a 36 month period, so long as the consultancy
continues.  The consultant also receives monthly cash payments of
$24,000 as part of this consulting agreement. At December 31, 2009 there are no
outstanding obligations under the agreement.  It remains ongoing at
this time. During the year ended December 31, 2009, the Company paid an
additional $288,000 to E4, LLC.





Effective
January 1, 2008 the Company entered into a consulting agreement with Robert M.
Blair, a current Board member, for corporate strategy and finance
services.  This agreement terminated effective October 31, 2009 and a
similar agreement initiated December 1, 2009. He was paid $35,000 for his
services and at December 31, 2009 there are no outstanding obligations under the
agreement.




Effective
October 31, 2009, Kenneth Londoner resigned as a full time employee and signed a
one-year, part time consulting agreement, continuing his business development
responsibilities under this new arrangement. At this transition, the unvested
portion of his 2007 option grant was accelerated.  He also receives
monthly cash payments of $14,300 as part of this consulting agreement. During
the year ended December 31, 2009, the Company paid Mr. Londoner $28,600 and at
December 31, 2009 there are no outstanding obligations under the
agreement.





DIRECTOR
INDEPENDENCE





The Board
of Directors has analyzed the independence of each director and has determined
that the following directors are independent under the NASDAQ Stock Market LLC
rules and have no direct or indirect material relationships with
us:





 ̈
            Mark
      W. Kroll, Ph.D. FACC, FHRS*





 ̈
            Patrick
      Maguire, M.D., Ph. D.*





 ̈
            James
      A. Heisch*





 ̈
            Michael
      Hanson*





 ̈
            Robert
      M. Blair**





*   Mark
Kroll, Patrick Maguire, Michael Hanson and James A. Heisch would qualify as
being independent for the Audit Committee, or any committee.





**  Robert M. Blair has a
consulting agreement and would not qualify as independent for the Audit
Committee under the NASDAQ Stock Market LLC rules. This agreement is not however
a material agreement as defined by Item 404(a).





In
particular, the Board of Directors has determined that these directors have no
relationships, other than as described above, that would cause them not to be
independent under the specific criteria of Section 4200(a) (15) of the NASDAQ
Manual.








43








Item
14.  Principal Accountant Fees and Services.





Summary
of Principal Accountant Fees for Professional Services Rendered





The
following table presents the aggregate fees for professional audit services and
other services rendered by RBSM LLP, our independent registered public
accountants in 2009 and 2008.





Year
              Ended
              December
              31, 2009
            
            
            Year
              Ended
              December
              31, 2008Audit
      Fees
            
            $
            58,500
            
            
            $
            58,000Audit-Related
      Fees
            
            
            60,925
            
            
            
            138,640Tax
      Fees
            
            
            -
            
            
            
            -All
      Other Fees
            
            
            -
            
            
            
            -$
            119,425
            
            
            $
            196,640


____________





Audit Fees consist of fees
billed for the annual audit of our financial statements and other audit services
including the provision of consents and the review of documents filed with the
SEC.





We
have an independent audit committee for all purposes relating to communication
with our auditors and responsibility for our audit. All engagements for audit
services, audit- related services and tax services are approved in advance by
our audit committee. Our audit committee has considered whether the provision of
the services described above for the fiscal year ended December 31, 2009, is
compatible with maintaining the auditor’s independence.





All
audit and non-audit services that may be provided by our principal accountant to
us shall require pre-approval by the audit committee. Further, our auditor shall
not provide those services to us specifically prohibited by the SEC, including
bookkeeping or other services related to the accounting records or financial
statements of the audit client; financial information systems design and
implementation; appraisal or valuation services, fairness opinion, or
contribution-in-kind reports; actuarial services; internal audit outsourcing
services; management functions; human resources; broker-dealer, investment
adviser, or investment banking services; legal services and expert services
unrelated to the audit; and any other service that the Public Company Oversight
Board determines, by regulation, is impermissible.











44








Item
15.  Exhibits, Financial Statement Schedules.





1.
            Financial
      Statements:  See “Index to Consolidated Financial Statements” in
      Part II, Item 8 of the Form 10-K.2.
            Financial
      Statement Schedule:  Schedules are included in the Consolidated
      Financial Statements or notes of this Form 10-K or are not
      required.3.
            Exhibits:  The
      exhibits listed in the accompanying index to exhibits are filed or
      incorporated by reference as part of this Form
  10-K.





3.1(a)
            Certificate
      of Incorporation of EP Floors, Inc., originally filed as Exhibit 3.1a to
      Registrant’s Registration Statement on Form SB-2 filed on March 22,
      2006.3.1(b)
            Amended
      Certificate of Incorporation of EP Floors, Inc., originally filed as
      Exhibit 3.1b to Registrant’s Registration Statement on Form SB-2 filed
      March 22, 2006.3.1(c)
            Certificate
      of Amendment of Certificate of Incorporation, originally filed as Exhibit
      3.2 to Registrant’s Form 8-K filed on February 1, 2008.3.2
            Bylaws,
      (incorporated herein by reference to Exhibit No. 3.2 of Registrant’s
      Registration Statement on Form SB-2 filed on March 22,
    2006).3.3
            Certificate
      of Designation of Series A Preferred Stock, filed as Exhibit 3.1 to
      Registrant’s Form 8-K filed on January 4, 2008.3.4
            Certificate
      of Amendment of Certificate of Incorporation, filed as Exhibit 3.2 to
      Registrant’s Form 8-K filed on February 1, 2008.3.5(a)
            Charter
      of the Audit Committee of the Board of Directors, filed
      herewith.3.5(b)
            Charter
      of the Compensation Committee of the Board of Directors, filed
      herewith.3.5(c)
            Charter
      of the Corporate Governance and Nominating Committee of the Board of
      Directors, filed herewith.4.1
            Securities
      Purchase Agreement (Incorporated herein by reference to Exhibit No. 4.1 of
      Registrant's Form 8-K filed on January 4, 2008).4.2
            Form
      of Series A Warrant (Incorporated herein by reference to Exhibit No. 4.2
      of Registrant's Form 8-K filed on January 4, 2008).4.3
            Form
      of Series J Warrant (Incorporated herein by reference to Exhibit No. 4.3
      of Registrant's Form 8-K filed on January 4, 2008).4.4
            Form
      of Series J-A Warrant (Incorporated herein by reference to Exhibit No. 4.4
      of Registrant's Form 8-K filed on January 4, 2008).4.5
            Registration
      Rights Agreement (Incorporated herein by reference to Exhibit No. 4.5 of
      Registrant's Form 8-K filed on January 4, 2008).4.6
            Amendment
      No. 1 to Securities Purchase Agreement dated as of December 27, 2007,
      between Marine Park Holdings, Inc. and certain of the purchasers’
      signatory hereto (Incorporated herein by reference to Exhibit No. 4.6 of
      Registrant's Form 8-K filed on February 6, 2008).4.7
            Amendment
      No. 1 to Registration Rights Agreement dated as of December 27, 2007,
      between Marine Park Holdings, Inc. and certain of the purchasers’
      signatory hereto (Incorporated herein by reference to Exhibit No. 4.7 of
      Registrant's Form 8-K filed on February 6, 2008).4.8
            Certificate
      of Designation of Series A Preferred Stock (incorporated herein by
      reference to Exhibit No. 3.1 of Registrant’s Form 8-K filed on January 4,
      2008).4.9
            Second
      Amendment to Securities Purchase Agreement, made as of April 7, 2009,
      incorporated by reference to Exhibit 10.32 of Registrant’s Form 8-K filed
      on April 8, 2009.4.10
            Third
      Amendment to Securities Purchase Agreement, made as of June 17, 2009,
      incorporated by reference to Exhibit 10.33 of Registrant’s Form 8-K filed
      on June 22, 2009.4.11
            Fourth
      Amendment to Securities Purchase Agreement, made as of July 28, 2009,
      incorporated by reference to Exhibit 10.32 of Registrant’s Form 8-K filed
      on July 30, 2009.4.12
            Form
      of Warrant issued to Purchasers of the Company’s Series C Convertible
      Preferred Stock on September 15, 2009, incorporated by reference to
      Exhibit 4.12 of the Company’s Form 8-K filed on September 18,
      2009.4.13
            Amended
      and Restated Certificate of Designation of Preferences, Rights and
      Limitations of Series C Convertible Preferred Stock, incorporated by
      reference to Exhibit 4.13 of the Company’s Form 8-K filed on September 18,
      2009.4.14
            Form
      of Warrant issued to the placement agent and the selected dealer in
      connection with the issuance of Company’s Series C Convertible Preferred
      Stock on September 15, 2009, incorporated by reference to Exhibit 4.14 of
      the Company’s Form 8-K filed on September 18, 2009.10.1
            Share
      Exchange Agreement by and among Marine Park Holdings, Inc., NewCardio,
      Inc., and the shareholder of NewCardio, Inc. (Incorporated herein by
      reference to Exhibit No. 10.1 of Registrant's Form 8-K filed on January 4,
      2008).10.2
            Return
      to Treasury Agreement between Marine Park Holdings, Inc. and Harborview
      Master Fund L.P., dated as of December 27, 2007 (Incorporated herein by
      reference to Exhibit No. 10.2 of Registrant's Form 8-K filed on January 4,
      2008).10.3
            Return
      to Treasury Agreement between Marine Park Holdings, Inc. and Diverse
      Trading Ltd., dated as of December 27, 2007 (Incorporated herein by
      reference to Exhibit No. 10.3 of Registrant's Form 8-K filed on January 4,
      2008).10.4
            2004
      Equity Incentive Plan (Incorporated herein by reference to Exhibit No.
      10.4 of Registrant's Form S-8 POS filed on March 7,
  2008).10.5
            Employment
      Agreement between NewCardio, Inc. and Branislav Vajdic dated November 1,
      2007.10.6
            Consulting
      Agreement between NewCardio, Inc. and Branislav Vajdic dated March 1,
      2007.10.7
            Employment
      Agreement between NewCardio, Inc. and Kenneth Londoner dated October 31,
      2007.10.8
            Restricted
      Stock Purchase Agreement between NewCardio, Inc. and Kenneth Londoner,
      dated as of June 4, 2007, as amended by Amendment No. 1 to Restricted
      Stock Purchase Agreement between NewCardio, Inc. and Kenneth Londoner,
      dated as of September 15, 2007.











45











10.9
            Return
      to Treasury Agreement dated December 27, 2007 between Marine Park
      Holdings, Inc. and Harborview Master Fund L.P., (incorporated herein by
      reference to The Company’s Current Report on Form 8-K filed by the Company
      with the SEC on January 4, 2008).10.10
            Return
      to Treasury Agreement dated as of December 27, 2007 between Marine Park
      Holdings, Inc. and Diverse Trading Ltd., (incorporated herein by reference
      to The Company’s Current Report on Form 8-K filed by the Company with the
      SEC on January 4, 2008).10.11
            2004
      Equity Incentive Plan of the Company (incorporated herein by reference to
      the Form S-8, filed by the Company with the SEC on March 7,
      2008).10.12
            Employment
      Agreement, dated November 1, 2007, by and between the Company and
      Branislav Vajdic (incorporated herein by reference to The Company’s
      Registration Statement on Form S-1/A (No. 2 filed by the Company with the
      SEC on May 20, 2008).10.13
            Consulting
      Agreement, dated March 1, 2007, by and between the Company and Branislav
      Vajdic (incorporated herein by reference to the Company’s Annual Report on
      Form 10-K/A, as filed with the SEC by the Company on April 4,
      2008).10.14
            Employment
      Agreement dated October 31, 2007 between NewCardio, Inc. and Kenneth
      Londoner (incorporated herein by reference to the Company’s Annual Report
      on Form 10-K/A, as filed with the SEC by the Company on April 4,
      2008).10.15
            Restricted
      Stock Purchase Agreement, dated as of June 4, 2007, by and between
      NewCardio, Inc. and Kenneth Londoner, as amended by Amendment No. 1 to
      Restricted Stock Purchase Agreement, dated as of September 15, 2007, by
      and between NewCardio, Inc. and Kenneth Londoner (incorporated herein by
      reference to the Company’s Annual Report on Form 10-K/A, as filed with the
      SEC by the Company on April 4, 2008).10.16
            Form
      of Lock Up Agreement (incorporated by reference to the Company’s
      Registration Statement on Form S-1/A (No. 1) filed on April 15,
      2008).10.17
            Escrow
      Deposit Agreement dated as of December 27, 2007, by and among Marine Park
      Holdings, Inc., Capstone Investments and Signature Bank (incorporated by
      reference to the Company’s Registration Statement on Form S-1/A (No. 1)
      filed on April 15, 2008).10.18
            Employment
      Agreement dated January 22, 2008 between NewCardio, Inc. and Richard
      Brounstein (incorporated herein by reference the Company’s Quarterly
      Report on Form 10-Q, as filed by the Company with the SEC on May 15,
      2008).10.19
            Employment
      Agreement dated as of March 1, 2008 between NewCardio, Inc. and Richard
      Brounstein (incorporated herein by reference the Company’s Quarterly
      Report on Form 10-Q, as filed by the Company with the SEC on May 15,
      2008).10.20
            Lease
      dated February 6, 2008 between NewCardio, Inc. and 2350 Mission Investors,
      LLC (incorporated herein by reference the Company’s Quarterly Report on
      Form 10-Q, as filed by the Company with the SEC on May 15,
      2008).10.21
            Settlement
      and Release Agreement, dated as of October 1, 2006, by and between Samuel
      E. George, M.D., and the Company (incorporated by reference to the
      Company's Registration Statement on Form S-1/A (No. 4) filed on July 24,
      2008).10.22
            Technology
      Assignment Agreement, dated as of September 28, 2004, by and between Bosko
      Bojovic and the Company (incorporated by reference to the Company’s
      Registration Statement on Form S-1/A (No. 3) filed on June 23,
      2008).10.23
            Consulting
      Agreement, dated as of February 22, 2008, by and between the Company and
      Robert N. Blair (incorporated by reference to the Company’s Registration
      Statement on Form S-1/A (No. 3) filed on June 23,
2008).10.24
            Consulting
      Agreement, dated as of September 13, 2007, by and between the Company and
      E4 LLC (incorporated by reference to the Company's Registration Statement
      on Form S-1/A (No. 4) filed on July 24, 2008).10.25
            Consulting
      Agreement, dated as of May 1, 2008, by and between the Company and JFS
      Investments (incorporated by reference to the Company's Registration
      Statement on Form S-1/A (No. 4) filed on July 24,
2008).10.26
            Consulting
      Agreement, dated as of June 27, 2008, by and between the Company and First
      Montauk Securities Group (incorporated by reference to the Company's
      Registration Statement on Form S-1/A (No. 4) filed on July 24,
      2008).10.27
            Waiver
      Agreement, dated as of March 13, 2008, by and between the Company and
      Vision Opportunity Master Fund, Ltd. (incorporated by reference to the
      Company's Registration Statement on Form S-1/A (No. 4) filed on July 24,
      2008).










46













10.28
            Employment
      Agreement dated August 18, 2008 between the Company and Vincent W. Renz,
      Jr. (incorporated by reference to the Company’s Current Report on Form 8-K
      filed by the Company with the SEC on August 21, 2008).10.29
            Amendment
      to Securities Purchase Agreement, dated as of December 1, 2008,
      incorporated by reference to Exhibit 10.29 to the Company’s Current Report
      on Form 8-K filed by the Company with the SEC on December 3,
      2008.10.30
            Platinum
      Put Letter dated as of December 1, 2008, incorporated by reference to
      Exhibit 10.30 to the Company’s Current Report on Form 8-K filed by the
      Company with the SEC on December 3, 2008.10.31
            Management
      Rights Letter, dated as of December 1, 2008, incorporated by reference to
      Exhibit 10.31 to the Company’s Current Report on Form 8-K filed by the
      Company with the SEC on December 3, 2008.10.32
            2009
      Equity Compensation Plan of the Company, incorporated by reference to
      Exhibit 10.1 to the Company’s Registration Statement on Form S-8, filed
      with the SEC on June 16, 2009.10.33
            Form
      of Restricted Stock Unit Grant Notice and Attachment, incorporated by
      reference to Exhibit 10.2 to Amendment No. 1 to the Company’s Registration
      Statement on Form S-8, filed with the SEC on June 19,
  2009.10.34
            Securities
      Purchase Agreement, dated July 30, 2009, incorporated by reference to
      Exhibit 10.33 to the Company’s Current Report on Form 8-K, filed by the
      Company with the SEC on July 30, 2009.10.35
            Securities
      Purchase Agreement dated as of September 11, 2009, between the Company and
      purchases signatory thereto in connection with the issuance of the
      Company’s Series C Convertible Preferred Stock on September 15, 2009,
      incorporated by reference to Exhibit 10.35 of the Company’s Form 8-K filed
      on September 18, 2009.10.36
            Amendment
      to $3 million Credit Line, incorporated by reference to Exhibit 10.1 to
      the Company’s Current Report on Form 8-K, filed by the Company with the
      SEC on December 30, 2009.31.1
            Certification
      of principal executive officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002, filed herewith.31.2
            Certification
      of principal financial officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002, filed herewith.32.1
            Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act, filed herewith.32.2
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act, filed herewith.











47





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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.Dated:  February
      23, 2010
              By:
              /s/ Branislav
      Vajdic, Ph.D.Branislav
      Vajdic, Ph.D.Chief
      Executive Officer







Pursuant
to the requirements of the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.





Signature
            
            Title
            
            Date/s/
      Branislav Vajdic, Ph.D.
            
            Chief
      Executive Officer and Director
            
            February
      23, 2010Branislav
      Vajdic, Ph.D./s/
      Vincent W. Renz
            
            President
      and Chief Operating Officer
            
            February
      23, 2010Vincent
      W. Renz/s/
      Richard D. Brounstein
            
            Executive
      Vice President, Chief Financial Officer and Secretary
            
            February
      23, 2010Richard
      D. Brounstein/s/
      Mark W. Kroll, Ph.D., FACC, FHRS
            
            Director
      and Chairman
            
            February
      23, 2010Mark
      W. Kroll, Ph.D., FACC, FHRS/s/
      Robert M. Blair, M.Inst.P.
            
            Director
            
            February
      23, 2010Robert
      N. Blair, M.Inst.P./s/
      James A. Heisch
            
            Director
            
            February
      23, 2010James
      A. Heisch/s/
      Jess Jones, M.D.
            
            Director
            
            February
      23, 2010Jess
      Jones, MD/s/
      Michael Hanson
            
            Director
            
            February
      23, 2010Michael
      Hanson/s/
      Patrick Maguire, M.D., Ph.D.
            
            Director
            
            February
      23, 2010Patrick
      Maguire, M.D., Ph.D.








48








NEWCARDIO,
INC.
 
 INDEX
TO FINANCIAL STATEMENTS
 
 PageReport
      of Independent Registered Public Accounting Firm
              
              F-1Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              
              F-2Consolidated
      Statements of Operations for the year ended December 31, 2009, 2008 and
      from the period September 7, 2004 (date of inception) to December 31,
      2009
              
              F-3Consolidated
      Statement of Stockholders’ (Deficit) Equity for the period from September
      7, 2004 (date of inception) to December 31, 2009
              
              F-4
      – F-12Consolidated
      Statements of Cash Flows for the year ended December 31, 2009, 2008 and
      from the period September 7, 2004 (date of inception) to December 31,
      2009
              
              F-13Notes
      to Consolidated Financial Statements
              
              F-14
      – F-37
      
 
 
 RBSM
LLP
 
 CERTIFIED
PUBLIC ACCOUNTANTS
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors
 NewCardio,
Inc.
 Santa
Clara, California
 
 We have
audited the accompanying consolidated balance sheets of NewCardio, Inc. and its
wholly owned subsidiaries (the “Company”), a development stage Company as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholder’s (deficit) equity and cash flows for each of the two
years in the period ended December 31, 2009 and the period September 7, 2004
(date of inception) through December 31, 2009. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
 We have
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable
assurance   about whether the
financial   statements are free of material misstatement. 
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NewCardio,
Inc.  at  December 31, 2009 and 2008 and the results of its
operations  and its cash flows for the each of the
two  years  in the period ended  December 31, 2009
and the period September 7, 2004 (date of inception) through December 31, 2009
in conformity with accounting principles generally accepted in the United States
of America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred significant losses
since inception. This raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans, with respect to these matters
are also described in Note 2 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
 
   By:
                /s/ RBSM
      LLPRBSM
      LLPCertified
      Public AccountantsNew
      York, New York
                  February
      23, 2010
 
 
 
 
 F-1
  NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      BALANCE SHEETSDECEMBER
      31, 2009 AND 2008  2009
                
                
                2008ASSETSCurrent
      assets:Cash
                
                $
                1,386,007
                
                
                $
                2,324,793Short
      term investment
                
                
                25,010
                
                
                
                2,143,457Prepaid
      expenses
                
                
                111,871
                
                
                
                118,454Prepaid
      commitment fees
                
                
                556,875
                
                
                
                -Total
      current assets
                
                
                2,079,763
                
                
                
                4,586,704Property,
      plant and equipment, net of accumulated depreciation of $79,041 and
      $19,208 as of December 31, 2009 and 2008, respectively
                
                
                198,955
                
                
                
                110,718Other
      assets:Deposits
                
                
                22,600
                
                
                
                22,600$
                2,301,318
                
                
                $
                4,720,022LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable and accrued expenses
                
                $
                480,152
                
                
                $
                842,510Note
      payable, related party, current portion
                
                
                -
                
                
                
                10,316Put
      liability
                
                
                744,280
                
                
                
                744,280Total
      current liabilities
                
                
                1,224,432
                
                
                
                1,597,106Warrant
      liability
                
                
                1,078,292
                
                
                
                -Reset
      derivative
                
                
                687,958
                
                
                
                -Total
      liabilities
                
                
                2,990,682
                
                
                
                1,597,106Preferred
      shares subject to liability conversion
                
                
                784,010
                
                
                
                -Stockholders'
      equity (deficit)Preferred
      stock, $0.001 par value; 1,000,000 shares authorized:Preferred
      stock Series B, $0.001 par value; 18,000 shares designated; 16,435 shares
      issued and outstanding as of  December 31, 2009 and
      2008
                
                
                16
                
                
                
                16Common
      stock, $0.001 par value, 99,000,000 shares authorized; 24,290,279 and
      22,335,595 shares issued and outstanding as of December 31, 2009 and 2008,
      respectively
                
                
                24,290
                
                
                
                22,336Additional
      paid in capital
                
                
                29,432,680
                
                
                
                24,440,311Deficit
      accumulated during development stage
                
                
                (30,930,360
                )
                
                
                (21,339,747
                )Total
      stockholders' equity (deficit)
                
                
                (1,473,374
                )
                
                
                3,122,916$
                2,301,318
                
                
                $
                4,720,022The
      accompanying notes to these consolidated financial
    statements
 
 
 F-2
    NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENTS OF OPERATIONS  From
      September 7, 2004Year
      ended December 31,
                
                
                (date
      of inception) through2009
                
                
                2008
                
                
                December 31, 2009Operating
      expenses:Selling,
      general and administrative
                
                $
                6,904,521
                
                
                $
                5,684,723
                
                
                $
                11,5564,320Depreciation
                
                
                59,833
                
                
                
                18,614
                
                
                
                79,041Research
      and development
                
                
                3,047,994
                
                
                
                2,126,084
                
                
                
                6,333,104Total
      operating expenses
                
                
                10,012,348
                
                
                
                7,829,421
                
                
                
                17,976,465Net
      loss from operations
                
                
                (10,012,348
                )
                
                
                (7,829,421
                )
                
                
                (17,976,465
                )Other
      income (expense)Gain
      (loss) on change in fair value of warrant liability and reset
      derivative
                
                
                907,866
                
                
                
                (5,012,875
                )
                
                
                (4,105,009
                )Other
      financing costs
                
                
                (512,330
                )
                
                
                (1,495,044
                )
                
                
                (5,118,452
                )Interest,
      net
                
                
                26,199
                
                
                
                155,701
                
                
                
                (912,724
                )Net
      loss before income taxes
                
                
                (9,590,613
                )
                
                
                (14,181,639
                )
                
                
                (28,112,650
                )Provision
      for income taxes
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                
                (9,590,613
                )
                
                
                (14,181,639
                )
                
                
                (28,112,650
                )Preferred
      stock dividend
                
                
                (784,010
                )
                
                
                (754,328
                )
                
                
                (4,356,048
                )NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
                
                $
                (10,374,623
                )
                
                $
                (14,935,967
                )
                
                $
                (32,468,698
                )Net
      (loss) income per share-basic and fully diluted
                
                $
                (0.44
                )
                
                $
                (0.71
                )Weighted
      average number of shares-basic and fully diluted
                
                
                23,726,059
                
                
                
                20,945,436The
      accompanying notes to these consolidated financial
    statements
 
 
 
 F-3
 
 NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009   Preferred
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                DeficitPreferred
      Founders
                
                
                Preferred
      Series B
                
                
                Common
                
                
                Additional
                  Paid
      in
                
                
                Common
      stock
                
                
                accumulated
      during
                  developmentStock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Capital
                
                
                Subscriptions
                
                
                stage
                
                
                TotalBalance,
      September 7, 2004
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Adjustment
      of recapitalizationCommon
      stock issued to founders at $0.001 per share in September
    2004
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,176,642
                
                
                
                3,177
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,177Common
      stock issued for intellectual property at $0.001 per share in September
      2004
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                260,152
                
                
                
                260
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                260Common
      stock issued in connection with options exercised at $0.001 per share in
      November 2004
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                300,000
                
                
                
                300
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                300Preferred
      stock issued to founders at $0.01 per share in September
    2004
                
                
                4,563,206
                
                
                
                456
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                45,176
                
                
                
                -
                
                
                
                -
                
                
                
                45,632-Fair
      value of options issued in September 2004
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                263
                
                
                
                -
                
                
                
                -
                
                
                
                263Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (172,343
                )
                
                
                (172,343
                )Balance,
      December 31, 2004
                
                
                4,563,206
                
                
                $
                456
                
                
                
                -
                
                
                $
                -
                
                
                
                3,736,794
                
                
                $
                3,737
                
                
                $
                45,439
                
                
                $
                -
                
                
                $
                (172,343
                )
                
                $
                (122,711
                )
 
 The
accompanying notes to these consolidated financial statements
 
 F-4
 
 NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009  Preferred
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                DeficitPreferred
      Founders
                
                
                Preferred
      Series B
                
                
                Common
                
                
                Additional
                  Paid
      in
                
                
                Common
      stock
                
                
                accumulated
      during
                  developmentStock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Capital
                
                
                Subscriptions
                
                
                stage
                
                
                TotalBalance
      forward
                
                
                4,563,206
                
                
                $
                456
                
                
                
                -
                
                
                $
                -
                
                
                
                3,736,794
                
                
                $
                3,737
                
                
                $
                45,439
                
                
                $
                -
                
                
                $
                (172,343
                )
                
                $
                (122,711
                )Fair
      value of options issued in August 2005
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                44,558
                
                
                
                -
                
                
                
                -
                
                
                
                44,558Fair
      value of warrants issued in conjunction with issuance of Series A-2
      preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                232,502
                
                
                
                -
                
                
                
                -
                
                
                
                232,502Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (604,739
                )
                
                
                (604,739
                )Balance,
      December 31, 2005
                
                
                4,563,206
                
                
                
                456
                
                
                
                -
                
                
                
                -
                
                
                
                3,736,794
                
                
                
                3,737
                
                
                
                322,499
                
                
                
                -
                
                
                
                (777,082
                )
                
                
                (450,390
                )Common
      stock issued at $0.10 per share for services rendered in March
      2006
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                278,375
                
                
                
                278
                
                
                
                27,560
                
                
                
                -
                
                
                
                -
                
                
                
                27,838Fair
      value of options issued in July 2006
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                60,082
                
                
                
                -
                
                
                
                -
                
                
                
                60,082Fair
      value of warrants issued in conjunction with convertible
      debenture
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,572
                
                
                
                -
                
                
                
                -
                
                
                
                1,572Fair
      value of options issued in September 2006
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,729
                
                
                
                -
                
                
                
                -
                
                
                
                9,729Common
      stock issued at $0.10 per share for services rendered in October
      2006
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                75,000
                
                
                
                75
                
                
                
                7,425
                
                
                
                -
                
                
                
                
                
                
                
                7,500Fair
      value of options issued in October 2006
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,006
                
                
                
                -
                
                
                
                -
                
                
                
                7,006Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (378,175
                )
                
                
                (378,175
                )Balance,
      December 31, 2006
                
                
                4,563,206
                
                
                $
                456
                
                
                
                -
                
                
                $
                -
                
                
                
                4,090,169
                
                
                $
                4,090
                
                
                $
                435,873
                
                
                $
                -
                
                
                $
                (1,155,257
                )
                
                $
                (714,838
                )
 
 
 The
accompanying notes to these consolidated financial statements
 
  F-5
 
 NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009  Preferred
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                DeficitPreferred
      Founders
                
                
                Preferred
      Series B
                
                
                Common
                
                
                Additional
                  Paid
      in
                
                
                Common
      stock
                
                
                accumulated
      during
                  developmentStock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Capital
                
                
                Subscriptions
                
                
                stage
                
                
                TotalBalance
      forward
                
                
                4,563,206
                
                
                $
                456
                
                
                
                -
                
                
                $
                -
                
                
                
                4,090,169
                
                
                $
                4,090
                
                
                $
                435,873
                
                
                $
                -
                
                
                $
                (1,155,257
                )
                
                $
                (714,838
                )Fair
      value of warrants issued in conjunction with convertible
      debenture
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,141
                
                
                
                -
                
                
                
                -
                
                
                
                4,141Fair
      value of options for services rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                201,424
                
                
                
                -
                
                
                
                -
                
                
                
                201,424Common
      stock subscription received in June 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                84,000
                
                
                
                -
                
                
                
                84,000Common
      stock issued in June 2007 at $0.02 per share for services rendered issued
      at fair value of $0.10 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,200,000
                
                
                
                4,200
                
                
                
                415,800
                
                
                
                (84,000
                )
                
                
                -
                
                
                
                336,000Common
      stock issued in connection with options exercised at $0.01 per share in
      June 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                137,500
                
                
                
                138
                
                
                
                1,237
                
                
                
                -
                
                
                
                -
                
                
                
                1,375Common
      stock issued in connection with options exercised at $0.001 per share in
      July 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                100,000
                
                
                
                100
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                100Common
      stock issued in connection with options exercised at $0.01 per share in
      July 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                204,000
                
                
                
                204
                
                
                
                1,836
                
                
                
                -
                
                
                
                -
                
                
                
                2,040Common
      stock subscription received in September 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                29,513
                
                
                
                -
                
                
                
                29,513Common
      stock issued in September 2007 at $0.02 per share for services rendered
      issued at fair value of $0.10 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,475,631
                
                
                
                1,476
                
                
                
                146,087
                
                
                
                (29,513
                )
                
                
                -
                
                
                
                118,050Common
      stock issued in connection with options exercised at $0.001 per share in
      October 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                300,000
                
                
                
                300
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                300Common
      stock issued in connection with options exercised at $0.01 per share in
      December 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                110,000
                
                
                
                110
                
                
                
                990
                
                
                
                -
                
                
                
                -
                
                
                
                1,100Subtotal
                
                
                4,563,206
                
                
                $
                456
                
                
                
                -
                
                
                $
                -
                
                
                
                10,617,300
                
                
                $
                10,618
                
                
                $
                1,207,388
                
                
                $
                -
                
                
                $
                (1,155,257
                )
                
                $
                63,205
 
 The
accompanying notes to these consolidated financial statements
 
 
 
 F-6
 
 
 NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009  Preferred
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                DeficitPreferred
      Founders
                
                
                Preferred
      Series B
                
                
                Common
                
                
                Additional
                  Paid
      in
                
                
                Common
      stock
                
                
                accumulated
      during
                  developmentStock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Capital
                
                
                Subscriptions
                
                
                stage
                
                
                TotalBalance
      forward
                
                
                4,563,206
                
                
                $
                456
                
                
                
                -
                
                
                $
                -
                
                
                
                10,617,300
                
                
                $
                10,618
                
                
                $
                1,207,388
                
                
                $
                -
                
                
                $
                (1,155,257
                )
                
                $
                63,205Common
      stock issued in connection with options exercised at $0.02 per share in
      December 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                50,000
                
                
                
                50
                
                
                
                950
                
                
                
                -
                
                
                
                -
                
                
                
                1,000Effect
      of merger with New Cardio, Inc. (Formerly Marine Park Holdings, Inc.) on
      December 27, 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,554,985
                
                
                
                1,555
                
                
                
                (1,555
                )
                
                
                -
                
                
                
                -
                
                
                
                -Effective
      with the merger, the conversion of the preferred stock to common shares at
      December 27, 2007
                
                
                (4,563,206
                )
                
                
                (456
                )
                
                
                -
                
                
                
                -
                
                
                
                4,563,206
                
                
                
                4,563
                
                
                
                (4,107
                )
                
                
                -
                
                
                
                -
                
                
                
                -Effective
      with the merger, the conversion of the Series A-2 preferred stock,
      initially classified as debt, to common shares at December 27,
      2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,592,000
                
                
                
                2,592
                
                
                
                256,608
                
                
                
                -
                
                
                
                -
                
                
                
                259,200Effective
      with the merger, the conversion of convertible debentures inclusive of
      interest to common shares at December 27, 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                267,900
                
                
                
                268
                
                
                
                196,691
                
                
                
                -
                
                
                
                -
                
                
                
                196,959Common
      stock issued as beneficial conversion feature in conjunction with
      settlement of convertible debentures
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                592,131
                
                
                
                592
                
                
                
                425,742
                
                
                
                -
                
                
                
                -
                
                
                
                426,334Fair
      value of warrants issued as compensation for financing
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                355,034
                
                
                
                -
                
                
                
                -
                
                
                
                355,034Fair
      value of warrants issued in conjunction with convertible
      debentures
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                598,693
                
                
                
                -
                
                
                
                -
                
                
                
                598,693Beneficial
      conversion feature of preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,817,710
                
                
                
                -
                
                
                
                -
                
                
                
                2,817,710Dividend
      on preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,817,710
                )
                
                
                (2,817,710
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (3,185,141
                )
                
                
                (3,185,141
                )Balance,
      December 31, 2007
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                20,237,522
                
                
                $
                20,238
                
                
                $
                5,853,154
                
                
                $
                -
                
                
                $
                (7,158,108
                )
                
                $
                (1,284,716
                )
 
 The
accompanying notes to these consolidated financial statements
 
  F-7
 
 NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009
    Preferred
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                DeficitPreferred
      Founders
                
                
                Preferred
      Series B
                
                
                Common
                
                
                Additional
                  Paid
      in
                
                
                Common
      stock
                
                
                accumulated
      during
                  developmentStock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Capital
                
                
                Subscriptions
                
                
                stage
                
                
                TotalBalance
      forward
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                20,237,522
                
                
                $
                20,238
                
                
                $
                5,853,154
                
                
                $
                -
                
                
                $
                (7,158,108
                )
                
                $
                (1,284,716
                )Fair
      value of vested options for services rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,260,570
                
                
                
                -
                
                
                
                -
                
                
                
                2,260,570Fair
      value of vested warrants for services rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                481,855
                
                
                
                -
                
                
                
                -
                
                
                
                481,855Common
      stock issued in settlement of preferred stock dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                273,245
                
                
                
                273
                
                
                
                621,396
                
                
                
                -
                
                
                
                -
                
                
                
                621,669Common
      stock issued in connection with options exercised at $0.01 per share in
      May 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,000
                
                
                
                25
                
                
                
                225
                
                
                
                -
                
                
                
                -
                
                
                
                250Common
      stock issued in May 2008 at $3.50 in connection for services
      rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                50,000
                
                
                
                50
                
                
                
                (50
                )
                
                
                -
                
                
                
                -
                
                
                
                -Common
      stock issued in connection with options exercised at $0.001 per share in
      June 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10,000
                
                
                
                10
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10Common
      stock issued in connection with options exercised at $0.22 per share in
      June 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                15,000
                
                
                
                15
                
                
                
                3,285
                
                
                
                -
                
                
                
                -
                
                
                
                3,300Common
      stock issued in June 2008 at $3.65 in connection for services
      rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,000
                
                
                
                5
                
                
                
                18,245
                
                
                
                -
                
                
                
                -
                
                
                
                18,250Common
      stock issued in June 2008 at $3.30 in connection for services
      rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,000
                
                
                
                3
                
                
                
                9,897
                
                
                
                -
                
                
                
                -
                
                
                
                9,900Subtotal
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                20,618,767
                
                
                $
                20,619
                
                
                $
                9,248,577
                
                
                $
                -
                
                
                $
                (7,158,108
                )
                
                $
                2,111,088
 
 
 The
accompanying notes to these consolidated financial statements
 
 F-8
 NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009  Preferred
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                DeficitPreferred
      Founders
                
                
                Preferred
      Series B
                
                
                Common
                
                
                Additional
                  Paid
      in
                
                
                Common
      stock
                
                
                accumulated
      during
                  developmentStock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Capital
                
                
                Subscriptions
                
                
                stage
                
                
                TotalBalance
      forward
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                20,618,767
                
                
                $
                20,619
                
                
                $
                9,248,577
                
                
                $
                -
                
                
                $
                (7,158,108
                )
                
                $
                2,111,088Common
      stock issued in June 2008 at $3.25 in connection for services
      rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                50,000
                
                
                
                50
                
                
                
                (50
                )
                
                
                -
                
                
                
                -
                
                
                
                -Common
      stock issued in July 2008 at $3.25 in connection with serviced
      rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,000
                
                
                
                3
                
                
                
                9,747
                
                
                
                -
                
                
                
                -
                
                
                
                9,750Common
      stock issued in connection with options exercised at $0.01 per share in
      July 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                31,000
                
                
                
                31
                
                
                
                279
                
                
                
                -
                
                
                
                -
                
                
                
                310Common
      stock issued in connection with options exercised at $0.01 per share in
      August 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                72,021
                
                
                
                72
                
                
                
                648
                
                
                
                -
                
                
                
                -
                
                
                
                720Common
      stock issued in connection with options exercised at $0.22 per share in
      August 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8,333
                
                
                
                8
                
                
                
                1,825
                
                
                
                -
                
                
                
                -
                
                
                
                1,833Common
      stock issued in connection with conversion of preferred stock in August
      2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,000
                
                
                
                25
                
                
                
                6,012
                
                
                
                -
                
                
                
                -
                
                
                
                6,037Common
      stock issued in connection with conversion of preferred stock in
      September  2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                241,119
                
                
                
                241
                
                
                
                57,989
                
                
                
                -
                
                
                
                -
                
                
                
                58,230Common
      stock issued in connection with exercise of warrants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                898,504
                
                
                
                899
                
                
                
                (899
                )
                
                
                -
                
                
                
                -
                
                
                
                -Subtotal
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                21,947,744
                
                
                $
                21,948
                
                
                $
                9,324,128
                
                
                $
                -
                
                
                $
                (7,158,108
                )
                
                $
                2,187,968
 
 
 The
accompanying notes to these consolidated financial statements
  F-9
  
 
 NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009  Preferred
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                DeficitPreferred
      Founders
                
                
                Preferred
      Series B
                
                
                Common
                
                
                Additional
                  Paid
      in
                
                
                Common
      stock
                
                
                accumulated
      during
                  developmentStock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Capital
                
                
                Subscriptions
                
                
                stage
                
                
                TotalBalance
      forward
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                21,947,744
                
                
                $
                21,948
                
                
                $
                9,324,128
                
                
                $
                -
                
                
                $
                (7,158,108
                )
                
                $
                2,187,968Common
      stock issued in connection with options exercised at $0.01 per share in
      October 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,917
                
                
                
                13
                
                
                
                116
                
                
                
                -
                
                
                
                -
                
                
                
                129Common
      stock issued in October 2008 at $1.85 per share for services
      rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10,000
                
                
                
                10
                
                
                
                18,490
                
                
                
                -
                
                
                
                -
                
                
                
                18,500Common
      stock issued in connection with options exercised at $0.01 per share in
      November 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                23,750
                
                
                
                24
                
                
                
                213
                
                
                
                -
                
                
                
                -
                
                
                
                237Common
      stock issued in connection with options exercised at $0.02 per share in
      November 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,500
                
                
                
                7
                
                
                
                143
                
                
                
                -
                
                
                
                -
                
                
                
                150Common
      stock issued in November 2008 in connection with conversion of redeemable
      preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                333,684
                
                
                
                334
                
                
                
                80,250
                
                
                
                -
                
                
                
                -
                
                
                
                80,584Preferred
      Series B stock issued in exchange redeemable Series A preferred
      stock
                
                
                -
                
                
                
                -
                
                
                
                9,665
                
                
                
                10
                
                
                
                -
                
                
                
                -
                
                
                
                3,490,676
                
                
                
                -
                
                
                
                -
                
                
                
                3,490,686Preferred
      Series B stock issued in settlement of Series A preferred stock
      dividend
                
                
                -
                
                
                
                -
                
                
                
                134
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                127,816
                
                
                
                -
                
                
                
                -
                
                
                
                127,816Exercise
      of warrants subject to redemption in exchange for Series B preferred
      stock
                
                
                -
                
                
                
                -
                
                
                
                2,267
                
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                2,925,743
                
                
                
                -
                
                
                
                -
                
                
                
                2,925,745Warrants
      exchanged for Series B preferred stock
                
                
                -
                
                
                
                -
                
                
                
                4,369
                
                
                
                4
                
                
                
                -
                
                
                
                -
                
                
                
                2,074,452
                
                
                
                -
                
                
                
                -
                
                
                
                2,074,456Modification
      of terms of warrants subject to redemption to equity
      instrument
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,815,112
                
                
                
                -
                
                
                
                -
                
                
                
                6,815,112Amortization
      of deferred compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                337,500
                
                
                
                -
                
                
                
                -
                
                
                
                337,500Dividend
      on preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (754,328
                )
                
                
                -
                
                
                
                -
                
                
                
                (754,328
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (14,181,639
                )
                
                
                (14,181,639
                )Balance,
      December 31, 2008
                
                
                -
                
                
                $
                -
                
                
                
                16,435
                
                
                $
                16
                
                
                
                22,335,595
                
                
                $
                22,336
                
                
                $
                24,440,311
                
                
                $
                -
                
                
                $
                (21,339,747
                )
                
                $
                3,122,916
 
 The
accompanying notes to these consolidated financial statements
  F-10
   NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009  Preferred
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                DeficitPreferred
      Founders
                
                
                Preferred
      Series B
                
                
                Common
                
                
                Additional
                  Paid
      in
                
                
                Common
      stock
                
                
                accumulated
      during
                  developmentStock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Stock
                
                
                Amount
                
                
                Capital
                
                
                Subscriptions
                
                
                stage
                
                
                TotalBalance
      forward
                
                
                -
                
                
                $
                -
                
                
                
                16,435
                
                
                $
                16
                
                
                
                22,335,595
                
                
                $
                22,336
                
                
                $
                24,440,311
                
                
                $
                -
                
                
                $
                (21,339,747
                )
                
                $
                3,122,916Dividend
      on preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,973
                
                
                
                4
                
                
                
                4,839
                
                
                
                -
                
                
                
                -
                
                
                
                4,843Fair
      value of vested options issued for services rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,885,337
                
                
                
                -
                
                
                
                -
                
                
                
                3,885,337Fair
      value of vested warrants issued for services rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                271,563
                
                
                
                -
                
                
                
                -
                
                
                
                271,563Common
      stock issued in January 2009 at $1.60 per share for services
      rendered
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,500
                
                
                
                2
                
                
                
                3,998
                
                
                
                -
                
                
                
                -
                
                
                
                4,000Common
      Stock issued in connection with options exercised at $0.01 per share in
      February 2009
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                69,792
                
                
                
                70
                
                
                
                628
                
                
                
                -
                
                
                
                -
                
                
                
                698Exercise
      of warrants on a cashless basis
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,395,000
                
                
                
                1,395
                
                
                
                (1,395
                )
                
                
                -
                
                
                
                -
                
                
                
                -Common
      Stock issued in connection with options exercised at $0.01 per share in
      March 2009
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                26,250
                
                
                
                26
                
                
                
                236
                
                
                
                -
                
                
                
                -
                
                
                
                262Common
      stock issued in connection with options exercised at $0.02 per share in
      March 2009
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,174
                
                
                
                9
                
                
                
                175
                
                
                
                -
                
                
                
                -
                
                
                
                184Common
      stock issued in connection with options exercised at $0.22 per share in
      March 2009
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,495
                
                
                
                13
                
                
                
                2,736
                
                
                
                -
                
                
                
                -
                
                
                
                2,749Subtotal
                
                
                -
                
                
                $
                -
                
                
                
                16,435
                
                
                $
                16
                
                
                
                23,854,779
                
                
                $
                23,855
                
                
                $
                28,608,428
                
                
                $
                -
                
                
                $
                (21,339,747
                )
                
                $
                7,292,552
 
 The
accompanying notes to these consolidated financial statements
 
  F-11
 
 NEWCARDIO,
      INC(a
      development stage company)CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' DEFICITFrom
      September 7, 2004 (date of inception) through December 31,
      2009Preferred
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              DeficitPreferred
      Founders
              
              
              Preferred
      Series B
              
              
              Common
              
              
              Additional
                Paid
      in
              
              
              Common
      stock
              
              
              accumulated
      during
                developmentStock
              
              
              Amount
              
              
              Stock
              
              
              Amount
              
              
              Stock
              
              
              Amount
              
              
              Capital
              
              
              Subscriptions
              
              
              stage
              
              
              TotalBalance
      forward
              
              
              -
              
              
              $
              -
              
              
              
              16,435
              
              
              $
              16
              
              
              
              23,854,779
              
              
              $
              23,855
              
              
              $
              28,608,428
              
              
              $
              -
              
              
              $
              (21,339,747
              )
              
              $
              7,292,552Common
      stock issued in connection with options exercised at $0.02 per share in
      April 2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25,000
              
              
              
              25
              
              
              
              475
              
              
              
              -
              
              
              
              -
              
              
              
              500Exercise
      of warrants on a cashless basis
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              120,000
              
              
              
              120
              
              
              
              (120
              )
              
              
              -
              
              
              
              -
              
              
              
              -Common
      stock issued in connection with options exercised at $0.22 per share in
      June  2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              13,000
              
              
              
              13
              
              
              
              2,847
              
              
              
              -
              
              
              
              -
              
              
              
              2,860Fair
      value of vested restricted stock units issued for services
      rendered
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              422,231
              
              
              
              -
              
              
              
              -
              
              
              
              422,231Change
      in fair value of re priced vested options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,677
              
              
              
              -
              
              
              
              -
              
              
              
              6,677Fair
      value of warrants issued in connection with financing
costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              978,954
              
              
              
              -
              
              
              
              -
              
              
              
              978,954Amortization
      of discount relating to Series C preferred stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (784,010
              )
              
              
              -
              
              
              
              -
              
              
              
              (784,010
              )Common
      stock issued in connection with options exercised at $0.01 per share in
      August  2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,500
              
              
              
              7
              
              
              
              68
              
              
              
              -
              
              
              
              -
              
              
              
              75Common
      stock issued in connection with options exercised at $0.22 per share in
      October  2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,000
              
              
              
              5
              
              
              
              1,095
              
              
              
              -
              
              
              
              -
              
              
              
              1,100Common
      stock issued in November 2009 at $0.73 per share for services
      rendered
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              150,000
              
              
              
              150
              
              
              
              109,350
              
              
              
              -
              
              
              
              -
              
              
              
              109,500Common
      stock issued in November 2009 at $0.70 per share for services
      rendered
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25,000
              
              
              
              25
              
              
              
              17,475
              
              
              
              -
              
              
              
              -
              
              
              
              17,500Common
      stock issued in December 2009 at $0.77 per share for services
      rendered
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              90,000
              
              
              
              90
              
              
              
              69,210
              
              
              
              -
              
              
              
              -
              
              
              
              69,300Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (9,590,613
              )
              
              
              (9,590,613
              )Balance,
      December 31, 2009
              
              
              -
              
              
              $
              -
              
              
              
              16,435
              
              
              $
              16
              
              
              
              24,290,279
              
              
              $
              24,290
              
              
              $
              29,432,680
              
              
              $
              -
              
              
              $
              (30,930,360
              )
              
              $
              (1,473,374
              )
 
 
 
 The
accompanying notes to these consolidated financial statements
  F-12
     NEWCARDIO,
      INC.(a
      development stage company)CONSOLIDATED
      STATEMENTS OF CASH FLOWS
  From
      September 7, 2004Year
      ended December 31,
                
                
                (date
      of inception) through2009
                
                
                2008
                
                
                December 31, 2009Cash
      flows from operating activities:Net
      loss for the period
                
                $
                (9,590,613
                )
                
                $
                (14,181,639
                )
                
                $
                (28,112,650
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                59,833
                
                
                
                18,614
                
                
                
                79,041Amortization
      of prepaid commitment fees
                
                
                378,984
                
                
                
                -
                
                
                
                378,984Amortization
      of deferred compensation
                
                
                -
                
                
                
                337,500
                
                
                
                337,500Common
      stock issued to founders for services rendered
                
                
                -
                
                
                
                -
                
                
                
                3,177Common
      stock issued for intellectual property
                
                
                -
                
                
                
                -
                
                
                
                260Common
      stock issued for services rendered
                
                
                200,300
                
                
                
                56,400
                
                
                
                746,088Common
      stock issued as beneficial conversion feature in conjunction with
      settlement of convertible debentures
                
                
                -
                
                
                
                -
                
                
                
                426,334Series
      A-Preferred stock issued to founders for services rendered
                
                
                -
                
                
                
                -
                
                
                
                45,632Series
      A-2-Preferred stock issued for services rendered
                
                
                -
                
                
                
                -
                
                
                
                180,121Series
      B-Preferred stock issued in connection with conversion of Series
      A-Preferred stock
                
                
                -
                
                
                
                1,551,044
                
                
                
                1,551,044Notes
      payable issued in conjunction with services rendered
                
                
                -
                
                
                
                -
                
                
                
                10,316Options
      converted for services rendered
                
                
                -
                
                
                
                3,300
                
                
                
                3,300Fair
      value of options issued for services rendered
                
                
                3,885,337
                
                
                
                2,260,570
                
                
                
                6,468,969Fair
      value of warrants issued as compensation for services
                
                
                271,563
                
                
                
                481,855
                
                
                
                753,418Fair
      value of restricted stock units issued for services
    rendered
                
                
                422,231
                
                
                
                -
                
                
                
                422,231Change
      in fair value of repriced vested options
                
                
                6,677
                
                
                
                -
                
                
                
                6,677Fair
      value of warrants issued in conjunction with issuance of Series A-2
      preferred stock
                
                
                -
                
                
                
                -
                
                
                
                232,502Change
      in fair value of warrants issued in conjunction with issuance of Series A
      redeemable preferred stock
                
                
                -
                
                
                
                5,012,875
                
                
                
                5,012,875Change
      in fair value of warrants and reset derivative liabilities in connection
      with Series C redeemable preferred stock
                
                
                (907,867
                )
                
                
                -
                
                
                
                (907,867
                )Fair
      value of warrants issued in settlement of convertible
      debentures
                
                
                -
                
                
                
                -
                
                
                
                598,692Amortization
      of debt discount attributable to subordinated convertible
    debt
                
                
                -
                
                
                
                -
                
                
                
                5,713(Increase)
      decrease in:Prepaid
      expenses
                
                
                (18,417
                )
                
                
                (118,454
                )
                
                
                (136,871
                )Deposits
                
                
                -
                
                
                
                (22,600
                )
                
                
                (22,600
                )Decrease
      in:Accounts
      payable and accrued liabilities
                
                
                (357,515
                )
                
                
                (89,579
                )
                
                
                343,611Net
      cash (used in) operating activities
                
                
                (5,649,487
                )
                
                
                (4,690,114
                )
                
                
                (11,573,503
                )Cash
      flows from investing activities:Purchase
      of property plant and equipment
                
                
                (148,070
                )
                
                
                (121,645
                )
                
                
                (277,996
                )Sale
      (purchases) of short term investment
                
                
                2,118,447
                
                
                
                2,856,543
                
                
                
                (25,010
                )Net
      cash provided by (used in) investing activities
                
                
                1,970,377
                
                
                
                2,734,898
                
                
                
                (303,006
                )Cash
      flows from financing activities:Payments
      on notes payable
                
                
                (10,316
                )
                
                
                -
                
                
                
                (10,316
                )Proceeds
      from exercise of common stock options
                
                
                8,428
                
                
                
                3,639
                
                
                
                18,283Proceeds
      from exercise of warrants
                
                
                
                
                
                
                2,799,745
                
                
                
                2,799,745Proceeds
      from the sale of Series A-2 preferred stock
                
                
                -
                
                
                
                -
                
                
                
                79,079Proceeds
      from sale of Series A preferred stock
                
                
                -
                
                
                
                -
                
                
                
                7,342,500Proceeds
      from sale of Series C preferred stock
                
                
                2,742,212
                
                
                
                -
                
                
                
                2,742,212Proceeds
      from sale of common stock
                
                
                -
                
                
                
                -
                
                
                
                113,513Proceeds
      from convertible debt, net
                
                
                -
                
                
                
                -
                
                
                
                177,500Net
      cash provided by financing activities
                
                
                2,740,324
                
                
                
                2,803,384
                
                
                
                13,262,516Net
      (decrease) increase in cash and cash equivalents
                
                
                (938,786
                )
                
                
                848,168
                
                
                
                1,386,007Cash
      and cash equivalents at beginning of period
                
                
                2,324,793
                
                
                
                1,476,625
                
                
                
                -Cash
      and cash equivalents at end of period
                
                $
                1,386,007
                
                
                $
                2,324,793
                
                
                $
                1,386,007Supplemental
      disclosures of cash flow information:Taxes
      paid
                
                $
                7,440
                
                
                $
                -
                
                
                $
                7,440Interest
      paid
                
                $
                1,117
                
                
                $
                -
                
                
                $
                1,117Non
      cash financing activities:Fair
      value of warrants issued with redeemable preferred stock
                
                $
                2,052,181
                
                
                $
                -
                
                
                $
                4,802,973Fair
      value of warrants issued as compensation for financing
                
                $
                978,955
                
                
                $
                -
                
                
                $
                1,333,989Beneficial
      conversion feature of redeemable preferred stock
                
                $
                2,674,116
                
                
                $
                -
                
                
                $
                5,491,826Preferred
      stock dividend - non-cash
                
                $
                784,010
                
                
                $
                754,328
                
                
                $
                4,356,048
    F-13
  
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES
 
 A summary
of the significant accounting policies applied in the presentation of the
accompanying financial statements follows:
 
 Basis and business
presentation
 
 NewCardio,
Inc. (the “Company”) was incorporated under the laws of the State of Delaware in
September 2004.  The Company is in the development stage, as defined
by Accounting Standards Codification subtopic 915-10, Development Stage Entities
("ASC 915-10") and is a cardiac diagnostic technology provider focused on the
research, development and commercialization of proprietary software platform
technology products and services for the non-invasive diagnosis and monitoring
of cardiovascular disease (“CVD”), as well as the cardiac safety assessment of
drugs under development.   To date, the Company has not generated
sales revenues, has incurred expenses and has sustained
losses.  Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise.  For the
period from inception through December 31, 2009, the Company has accumulated a
deficit through its development stage of $30,930,360.
 
 The
consolidated financial statements include the accounts of the Company,
and its wholly-owned subsidiary NewCardio Technologies, Inc. (“New Cardio
Technologies”).  All significant intercompany balances and transactions
have been eliminated in consolidation.
 
 Reverse Merger and Corporate
Restructure
 
 On
December 27, 2007, the Company consummated a reverse merger by entering into a
share exchange agreement (the “Share Exchange”) with the stockholders of
NewCardio Technologies, pursuant to which the stockholders of NewCardio
Technologies  exchanged all of the issued and outstanding capital
stock of NewCardio Technologies for 18,682,537 shares of common stock of the
Company representing 92% of the Company’s outstanding capital stock, after the
return to treasury and retirement of 9,445,015 shares of common stock of the
Company held by certain stockholders of the Company concurrently with the Share
Exchange. Prior to the Share Exchange, the Company was an inactive corporation
with no significant assets and liabilities and was considered as “Shell Company”
under the SEC guidelines
 
 As a
result of the Share Exchange, there was a change in control of the Company. In
accordance with Accounting Standards Codification subtopic 805-10, Business
Combinations (“ASC 805-10) Accounting Standards Codification subtopic 805-10,
Business Combinations (“ASC 805-10), the Company was the acquiring entity.
In substance, the Share Exchange is a recapitalization of the Company’s capital
structure rather than a business combination and accounted for as
such.
 
 All
reference to Common Stock shares and per share amounts have been retroactively
restated to effect the reverse merger as if the transaction had taken place as
of the beginning of the earliest period presented.
 
 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.  Accordingly, actual
results could differ from those estimates.
 
 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.
    F-14
   NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 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.
 
 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 the Company's financial position and results of operations was not
significant.
 
 Cash and Cash
Equivalents
 
 For
purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.
 
 Commitment
Fees
 
 The
Company amortizes commitment fees paid in connection with establishment of a
credit facility are ratably over the term of the credit facility commitment.
(See note 7)
 
 Fair
Values
 
 In the
first quarter of fiscal year 2008, the Company adopted Accounting Standards
Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC
820-10”).  ASC 820-10 defines fair value, establishes a framework for
measuring fair value, and enhances fair value measurement disclosure. ASC 820-10
delays, until the first quarter of fiscal year 2009, the effective date for ASC
820-10 for all non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The adoption of ASC 820-10 did not have a
material impact on the Company’s financial position or operations. Refer to
Footnote 11 for further discussion regarding fair valuation.
 
 Short Term
Investments
 
 Short-term
investment consists of a bank certificate of deposit that matures within the
next 12 months.
 
 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.
 
 
 
 
 
  F-15
 
 
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Long-Lived
Assets
 
 The
Company has adopted The Company has adopted Accounting Standards Codification
subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10
requires that long-lived assets and certain identifiable intangibles held and
used by the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Events relating to recoverability may include significant
unfavorable changes in business conditions, recurring losses, or a forecasted
inability to achieve break-even operating results over an extended period. The
Company evaluates the recoverability of long-lived assets based upon forecasted
undiscounted cash flows. Should impairment in value be indicated, the carrying
value of intangible assets will be adjusted, based on estimates of future
discounted cash flows resulting from the use and ultimate disposition of the
asset. ASC 360-10 also requires assets to be disposed of be reported at the
lower of the carrying amount or the fair value less costs to sell.
 
 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 are
insignificant.  The adoption of ASC 740-10 did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
 
 Comprehensive
Income
 
 The
Company does not have any items of comprehensive income in any of the periods
presented.
 
 Net Loss per
Share
 
 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 have 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 there effect is anti-dilutive on the computation.
Fully diluted shares outstanding were 48,087,203 and 44,788,587 for the years
ended December 31, 2009 and 2008, respectively.
 
 Stock based
compensation
 
 Effective
for the year beginning January 1, 2006, the Company has adopted Accounting
Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) which
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values.  Pro-forma disclosure is no longer an alternative. This
statement does not change the accounting guidance for share based payment
transactions with parties other than employees provided in ASC
718-10.  The Company implemented ASC 718-10 on January 1, 2006
using the modified prospective method.
 
 
 F-16
 
 
  NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 As more
fully described in Note 10 below, the Company granted equity based compensation
over the years to employees of the Company under its equity
plans.  The Company granted non-qualified stock options to purchase
510,000 and 4,075,000 shares of common stock during the year ended December 31,
2009 and 2008, respectively, to employees and directors of the Company under the
2004 Equity Incentive Plan and the 2009 Equity Compensation Plan as well as
1,470,000 restricted stock units during the year ended December 31, 2009 under
the 2009 Equity Compensation Plan.
 
 As of
December 31, 2009, there were outstanding employee stock options to purchase
7,365,000 shares of common stock, 4,273,400 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.
 
 Reliance on Key Personnel
and Consultants
  The
Company has only 10 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 Company maintains $2 million in key
life insurance on the CEO and nothing for any of the other executive officers or
other personnel. 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. 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
$3,047,994, $2,126,084 and $6,333,104 for the years ended December 31, 2009 and
2008 and from September 7, 2004 (date of inception) through December 31, 2009,
respectively.
 
 Fair Value of Financial
Instruments
 
 Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”)
requires disclosure of the fair value of certain financial instruments. The
carrying value of cash and cash equivalents, accounts payable and short-term
borrowings, as reflected in the balance sheets, approximate fair value because
of the short-term maturity of these instruments. The carrying amount for the
Series C convertible preferred stock approximate fair value.
 
 
 
 F-17
 
 
 
 
  NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Recent accounting
pronouncements
 
 Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification(the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not
included in the Codification is non-authoritative. The FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”). The FASB will not consider ASUs as authoritative in their own right.
ASUs will serve only to update the Codification, provide background information
about the guidance and provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this document have
been updated for the Codification.
 
 Effective
January 1, 2008, the Company adopted FASB ASC 820-10, Fair Value Measurements and
Disclosures – Overall(“ASC 820-10”) with respect to its financial assets
and liabilities. In February 2008, the FASB issued updated guidance related to
fair value measurements, which is included in the Codification in ASC 820-10-55,
Fair Value Measurements and
Disclosures – Overall – Implementation Guidance and Illustrations. The
updated guidance provided a one year deferral of the effective date of ASC
820-10 for non-financial assets and non-financial liabilities, except those that
are recognized or disclosed in the financial statements at fair value at least
annually. Therefore, the Company adopted the provisions of ASC 820-10 for
non-financial assets and non-financial liabilities effective January 1,
2009, and such adoption did not have a material impact on the Company’s
consolidated results of operations or financial condition.
 
 Effective
April 1, 2009, the Company adopted FASB ASC 820-10-65, Fair Value Measurements and
Disclosures – Overall – Transition and Open Effective Date Information
(“ASC 820-10-65”). ASC 820-10-65 provides additional guidance for estimating
fair value in accordance with ASC 820-10 when the volume and level of activity
for an asset or liability have significantly decreased. ASC 820-10-65 also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. The adoption of ASC 820-10-65 did not have an impact on the
Company’s consolidated results of operations or financial
condition.
 
 Effective
April 1, 2009, the Company adopted FASB ASC 825-10-65, Financial Instruments – Overall –
Transition and Open Effective Date Information (“ASC 825-10-65”). ASC
825-10-65 amends ASC 825-10 to require disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements and also amends ASC 270-10 to require those disclosures in all
interim financial statements. The adoption of ASC 825-10-65 did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
 
 In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”, which is included in
ASC Topic 855, Subsequent Events. ASC Topic 855 established principles and
requirements for evaluating and reporting subsequent events and distinguishes
which subsequent events should be recognized in the financial statements versus
which subsequent events should be disclosed in the financial statements. ASC
Topic 855 also required disclosure of the date through which subsequent events
are evaluated by management.  ASC Topic 855 was effective for interim
periods ending after June 15, 2009 and applies
prospectively.  Because ASC Topic 855 impacted the disclosure
requirements, and not the accounting treatment for subsequent events, the
adoption of ASC Topic 855 did not impact our results of operations or financial
condition.  See Note 14 for disclosures regarding our subsequent
events.
 
   F-18
   NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Recent accounting
pronouncements (continued)
 
 Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using certain techniques. ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in
an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are
Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
 
 In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) (“ASU
2009-13”) and ASU 2009-14, Certain Arrangements That Include
Software Elements, (amendments to FASB ASC Topic 985, Software) (“ASU
2009-14”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-14 removes tangible products from the scope
of software revenue guidance and provides guidance on determining whether
software deliverables in an arrangement that includes a tangible product are
covered by the scope of the software revenue guidance. ASU 2009-13 and ASU
2009-14 should be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010, with early adoption permitted. The Company does not expect
adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on the
Company’s consolidated results of operations or financial
condition.
 
 NOTE
2 – GOING CONCERN MATTERS
 
 The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements during year ended December 31, 2009, the
Company incurred net losses attributable to common shareholders of $10,374,623,
incurred net losses attributable to common shareholders of $32,468,698 from its
inception on September 7, 2004 through December 31, 2009 and used
$11,573,503 in cash for operating activities from its inception
through December 31, 2009. These factors among others may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.
 
 The
Company's existence is dependent upon management's ability to develop profitable
operations. Management is devoting substantially all of its efforts to
developing its products and services and there can be no assurance that the
Company's efforts will be successful. However, the planned principal operations
have not commenced and no assurance can be given that management's actions will
result in profitable operations or the resolution of its liquidity problems. The
accompanying statements do not include any adjustments that might result should
the Company be unable to continue as a going concern.
 
 
 
 
 F-19
 
 
 
  NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
3 - PROPERTY, PLANT AND EQUIPMENT
 
 Property,
plant and equipment at December 31, 2009and 2008 are as follows:
 
 2009
              
              
              2008Computer
      equipment
              
              $
              122,154
              
              
              $
              45,240Furniture
      and fixtures
              
              
              65,883
              
              
              
              61,686Research
      equipment
              
              
              48,706
              
              
              
              23,000Software
              
              
              23,455
              
              
              
              -Production
      equipment
              
              
              17,798
              
              
              
              -Less:
      accumulated depreciation
              
              
              (79,041
              )
              
              
              (19,208
              )$
              198,955
              
              
              $
              110,718
 
 The
Company uses the straight line method of depreciation over 3 to 5 years. During
the years ended December 31, 2009 and 2008, depreciation expense charged to
operations was $59,833 and $18,614, respectively.
 
 NOTE
4 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
 The
Company has consulting agreements with independent contractors, certain of whom
are also Company stockholders plus one Board member. See Footnote 5 for related
party transactions. The agreements are generally short term and milestones based
and include cash compensation, equity compensation or a combination thereof.
Accounts payable and accrued liabilities at December 31, 2009 and 2008 are
comprised of trade payables and accrued expenses.
 
 NOTE
5 – RELATED PARTY TRANSACTIONS
 
 Notes
payable related party is comprised of a promissory note totaling $10,316, due
November 15, 2008 with interest at 4.9%per annum due upon
maturity to a former director and shareholder of the Company. The note was paid
in January 2009.
 
 In
September 2007, the Company entered into a three-year consulting agreement with
E4, LLC, a greater than 5% shareholder of the Company. The Company sold E4, LLC
1,475,631 shares of common stock for $0.02 per share for cash, or $29,513. The
consultant also receives monthly cash payments of $24,000 as part of this
consulting agreement.  At December 31, 2007 the Company owed E4, LLC
$84,000 that was subsequently paid in January 2008. During the year ended
December 31, 2009 and 2008, the Company paid an additional $288,000 each year to
E4, LLC. At December 31, 2009 there are no outstanding obligations under the
agreement.  His services are to provide business guidance, and
primarily in areas related to sales, marketing and business
strategy.
 
 Effective
January 1, 2008 the Company entered into a consulting agreement with a current
Board member for corporate strategy and finance services. This agreement
terminated effective October 31, 2009 and a similar agreement initiated December
1, 2009. During the year ended December 31, 2009 and 2008, the Company paid
$35,000 and $33,000, respectively and at December 31, 2009 there are no
outstanding obligations under the agreement.
 
 
 
 
 F-20
  NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
5 – RELATED PARTY TRANSACTIONS (continued)
 
 Effective
October 31, 2009, Kenneth Londoner resigned as a full time employee and signed a
one-year, part time consulting agreement, continuing his business development
responsibilities under this new arrangement. At this transition, the unvested
portion of his 2007 option grant was accelerated.  He also receives
monthly cash payments of $14,300 as part of this consulting agreement. During
the year ended December 31, 2009, the Company paid Mr. Londoner $28,600 and at
December 31, 2009 there are no outstanding obligations under the
agreement.
 
 NOTE
6 – PUT LIABILITY
  In
connection with the exercise of J warrants in December 2008, the Company has
agreed to re-acquire 1,896 shares of Series B Preferred Stock (Put Option) for a
sum of $744,280, net of unpaid transaction costs of $56,000, allowing the
Company to reacquire these shares for a net value of approximately $0.39 per
share. This Put is at the holder’s option for 30 days after June 30,
2010.  If the holder does not exercise the Put Option by July 30,
2010, or if the Company completes financings totaling $5 million or more by June
30, 2010 (which is an additional $2.1 million as of year end), the option
expires.
 
 NOTE
7 – CREDIT FACILITY
 
 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 May 31, 2011, as amended, and, in
connection therewith, (x) was issued 750,000 five year common stock purchase
warrants with an exercise price of $0.01 per share, and (y) will be issued upon
each draw down under the Credit Line, for each $1.00 advanced under the Credit
Line, additional five year common stock purchase warrants exercisable at a price
equal to 100% of the average VWAPs for the prior five trading days (the “Draw
Down Warrants”). The Draw Down Warrants will 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) with respect to future Draw Down Warrants issued under the Credit Line
and future issuances of equity securities by the Company (subject to certain
specific exceptions).  The warrants will have cashless exercise
provisions and be 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 will accrue and be payable upon maturity.
 
 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 of $910,860,
determined using the Black Scholes Option Pricing Model, is amortized ratably to
operations over the life of the Credit Line.  The assumptions for fair
value determination were as follows: Dividend yield: 0%; Volatility: 139.04%;
Expected life: 5 years; Risk free rate: 2.66%. Also $25,000 was paid toward
availing the credit facility. During the year ended December 31, 2009, $378,984
was amortized as “financing cost” and balance $556,875 is shown under “Prepaid
commitment fees”.
 
 The
Credit Line is provided by three stockholders of the Company, one of which has
representation on the Board of Directors.
 
 As of
December 31, 2009, the Company has not utilized the credit
facility.
 
 
 
 
 F-21
 
 
 
  NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
8 - SERIES C CONVERTIBLE 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”)
 
 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 to any of the forgoing.
 
 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.
 
 Dilutive
issuance.  If, at any time prior to the first anniversary of
the date of issuance, the Company, except in connection with defined exempt
issuances, sell or grant any option to purchase, or sell or grant any right to
re-price, or otherwise dispose of or issue any common stock (or common stock
equivalents) entitling any person to acquire shares of common stock at an
effective price per share less than the market price of the common stock on the
date that the Series C preferred stock was issued (a “dilutive issuance”), than
the conversion ratio shall be increased by the same percentage as the percentage
by which the price per share of common stock in connection with the dilutive
issuance was lower than the market price of the common stock on the date that
the Series C preferred stock was issued.
 
 Exchange
Right.  If, at any time prior to the first anniversary of the
date of issuance, the Company delivers a notice requesting a draw down under the
Company’s 12% secured revolving debenture due May 31, 2011, then a copy of such
request shall be delivered to each holder of the Series C preferred stock within
five trading days of such notice.  Each holder of the Series C
preferred stock shall have a one-time right, at any time within five trading
days after delivery of notice, to elect to exchange its 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 debentures and
warrants.
 
 In
connection with the issuance of each share Series C preferred stock, the Company
issued 1,000 warrants to purchase the Company’s common stock at $1.20 per share
for five years.  Prior to the first anniversary of the date of
issuance, the warrants contain certain reset provisions should the Company issue
sell or grant any option to purchase, or sell or grant any right to re-price, or
otherwise dispose of or issue any common stock (or common stock equivalents)
entitling any person to acquire shares of common stock at an effective price per
share less than the exercise price of the Series C Preferred Stock.
 
 Series C
convertible preferred stock contains certain reset and possible redemption
provisions which require it to be classified as a liability in the balance sheet
and is stated at redemption value net of discounts.
 
 In
accordance with ASC 815-40,the Company is 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.
 
 F-22
 
 
  NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
8 - SERIES C CONVERTIBLE PREFERRED STOCK (continued)
 
 In
connection with the issuance of the Series C preferred stock, the Company issued
2,920,000 warrants with certain reset provisions.  In accordance with
ASC 815-40,the
Company is required to record the fair value of the warrants outside of equity
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 issued an aggregate of 2,920 shares of preferred stock in September 2009
to accredited investors including Company officers, shareholders and
directors.
 
 The
Company recorded a total debt discount of $2,674,117 from the reset provision
and related warrants.  The discount is amortized ratably over the
reset provision life of one year. During the year ended December 31, 2009,
$784,010 was amortized and charged to Additional paid in Capital.
 
 Warrant liability in
connection with issuance of Series C Preferred Stock in September
2009
 
 As
described above, the Company issued warrants in conjunction with the sale of
Series C preferred stock.  These warrants contain 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 on the balance sheet in the amount of $2,052,181
and a reduction in value of the Series C preferred stock and charge to current
period operations. 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 fair
values of the warrants of $1,078,292 at December 31, 2009 were determined using
the Black Scholes Option Pricing Model with the following
assumptions:
 
 Dividend
      yield:
              -0-%Volatility
              132.30%Risk
      free rate:
              1.14%
 
 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 in remote and has classified the obligation as a long term
liability.
 
 
 
 
 F-23
 
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
8 - SERIES C CONVERTIBLE PREFERRED STOCK (continued)
 
 Reset derivative
liability
 
 As
described in above, the Company issued Series C preferred stock that contains
certain reset provisions up to the first anniversary of date of the issuance.
Therefore, in accordance with ASC 815-40, the Company determined the fair value
of the reset provision of $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. Since the Series C preferred stock contains a
reset provision for the first year, pursuant to ASC 815-40, the Company has
recorded the fair value of the reset provision as a derivative liability. The
net value of the reset provision at the date of issuance was recorded as a reset
derivative liability on the balance sheet in the amount of $1,647,771 and a
reduction in value of the Series C preferred stock and charge to current period
operations. Until expiration of the reset provisions of the Series C
preferred stock, changes in fair value were recorded as non-operating, non-cash
income or expense at each reporting date.
 
 The fair
value of the reset provision of $687,958 at December 31, 2009 was determined
using the Black Scholes Option Pricing Model with the following
assumptions:
 
 Dividend
      yield:
              -0-%Volatility
              132.30%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 in remote and has classified the obligation as a long term
liability.
 
 The
initial fair value of the warrants and derivative liability resulted in a
current period non operating charge to operations of $1,025,836.  At
December 31, 2009, the Company adjusted the recorded fair values of the warrants
and derivative liability to market resulting in aggregate non cash, non
operating gain of $907,866.
 
 NOTE
9– STOCKHOLDERS EQUITY
 
 Founders Convertible
Preferred Stock
 
 At the
time of its founding in September 2004, NewCardio Technologies issued 4,563,206
shares of Convertible Preferred Stock, par value $0.0001 per share, to certain
persons for costs incurred and services rendered.  The shares of
Preferred Stock were valued at $0.01 per share at the time of
issuance.  In December 2007, in conjunction with the Share Exchange,
the Preferred Stock was converted on a one share-to-one share basis into
4,563,206 shares of common stock.
 
 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 A – 10% Convertible
Preferred Stock
 
 In
December, 2007, the Board of Directors authorized the issuance of up to 12,000
shares of Series A 10% convertible non-voting preferred stock (the “Series A
shares”) having a stated value of $1,000 per share.  8,200 shares were
issued and subsequently converted into common stock or Series B preferred
Stock.
 
   F-24
   NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
9– STOCKHOLDERS EQUITY (continued)
 
 Series A – 10% Convertible
Preferred Stock (continued)
 
 On May
12, 2009 the Company canceled the Series A Convertible Preferred Stock
authorization.
 
 Warrant liability in
connection with the issuance of Series A Preferred Stock in December
2007
 
 The
Company estimated the fair value at date of issue of the warrants issued in
connection with the private placement to be $4,802,973 using the Black-Scholes
formula assuming no dividends, a risk-free interest rate of 3.37% to 3.64 %,
expected volatility of 121.06%, and expected warrant life of one to five years.
Since the Company may be obligated to settle the warrants in cash, pursuant to
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging;
Contracts in Entity’s Own Equity (“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 on the
balance sheet in the amount of $4,802,973 and a reduction in value of shares
subject to redemption. Until conversion and modification of the warrants in
December 2008, changes in fair value were recorded as non-operating, non-cash
income or expense at each reporting date.
 
 These
warrants originally contained a “fundamental transaction” clause that if while
the warrant(s) are outstanding, the Company effects any merger or consolidation
of the Company with or into another “Person” or other similar transactions (as
defined in the warrants), the warrant holders can demand net cash
settlement.
 
 As the
warrants contained a provision that could have required cash settlement,
pursuant to ASC 815-40, the warrants were recorded as a derivative
liability and valued at fair market value until the Company met the criteria
under ASC 815-40 for permanent equity. The net value of the warrants at the date
of issuance was recorded as a warrant liability on the balance sheet in the
amount of $4,802,973 and charged as a reduction of the preferred stock carrying
value. Subsequent to the initial issuance date, the Company adjusted to
fair value the warrant in current period operations.
 
 In
accordance with Accounting Standards Codification subtopic 815-10, Derivatives
and Hedging (“ASC 815-10”), the Company recorded a loss during the year
ended December 31, 2008 on the change in fair value of warrant liability of
$5,012,875 until December 1, 2008 at which time the warrants were exercised on
term modification.  The fair value of the warrants at December 1, 2008
(time of modification or conversion, see below) was determined using the Black
Scholes Option Pricing Model with the following assumptions:  Dividend
yield: -0-%, volatility: 127.56%; risk free rate: 0.11% to 1.16%.
 
 On
December 1, 2008, all warrants that contain a provision that require a cash
settlement as described above were exercised or terms modified to exclude such
provision. As such, the fair value of the warrant liability of $9,815,847
at the time of the exercise or term modification was reclassified to
equity.
 
 During
the year ended December 31, 2008, the Company incurred a $5,012,875 charge to
current period operations for the change in fair value of the warrant
liability.  As discussed above, as of December 1, 2008; the warrant
liability was reclassified to equity.
 
 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”).
 
 
 
 F-25
 
  NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
9– STOCKHOLDERS EQUITY (continued)
 
 Series B – Preferred Stock
(continued)
 
 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.
 
 On
December 1, 2008; the Company issued 16,435 shares of Series B preferred
stock:
 
 1.
              An
      aggregate of 8,031 shares of Series B preferred stock in exchange for
      7,630.18542 shares of Series A Convertible preferred
  stock;2.
              An
      aggregate of 1,634 shares of Series B preferred stock as an inducement to
      convert Series A 10% convertible preferred stock to Series B preferred
      stock;3.
              An
      aggregate of 134 shares of Series B preferred stock in settlement of
      accrued and unpaid dividends on Series A 10% convertible preferred stock
      of $127,816; and4.
              An
      aggregate of 6,636 shares of Series B preferred stock in exchange for the
      exercise of Series J and JA
warrants.
 
 Refer to
Note 6 above regarding put liability relating to certain issuances of Series B
0% convertible non-voting preferred stock.
 
 Common
Stock
 
 The
Company is authorized to issue 99,000,000 shares of common stock, par value
$0.001 per share.
 
 In
September 2004, NewCardio Technologies issued 3,436,794 shares of common stock
to founders and consultants in exchange for services and intellectual
property.  The shares of common stock were valued at $0.001 per share
at the time of issuance.
 
 In
November 2004, NewCardio Technologies issued 300,000 shares of common stock upon
the exercise of stock options at the exercise price of $0.001 per
share.
 
 In March
2006, NewCardio Technologies issued 278,375 shares of common stock for services
rendered and, in October 2006, NewCardio Technologies issued 75,000 shares of
common stock for services rendered.  The shares were valued at $0.10
per share. The valuations of common stock issued for services were based on the
value of the services rendered, which did not differ materially from the fair
value of the common stock during the period the services were
rendered.
 
 In June
2007, NewCardio Technologies sold 4,200,000 shares of common stock, valued at
$0.10 per share, for $0.02 per share, or $84,000.  The remaining $0.08
per share value was issued as compensation for services valued at
$336,000.  The valuation of common stock issued for services was based
on the value of the services rendered, which did not differ materially from the
fair value of the common stock during the period the services were rendered. The
difference between cash received for the sale of the common stock and the
estimated fair value of $0.08 per share was recorded as stock-based
compensation.  The shares are subject to a repurchase right that
diminishes when certain events occur.  192,000 shares remain subject
to the repurchase right.
 
 
 F-26
 
 
 
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
9– STOCKHOLDERS EQUITY (continued)
 
 In
September 2007, NewCardio Technologies sold 1,475,631 shares of common stock,
valued at $0.10 per share, for $0.02 per share for cash, or $29,513. The
remaining $0.08 per share value was issued as compensation for services
rendered.  The difference between cash received for the sale of the
common stock and the estimated fair value of $0.08 per share was recorded as
stock-based compensation.  25% of the shares were fully vested at the time
of sale.  The remaining shares are subject to a repurchase right that
diminishes over a 36 month period.
 
 In April
2008, the Company issued an aggregate of 110,301 shares of common stock as
dividends due to holders of the Series A shares in the amount of
$214,112.
 
 In June
2008, the Company issued 100,000 shares of common stock as deferred compensation
at $3.38 per share.
 
 In July
2008, the Company issued an aggregate of 64,903 shares of common stock as a
dividend due to holders of the Series A shares in the amount of
$205,000.
 
 In
October 2008, the Company issued an aggregate of 98,041 shares of common stock
as a dividend due to holders of the Series A shares in the amount of
$202,557.
 
 In
January 2009, the Company issued an aggregate of 3,973 shares of common stock as
a dividend due to holders of the Series A shares in the amount of
$4,843.
  In
January 2009, the Company issued an aggregate of 2,500 shares of common stock
for services rendered at approximately $1.60 per share.  The
valuations of common stock issued for services were based on the value of the
services rendered, which did not differ materially from the fair value of the
common stock during the period the services were rendered.
 
 In
November and December 2009, the Company issued an aggregate of 265,000 shares of
common stock for services rendered at approximately $0.70 to $0.77 per
share.  The valuations of common stock issued for services were based
on the value of the services rendered, which did not differ materially from the
fair value of the common stock during the period the services were
rendered.
 
 As of
December 31, 2009 and 2008, there were 24,290,279 and 22,335,595 shares of
common stock issued and outstanding, respectively
 
 
 
 
 
 
 F-27
 
 
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
10 –WARRANTS, STOCK OPTIONS, AND RESTRICTIVE STOCK UNITS
 
 Warrants
 
 The
following table summarizes in warrants outstanding and related prices for the
shares of the Company’s common stock issued to shareholders at December 31,
2009:
 
 Warrants Outstanding
                Weighted Average
              
              
              
              
              
              
              
              
              Warrants ExercisableRemaining
              
              
              Weighted
              
              
              
              
              
              WeightedNumber
              
              
              Contractual
              
              
              Average
              
              
              Number
              
              
              AverageExercise Price
              
              
              Outstanding
              
              
              Life (years)
              
              
              Exercise price
              
              
              Exercisable
              
              
              Exercise Price$ 0.01
              
              
              750,000
              
              
              4.58
              
              
              $ 0.01
              
              
              750,000
              
              
              $ 0.010.10
              
              
              
              965,199
              
              
              
              0.47
              
              
              
              0.10
              
              
              
              965,199
              
              
              
              0.100.50
              
              
              
              25,000
              
              
              
              1.65
              
              
              
              0.50
              
              
              
              25,000
              
              
              
              0.500.95
              
              
              
              120,842
              
              
              
              2.99
              
              
              
              0.95
              
              
              
              120,842
              
              
              
              0.950.96
              
              
              
              203,385
              
              
              
              2.50
              
              
              
              0.96
              
              
              
              203,385
              
              
              
              0.961.00
              
              
              
              71,000
              
              
              
              4.70
              
              
              
              1.00
              
              
              
              71,000
              
              
              
              1.001.14
              
              
              
              5,178,948
              
              
              
              2.99
              
              
              
              1.14
              
              
              
              5,178,948
              
              
              
              1.141.15
              
              
              
              162,709
              
              
              
              2.50
              
              
              
              1.15
              
              
              
              162,709
              
              
              
              1.151.20
              
              
              
              2,920,000
              
              
              
              4.70
              
              
              
              1.20
              
              
              
              2,920,000
              
              
              
              1.201.50
              
              
              
              250,000
              
              
              
              4.03
              
              
              
              1.50
              
              
              
              229,176
              
              
              
              1.502.00
              
              
              
              300,000
              
              
              
              1.42
              
              
              
              2.00
              
              
              
              300,000
              
              
              
              2.004.00
              
              
              
              300,000
              
              
              
              1.42
              
              
              
              4.00
              
              
              
              300,000
              
              
              
              4.00Total
              
              
              
              11,247,083
              
              
              
              3.23
              
              
              
              
              
              
              
              11,226,259
 
 Transactions involving the Company’s warrant issuance are summarized as
follows:
 
 Number of
                Shares
              
              
              Weighted
                Average Price
                Per ShareOutstanding
      at December 31, 2007
              
              
              17,718,627
              
              
              $
              1.06Issued
              
              
              600,000
              
              
              
              3.00Exercised
              
              
              (9,435,743
              )
              
              
              1.27Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2008
              
              
              8,882,884
              
              
              
              0.95Issued
              
              
              3,991,000
              
              
              
              0.96Exercised
              
              
              (1,626,801
              )
              
              
              0.10Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2009
              
              
              11,247,083
              
              
              $
              1.08
 
 
  F-28
   NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
10 –WARRANTS, STOCK OPTIONS, AND RESTRICTIVE STOCK UNITS
(continued)
 
 Warrants
(continued)
 
 For the
year ended December 31, 2009, warrants totaling 250,000 were issued in
connection with services rendered. The warrants vest over a twelve month period
and are exercisable for five years from the date of issuance at an exercise
price of $1.50 per share.  The vesting portions of the warrants were
valued using the Black Scholes option pricing method with the following
assumptions:  dividend yield $-0-, volatility of 131.35% to 143.28%
and risk free rate from 1.67% to 2.69%.
 
 On July
30, 2009, warrants totaling 750,000 were issued in connection with services
rendered. The warrants are exercisable for five years from the date of issuance
at an exercise price of $0.01 per share.  The warrants were valued
using the Black Scholes option pricing method with the following
assumptions:  dividend yield $-0-, volatility of 139.04% and risk free
rate from 2.66%.   The fair value of $910,860 was recorded as
prepaid commitment fees and is amortized ratably over one year.
 
 On
September 15, 2009, warrants totaling 71,000 were issued in connection with
issuance of Series C preferred stock. The warrants are exercisable for five
years from the date of issuance at an exercise price of $1.00 per
share.  The warrants were valued using the Black Scholes option
pricing method with the following assumptions:  dividend yield $-0-,
volatility of 131.04% and risk free rate from 2.41%.   The fair
value of $68,095 was recorded as a charge against net proceeds received in
issuance of related Series C preferred stock.
 
 On
September 15, 2009, warrants totaling 2,920,000 were issued in connection with
issuance of Series C preferred stock. The warrants are exercisable for five
years from the date of issuance at an exercise price of $1.20 per
share.  The warrants were valued using the Black Scholes option
pricing method with the following assumptions:  dividend yield $-0-,
volatility of 131.04% and risk free rate from 2.41%.  As described in
Note 8 above, these warrants contain certain reset provisions for the first year
which require the Company to classify the market value of the warrants outside
of equity.
 
 The
Company recorded the vested portion of warrants as a charge to operations of
$271,563 in the year ended December 31, 2009.
 
 During
the year ended December 31, 2009, warrant holders exercised 1,626,801 warrants
on a cashless basis in exchange for 1,515,000 shares of the Company’s common
stock.
 
 
 
 
 
 
 
  F-29
  NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
10 –WARRANTS, STOCK OPTIONS, AND RESTRICTIVE STOCK UNITS
(continued)
 
 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 December 31,
2009:
 
 Options Outstanding
              
              
              
              
              
              Options ExercisableWeighted Average
              
              
              Weighted
              
              
              
              
              
              WeightedRemaining
              
              
              Average
              
              
              
              
              
              AverageExercise
              
              Number
              
              
              Contractual Life
              
              
              Exercise
              
              
              Number
              
              
              ExercisePrices
              
              Outstanding
              
              
              (Years)
              
              
              Price
              
              
              Exercisable
              
              
              Price$0.01
              
              
              136,646
              
              
              
              4.74
              
              
              $
              0.01
              
              
              
              127,069
              
              
              $
              0.010.02
              
              
              178,326
              
              
              
              6.26
              
              
              
              0.02
              
              
              
              143,842
              
              
              
              0.020.22
              
              
              71,172
              
              
              
              8.11
              
              
              
              0.22
              
              
              
              28,047
              
              
              
              0.220.80
              
              
              444,000
              
              
              
              8.62
              
              
              
              0.80
              
              
              
              148,960
              
              
              
              0.801.16
              
              
              25,000
              
              
              
              8.58
              
              
              
              1.16
              
              
              
              2,083
              
              
              
              1.162.00
              
              
              400,000
              
              
              
              8.95
              
              
              
              2.00
              
              
              
              -
              
              
              
              2.002.25
              
              
              150,000
              
              
              
              8.18
              
              
              
              2.25
              
              
              
              65,625
              
              
              
              2.25Total
              
              
              1,405,144
              
              
              
              7.93
              
              
              
              
              
              
              
              515,626
 
 Transactions
involving stock options issued to non employees are summarized as
follows:
 
 Number of
                Shares
              
              
              Weighted
                Average
                Price
                Per ShareOutstanding
      at December 31, 2007:
              
              
              766,959
              
              
              $
              0.07Granted
              
              
              854,000
              
              
              
              2.32Exercised
              
              
              (205,521
              )
              
              
              (0.03
              )Canceled
      or expired
              
              
              (7,083
              )
              
              
              (0.01
              )Outstanding
      at December 31, 2008:
              
              
              1,408,355
              
              
              
              1.44Granted
              
              
              165,000
              
              
              
              0.85Exercised
              
              
              (168,211
              )
              
              
              (0.05
              )Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2009:
              
              
              1,405,144
              
              
              $
              1.10
 
 During
the year ended December 31, 2009, the Company granted an aggregate of 165,000
non employee stock options in connection services rendered at the exercise
prices from $0.80 to $1.16.
 
 The fair
values of the vesting non employee options were determined using the Black
Scholes option pricing model with the following assumptions:
 
 Dividend
      yield:
              -0-%Volatility
              131.35%
      to 143.28%Risk
      free rate:
              2.28%
      to 2.69%
 
 
 
 F-30
 
 
 
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
10 –WARRANTS, STOCK OPTIONS, AND RESTRICTIVE STOCK UNITS
(continued)
 
 Non-Employee Stock Options
(continued)
 
 During
the year ended December 31, 2009, the Company re-priced certain non employee
options initially with exercise prices from $1.58 to $4.72 to $0.80 per share
with other terms remaining the same.  The fair value of the vested
portion of the re-priced options of $2,862 was charged to current period
operations.
 
 The
fair values of the vesting re-priced non employee options were determined using
the Black Scholes option pricing model with the following
assumptions:
 
 Dividend
      yield:
              -0-%Volatility
              118.36%Risk
      free rate:
              2.82%
 
 The fair
value of all non-employee options vesting during the year ended December 31,
2009 and 2008 of $404,532 and $457,307 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 December 31,
2009:
 
 Options Outstanding
              
              
              
              
              
              Options ExercisableWeighted Average
              
              
              Weighted
              
              
              
              
              
              WeightedRemaining
              
              
              Average
              
              
              
              
              
              AverageExercise
              
              Number
              
              
              Contractual Life
              
              
              Exercise
              
              
              Number
              
              
              ExercisePrices
              
              Outstanding
              
              
              (Years)
              
              
              Price
              
              
              Exercisable
              
              
              Price$
              0.001
              
              
              100,000
              
              
              
              4.04
              
              
              $
              0.001
              
              
              
              100,000
              
              
              $
              0.0010.01
              
              
              300,000
              
              
              
              6.53
              
              
              
              0.01
              
              
              
              263,542
              
              
              
              0.010.02
              
              
              880,000
              
              
              
              7.19
              
              
              
              0.02
              
              
              
              880,000
              
              
              
              0.020.22
              
              
              1,750,000
              
              
              
              7.90
              
              
              
              0.22
              
              
              
              1,444,442
              
              
              
              0.220.78
              
              
              40,000
              
              
              
              9.88
              
              
              
              0.78
              
              
              
              -
              
              
              
              0.780.80
              
              
              4,295,000
              
              
              
              8.57
              
              
              
              0.80
              
              
              
              1,585,416
              
              
              
              0.80Total
              
              
              7,365,000
              
              
              
              8.10
              
              
              
              
              
              
              
              4,273,400
 
 Transactions
involving stock options issued to employees are summarized as
follows:
 
 
 
  F-31
   NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
10 –WARRANTS, STOCK OPTIONS, AND RESTRICTIVE STOCK UNITS
(continued)
 
 Employee Stock Options
(continued)
 
 Number of
                Shares
              
              
              Weighted
                Average
                Price
                Per ShareOutstanding
      at December 31, 2007:
              
              
              3,030,000
              
              
              $
              0.14Granted
              
              
              4,075,000
              
              
              
              3.06Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2008:
              
              
              7,105,000
              
              
              
              1.81Granted
              
              
              510,000
              
              
              
              0.85Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              (250,000
              )
              
              
              (0.90
              )Outstanding
      at December 31, 2009:
              
              
              7,365,000
              
              
              $
              0.53
 
 During
the year ended December 31, 2009, the Company granted 510,000 stock options with
an exercise price of $0.80 (after effect of re-pricing, see below) to $0.90
expiring ten years from issuance. In December 2009, the Company canceled
250,000 options previously issued at $0.90 per share. The fair values were
determined using the Black Scholes option pricing model with the following
assumptions:
 
 Dividend
      yield:
              -0- %Volatility
              
              114.10%
      to 136.21 %Risk
      free rate:
              
              2.49%
      to 3.69 %
 
 During
the year ended December 31, 2009, the Company re-priced certain employee options
initially with exercise prices from $1.60 to $5.00 to $0.80 per share with other
terms remaining the same.  The fair value of the fully vested
re-priced options of $3,815 was charged to current period
operations.
 
 The fair
values of the fully vested re-priced employee options were determined using the
Black Scholes option pricing model with the following assumptions:
 
 Dividend
      yield:
              -0-%Volatility
              118.36%Risk
      free rate:
              2.82%
 
 The fair
value of all employee options vesting in the year ended December 31, 2009 and
2008 of $3,480,805 and $1,803,263, respectively, was charged to current period
operations.
 
 Restrictive Stock
Units
 
 On April
15, 2009, the Company established 2009 Equity Compensation Plan for key
employees and consultants.  A maximum of 8,000,000 shares were
earmarked under the plan.
 
 
 
 F-32
 
 
 
 
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
10 –WARRANTS, STOCK OPTIONS, AND RESTRICTIVE STOCK UNITS
(continued)
 
 Restrictive Stock Units
(continued)
 
 Employees
 
 During
the year ended December 31, 2009 the Company issued Restricted Stock Units
(“RSU”) for key employees and non employees under the 2009 Equity Compensation
Plan.  Each RSU vests with a 24 month cliff with certain acceleration
clauses due to a change of control (as defined by the 2009 Equity Compensation
Plan).
 
 
 A summary
of RSU stock unit activity, related to employees, for the Company during the
year ended December 31, 2009, is as follows:
 
 Number of
                Shares
              
              
              Weighted
                Average
                Price
                Per ShareOutstanding
      at December 31, 2007:
              
              
              -
              
              
              $
              -Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2008:
              
              
              -
              
              
              
              -Granted
              
              
              1,470,000
              
              
              
              0.80Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2009:
              
              
              1,470,000
              
              
              $
              0.80
 
 As of
December 31, 2009, there was $784,000 of total unrecognized compensation cost
related to non vested restricted stock units granted to employees under the 2009
Stock Plan, which is expected to be recognized ratably over a weighted-average
period of 2 years.
 
 The fair
value of all employees RSU vesting during the year ended December 31, 2009 of
$392,000 was charged to current period operations.
 
 Non
employees
 
 A summary
of RSU stock unit activity, related to non employees, for the Company during the
year ended December 31, 2009, is as follows:
 
 
 
  F-33
    NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
10 –WARRANTS, STOCK OPTIONS, AND RESTRICTIVE STOCK UNITS
(continued)
 
 Restrictive Stock Units
(continued)
 
 Non –employees
(continued)
 
 Number of
                Shares
              
              
              Weighted
                Average
                Price
                Per ShareOutstanding
      at December 31, 2007:
              
              
              -
              
              
              $
              -Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2008:
              
              
              -
              
              
              
              -Granted
              
              
              105,000
              
              
              
              0.80Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2009:
              
              
              105,000
              
              
              $
              0.80
 
 As of
December 31, 2009, there was $50,400 of total unrecognized compensation cost
related to non vested restricted stock units granted under the 2009 Stock Plan
granted to non employees based on the fair value of the Company’s common stock
at reporting date.  The fair value is expected to be recognized based
on the fair value of the Company’s common stock over a weighted-average period
of 2 years.
 
 The fair
value of all non employees RSU vesting during the year ended December 31, 2009
of $30,231 was charged to current period operations.
 
 NOTE
11 — 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.
 
  F-34
   NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
11 — FAIR VALUE (continued)
 
 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.
 
 Items
recorded or measured at fair value on a recurring basis in the accompanying
consolidated financial statements consisted of the following items as of
December 31, 2009:
 
 Total
              
              
              Quoted
                Prices
      in
                Active
                Markets
      for
                Identical
                Instruments
                Level
      1
              
              
              Significant
                Other
                Observable
                Inputs
                Level
      2
              
              
              Significant
                Unobservable
                Inputs
                Level
      3 (A)Assets:Short
      term investment
              
              $
              25,010
              
              
              $
              25,010
              
              
              $
              -
              
              
              $
              -Total
              
              
              25,010
              
              
              
              25,010
              
              
              
              -
              
              
              
              -LiabilitiesWarrant
      liability
              
              
              (1,078,292
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,078,292
              )Reset derivative
              
              
              (687,958
              )
              
              
              -
              
              
              
              -
              
              
              
              (687,958
              )Total
              
              $
              (1,766,250
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              (1,766,250
              )
 
 (A)
              Fair
      value is estimated based on internally-developed models or methodologies
      utilizing significant inputs that are unobservable from objective
      sources.
 
 The
Company adopted the provisions of ASC 825-10 prospectively effective as of the
beginning of Fiscal 2008.  For financial assets and liabilities
included within the scope of ASC 825-10, the Company will be required to adopt
the provisions of ASC 825-10 prospectively as of the beginning of Fiscal
2009.  The adoption of ASC 825-10 did not have a material impact on
our consolidated financial position or results of operations.
  The fair
value of the assets, short term investments, at December 31, 2009 was grouped as
Level 1 valuation as the market price was readily available, and there has been
no change to the fair value of the securities at December 31, 2009.
  Level 3
Liabilities comprised of our bifurcated reset provision contained within our
Series C stock and the fair value of issued warrants with reset
provisions.
 
 NOTE 12 – 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 bases 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 are insignificant.
 
 
 F-35
 
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE 12 – INCOME TAXES
(continued)
  At
December 31, 2009, the Company has available for federal income tax purposes a
net operating loss carryforward of approximately $11,000,000, expiring in the
year 2028, that may be used to offset future taxable income. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earnings history of
the Company; it is more likely than not that the benefits will not be realized.
Due to possible significant changes in the Company's ownership, the future use
of its existing net operating losses may be limited. Components of deferred tax
assets as of December 31, 2009 are as follows Income tax expense for the year
ended December 31, 2009 is comprised of State taxes which primarily are not
based on earnings.  No other income taxes were recorded on the
earnings in 2009 as a result of the utilization of the carry
forwards.  All or portion of the remaining valuation allowance may be
reduced in future years based on an assessment of earnings sufficient to fully
utilize these potential tax benefits.
 
 At
December 31, 2009, the significant components of the deferred tax assets
(liabilities) are summarized below:
 
 Net
      operating loss carry forwards expiring in 2028
              
              $
              11,000,000Tax
      Asset
              
              
              3,850,000Less
      valuation allowance
              
              
              (3,850,000
              )Balance
              
              $
              11,000,000
 
 The
$11,000,000 is based on the 2008 tax return and an estimate for 2009 as
summarized below:
 
 Net
      operating loss carry forwards 2007 and prior
              
              $
              2,840,000Net
      operating loss carry forwards 2008
              
              
              4,533,000Net
      operating loss carry forwards 2009 (estimate)
              
              
              3,627,000Balance
              
              $
              11,000,000
  The
primary components of the differences between the book losses to date of $32.5
million and the tax NOL of $11.0 million are timing differences which primarily
include stock compensation and other equity-related non-cash charges,
capitalized financing costs and certain accruals.
  NOTE
13 -COMMITMENTS AND CONTINGENCIES
 
 Consulting
Agreements
 
 The
Company has consulting agreements with independent contractors, certain of whom
are also Company stockholders. Of those two are former directors of the Company.
The Company incurred $173,000 (plus travel expenses) and $132,000 (plus travel
and expenses) in fees and expenses to these individuals for the years ended
December 31, 2009 and 2008 respectively, in a consulting role.  They
were involved in business development in 2009 and R&D in 2009 and 2008. The
Agreements are generally short term and milestones based and include cash
compensation, equity compensation or a combination thereof. The current
agreements have no equity compensation.
 
 
 
 F-36
 
 NEWCARDIO,
INC.
 (a
development stage company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
 
 NOTE
13 -COMMITMENTS AND CONTINGENCIES (continued)
 
 Operating Lease
Commitments
 
 The
Company leases office space in Santa Clara, California on a lease expiring April
30, 2011 at approximately $5,800 per month.  Additionally the Company
maintains a Princeton, New Jersey office at $5,200 per month with the lease
expiring June 30, 2010 and a facility in Belgrade, Serbia on a month to month
basis at $500 per month.
 
 At
December 31, 2009, future minimum lease payments are as follows:
 
 2010
              
              $
              106,0882011
              
              
              25,207Thereafter
              
              
              -
 
 Total
lease rental expenses for the years ended December 31, 2009 and 2008 was
$166,719 and $90,506, respectively.
 
 Litigation
 
 The
Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business.  Although occasional adverse
decisions or settlements may occur, the Company believes that the final
disposition of such matters should not have a material adverse effect on its
financial position, results of operations or liquidity.  There was no
outstanding litigation as of December 31, 2009.
 
 NOTE
14 – SUBSEQUENT EVENTS
 
 Subsequent
events have been evaluated through February
23, 2010, a date that the financial statements were issued.
 
 In
January 2010, the Company issued 30,000 shares in connection with the exercise
of 33,615 warrants to purchase the Company’s common stock at $0.10 per
share.  The warrants were exercised on a cashless basis.
  In
January 2010, the Company issued 100,000 warrants in connection with services
rendered to purchase the Company’s common stock at an exercise price of $1.00
per share (when the market price of the stock was $0.72 per share) vesting 50%
on grant and the balance in February 2010 subject to certain milestones as
defined in the consulting agreement.
  In
January 2010, in conjunction with the exercise of 2,185 shares of Series B
Preferred Stock, the Company issued 2,185,000 shares of its common
stock.
  In
January 2010 the Company issued an aggregate of 115,000 shares of common stock
for services rendered at approximately $0.72 per share.  47,500 vested
on grant and 22,500 will vest quarterly starting February 2010.
  In
February 2010, the Company issued 30,000 shares in connection with the exercise
of 32,223 warrants to purchase the Company’s common stock at $0.10 per
share.  The warrants were exercised on a cashless basis.
  
 F-37