News Column

ATHERONOVA INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

February 27, 2014

This discussion summarizes the significant factors affecting our operating results, financial condition and liquidity and cash flows for the periods ended December 31, 2013 and 2012. The discussion and analysis that follows should be read together with the consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this report. Management's Discussion and Analysis of Financial Condition and Results Of Operations is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. 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 Section 1A above - "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 Z&Z Nevada incorporated 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 with Z&Z Merger Corporation, our wholly-owned subsidiary and Z&Z Delaware, and on May 13, 2010, Z&Z Merger Corporation merged into Z&Z Delaware with Z&Z Delaware surviving as our operating subsidiary. Concurrent with the Merger, Z&Z Delaware changed its name to AtheroNova Operations, Inc. and we changed our name from Trist Holdings, Inc. to AtheroNova Inc. The business of AtheroNova Operations, pharmaceuticals and pharmaceutical intellectual property, became our business upon consummation of the Merger.

We have developed intellectual property, covered by our issued and 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 of several genetic signaling agents, such compounds stimulate reverse cholesterol transport which dissolves 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.

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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



Our operating costs consist of research and development costs as well as general and administrative costs. Such costs consist primarily of expenses under research and development contracts, payroll and related costs, legal and professional fees (including patent acquisition costs) and corporate infrastructure costs. We expect that our operating expenses will increase as we 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



Year ended December 31, 2013 Compared to the year ended December 31, 2012

Years ended December 31, Increase 2013 2012 (decrease) Costs and expenses: Share-based compensation $ 2,369,009 $ -- $ 2,369,009 Other research and development expenses 2,030,285 986,261 1,044,024 Total research and development expenses 4,399,294 986,261 3,413,033 General and administrative: Share-based compensation 1,359,579 1,182,920 176,659 Other general and administrative expenses 1,455,277 1,468,805 (13,528 ) Total general and administrative expenses 2,814,856 2,651,725 163,131 Other (income) expense: Interest expense 601,664 871,431 (269,767 ) Cost to induce conversion of 12% notes -- 866,083 (866,083 ) Change in fair value of derivative liabilities -- (2,640,497 ) 2,640,497 Gain on extinguishment of derivative liability -- (97,975 ) 97,975 Other (income)/expense (1,092 ) (1,467 ) 375 Total other (income) expense (600,572 ) (1,002,425 ) 1,602,997 Net loss $ (7,814,722 )$ (2,635,561 )$ 5,179,161



During the years ended December 31, 2013 and 2012, 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 twelve months ended December 31, 2013, research and development expenses increased to $4,399,294 from $986,261 in the same period in 2012. This is due to significant increases in spending in 2013 for Phase 1 clinical trial drug product, consultants and employees added to oversee our clinical trial programs as well as expenses recognized with the issuance of common stock upon achievement of two milestones and accrual based upon the probability of another milestone as of December 31, 2013 pursuant to the CardioNova clinical trial program. The expenses in the period ended December 31, 2012 included purchase of active pharmaceutical ingredient, formulation development and additional pre-clinical research as reported in that that period.

General and administrative costs increased by $163,131, to $2,814,856, in 2013 compared to $2,651,725 for 2012 due slight increases in travel, lodging and professional fees due to increased activity with CardioNova and increased participation in financial and investor conferences during the current year. We incurred non-cash stock-based compensation expense of $878,179 for our officers, directors and consultants in 2013, compared to $1,182,920 for 2012. Also recognized in 2013 was $422,500 for below market purchases by directors and $58,900 for the cost of shares gifted to officers, both from a controlling stockholder of the Company.

For the year ended December 31, 2013, interest expense was $601,664 compared to $871,431 for the year ended December 31, 2012. The decrease in interest expense was due to the recognition of unamortized discounts on a larger balance of converted notes in 2012 when compared to 2013. For the year ended December 31, 2012, we also recognized amortization expense on the short term convertible notes issued and matured in 2012 with no comparable activity in the current year.

For the twelve months ended December 31, 2012, the cost to induce conversion of 12% notes was $866,083. These costs related to the expensing of the Beneficial Conversion Feature recorded on the 12% convertible notes upon conversion in 2012 as well as the fair value of warrants issued to the holders of our short-term convertible notes as inducement to convert the notes in October 2012. There was no comparable expense in 2013.

For the year ended December 31, 2012, there was a gain of $2,640,497 recorded for the change in fair value of derivative liabilities during the period. There was no comparable gain in the same period of 2013.

For the year ended December 31, 2012, gain on extinguishment of derivative liability was $97,975 compared to $0 for the comparable period in 2013. This gain is due to the extinguishment of a portion of the derivative liability due to the partial conversion of the 2.5% Senior Convertible Notes during the prior year period with no corresponding gain in the current year.

Net loss for the year ended December 31, 2013, was $7,814,722 compared to a loss of $2,635,561 for the year ended December 31, 2012. The increased net loss is due to the increased spending as the Company increases its research and development activities, recognition of expenses of research and development expenses paid or to be paid by issuance of our common stock and the corresponding consultants and employee expenses for staffing to monitor and conduct our clinical research. Additionally, there were no gains associated with revaluation or extinguishing derivative liabilities as were recorded in fiscal year 2012.

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Liquidity and Capital Resources

From inception to December 31, 2013, we incurred a deficit during the development stage of $22,029,794 primarily due to non-cash costs relating to the valuation of our note and warrant issuances accounted for as a derivative liability, and net operating losses. 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 twelve months ended December 31, 2013, we had a net decrease in cash and cash equivalents of $2,477,836. This decrease resulted largely from net cash provided by financing activities of $787,048, offset by net cash used in operating activities of $3,261,824. Total cash as of December 31, 2013 was $266,210 compared to $2,744,046 at December 31, 2012.

As of December 31, 2013, we had a working capital deficit of $989,341 compared to working capital of $2,121,023 at December 31, 2012. We have reported net losses of $7,814,722 and $2,635,561 for the years ended December 31, 2013 and 2012, respectively. The net loss attributable from date of inception, December 13, 2006 to December 31, 2013, amounts to $22,029,794. Management believes that we will continue to incur net losses through at least December 31, 2014.

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

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 December 31, 2013, 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.

Based on our resources available at December 31, 2013, plus the gross proceeds of the 6% Secured Note financing completed in February 2014, which provided gross cash proceeds of $1,906,500, management believes that we have sufficient capital to fund our operations through April of 2014. Management believes that we will need additional equity or debt financing, or to generate revenues through licensing of our products or entering into strategic alliances as well as reduce and defer expenses where possible to be able to sustain our operations further into 2014. Furthermore, we will need additional financing thereafter to complete development and commercialization of our intellectual property. There can be no assurances that we can successfully complete development and commercialization of our intellectual property.

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 (the "Original Notes"), 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 "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.

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The Original Notes accrued 2.5% interest per annum with a maturity of 4 years after the closing of the Capital Raise Transaction. No cash interest payments were required, except that accrued and unconverted interest is 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 Original Notes), of which one event of default would be the departure of Thomas Gardner without us obtaining a suitable full-time replacement within 90 days of such departure, the holder of each Original 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 Original 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 Original 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 Original Notes or such agreements, the Original 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 Original Notes.

The Original Notes and warrants issued in connection therewith 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 conversion or exercise price.

On July 6, 2011, we entered into the First Amendment and Exchange Agreement with each of W-Net, Europa and MKM pursuant to which the Purchasers agreed to exchange the Original Notes for the Amended and Restated 2.5% Senior Secured Convertible Notes (the "Amended Notes"). The Amended Notes had the same terms as the Original Notes (as described above), except that each Amended Note is convertible at any time into common stock at a per share conversion price of $0.29, subject to adjustment.

On June 15, 2012, we entered into the Second Amendment and Exchange Agreement with each W-Net, Europa and MKM pursuant to which the Purchasers agreed to exchange the Amended Notes for Second Amended and Restated 2.5% Senior Secured Convertible Notes (the "Second Amended Notes"). The Second Amended Notes have the same terms as the Amended Notes (as described above) except as follows: (i) each Second Amended Note has an automatic conversion provision and removal of the applicable beneficial ownership limitations effective the later of 61 days following our notice to the Purchasers of our application to list or quote our securities on a national securities exchange or the date immediately prior to the effective date of the listing or quotation of our securities on the applicable exchange; (ii) the price-based anti-dilution provisions contained in the Amended Notes have been removed; and (iii) under the Securities Purchase Agreement, as currently amended, if we met two specified operating benchmarks during the first twenty-nine months after the closing of the first Original Note purchase, an additional $1,500,000 in note purchases, substantially in the form of the Second Amended Notes (without warrants), could be requested by us from the Purchasers. The determination of whether we had met the benchmarks was solely at the discretion of the Purchasers. If the benchmarks were determined to have been achieved, then we could have required the Purchasers to make the additional $1,500,000 of note purchases. If such benchmarks were not attained in the 29-month period or we did not exercise the option to request the additional notes, then the Purchasers, in their discretion, during the next 10 days could elect to purchase up to $1,500,000 of notes, substantially in the form of the Second Amended Notes (without warrants), having an initial conversion price which is 100% of the conversion price in the Second Amended Notes. On July 23, 2012 the Purchasers notified us of their intention of putting the additional $1,500,000 in notes in 3 tranches. The first $500,000 was put to us and we issued notes (substantially in the form of the Second Amended Notes) (the "Additional Notes" and together with the Original Notes, the Amended Notes and the Second Amended Notes, the "Senior Notes") on September 4, 2012. These Additional Notes mature on September 3, 2016. The second tranche of $498,333 was put to us and we issued Additional Notes on October 1, 2012. These Additional Notes mature on September 30, 2016. The final tranche of $500,000 was put to us and we issued Additional Notes on October 31, 2012. These Additional Notes mature on October 30, 2016. In addition, the 1,908,798 warrants to purchase shares of our common stock issued in conjunction with the Original Notes were also amended to remove the reset provision in the warrants' exercise price. All other existing terms of such warrants did not change.

From issuance through December 31, 2012, the Purchasers exercised their option to convert a portion of the Senior Notes into our common stock. During the year ended December 31, 2010, principal in the amount of $98,049 and accrued interest in the amount of $965 was converted at a per share price of approximately $0.39 into 249,488 and 2,456 shares, respectively, of our common stock. During the year ended December 31, 2011, principal on the amount of $446,600 was converted at a per share price of $0.29 into 1,540,000 shares of our common stock. In addition, we also issued 45,164 shares of our common stock with a market value of $27,098 to settle $13,098 of accrued interest relating to the Senior Notes. The issuance of these common shares resulted in an additional charge of $14,000 that has been reflected as a financing cost in the 2011 statement of operations. During the year ended December 31, 2012, principal on the amount of $690,851 was converted at a per share price of $0.29 into 2,382,245 shares of our common stock. In addition, we also issued 111,474 shares of our common stock with a market value of $72,278 to settle $32,401 of accrued interest relating to these notes. The issuance of these common shares resulted in an additional charge of $39,877 that has been reflected as an additional expense in the 2012 statement of operations. During the year ended December 31, 2013, principal on the amount of $165,000 was converted at a per share price of $0.29 into 568,965 shares of our common stock. In addition, we also issued 7,942 shares of our common stock with a market value of $4,765 to settle $2,303 of accrued interest relating to these notes. The issuance of these common shares resulted in an additional charge of $2,462 that has been reflected as an additional expense in the accompanying consolidated statement of operations. The aggregate balance of the Senior Notes outstanding as of December 31, 2013 amounted to $1,597,833.

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

Each of the Original Notes, Amended Notes and warrants had, until being amended in June 2012, 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 conversion or exercise price. We 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, we determined that as the conversion price of the Original Notes and Amended Notes and the strike price of the warrants may have fluctuated based on the occurrence of future offerings or events, such prices were not fixed amounts. As a result, we determined that the conversion features of the Original Notes, Amended Notes and the warrants are not considered indexed to our stock and characterized the value of the Original Notes, Amended Notes and the warrants as derivative liabilities upon issuance.

6% Secured Convertible Notes Payable

In January and February 2014, we entered into Securities Purchase Agreements with approximately 31 accredited investors (the "Purchasers"), pursuant to which the Purchasers, on February 12, 2014, purchased from us (i) 6% Secured Convertible Notes for a cash purchase price of $1,906,500 (the "6% Notes"), and (ii) Common Stock Purchase Warrants pursuant to which the Purchasers may purchase up to 4,144,568 shares of our common stock at an exercise price equal to $0.23 per share (the "6% Note Placement"). The 6% Notes have a 3 year term and are convertible into common stock at any time at the lesser of i) $0.23 per share and ii) seventy percent of the average of the three lowest daily volume-weighted average prices ("VWAPs") occurring during the 20 consecutive trading days immediately preceding the applicable conversion date. The associated warrants are exercisable immediately, have a 10 year term and are exercisable at $0.23 per share. 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.

The 6% Notes accrue 6% interest per annum, require no cash interest payments, except that accrued and unconverted interest is 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 6% Notes), the holder of each 6% 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 6% Note principal plus accrued interest may be payable.

On February 12, 2014, 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 6% Notes are secured by security interests in all of our assets and the assets of AtheroNova Operations, including intellectual property on a pari passu basis with the 2.5% Senior Secured Convertible Notes outstanding. Upon an event of default under the 6% Notes or such agreements, the 6% 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 6% Notes.

A portion of the proceeds from the 6% Notes were generated through the efforts of Philadelphia Brokerage Corporation, whereby we agreed to pay a commission of 8% of the aggregate gross proceeds in cash and 2% in the form of our common stock for placements generated by Philadelphia Brokerage Corporation. Accordingly, commissions of $68,720 and a common stock issuance of 65,351 shares were due to them at the completion of the 6% Note Placement. The net proceeds available to us for our operations were reduced by the cash payment.

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Commitments Development Commitments



In October 2011, we entered into two definitive agreements with OOO CardioNova, a wholly-owned subsidiary of Maxwell Biotech Group, a Russian biotech fund, covering our AHRO-001 compound. The agreements cover a territory represented by the Russian Federation, the Ukraine and various countries in central Asia (the "Territory").

Under the Licensing Agreement, OOO CardioNova ("CardioNova") became an equity investor in our Company in exchange for the funding of Phase 1 and 2 human clinical trials conducted by a Clinical Research Organization ("CRO") located in Russia. Pursuant to the agreement, a Joint Steering Committee was established between both entities and determined the final clinical protocols and the research budget of approximately $3.8 million. Upon acceptance of the development plan on April 25, 2013, 391,753 shares of common stock (10% of the research budget) were issued to CardioNova at a 20-day weighted average prior to signature of the initial term sheet, or $0.97 per share. On April 29, 2013 the Russian Ministry of Healthcare approved the protocol submitted on January 22, 2013, upon which the Joint Steering Committee had based the Phase 1 protocol. Accordingly, 1,605,408 shares of common stock were issued at the weighted 20-day average of $0.4734, representing 20% of the approved budget.

Additional common stock issuances of 40% and 30% of the approved budget shall be issued upon the announcement of Phase 1 results and announcement of Phase 2 results, respectively. The number of shares of common stock to be issued at each tranche will be determined at the lower of the weighted 20-day average immediately prior to each issuance event, or $0.97 per share, whichever is lower. As of December 31, 2013, the Phase1 or Phase 2 milestones calling for additional issuance of common stock had not been achieved.

If CardioNova successfully develops and commercializes AHRO-001 in the Territory, we will be entitled to receive a quarterly royalty, based on net sales during the period using an escalating scale. The royalty agreement shall remain in force for the period in which intellectual property rights for AHRO-001 are in full force and effect in the Territory.

Under the Securities Purchase Agreement, CardioNova purchased a total of 275,258 shares of our common stock for a cash purchase price of $0.97 per share, which took place in two installments. The first installment, which took place on December 22, 2011, was for the issuance of 154,639 shares upon receipt of $150,000 as specified in the Licensing Agreement. The 2nd installment of 120,619 shares took place on June 14, 2013 upon delivery of final clinical product to be used in Phase 1 clinical trials.

Research and Development Projects

We have a research agreement signed in September 2012, amended in April 2013 and again in September 2013, with a major university in Southern California to conduct contract research in additional compounds covered under our pending patents. This agreement calls for payment of all research costs relating to the study of dosage and efficacy of bile acids on the atherosclerotic plaque in a non-human model. The total potential cost of the amended project is $236,323, to be paid in four installments over the estimated one year length of the study. As of December 31, 2013, $236,323 has been expensed, of which $120,327 has been recorded as part of Research and Development costs on the accompanying statement of operations for the year ended December 31, 2013. The final report on this research project was received in early 2014.

The Company has multiple testing agreements signed in September 2012 and August 2013 for testing of the oral toxicity of AHRO-001 in non-human models. Each agreement can be terminated anytime and there are no commitments or guarantees other than to reimburse costs incurred prior to termination.

The study initiated in September 2012, with a cost of approximately $510,000, has completed the active phase of testing and is in the data write-up stage of the project. The process is ongoing and to date, $488,530 has been expensed, of which $389,785 has been recorded as part of Research and Development costs on the accompanying statement of operations for the year ended December 31, 2013.

The studies authorized in August 2013, with a cost of approximately $224,600, have both completed the active phase of testing and are in the initial data analysis stage of the projects. The process is ongoing and to date, $175,950 has been expensed, all of which has been recorded as part of Research and development costs on the accompanying statement of operations for the period ended December 31, 2013.

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Summary of Contractual Commitments

Employment Contracts



Contracts pursuant to which we have engaged the services of 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 SEC on September 3, 2010 and, for our Chief Financial Officer, amended in a Current Report on Form 8-K filed with the SEC on December 4, 2012. These agreements expired on August 29, 2013.

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

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.

Accounting for Share-Based Research and Development Costs

Under its research and development (R&D) agreements, the Company is obligated to issue shares of common stock if milestones are met by the R&D vendor. It is the Company's policy to recognize expense for these shares when it is estimated that there is a high probability of meeting the milestone. The Company accrues the share based expense based upon the estimated percentage of completion of the milestone. The shares are valued at the market price at the end of the period and revalued at each period until issued. At December 31, 2013, approximately 3 million shares of common stock are to be issued pursuant to the agreement with a fair value of $1,170,712. The liability was recorded as part of "Research and development costs - payable in stock" in the accompanying balance sheet below long term liabilities as it is only payable in shares of common stock.

Stock-Based Compensation



We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option and warrant grants issued and vesting to employees based on current accounting guidance, whereby the award is measured at its fair value at the date of grant and is amortized ratably over the vesting period. We account for stock option and warrant grants issued and vesting to non-employees based on current accounting guidance, whereby the fair value of the stock compensation is based on 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 instrument is complete.

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We estimate the fair value of stock options using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and are fully transferable. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock and the expected life of stock options. Projected data related to the expected volatility of stock options is based on the historical volatility of the trading prices of our common stock and the expected life of stock options is based upon the average term and vesting schedules of the options. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore the existing valuation models do not provide a precise measure of the fair value of our employee stock options.

Derivative Financial Instruments

We evaluate our 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, we use 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.

Recently Issued Accounting Standards

In January 2013, the FASB issued Accounting Standard Update ("ASU") 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. This guidance is effective for annual and interim reporting periods beginning January 1, 2013. The Company does not believe the adoption of this update will have a material effect on its financial position and results of operations.

On March 4, 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity" ("ASU 2013-05"). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. The Company does not believe the adoption of this update will have a material effect on its financial position and results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Loss, or a Tax Credit Carryforward Exists. Topic 740, Income Taxes, does not include explicit guidance on the financial statement presented of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances and the amendments in this update are intended to eliminate that diversity in practice. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Early adoption is permitted. The Company does not believe the adoption of this update will have a material effect on its financial position and results of operations.

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


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Source: Edgar Glimpses


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