NewCardio, Inc.

On October 5, 2011, the Company entered into a letter agreement with the purchasers of the Company’s 12% Secured Revolving Debentures, amending the Debentures to change their maturity from a stated maturity date of September 30, 2011, to payment on demand.  Any demand for payment of the Debentures must be in writing, given at least five (5) business days prior to the specified payment date, and must be signed by the holders of at least sixty percent (60%) of the aggregate principal amount of Debentures then outstanding. The Debentures, in the aggregate principal amount of $3.9 million, were issued under a Securities Purchase Agreement, dated as of July 30, 2009 (the “2009 SPA”), and a Securities Purchase Agreement, dated as of July 28, 2010 (the “2010 SPA”), between the Company and the Purchasers.  

In October 2011, the Company voluntarily reduced the price of warrants issued with the 2009 SPA and 2010 SPA. 3,000,006 warrants issued with $3 million in borrowings under the 2009 SPA are now exercisable at $0.01 per underlying common share, down from $0.85 per underlying common share. 750,000 warrants issued as a commitment fee under the 2010 SPA are now exercisable at $0.01 per underlying common share, down from $1.00 per underlying common share.

During this transition, Accounts Payable and Accrued Expenses (not associated with the debt) have grown from $404,000 at year end to $718,000, an increase of $314,000. We were unable to pay salaries beginning September 1, 2011 and in October, four of our R&D personnel, including the CTO and Fellow have either converted to a consulting status or were furloughed. They are continuing to support the in process prosecution of our intellectual property patent filings and the sales process as needed.  All others have taken further salary reductions or have been furloughed.  We have 5 active employees at this time including the Chief Executive and Chief Financial Officer. And while we have curtailed development efforts on CardioBip™, our telemedicine monitoring product, as well as the early research on my3KG™, we have consulting agreements in place that we expect will permit us to move forward, by leveraging the resources that have driven the development to date,  when finances permit.

Research and development (“R&D”) expenses decreased 24% to $566,000 in the three months ended September 30, 2011, a decrease of $182,000 from $748,000 in 2010.  Stock based compensation totaled $337,000 in the quarter ended September 30, 2011, down $57,000 from $394,000 a year ago. R&D spending decreased $124,000 to $230,000 in the quarter ended September 30, 2011 compared to $354,000 a year ago. This spending is primarily for human resources, both employees and consultants and such spending accounts for virtually all of the $124,000 decrease. We did not introduce any new projects in the September 2011 quarter and there were no monies spent on enhancements to our lead product, QTinno. We believe that current sales slowdown is primarily due to market factors and that QTinno’s product features effectively meet, if not exceed,  the requirements for performing  cardiac safety testing for compounds in clinical development.  With cash at a premium we limited the development efforts on CardioBip, as well as the early research on my3KG, where our lead engineer in this longer term project resigned during the quarter.

SG&A expenses decreased 31% to $3,268,000 for the nine months ended September 30, 2011, a decrease of $1,464,000 from $4,732,000 in 2010.  The decrease is made up of both cash and stock-based compensation to key consultants and executives. In the first nine months of 2011, $1,924,000 was non-cash expense, compare to $2,339,000 in 2010. For the first nine months of 2011, SG&A spending of $1,344,000 decreased $1,049,000 from $2,393,000 in the same period last year. This spending is primarily for human resources, both employees and consultants, and related travel expenses.  The decrease includes the expense management program and the expiration of two consulting contracts in the third quarter of 2010, as well as the new responsibilities for our founder/CEO, who in June 2010 became a NewCardio Fellow focusing on R&D with the President assuming the CEO responsibilities. In the first part of 2010 we invested in an aftermarket awareness program which partially offset these expense reductions.

As of September 30, 2011, we had $13,000 in cash and we currently have no commitments for any additional capital beyond $100,000 that we received in October 2011 from a shareholder that invested in our Series D Preferred stock last year. This is a non-interest bearing promissory note due in April 2012, sooner if we close a material financing.  While we are working on an immediate source of financing, with this promissory note serving as a bridge in this effort, we require substantial additional financing to meet our working capital requirements and to complete development of and commercialize the next two solutions, CardioBip and my3KG.  We anticipate that we will need between $12 million and $15 million to develop and obtain FDA 510(k) clearance for the initial indications for these products and another $8 million to $10 million to achieve full commercialization. Actual expenses could exceed these estimates in the event the FDA considers that any of the two products requires clearance via the FDA PMA process or if we will be required to conduct larger clinical studies either for regulatory or for reimbursement approvals.  At this time, the lack of funding is adversely impacting our ability to continue our operations until such time, if ever; we were to obtain additional financing. Our short term focus is to maintain the enterprise value that exists in our existing product in commercialization, QTinno, as well as our patent (and patent pending) portfolio.  While we are working with our creditors and larger shareholders to explore sources of financing to meet our working capital requirements – at least at a minimum level in the short term, there is no guarantee that such financing will become available or, if it does, that it will become available on acceptable terms, or that any additional capital we may obtain will be sufficient to meet our long-term needs.