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AtheroNova Inc. 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
atheronova_10q-033111.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission file number 000-52315

AtheroNova Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
20-1915083
(I.R.S. Employer Identification No.)

2301 Dupont Drive, Suite 525, Irvine, CA 92612
(Address of principal executive offices and zip code)

(949) 476-1100
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes þ No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer      ¨
Accelerated filer      ¨
Non-accelerated filer      ¨
Smaller reporting company  þ

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of May10, 2011 there were 24,219,037 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
 
 
 

 
 
TABLE OF CONTENTS
 
   
Page
     
PART I
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
3
     
 
Condensed Consolidated Statements of Operations (Unaudited) for the three month periods
ended March 31, 2011 and 2010, and for the period from December 13, 2006 (Inception) through March 31, 2011
4
     
 
Condensed Consolidated Statements of Stockholders’ Equity (Deficiency) (Unaudited)
for the period from December 13, 2006 (Inception) through March 31, 2011
5
     
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three month periods ended
March 31, 2011 and 2010, and for the period from December 13, 2006 (Inception) through March 31, 2011
6
     
 
Notes to Condensed Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
25
     
Item 4.
Controls and Procedures
26
     
PART II
OTHER INFORMATION
 
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
     
Item 6.
Exhibits
27

 
2

 
Part I – Financial Information
Item 1. Financial Statements

ATHERONOVA INC.
(A Development Stage Company)
Condensed Consolidated Balance Sheets
 
 
March 31,
 
December 31,
 
 
2011
 
2010
 
Assets
(unaudited)
       
     
Current Assets
   
 Cash
  $ 15,219     $ 177,802  
 Other Current Assets
    6,653       14,039  
      Total Current Assets
    21,872       191,841  
Equipment, net
    4,932       5,521  
Total Assets
  $ 26,804     $ 197,362  
Liabilities and Stockholders’ Deficiency
   
     
Current Liabilities:
   
Accounts payable and accrued expenses
  $ 273,908     $ 157,665  
Interest payable
    31,358       22,596  
Derivative Liability
    6,476,493       13,697,923  
     Total Current Liabilities
    6,781,759       13,878,184  
                 
2.5% Senior secured convertible notes, net of discount
    315,740       228,298  
                 
Stockholders’ Deficiency:
               
Preferred stock $0.0001 par value, 10,000,000 shares authorized, none outstanding at  March 31, 2011 and December 31, 2010
    --       --  
Common stock $0.0001 par value, 100,000,000 shares authorized, 23,445,899 and 23,420,899 outstanding at March 31, 2011 and December 31, 2010, respectively
    2,340       2,337  
Additional paid in capital
    2,074,024       1,931,340  
Deficit accumulated during the development stage
    (9,147,059 )     (15,842,797 )
Total stockholders’ deficiency
    (7,070,695 )     (13,909,120 )
Total Liabilities and Stockholders’ Deficiency
  $ 26,804     $ 197,362  


See accompanying notes to condensed consolidated financial statements.
 
 
3

 

ATHERONOVA INC.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
For the three month periods ended March 31, 2011 and 2010,
And for the period from December 13, 2006 (Inception) through March 31, 2011
 
   
Three months ended March 31,
   
Cumulative From
 
   
2011
   
2010
    Inception  
                   
Revenue, net
  $ --     $ --     $ --  
                         
Operating expenses:
                       
Research and development
    88,263       60,000       579,798  
General and administrative expenses
    338,050       72,633       2,240,717  
Impairment charge-intellectual property
    --       --       572,868  
Total operating expenses
    426,313       132,633       3,393,383  
                         
Loss from operations
    (426,313 )     (132,633 )     (3,393,383 )
                         
Other income / (expenses):
                       
Other income
    64       6       3,180  
Merger-related expenses
    --       --       (323,294 )
Cancellation of related-party debt
    --       --       100,000  
Interest expense
    (96,203 )     --       (446,111 )
Private Placement Costs
    --       --       (2,148,307 )
Change in fair value of derivative liabilities
    7,221,430       --       (2,934,145 )
                         
Net income (loss) before income taxes
    6,698,978       (132,627 )     (9,142,060 )
                         
Provision for income taxes
    3,240       959       4,999  
Net income (loss)
  $ 6,695,738     $ (133,586 )   $ (9,147,059 )
                         
Basic income (loss) per share
  $ 0.29     $ (0.01 )        
Diluted income (loss) per share
  $ 0.25     $ (0.01 )        
                         
Basic weighted average shares outstanding
    23,429,232       21,412,167          
Diluted weighted average shares outstanding
    26,449,122       21,412,167          

 
See accompanying notes to condensed consolidated financial statements.
 
 
4

 

ATHERONOVA INC.
(A Development Stage Company)
Condensed Consolidated Statements of Stockholders’ Equity (Deficiency)
For the period from December 13, 2006 (Inception) through March 31, 2011
 
Description
 
Common Stock
Shares
   
Common Stock Amount
   
Additional Paid-in Capital
   
Deficit Accumulated During Development Stage
   
Total Stockholders’ Equity (Deficit)
 
Issuance of Common Stock to Founders
    19,233,029       1,923       (1,923 )     --       --  
Net loss
    --       --       --       --       --  
Balance – December 31, 2007
    19,233,029       1,923       (1,923 )     --       --  
Issuance of Common Stock for Cash at $0.223 per share
    1,010,132       101       224,899       --       225,000  
Net loss
    --       --       --       (173,622 )     (173,622 )
Balance – December 31, 2008
    20,243,161       2,024       222,976       (173,622 )     51,378  
Issuance of Common Stock for Cash at $0.223 per share
    224,663       23       99,977       --       100,000  
Fair value of common stock issued for services
    224,284       22       49,978       --       50,000  
Net Loss
    --       --       --       (12,323 )     (12,323 )
Balance – December 31, 2009
    20,692,108       2,069       372,931       (185,945 )     189,055  
Issuance of common stock for Cash at $0.223 per share
    1,010,132       101       224,899       --       225,000  
Exercise of warrants
    392,498       39       87,488       --       87,527  
Fair value of warrants issued for services
    --       --       518,000       --       518,000  
Fair value of vested options
    --       --       287,355       --       287,355  
Fair value of common stock issued for services
    466,570       47       140,453       --       140,500  
Contribution of stockholder notes payable to capital
    --       --       200,000       ---       200,000  
Shares issued in reverse merger
    607,647       56       1,225       --       1,281  
Shares issued upon note conversion
    251,944       25       98,989       --       99,014  
Net loss
    --       --       --       (15,656,852 )     (15,656,852 )
Balance – December 31, 2010
    23,420,899       2,337       1,931,340       (15,842,797 )     (13,909,120 )
Issuance of common stock for Cash at $1.00 per share
    25,000       3       24,997       --       25,000  
Fair value of vested options
    --       --       110,197       --       110,197  
Fair value of warrants issued for services
    --       --       7.490       --       7,490  
Net income
    --       --       --       6,695,738       6,695,738  
Balance – March 31, 2011
    23,445,899     $ 2,340     $ 2,074,024     $ (9,147,059 )   $ (7,070,695 )

 
See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 
ATHERONOVA INC.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the three month periods ended March 31, 2011 and 2010,
And for the period from December 13, 2006 (Inception) through March 31, 2011
 
   
Three months ended March 31,
   
Cumulative From
 
   
2011
   
2010
    Inception  
Operating Activities:
                 
Net  income (loss)
  $ 6,695,738     $ (133,586 )   $ (9,147,059 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
                       
Amortization of debt discount
    87,442       --       413,789  
Depreciation
    589       86       2,137  
Stock based compensation
    117,687       --       1,113,542  
Impairment charge-intellectual property
    --       --       572,867  
Cost of private placement
    --       --       2,148,307  
Change in fair value of derivative liabilities
    (7,221,430 )     --       2,934,145  
Cancellation of debt
    --       --       (100,000 )
Changes in operating assets and liabilities:
                       
Other current assets
    7,386       --       (6,653 )
Accounts payable and accrued expenses
    125,005       (97,271 )     405,266  
Net cash used in operating activities
    (187,583 )     (230,771 )     (1,663,659 )
Investing Activities
                       
Purchase of equipment
    --       (1,042 )     (7,069 )
Investment in intellectual property
    --       --       (372,867 )
Cash received from reverse merger
    --       --       1,281  
Net cash used in investing activities
    --       (1,042 )     (378,655 )
Financing Activities
                       
Proceeds from issuance of common stock
    25,000       327,500       662,527  
Proceeds from sale of 2.5% senior secured convertible notes, net
    --       --       1,395,006  
Net cash provided by financing activities
    25,000       327,500       2,057,533  
Net change in cash
    (162,583 )     95,688       15,219  
Cash - beginning balance
    177,802       28,047       --  
Cash - ending balance
  $ 15,219     $ 123,734     $ 15,219  
Supplemental disclosure of cash flow information:
                       
Cash paid for income taxes
  $ 3,240     $ 959     $ 4,999  
Supplemental disclosure of non-cash investing and financing transactions:
                       
Stockholder notes issued in exchange for intellectual property
  $ --     $ --     $ 200,000  
Conversion of notes payable to related parties treated as a contribution to capital
  $ --     $ --     $ --  
Conversion of convertible notes payable to additional paid-in capital
  $ --     $ --     $ 99,014  
Derivative liability created on issuance of convertible notes and warrants created
  $ --     $ --     $ 1,500,000  
Reclass of accounts payable to related party notes
  $ --     $ --     $ 100,000  

 
See accompanying notes to condensed consolidated financial statements.
 
 
6

 
 
ATHERONOVA INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
The accompanying condensed consolidated financial statements of AtheroNova Inc. and subsidiary (“AtheroNova,” “we,” “us, “our” and “our Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission.  Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending December 31, 2011 or for any other interim period.  These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2010, which are included in the Company’s Report on Form 10-K for such year filed on March 31, 2011.  The condensed consolidated balance sheet as of December 31, 2010 has been derived from the audited financial statements included in the Form 10-K for that year.

1.           ORGANIZATION>

Z&Z Medical Holdings, Inc. (“Z&Z Nevada”) was incorporated under the laws of the State of Nevada on December 13, 2006 (Inception).  Z&Z Nevada had its headquarters located in Laguna Niguel, California.  On November 30, 2009, a separate corporation named Z&Z Medical Holdings, Inc. (“Z&Z Delaware”) was incorporated under the laws of the State of Delaware and on March 3, 2010 Z&Z Nevada was merged into Z&Z Delaware.  On May 13, 2010, pursuant to an Agreement and Plan of Merger dated March 26, 2010, (i) our subsidiary, Z&Z Merger Corporation, merged with and into Z&Z Delaware and the surviving subsidiary corporation changed its name to AtheroNova Operations, Inc. (“AtheroNova Operations”), (ii) we assumed all the outstanding options and warrants of Z&Z Delaware and (iii) we completed a Capital Raise Transaction in which we sold $1,500,000 in 2.5% Senior Secured Convertible Notes.  The former holders of AtheroNova Operations’ common stock became holders of approximately 98% of our outstanding common stock.  On May 21, 2010, holders of approximately 76.7% of the then outstanding shares of our Super-Voting Common Stock, approximately 90.7% of the then outstanding shares of common stock, and approximately 77.1% of the combined voting power of the then outstanding shares of our Super-Voting Common Stock and our common stock approved an amendment of our certificate of incorporation that (i) decreased the authorized number of shares of our common stock to 100,000,000, (ii) designated 10,000,000 shares of blank check preferred stock, and (iii) adopted a 1-for-200 reverse stock split.  The amendment to our certificate of incorporation became effective on June 23, 2010.

As a result of the merger AtheroNova is now engaged, through AtheroNova Operations, in development of pharmaceutical preparations and pharmaceutical intellectual property.  The Company will continue to be a development stage company for the foreseeable future.  The Company has entered into contracts with two research sites for its second pre-clinical trial.

Immediately prior to the Merger, AtheroNova had 107,272,730 shares of its common stock issued and outstanding. In connection with the Merger, AtheroNova issued 88,575,048 shares of its Super-Voting Common stock in exchange for the issued and outstanding shares of common stock of AtheroNova Operations, and assumed AtheroNova Operations’ outstanding options and warrants which became exercisable to purchase an aggregate of up to 16,552,227 shares of AtheroNova Super-Voting Common Stock.  Upon the effectiveness of the 1-for-200 reverse stock split all shares of AtheroNova Super-Voting Common Stock were automatically converted on a 50-to-1 basis into AtheroNova common stock, resulting in the issuance of 22,143,763 shares of AtheroNova common stock to the former holders of AtheroNova Operation’s common stock, and the outstanding shares of common stock held by AtheroNova’s existing stockholders were combined into 607,647 shares of AtheroNova common stock.
 
 
7

 

Since former holders of AtheroNova Operation’s common stock owned, after the Merger, approximately 98% of AtheroNova’s shares of common stock, and as a result of certain other factors, including that all members of the Company’s executive management are members of AtheroNova Operation’s management, AtheroNova Operations is deemed to be the acquiring company for accounting purposes and the merger was accounted for as a reverse merger and a recapitalization in accordance with generally accepted accounting principles in the United States (“GAAP”).  These condensed consolidated financial statements reflect the historical results of AtheroNova Operations prior to the merger and that of the combined company following the merger, and do not include the historical financial results of AtheroNova prior to the completion of the merger.  Common stock and the corresponding capital amounts of the Company pre-merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the merger and subsequent 1-for-200 reverse stock split effected on June 23, 2010.  In conjunction with the Merger, the Company assumed liabilities and incurred costs of $323,294 which have been reflected as costs of the reverse merger in the 2010 statement of operations.

On May 13, 2010, we also entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with W-Net Fund I, L.P. (“W-Net”), Europa International, Inc. (“Europa”), and MKM Opportunity Master Fund, Ltd. (“MKM” and together with W-Net and Europa, the “Purchasers”), pursuant to which the Purchasers, on May 13, 2010, purchased from us (i) 2.5% Senior Secured Convertible Notes (the “Notes”) for a cash purchase price of $1,500,000, and (ii) Common Stock Purchase Warrants pursuant to which the Purchasers may purchase up to 1,908,798 shares of our common stock at an exercise price of approximately $0.39 per share (the “Warrants”) (the “Capital Raise Transaction”).  The Notes, including accrued interest through their maturity, are convertible into 4,199,358 shares of our common stock at a conversion price of approximately $0.39 per share (see Note 3).  To date, principal of $98,049 and interest of $965 have been converted to 249,488 and 2,456 shares, respectively.

2.           BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES>

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements.  Such financial statements and accompanying notes are the representation of the Company’s management, who is responsible for their integrity and objectivity.

Condensed ConsolidatedFinancial Statements>

The accompanying unaudited condensed consolidated financial statements primarily reflect the financial position, results of operations and cash flows of AtheroNova Operations (as discussed above).  The accompanying unaudited condensed consolidated financial statements of AtheroNova Operations have been prepared in accordance with GAAP for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (“Commission”).  Accordingly, these interim financial statements do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or for any other period.  Amounts related to disclosures of December 31, 2010 and balances within those consolidated financial statements were derived from the audited 2010 consolidated financial statements and notes thereto filed on Form 10-K filed with the Commission on March 31, 2011.


These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in AtheroNova’s Annual Report on Form 10-K filed with the Commission on March 31, 2011.  In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements and the reported amount of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.  Significant estimates and assumptions included in the Company’s condensed consolidated financial statements relate to the valuation of long-lived assets, accrued other liabilities, and valuation assumptions related to share based payments and derivative liability.
 
 
8

 

Going Concern

The accompanying condensed consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  The Company has a stockholders deficiency of $7,070,695 at March 31, 2011, and has incurred recurring losses from operations since inception.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Management is currently in the process of offering and selling to accredited investors units consisting of one share of the Company’s common stock and a warrant to purchase 0.3 of a share of the Company’s common stock, at a per unit price of $0.55, to raise funds necessary for general corporate and research costs.  This offering if fully subscribed, will raise approximately $1,000,000, prior to any fundraising costs, which should be sufficient to fund operations through the end of the fourth quarter of 2011.  This offering is ongoing and there can be no assurances it will result in the sale of a sufficient number of units to provide sufficient operating capital.  The securities being offered in such offering will not be or have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.  There can be no assurances that sufficient subsequent funding, if any at all, will be raised by this or future offerings or that the cost of such funding will be reasonable.

In light of the foregoing, management will also seek funding through grants and other such funds available from private and public sources established to further research in health care and advancement of science.  Management continues to meet with representatives of private and public sources of funding to continue the ongoing process of capital development sufficient enough to cover negative cash flows expected in future periods and will continue to do so in the coming months.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiary.  All significant intercompany transactions and balances have been eliminated in consolidation.

Research and Development Costs

Costs incurred for research and development are expensed as incurred.  Purchased materials that do not have an alternative future use are also expensed.  For the three months ended March 31, 2011 and 2010, research and development costs incurred were $88,263 and $60,000, respectively.

Income Taxes

Current income tax expense is the amount of income taxes expected to be payable for the current year plus extensions for the prior year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies, in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.
 
9

 
 
Earnings and Loss per Share

The Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS.  Basic EPS is measured as the income (loss) available to common stockholders divided by the weighted average common shares outstanding for the period.  Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants and options) as if they had been converted at the beginning of the periods presented, or issuance date, if later.  Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted (loss) per common share is the same for periods in which the company reported an operating loss because all warrants and stock options outstanding are anti-dilutive.

A reconciliation of basic and diluted shares for the three months ended March 31, 2011 and 2010 follows:

   
March 31,
   
March 31,
 
   
2011
   
2010
 
   
 
       
Average common shares outstanding-basic
    23,429,232       21,412,167  
Effect of dilutive securities-
               
Warrants
    2,756,074       --  
Employee and director stock options
    263,816       --  
                 
Average diluted shares
  $ 26,449,122     $ 21,412,167  

There were no adjustments to net income required for purposes of computing diluted earnings per share.

Warrants, options and other potentially dilutive securities are antidilutive and excluded from the dilutive calculations when their exercise or conversion price exceeds the average stock market price during the period or the effect would be anti-dilutive when applied to a net loss during the period(s) presented.  The following table sets forth the shares excluded from the diluted calculation for the three month periods presented as follows:

   
March 31,
   
March 31,
 
   
2011
   
2010
 
   
 
       
Convertible notes
    3,568,108       --  
Warrants
    --       4,059,556  
Employee and director stock options
    --       549,498  
                 
Total potentially dilutive shares
  $ 3,568,108     $ 4,609,054  

Such securities could potentially dilute earnings per share in the future.
 
 
10

 
 
Stock-Based Compensation

The Company periodically issues stock options and warrants to officers, directors and consultants for services rendered.  Options vest and expire according to terms established at the grant date.  The Company accounts for share-based payments to officers and directors by measuring the cost of services received in exchange for equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense in the Company’s financial statements over the vesting period of the awards.

The Company accounts for share-based payments to consultants by determining the value of the stock compensation based upon the measurement date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

Derivative financial instruments

The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses both the Black-Scholes-Merton and Binomial option pricing models to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.  Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Revenue Recognition
 
As of March 31, 2011, the Company has not generated any revenues from the development of its products and is therefore still considered to be a development stage company.

Fair value of financial instruments

Effective January 1, 2008, fair value measurements are determined by the Company’s adoption of authoritative guidance issued by the FASB, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative guidance did not have a material impact on the Company’s fair value measurements.  Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
 
Level 1—Quoted prices in active markets for identical assets or liabilities.
 
Level 2—Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
 
Level 3—Unobservable inputs based on the Company’s assumptions.
 
The Company is required to use observable market data if such data is available without undue cost and effort.
 
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2011.
 
 
11

 
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Fair value of Derivative Liability
  $ 6,476,493     $ --     $ --     $ 6,476,493  

At March 31, 2011 and December 31, 2010, the fair values of cash and cash equivalents, and accounts payable approximate their carrying values.

Recently Issued Accounting Standards

Recent accounting pronouncements did not or are not believed to have a material impact on the Company's present or future consolidated financial statements.

3.            2.5% SENIOR SECURED CONVERTIBLE NOTES PAYABLE>

Convertible notes payable consist of the following as of March 31, 2011 and December 31, 2010:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Convertible Notes Payable
  $ 1,401,951     $ 1,401,951  
Less valuation Discount
    (1,086,211 )     (1,173,653 )
Convertible Notes Payable, net
  $ 315,740     $ 228,298  

The following table summarizes the changes in the net carrying value of the notes during the current quarter:

   
Principal
Balance
   
Valuation
Discount
   
Net Notes
payable
balance
 
Beginning balance at December 31, 2010
  $ 1,401,951     $ (1,173,653 )   $ 228,298  
Exercise of convertible feature
    --       --       --  
Amortization of discount
    --       87,442       87,442  
Ending balance at March 31, 2011
  $ 1,401,951       (1,086,211 )   $ 315,740  
 
On May 13, 2010, we entered into a Securities Purchase Agreement with W-Net, Europa and MKM pursuant to which the Purchasers, purchased from us (i) 2.5% Senior Secured Convertible Notes for a cash purchase price of $1,500,000, and (ii) Common Stock Purchase Warrants pursuant to which the Purchasers may purchase up to 1,908,797 shares of our common stock at an exercise price equal to approximately $0.39 per share, subject to adjustment.  A portion of the proceeds from the Capital Raise Transaction were used to pay $250,000 owed by us to the two principal holders of our common stock, W-Net and Europa, and to reimburse them for legal and accounting fees and $73,294 of other expenses incurred by them and our company in connection with the Merger and the Capital Raise Transaction. Such costs have been reflected as costs of the reverse merger in the accompanying statement of operations. The net proceeds available to us for our operations were reduced by such payments.

The Notes accrue 2.5% interest per annum with a maturity of 4 years after the closing of the Capital Raise Transaction.  No cash interest payments are required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.  If there is an uncured event of default (as defined in the Notes), the holder of each Note may declare the entire principal and accrued interest amount immediately due and payable.  Default interest will accrue after an event of default at an annual rate of 12%.  If there is an acceleration, a mandatory default amount equal to 120% of the unpaid Note principal plus accrued interest may be payable.
 
 
12

 
 
The Warrants may be exercised on a cashless basis under which a portion of the shares subject to the exercise are not issued in payment of the purchase price, based on the then fair market value of the shares.

On May 13, 2010, we also entered into a Security Agreement and an Intellectual Property Security Agreement with the Purchasers and AtheroNova Operations, pursuant to which all of our obligations under the Notes are secured by first priority security interests in all of our assets and the assets of AtheroNova Operations, including intellectual property.  Upon an event of default under the Notes or such agreements, the Note holders may be entitled to foreclose on any of such assets or exercise other rights available to a secured creditor under California and Delaware law.  In addition, under a Subsidiary Guarantee, AtheroNova Operations guaranteed all of our obligations under the Notes.

Each Note is convertible at any time into common stock at a specified conversion price, which is initially approximately $0.39 per share, subject to adjustment.  Immediate conversion of the Notes would result in the holders receiving 3,817,594 shares of our common stock.

The Notes may not be prepaid, or forced by us to be converted in connection with an acquisition of our company, except in a limited case more than a year after the Note issuance where the average of our stock trading price for 30 days on a national trading market other than the OTC Bulletin Board (“OTCBB”) is at least three times the conversion price, in which event, and subject to the satisfaction of certain other requirements, the Note holders may elect to receive at least double the unpaid principal amounts in cash and other requirements are satisfied.  In such a limited case acquisition, there could also be a forced cashless exercise of the Warrants subject to similar requirements and optional cash payments to the Warrant holders of at least double the exercise prices of their Warrants.

The Note conversion price and the Warrant exercise price will be subject to specified adjustments for certain changes in the numbers of outstanding shares of our common stock, including conversions or exchanges of such.  If additional shares of our capital stock are issued, except in specified exempt issuances, for consideration which is less than the then existing Note conversion or Warrant exercise price, then such conversion or warrant price will be reduced by anti-dilution adjustments.  For the first $400,000 of such “Dilutive Issuances,” the reduction will be made on a weighted average basis, taking into account the relative magnitudes of any Dilutive Issuance relative to the total number of outstanding shares.  However, any further Dilutive Issuance would be subject to a more detrimental “full ratchet” adjustment that generally reduces the conversion or exercise price to equal the price in the Dilutive Issuance, regardless of the size of the Dilutive Issuance, see related accounting treatment for the Notes and Warrants under footnote 7.

The Notes will greatly restrict the ability of our company or AtheroNova Operations to issue indebtedness or grant liens on our or its respective assets without the Note holders’ consent.  They will also limit and impose financial costs on our acquisition by any third party.

Under the Securities Purchase Agreement, if we meet three specified operating benchmarks during the first twelve months after the closing of the first Note purchase, an additional $1,500,000 in Note purchases (without Warrants) can be requested by us from the Purchasers.  The determination of whether we have met the benchmarks is solely at the discretion of the Purchasers.  If the benchmarks are determined to have been achieved, then we can require the Purchasers to make the additional $1,500,000 of Note purchases.  If such benchmarks are not attained in the 12-month period, then the Purchasers, in their discretion, during the next two months may elect to purchase up to $1,500,000 of Notes (without Warrants) having an initial conversion price which is 25% higher than the conversion price in the original Notes.
 
 
13

 

Each of the convertible note and warrant agreements included an anti-dilution provision that allowed for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current exercise price. The Company considered the current Financial Accounting Standards Board guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that as the conversion price of these notes and the strike price of these warrants contain exercise prices that may fluctuate based on the occurrence of future offerings or events, and as such is not a fixed amount. As a result, the Company determined that the conversion features and these warrants are not considered indexed to the Company’s own stock and characterized the fair value of these warrants as derivative liabilities upon issuance.
 
The Company determined that the fair value of the conversion feature at issuance was $2,370,245, and that the fair value of the warrant liability at issuance was $1,172,103, based upon a weighted average Black-Sholes-Merton calculation. The Company recorded the full value of the derivative as a liability at issuance with an offset to valuation discount, which will be amortized over the life of the note. As the aggregate fair value of these liabilities of $3,542,348 exceeded the note value of $1,500,000, the excess of the liability over the note amount of $2,042,348 was considered as a cost of the private placement.  As of March 31, 2011, the Company has amortized $413,789 of the valuation discount, and the remaining unamortized valuation discount of $1,086,211 as of March 31, 2011 has been offset against the face amount of the notes for financial statement purposes. The fair value of the derivative liabilities as of March 31, 2011 was $6,476,493 (see Note 4).

From issuance through March 31, 2011, holders of the notes have exercised their option to convert a portion of the notes into our common stock.  Principal in the amount of $98,049 and accrued interest in the amount of $965 was converted into 249,488 and 2,456 shares, respectively, of our common stock in the year ended December 31, 2010.
 
4.          DERIVATIVE LIABILITY>

In April 2008, the FASB issued a pronouncement which provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives.  This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008.  The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions).  For example, warrants with such provisions will no longer be recorded in equity.  Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.

We evaluated whether convertible debt and warrants to acquire stock of the Company contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective convertible debt and warrant agreements.  We determined that the convertible debt and warrants issued to W-Net, Europa and MKM in May 2010 contained such provisions and were recorded as derivative liability.  Derivative liabilities were valued using weighted-average Black-Scholes-Merton and bi-nominal valuation techniques with the following assumptions:
 
 
14

 
 
   
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Conversion feature :
           
Risk-free interest rate
   
1.29%
     
2.01%
 
Expected volatility
   
140%
     
150%
 
Expected life (in years)
 
3.12 years
   
3.37 years
 
Expected dividend yield
   
0.00%
     
0.00%
 
                 
Warrants :
               
Risk-free interest rate
   
1.29%
     
2.01%
 
Expected volatility
   
140%
     
150%
 
Expected weighted average life (in years)
 
3.12 years
   
3.37 years
 
Expected dividend yield
   
0.00%
     
0.00%
 
                 
Fair Value :
               
Conversion feature
 
$
4,353,427
   
$
9,177,865
 
Warrants
   
2,123,066
     
4,520,058
 
   
$
6,476,493
   
$
13,367,923
 

The Company used an average of three valuation methodologies to determine the value of the Company’s shares since upon the consummation of the merger transaction, the shares of the Company was thinly traded on the OCTBB and therefore management believes the share price in the market did not reflect the true value of these shares. Management concluded that the share price as of May 13, 2010 and September 30, 2010 was $0.50/share and $0.65/share, respectively.  The risk-free interest rate was based on rates established by the Federal Reserve Bank, the Company uses the historical volatility of its common stock, and the expected life of the instruments is determined by the expiration date of the instrument.  The expected dividend yield was based on the fact that the Company has not paid dividends to common stockholders in the past and does not expect to pay dividends to common stockholders in the future.

The Company measured the aggregate fair value of the conversion feature and the warrants issued on the date of issuance of May 13, 2010 as $3,542,348. The value of the derivative liability at the date of issuance of $3,542,348 in excess of the related convertible notes payable with a face amount of $1,500,000 was $2,042,348, and such amount was recognized in the 2010 statements of operations as a cost of the private placement. As of March 31, 2011, the Company re-measured the remaining derivative liabilities and determined the aggregate fair value to be $6,476,493. The Company recorded the change in fair value of the derivative liabilities of $7,221,430 in the accompanying statement of operations for the three months ending March 31, 2011.
 
 
15

 
 
5.             STOCKHOLDERS’ EQUITY

Common Stock

During the three months ended March 31, 2011, the Company sold an aggregate of 25,000 shares of the Company’s common stock to an accredited investor at a per share price of $1.00, resulting in gross proceeds to the Company of $25,000. On April 11, 2011, the Company amended the subscription agreement pursuant to which such shares were sold to provide, instead for the purchase of 45,454 units consisting of 45,454 shares of the Company’s common stock and warrants, having a term of three years and an exercise price of $0.60 per share, to purchase 13,636 shares of the Company’s common stock.  There were no commissions paid with respect to this sale.  In making the stock issuances described above without registration under the Securities Act, we relied upon one or more of the exemptions from registration contained in and/or promulgated under Section 4(2) of the Securities Act as each of the stock recipients was an accredited investor and no general solicitation or advertising was used in connection with the stock issuances.
 
Stock Options

The Company has a stockholder-approved stock incentive plan for employees under which it has granted incentive stock options.  In May 2010, the Company established the 2010 Stock Incentive Plan (the “2010 Plan”), which provides for the granting of awards to officers, directors, employees and consultants to purchase or acquire up to 4,362,964 shares of the Company’s common stock.  The awards have a maximum term of 10 years and vest over a period determined by the Company’s Board of Directors and are issued at an exercise price determined by the Board of Directors.  Options issued under the 2010 Plan will have an exercise price equal to or greater than the fair market value of a share of the Company’s common stock at the date of grant.  The 2010 Plan expires on May 20, 2020 as to any further granting of options.  In the three months ended March 31, 2011 there were no options to purchase shares of the Company’s common stock granted under the 2010 Plan.  There were options outstanding to purchase a total of 2,161,998 shares granted under the 2010 Plan as well as outside the 2010 Plan.  There were 2,750,464 shares reserved for future grants under the 2010 Plan.
 
A summary of the status of the Company’s stock options as of March 31, 2011 and changes during the period then ended is presented below:
 
   
Shares
   
Weighted
average
exercise
price
   
Weighted
Average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2010
    2,199,498     $ 0.878       6.852       3,458,411  
Granted
    --     $ --       --       --  
Exercised
    --       --       --       --  
Cancelled
    (37,500 )     1.110       --       (37,875 )
Outstanding at March 31, 2011
    2,161,998     $ 0.935       6.278     $ 776,084  
Exercisable at March 31, 2011
    257,667     $ 0.663       6.074     $ 174,734  
Weighted-average fair value of options granted
during the three month period ended March 31, 2011
  $ 0.000                          

During the three months ended March 31, 2011, the Company recognized $110,197 of compensation costs related to the vesting of these options. As of March 31, 2011, the total compensation cost related to nonvested option awards not yet recognized is $1,443,770.  The weighted average period over which it is expected to be recognized is approximately 3.25 years.  The intrinsic value of the shares outstanding at March 31, 2011 was $776,084.
 
 
16

 

To compute compensation expense, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes model.  The Company based the expected volatility assumption on a volatility index of peer companies as the Company did not have sufficient market information to estimate the volatility of its own stock.  The expected term of options granted represents the period of time that options are expected to be outstanding.  The Company estimated the expected term of stock options by using the simplified method. The expected forfeiture rates are based on the historical employee forfeiture experiences.  To determine the risk-free interest rate, the Company utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of the Company’s awards.  The Company has not declared a dividend on its common stock since its inception and has no intentions of declaring a dividend in the foreseeable future and therefore used a dividend yield of zero.

The following table shows the weighted average assumptions the Company used to develop the fair value estimates for the determination of the compensation charges in the three months ended March 31, 2011 and 2010:
 
   
Three months ended March 31,
 
   
2011
   
2010
 
             
Expected volatility
   
--
     
139%
 
Dividend yield
   
--
     
--
 
Expected term (in years)
   
--
     
6.25
 
Risk-free interest rate
   
--
     
2.62%
 

Warrants

On March 29, 2011, we issued warrants to an advisor to the Company to purchase 21,000 shares of our common stock.  The warrants vested over a 3 year period, have a term of 3 years and are exercisable at a purchase price of $0.50.  The warrants were valued using a Black Scholes option pricing model at $23,100 with the following assumptions: risk free interest rate of 2.25%, dividend yield of 0%, volatility factors of the expected market price of common stock of 239%, and an expected life of 3 years.

As of March 31, 2011 there are warrants to purchase 5,325,857 shares of our common stock outstanding with expiration dates ranging from February 2013 through December 2015 and exercise prices ranging from $0.22 to $1.64.  A summary of the status of our warrants as of March 31, 2011 and changes during the period then ended is presented below:
 
   
Shares
   
Weighted
average
exercise
price
   
Weighted
Average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2010
    5,304,857     $ 0.338       3.664       11,471,264  
Granted
    21,000     $ 0.500       3.000       15,750  
Exercised
    --       --       --       --  
Cancelled
    --       --       --       --  
Outstanding at March 31, 2011
    5,325,857     $ 0.338       3.412     $ 4,933,943  
Exercisable at March 31, 2011
    5,304,857     $ 0.338       3.414     $ 4,918,193  
Weighted-average fair value of warrants granted
during the three month period ended March 31, 2011
  $ 1.070                          
 
 
17

 
 
6.             COMMITTMENTS>

At present the Company has commitments for two research and development projects for the second pre-clinical trials.  The first agreement, with the University of California, has an expected completion date of July 1, 2011 with additional amounts due under the agreement of $39,167.

The second commitment for research and development projects, with the Cedars-Sinai Medical Center, has an expected completion date for the research portion of the project of August 31, 2011 and a completion of the preparation of the data analysis and publishable manuscript approximately 45-60 days after the completion of the laboratory work.  Additional progress payments are due at various dates dependent upon the stages of completion of the project and total $187,583.
 
7.             SUBSEQUENT EVENTS>
 
On April 11, 2011, the Company amended the subscription agreement pursuant to which the Company sold, on March 11, 2011, an aggregate of 25,000 shares of the Company’s common stock to an accredited investor at a per share price of $1.00, to provide, instead, for the purchase of 45,454 shares of the Company’s common stock and warrants, having a term of three years and an exercise price of $0.60 per share, to purchase 13,636 shares of the company’s common stock.

On April 20, 21 and 25, and May 4 and 5, 2011 the Company sold to six accredited investors, in private placement transactions, an aggregate of 750,410 units at $0.55 per unit, resulting in gross proceeds to the Company of $412,725.50.  Each unit represents a share of the Company’s common stock and a warrant to purchase 0.30 shares of the Company’s common stock at an exercise price of $0.60 per share.  The warrants are fully vested and exercisable for three years from the date of issuance.

In making the stock issuances described above without registration under the Securities Act, we relied upon one or more of the exemptions from registration contained in and/or promulgated under Section 4(2) of the Securities Act as each of the stock recipients was an accredited investor and no general solicitation or advertising was used in connection with the stock issuances.
 
 
18

 

Item 2.            Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This discussion summarizes the significant factors affecting our operating results, financial condition and liquidity and cash flows for the three  months ended March 31, 2011 and 2010.  The discussion and analysis that follows should be read together with the condensed consolidated financial statements and the notes to the financial statements included elsewhere in this report.  Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control.  Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in the section of our annual report on Form 10-K captioned “Risk Factors.”
 
Overview
 
Z&Z Medical Holdings, Inc. (“Z&Z Nevada”) was incorporated in the State of Nevada on December 13, 2006 with contributed intellectual property from its founders.  Z&Z Nevada was engaged in developing the contributed intellectual property while seeking sources of funding to conduct further research and development.  In November 2009 we incorporated a separate company, Z&Z Medical Holdings Inc. in Delaware (“Z&Z Delaware”) and merged Z&Z Nevada into Z&Z Delaware in March 2010.  On March 26, 2010 we entered into a merger agreement between us, Trist Holdings, Inc. and Z&Z Merger Corporation, our wholly-owned subsidiary and on May 13, 2010, Z&Z Delaware merged into Z&Z Merger Corporation and became our operating subsidiary.  Concurrent with the merger, Z&Z Delaware changed its name to AtheroNova Operations Inc. (“AtheroNova Operations”) and Trist changed its name to AtheroNova Inc.  The business of AtheroNova Operations, pharmaceuticals and pharmaceutical intellectual property, became our business upon consummation of the merger.  Concurrent with the closing of the merger we consummated a capital raise transaction, in which we sold to investors $1,500,000 in 2.5% Senior Secured Convertible Notes and Common Stock Purchase Warrants to purchase 1,908,798 shares of our commons stock (See Note 7 to the accompanying financial statements).

We have developed intellectual property, covered by our pending patent applications, which uses certain pharmacological compounds uniquely for the treatment of atherosclerosis, which is the primary cause of cardiovascular diseases.  Atherosclerosis occurs when cholesterol of fats are deposited and form as plaques on the walls of the arteries.  This buildup reduces the space within the arteries through which blood can flow.  The plaque can also rupture, greatly restricting or blocking blood flow altogether.  Through a process called delipidization, such compounds dissolve the plaques so they can be eliminated through normal body processes and avoid such rupturing or restriction of blood flow.  Such compounds may be used both to treat and prevent atherosclerosis.

In the near future, we plan to continue studies and trials to demonstrate the efficacy of our IP.  Ultimately, we plan to use or license our technology to various licensees throughout the world who may use it in treating or preventing atherosclerosis and other medical conditions or sublicense the IP to other such users.  Our potential licensees may also produce, market or distribute products which utilize or add our compounds and technology in such treatment or prevention.

General

Operating expenses consist primarily of payroll and related costs, corporate infrastructure costs and research costs.  We expect that our operating expenses will increase as we finalize clinical testing and continue executing our business plan, in addition to the added costs of operating as a public company.

Historically, we have funded our working capital needs primarily through the sale of shares of our capital stock and debt financing.

The merger was accounted for as a reverse merger (recapitalization) with AtheroNova Operations deemed to be the accounting acquirer, and our company deemed to be the legal acquirer.  Accordingly, the following discussing represents a discussion of the operations of our wholly-owned subsidiary, AtheroNova Operations for the periods presented.
 
 
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Results of Operations

Three-month Period ended March 31, 2011 vs. 2010

   
Quarters ended March 31,
   
Increase
 
   
2011
   
2010
   
(decrease)
 
Costs and expenses:
                 
Research and development:
                 
Share-based compensation
  $ -     $ -     $ -  
Other research and development expenses
    88,263       60,000       28,263  
Total research and development expenses
    88,263       60,000       28,263  
General and administrative:
                       
Share-based compensation
    117,687       -       117,687  
Other general and administrative expenses
    220,363       72,633       147,730  
Total general and administrative expenses
    338,050       72,633       265,417  
Interest expense
    96,203       -       96,203  
Change in fair value of derivative liabilities
    (7,221,430 )     -       (7,221,430 )
Other (income) expense
    3,176       953       2,223  
Total other (income) expense
    (7,122,051 )     953       (7,123,004 )
Net (income) loss
  $ (6,695,738 )   $ 133,586     $ (6,829,324 )

Three months ended March 31, 2011 Compared to the three months ended March 31, 2010

During the three month periods ended March 31, 2011 and 2010, we did not recognize any revenues.  We are considered a development stage company and do not expect to have revenues relating to our products in the foreseeable future, if at all.

For the quarters ended March 31, 2011 and 2010, research and development expenses increased to $88,263 from $60,000.  This increase is primarily the result of our recording  the 2nd progress payments  due in connection with our second pre-clinical studies being currently  conducted plus additional patent development work recorded in the first quarter of 2011 compared to the final payment made upon conclusion of data analysis for our first pre-clinical study in the first quarter of 2010.

General and administrative costs increased to $338,050 in the first quarter of 2011 compared to $72,633 for the quarter ended March 31, 2010, or an increase of $265,417.  The increase in costs incurred in 2011 is due to the costs associated with our corporate offices, payroll expenses as well as the cost of stock based compensation expense of $117,687 for our officers and directors, compared to the crediting of administrative expenses in the same period of 2010 due to dismissal of obligations incurred in prior periods.

For the quarter ended March 31, 2011 interest expense was $96,203.  This change is due to interest expense and discount amortization incurred on the 2.5% Senior Secured Convertible Notes (“Notes”) for the quarter.  We had no comparable debt or interest costs in the three months ended March 31, 2010.

Change in fair value of derivative liabilities resulted in income of $7,221,430 for the three months ended March 31, 2011.  There were no such costs for the three months of the prior year.  This change in fair value results from revaluing our derivative liabilities associated with the convertible notes and warrants issued in prior year.
 
 
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Net income for the quarter ended March 31, 2011 was $6,695,738 compared to a net loss of $33,586 for the quarter ended March 31, 2010 due to the income generated from the re-valuing our derivative liabilities which is only partially offset by payroll and stock based compensation for employees, officers and directors retained by the us as well as the costs associated with the ongoing costs of the 2nd pre-clinical trials.  The net loss in the three months ended March 31, 2010 included the final costs of the proof of concept study as well as legal costs associated with the negotiation  and review of merger documents and pre-merger due diligence partially offset by a reclassification of expenses.
 
Liquidity and Capital Resources
 
From inception to March 31, 2011, we incurred a deficit during the development stage of $9,147,059 primarily as a result of our losses from operations and the non-cash costs relating to the accounting of debt, derivative and warrant issuances.  We expect to continue to incur additional losses for at least the next twelve months and for the foreseeable future.  These losses have been incurred through a combination of research and development activities as well as patent work related to our technology, expenses related to the merger and to public reporting obligations and the costs to supporting all of these activities.

We have financed our operations since inception primarily through equity and debt financings.  During the three months ended March 31, 2011, we had a net decrease in cash and cash equivalents of $162,583.  This decrease resulted largely from net cash used in operating activities of $187,583, which was only partially offset by cash provided by financing activities of $25,000.  Total liquid resources as of March 31, 2011 were $15,219 compared to $177,802 at December 31, 2010.

As of March 31, 2011, excluding our derivative liability of $6,476,493, we had a working capital deficit of $283,395 compared to working capital of $11,580 at December 31, 2010, when excluding our derivative liability of $13,697,823 as that date.

Our available working capital and capital requirements will depend upon numerous factors, including progress of our research and development programs, our progress in and the cost of ongoing and planned nonclinical and clinical testing, the timing and cost of obtaining regulatory approvals, the cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights, in-licensing activities, competing technological and market developments, the resources that we devote to developing manufacturing and commercializing capabilities, the status of our competitors, our ability to establish collaborative arrangements with other organizations and our need to purchase additional capital equipment.

Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing, other collaborative agreements, strategic alliances, and our ability to realize the full potential of our technology in development.  Such additional funds may not become available on acceptable terms and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term.  Through March 31, 2011, a significant portion of our financing has been through private placements of common stock and warrants and debt financing.  Unless our operations generate significant revenues and cash flows from operating activities, we will continue to fund operations from cash on hand and through the similar sources of capital previously described.  We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs.  We believe that we will continue to incur net losses and negative cash flows from operating activities for the foreseeable future.

We are currently in the process of offering and selling units consisting of one share of our common stock and a warrant to purchase 0.30 shares of our common stock at an exercise price of $0.60 per share, to accredited investors to raise funds necessary for general corporate and research costs.  The warrants are fully vested and exercisable for 3 years from the date of issuance. This private placement, if fully subscribed, will raise approximately $1,000,000, prior to any fundraising costs, which should be sufficient to fund operations through the end of the fourth quarter of 2011.  The securities being offered in such offering will not be or have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.  The offering is ongoing and there can be no assurances that it will result in placement of a sufficient number of units to provide sufficient operating capital.  There can be no assurances that sufficient subsequent funding, if any at all, will be raised by these or future discussions or the cost of such investments will be reasonable.  Furthermore, we will need additional financing thereafter to complete development and commercialization of our products.  There can be no assurances that we can successfully complete development and commercialization of our products.
 
 
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On April 11, 2011, we amended the subscription agreement pursuant to which we sold, on March 11, 2011, an aggregate of 25,000 shares of our common stock to an accredited investor at a per share price of $1.00, to provide, instead, for the purchase of 45,454 units.  On April 20, 21 and 25, and May 4 and 5, 2011 we sold to six accredited investors an aggregate of 750,410 units at $0.55 per unit, resulting in gross proceeds to us.  In making the stock issuances described above without registration under the Securities Act, we relied upon one or more of the exemptions from registration contained in and/or promulgated under Section 4(2) of the Securities Act as each of the stock recipients was an accredited investor and no general solicitation or advertising was used in connection with the stock issuances.

These matters raise substantial doubt about our ability to continue as a going concern.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have reported a net operating loss of $426,313 in the three months ended March 31, 2011, offset by non-cash gains on valuation of derivative liabilities of $7,221,430, compared to a net loss of $33,586 for the three month periods ended March 31, 2010.  The net loss attributable to common shares from date of inception, December 13, 2006 to March 31, 2011, amounts to $9,147,059.  Management believes that we will continue to incur net losses through at least March 31, 2012.
  
2.5% Senior Secured Convertible Notes Payable

On May 13, 2010, we entered into a Securities Purchase Agreement with W-Net Fund I, L.P. (“W-Net”), Europa International, Inc. (“Europa”), and MKM Opportunity Master Fund, Ltd. (“MKM” and together with W-Net and Europa, the “Purchasers”), pursuant to which the Purchasers, on May 13, 2010, purchased from us (i) 2.5% Senior Secured Convertible Notes for a cash purchase price of $1,500,000, and (ii) Common Stock Purchase Warrants pursuant to which the Purchasers may purchase up to 1,908,798 shares of our common stock at an exercise price equal to approximately $0.39 per share (the “Warrants”) (the “Capital Raise Transaction”).  A portion of the proceeds from the Capital Raise Transaction were used to pay $250,000 owed by us to the two principal holders of our common stock, W-Net and Europa, and to reimburse them for legal and accounting fees and other expenses incurred by them and our company in connection with the Merger and the Capital Raise Transaction.  The net proceeds available to us for our operations were reduced by such payments.

The Notes pay 2.5% interest per annum with a maturity of 4 years after the closing of the Capital Raise Transaction.  No cash interest payments are required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.  If there is an uncured event of default (as defined in the Notes), the holder of each Note may declare the entire principal and accrued interest amount immediately due and payable.  Default interest will accrue after an event of default at an annual rate of 12%.  If there is an acceleration, a mandatory default amount equal to 120% of the unpaid Note principal plus accrued interest may be payable.

The Warrants may be exercised on a cashless basis under which a portion of the shares subject to the exercise are not issued in payment of the purchase price, based on the then fair market value of the shares.

On May 13, 2010, we also entered into a Security Agreement and an Intellectual Property Security Agreement with the Purchasers and AtheroNova Operations, pursuant to which all of our obligations under the Notes are secured by first priority security interests in all of our assets and the assets of AtheroNova Operations, including intellectual property.  Upon an event of default under the Notes or such agreements, the Note holders may be entitled to foreclose on any of such assets or exercise other rights available to a secured creditor under California and Delaware law.  In addition, under a Subsidiary Guarantee, AtheroNova Operations will guarantee all of our obligations under the Notes.
 
 
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Each Note is convertible at any time into common stock at a specified conversion price, which will initially be approximately $0.39 per share.  Note principal in the amount of $98,049 has been converted in 2010 and immediate conversion of the remaining balance outstanding on the Notes of $1,401,951 would result in the holders receiving 3,568,106 shares of our common stock.  Interest expense of $965 accrued on the converted portion of the notes from the date of issuance through the respective conversion dates in 2010 resulted in the issuance of 2,456 shares of our common stock in lieu of cash payment of the interest expense.

The Notes may not be prepaid, or forced by us to be converted in connection with an acquisition of our company, except in a limited case more than a year after the Note issuance where the average of our stock trading price for 30 days on a national trading market other than the OTC Bulletin Board (“OTCBB”) is at least three times the conversion price, in which event, and subject to the satisfaction of certain other requirements, the Note holders may elect to receive at least double the unpaid principal amounts in cash and other requirements are satisfied.  In such a limited case acquisition, there could also be a forced cashless exercise of the Warrants subject to similar requirements and optional cash payments to the Warrant holders of at least double the exercise prices of their Warrants.

The Note conversion price and the Warrant exercise price will be subject to specified adjustments for certain changes in the numbers of outstanding shares of our common stock, including conversions or exchanges of such.  If additional shares of our capital stock are issued, except in specified exempt issuances, for consideration which is less than the then existing Note conversion or Warrant exercise price, then such conversion or warrant price will be reduced by anti-dilution adjustments.  For the first $400,000 of such “Dilutive Issuances,” the reduction will be made on a weighted average basis, taking into account the relative magnitudes of any Dilutive Issuance relative to the total number of outstanding shares.  However, any further Dilutive Issuance would be subject to a more detrimental “full ratchet” adjustment that generally reduces the conversion or exercise price to equal the price in the Dilutive Issuance, regardless of the size of the Dilutive Issuance.

The Notes will greatly restrict the ability of our company or AtheroNova Operations to issue indebtedness or grant liens on our or its respective assets without the Note holders’ consent.  They will also limit and impose financial costs on our acquisition by any third party.

Under the Securities Purchase Agreement, if we meet three specified operating benchmarks during the first twelve months after the closing of the first Note purchase, an additional $1,500,000 in Note purchases (without Warrants) can be requested by us from the Purchasers.  The determination of whether we have met the benchmarks is solely at the discretion of the Purchasers.  If the benchmarks are determined to have been achieved, then we can require the Purchasers to make the additional $1,500,000 of Note purchases.  If such benchmarks are not attained in the 12-month period, then the Purchasers, in their discretion, during the next two months may elect to purchase up to $1,500,000 of Notes (without Warrants) having an initial conversion price which is 25% higher than the conversion price in the original Notes.

Commitments

Development Commitments

At present we have no development commitments.

Research and Development Projects

At present we have commitments for two research and development projects for our second pre-clinical trials.  The first agreement, with the University of California, has an expected completion date of July 1, 2011 with additional amounts due under the agreement of $39,167.

The second commitment for research and development projects, with the Cedars-Sinai Medical Center, has an expected completion date for the research portion of the project of August 31, 2011 and a completion of the preparation of the data analysis and publishable manuscript approximately 45-60 days after the completion of the laboratory work.  Additional progress payments are due at various dates dependent upon the stages of completion of the project and total $187,583.
 
 
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Summary of Contractual Commitments

Employment Agreements

Employment agreements with our Chief Executive Officer and Chief Financial Officer are incorporated by reference as Exhibits 10.1 and 10.2 to the Current Report on Form 8-K (File No. 000-52315) filed with the Securities Exchange Commission (“Commission”) on September 3, 2010.
 
Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants discuss their most “critical accounting policies” in management’s discussion and analysis of financial condition and results of operations.  The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.  On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation.  Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates under different assumptions or conditions.  The following represents a summary of our critical accounting policies.

Research and Development Expenses>

All research and development costs are expensed as incurred and include costs of consultants and contract research facilities who conduct research and development on our behalf and on behalf of AtheroNova Operations.  We have contracted with third parties to facilitate, coordinate and perform agreed upon research and development of our technology.  We have expensed all costs associated with the conduct of the laboratory research as well as the costs associated with peripheral clinical researchers as period costs.


We periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. We accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
 
 
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The fair value of our common stock option and warrant grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

Recently Issued Accounting Standards>

Recent accounting pronouncements did not or are not believed to have a material impact on the Company's present or future consolidated financial statements
 
Item 3.            Quantitative and Qualitative Disclosure About Market Risk>

As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.
 
 
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Item 4.            Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

As of March 31, 2011, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, 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) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to the our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our disclosure controls or internal controls over financial reporting were designed to provide only reasonable assurance that such disclosure controls or internal control over financial reporting will prevent all errors or all instances of fraud, even as the same are improved to address any deficiencies.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be only reasonable, not absolute assurance that any design will succeed in achieving its stated goals under all potential future conditions.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

Changes in Internal Control

During the quarter ended March 31, 2011, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
 
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Part II – Other Information

Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds.

On March 11, 2011, we issued 25,000 shares of our common stock for gross proceeds of $25,000 to an accredited investor in a private placement transaction.  On April 11, 2011, we amended the subscription agreement pursuant to which we sold such shares to provide, instead, for the purchase of 45,454 units consisting of 45,454 shares of our common stock and warrants, having a term of three years and an exercise price of $0.60 per share, to purchase 13,636 shares of our common stock.

In making the stock issuances described above without registration under the Securities Act, we relied upon one or more of the exemptions from registration contained in and/or promulgated under Section 4(2) of the Securities Act as each of the stock recipients was an accredited investor and no general solicitation or advertising was used in connection with the stock issuances.
 
Item 6.            Exhibits

Exhibit No.
 
Description
     
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
     
32.1
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

 
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SIGNATURES

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

 
ATHERONOVA INC.
       
Date: May 13, 2011
By:
/s/ Mark Selawski  
 
Mark Selawski
 
Chief Financial Officer
(Principal financial and accounting officer)
 
 
 
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