Attached files
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EX-32.1 - ProUroCare Medical Inc. | v211317_ex32-1.htm |
EX-23.1 - ProUroCare Medical Inc. | v211317_ex23-1.htm |
EX-31.2 - ProUroCare Medical Inc. | v211317_ex31-2.htm |
EX-31.1 - ProUroCare Medical Inc. | v211317_ex31-1.htm |
EX-10.36 - ProUroCare Medical Inc. | v211317_ex10-36.htm |
EX-10.35 - ProUroCare Medical Inc. | v211317_ex10-35.htm |
EX-10.34 - ProUroCare Medical Inc. | v211317_ex10-34.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December
31, 2010
o TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _________________ to __________________
Commission
file number: 000-51774
ProUroCare
Medical Inc.
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|
(Exact
name of registrant as specified in its charter)
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|
Nevada
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20-1212923
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(State
or other jurisdiction
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(IRS
Employer
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of
incorporation)
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Identification
No.)
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6440
Flying Cloud Drive, Suite 101, Eden Prairie, MN
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55344
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code 952-476-9093
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|
___________________________________________________________________________________
(Former
name or former address, if changed since last
report.)
|
Securities
registered pursuant to Section 12(b) of the Exchange Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock $0.00001 par
value; Common Stock Warrants
Units, consisting of one
share of Common Stock and one Warrant
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
o
Yes x No
Indicate
by check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. x
Yes o 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 pursuant 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). o
Yes o No
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K o
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 o
|
Accelerated filer o | |
Non-accelerated
filer o
|
|
Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act).
o Yes x No
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal
quarter. $20,641,344 as of June 30,
2010
Indicate
the number of shares outstanding of each of the registrant’s classes of common
equity, as of the latest practicable date.
15,571,993
common shares and 306,679 Units at February 11, 2011
INTRODUCTORY
CAUTIONARY STATEMENT
This
Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These statements are based on management’s current beliefs and
assumptions and on information currently available to us. Forward-looking
statements include, among others, the information concerning possible or assumed
future results of operations of ProUroCare Medical Inc. and its subsidiary (the
"Company,” “we,” “us,” or “our”) set forth in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and
elsewhere in this Annual Report. Forward-looking statements also
include statements where the words "may,”" "will,” "should,” "could,” "expect,”
"anticipate,” "intend,” "plan,” "believe,” "estimate,” "predict,” "potential,”
or similar expressions are used. Forward-looking statements are not
guarantees of future performance. Our future actual results and shareholder
values may likely differ materially from those expressed in these
forward-looking statements. We caution you not to put undue reliance on any
forward-looking statements included in this document. See Part I,
Item 1A, “Risk Factors Associated with our Business, Operations, and
Securities.”
TABLE OF
CONTENTS
Page
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PART
I
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ITEM
1:
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BUSINESS
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1
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ITEM
1A:
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RISK
FACTORS
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14
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ITEM
1B:
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UNRESOLVED
STAFF COMMENTS
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27
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ITEM
2:
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PROPERTIES
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27
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ITEM
3:
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LEGAL
PROCEEDINGS
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27
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PART
II
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ITEM
4:
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RESERVED
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27
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ITEM
5:
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MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
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27
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ITEM
6:
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SELECTED
FINANCIAL DATA
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28
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ITEM
7:
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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29
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ITEM
7A:
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QUANTITATIVE
AND QUALITATTIVE DISCLOSURES ABOUT MARKET RISK
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35
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ITEM
8:
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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F-1
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ITEM
9:
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
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36
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ITEM
9A(T):
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CONTROLS
AND PROCEDURES
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36
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ITEM
9B:
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OTHER
INFORMATION
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37
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PART
III
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ITEM
10:
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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37
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ITEM
11:
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EXECUTIVE
COMPENSATION
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40
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ITEM
12:
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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43
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ITEM
13:
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS,
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AND
DIRECTOR INDEPENDENCE
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45
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ITEM
14:
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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46
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PART IV
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ITEM
15:
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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48
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SIGNATURES
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52
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PART I
We have
developed and intend to market an innovative prostate imaging system known as
the ProUroScan™ System. The ProUroScan System creates images and
documents abnormalities of the prostate using our new, proprietary mechanical
elasticity imaging technology. The ProUroScan System is an imaging
system designed for use as an aid to the physician in documenting abnormalities
in the prostate that have been previously detected by a digital rectal exam
(“DRE”). As an adjunct to DRE, the ProUroScan System will be used following an
abnormal DRE to generate a real-time image of the prostate. The final
composite image is saved as a permanent electronic record and can be
conveniently retrieved to view previous test results.
Most
abnormalities found in otherwise homogenous organ tissues are less elastic than
normal tissues. The ProUroScan’s unique technology uses mathematical
algorithms to interpret measurements of relative prostate tissue elasticity
taken by mechanical sensors to render images of the prostate in real
time. Using the system’s specially designed rectal probe, physicians
can quickly and cost-effectively visualize the prostate gland and document
specific areas of concern. The real-time image can be saved as a
permanent electronic record.
Current
tools used to detect the presence of an abnormality in the prostate have
significant limitations, a fact that has been documented in numerous scientific
articles published throughout the world. Prostate disease patients
who receive a positive test result must make numerous decisions, such as whether
to biopsy, based on limited, non-specific and sometimes subjective
information. We believe that our ProUroScan System’s ability to
produce images of the prostate and objectively document abnormalities will be of
significant value to the patient and his physician as an adjunct to the
DRE.
The
ProUroScan System is not currently marketed or sold and has not yet been cleared
for marketing by the U.S. Food and Drug Administration (“FDA”). Our goal is to
have ProUroScan System regulated by the FDA as a Class II device. We
are implementing a regulatory strategy to obtain FDA clearance of the ProUroScan
System for a documentation claim and for the ProUroScan System to serve as an
adjunct to a DRE. The current status of the FDA market clearance
process is described below under the caption “ProUroCare System
Status.”
Once FDA
clearance is obtained on our current generation ProUroScan System, the systems
will be manufactured by one or more FDA-regulated contract manufacturers and
marketed in cooperation with a to-be-determined medical products company with an
established worldwide presence in the urology market.
Our
imaging technology is based on work originally performed by Artann Laboratories
Inc. (“Artann”), a scientific technology company based in Trenton, New Jersey,
focused on early-stage technology development. In 2002, we licensed the rights
to this technology and since then have worked with Artann on its development. In
September 2006, Artann was awarded a $3 million Small Business Innovation
Research Phase II Competitive Renewal grant from the National Institute of
Health and the National Cancer Institute to help advance the development and
application for clearance of the ProUroScan System by the FDA. We
have entered into license and development and commercialization agreements with
Artann relating to their existing technology and know-how and all future
technology developed by Artann in our field of use. After we obtain FDA
clearance, it is our intent to expand our working relationship with Artann to
include their participation in the development and licensing of additional
technologies.
We
believe the ProUroScan System’s existing technology provides a platform on which
to develop multiple future generation systems. In the future, following our
initial FDA regulatory clearance, we intend to work with Artann to develop and
introduce enhanced versions and additional indications for this
technology. For example, we plan to study and develop enhanced
versions of the system that may be able to monitor changes in prostate tissue
over time, guide prostate biopsies, do prostate disease screening and assess
changes in prostate size following drug treatment for benign prostate
hyperplasia (“BPH”). Future generation systems will require us to
obtain regulatory approval or clearance by conducting studies and filing
additional submissions with the FDA.
1
Prostate
Disease
Prostate
cancer is the most common form of cancer and the second leading cause of cancer
death in men. According to the National Cancer Institute, more than
217,730 men were expected to be diagnosed with prostate cancer and over
32,000 were expected to die from the disease in 2010. Currently, there are
approximately 42 million men in the U.S. over the age of 50. For men in
this age category, the standard of care to screen for the presence of prostate
cancer is to have a physical exam each year in which two tests are routinely
performed: the DRE and the Prostate Specific Antigen (“PSA”) blood test.
Although PSA and DRE provide some positive predictive value, many factors limit
their accuracy and usefulness, and neither test creates a physical or visual
record of the abnormality or its position in the prostate.
A patient
with a positive DRE or an elevated PSA is typically referred to a urologist for
further diagnosis. The urologist will usually perform a prostate biopsy to
obtain tissue samples for microscopic analysis. The prostate is biopsied by a
needle that is guided by ultrasound into the prostate through the rectal wall.
Since the existence and exact location of possible cancerous tissue is not
known, the urologist will usually take 10 to 14 samples in a scattered pattern
throughout the prostate in an attempt to find the suspect tissue. The tissue
samples are then sent to a laboratory for analysis and interpretation, and the
results are reported several days later. If the results are negative or
indeterminate, the urologist may suggest a second biopsy procedure, or that the
patient increase the frequency of future screening examinations.
The
treatment path for patients who test positive for prostate cancer depends on
many variables, including age, location and pathology of the cancerous tissue
and general health of the patient. Generally, a younger, otherwise healthy
patient will elect to have the prostate removed to eliminate the possibility
that it might spread beyond the prostate. Older, less healthy patients may elect
not to undergo surgery, and instead monitor the disease closely by semi-annual
PSA and DRE exams, and annual biopsies. This monitoring regimen is commonly
referred to as “active surveillance.” Some patients may elect radiation or drug
treatments, in addition to necessary ongoing active surveillance. The National
Cancer Institute estimates that there are approximately 2.3 million men
alive who have a history of cancer of the prostate.
Limitations
of Current Prostate Cancer Screening and Diagnosis
The two
most common screening tests for identifying prostate cancer are the DRE and the
PSA. These tests have been used for years, but have often been criticized for
their lack of specificity and selectivity.
In a DRE
exam, a physician wearing a latex glove inserts a lubricated finger into the
rectum to palpate the prostate gland to detect abnormalities. The clinician must
rely on his or her experience and sensitivity of touch to estimate the size of
the prostate and detect irregularities in shape or hardness. There is
significant subjectivity inherent in the DRE exam which can be negatively
affected by poor examiner training, lack of experience or poor ability to
interpret the results, as well as other patient related limitations including
excessive obesity, patient discomfort and unusual anatomical positioning of the
prostate. Data from community-based studies indicate that the
positive predictive value of a DRE in detecting cancer is 15% to 30% and
varies relatively little with age. In a Scandinavian study, the positive
predictive value of DRE was found to be only 22% to 29%. According to the
Eighth Edition of Campbell’s Urology, a DRE has only fair reproducibility even
with experienced examiners and the test misses a substantial proportion of
cancers before they become advanced and less amenable to treatment.
A PSA
test is a simple blood test that measures the presence of prostate-specific
antigens in the blood serum. The advantages offered by PSA testing are its
simplicity, objectivity, reproducibility and low level of
invasiveness. In clinical practice, a PSA level greater than 4ng/mL
is generally considered an abnormal result. Community-based studies
have shown that PSA levels greater than 4ng/mL are seen in about
15% of men who are older than 50 years of age. The probability, or
positive predictive value, that a man who is older than 50 having prostate
cancer if his PSA level is elevated is approximately 20% to 30%. However,
the likelihood of cancer depends on the degree of elevation in the PSA levels.
For levels between 4 and 10ng/mL, the positive predictive value is about
20 percent. This value increases to between 42 percent and
64 percent if the PSA level is greater than 10ng/nL. Although PSA is
specific to prostate tissue, it is not specific to prostate cancer. Older men
that have benign enlargement of the prostate and acute prostatitis often have
elevated PSA levels. Serum levels of PSA can also be elevated for a period
of time after transrectal needle biopsy, acute urinary retention, ejaculation
and prostate surgery. Because of the prevalence of these conditions in men over
the age of 50, the positive predictive value of PSA measurements decreases
with age. Despite these variances, PSA testing has increased the detection
rate of early-stage prostate cancers, which are more curable than late-stage
cancers.
2
Most
clinicians have adopted the strategy of performing both tests in combination,
which has been shown to increase the combined predictive value. In fact, in a
large study of volunteers, the combination of DRE and PSA detected 26% more
cancers than PSA alone. However, because of the significant risk of prostate
cancer, prostate biopsy is recommended for all men who have DRE abnormalities,
regardless of PSA level, because 25% of men with cancer have
PSA levels less than 4mg/nL.
Prostate
biopsies can cause patient anxiety, pain, bleeding and infection, and can lead
to a significant increase in medical and non-medical costs to health care
systems and patients. According to Oregon Health and Science University,
approximately one million prostate biopsies are performed each year in the
United States, but only approximately 25% of biopsy procedures performed detect
the presence of cancer, and another 25% are given a false negative, meaning that
no cancer is detected even when later it is found that a patient does have
cancer.
The
need for imaging and objective documentation of prostate disease
Prostate
disease patients who receive a positive test result are asked to make numerous
serious decisions based on limited, non-specific and sometimes subjective
information. Should they undergo one or more biopsy procedures, which
itself generates 25% false negatives? Should they have a radical
prostatectomy? Is active surveillance a better course of
action? In all of these scenarios, having a tool that can effectively
image the presence of an abnormality will allow physicians and patients to
better understand the current status of their disease. We believe that patients
facing such decisions will benefit from the information provided by having an
objective, readily obtained image of their prostate, both upon the initial
imaging and also upon successive imaging if their disease is monitored over
time.
Our
Solution - ProUroScan Prostate Imaging System
We
believe that the ProUroScan System is an innovative new technology that for the
first time offers patients and their physicians the ability to quickly and cost
effectively generate images of the abnormalities in the prostate in real-time
following a positive DRE, and electronically store them for later retrieval and
reference.
The
ProUroScan System is an imaging system designed for use as an aid to the
physician in visualizing and documenting abnormalities in the
prostate. As an adjunctive tool to DRE, it will be used after a
physician identifies abnormalities during a DRE examination. The first
generation system will provide an image or record of the pressures that are
generated from palpation of the posterior surface of the prostate using a sensor
probe. The system’s operation is based on measurement of the stress pattern
created when the probe is pressed against the prostate through the rectal wall.
Temporal and spatial changes in the stress pattern provide information on the
elastic structure of the gland and allow two-dimensional reconstruction of
prostate anatomy and visualization of prostate mechanical properties. The data
acquired allow the calculation of prostate features such as size and shape. The
prostate image is displayed on a screen that allows physicians to visualize
tissue abnormalities in the prostate gland. In addition to the real time visual
image, the results are stored electronically as a digital record.
The
ProUroScan System consists of arrays of pressure sensors mounted on a probe, a
central processing unit, proprietary software and image construction algorithms,
and a color monitor. The probe is specially designed for the rectal anatomy to
minimize patient discomfort. It is ergonomic for the clinician and similar to a
traditional DRE for the patient. The probe utilizes highly sensitive pressure
sensors located on the face of the probe head to palpate the prostate. The
probe’s positioning system ensures that the person administering the scan
examines the entire surface of the prostate, and assists prostate image
construction.
To
perform a scan, the clinician inserts the tip of the probe into the patient’s
rectum and palpates the prostate. As the prostate is palpated, an image of the
prostate is produced and displayed on the computer monitor, along with
indicators of the amount of pressure being applied to help guide the clinician.
Differences in tissue density or elasticity will be depicted in real time on a
color monitor. Tissue that can be easily displaced or is soft is
represented in a light blue or yellow color where tissue that is less elastic
(abnormal tissue) is represented in a dark brown or red color. The
image that is generated during the evaluation shows the physician in real-time
where abnormal tissue exists in an otherwise homogeneous soft tissue
organ.
Our
Strategy
Our goal
is to establish the ProUroScan System as part of the standard of care in the
process of detecting and monitoring prostate disease, and to leverage our
mechanical imaging technology and intellectual property to create new products
both within and outside the urology field. The key business strategies by
which we intend to achieve these objectives include:
Obtain Regulatory
Clearance for the ProUroScan Prostate Imaging System. We are
actively pursuing FDA clearance under a de novo application for a
labeling claim to support use of the ProUroScan System to create an image to aid
physicians in documenting abnormalities in the prostate following a suspicious
DRE. The details of our efforts in this regard are outlined under
“ProUroScan System Regulatory Status,” below. We have engaged highly
experienced regulatory experts to assist us in this process including Washington
D.C. based regulatory attorneys and a consultant with close ties to the
FDA. They both help us monitor the application’s status and provide
assistance to achieve our regulatory goals as quickly as possible.
3
Commercialize Our
Products in Collaboration with a Corporate Distribution Partner. As
an effective way to accelerate sales and marketing support for the ProUroScan
System, we plan to enter into a distribution agreement with a large urology
product, diagnostic or drug company. We believe that establishing such a
relationship would allow us to penetrate markets more quickly and afford us an
opportunity to obtain additional financial support in the form of licensing
fees, equity investments and “in kind assistance” from key functional groups
within the licensing organization.
Expand and
Protect Our Intellectual Property Position. We believe that
our issued and licensed patents, patent applications and technology provide a
strong position from which the company can successfully market the current
ProUroScan System and develop new products within the prostate disease market
segment. We will also work to expand coverage for this technology in
other market segments and for additional new technologies that may jointly be
developed with the support of Artann. We intend to implement our
patent strategy globally because of the significant market opportunities that
exist for our products outside the United States.
Drive Market
Adoption and Establish Prostate Mechanical Imaging as a Standard of Care for
Detecting Abnormalities in the Prostate. Our clinical
development strategy is to collaborate closely with leading physicians and
scientific experts involved with prostate disease. We have established a high
level of awareness and strong working relationships with leading experts and
believe that their involvement will allow us to create awareness and scientific
validity for the ProUroScan System while assisting in physician training and
ongoing clinical studies. These scientific experts will also be important in
promoting patient awareness and gaining widespread adoption of the ProUroScan
System when approved and commercialized.
Drive revenue
through a Patient-Pay Model and Eventually Seek Coverage and Payment for the
ProUroScan Imaging Procedure. We expect our primary revenue stream
will consist of fees charged per procedure rather than from sales of
equipment. Initially, we anticipate using a “patient pay model” for
physicians to receive payment for performing the ProUroScan System procedure.
Under a patient pay model, in the absence of coverage from their health
insurance, patients pay for the scan out of their own funds. There is a
high incentive for patients to seek additional information so they can make an
informed and reasonable decision for themselves and their family. We believe
that patients will be willing to pay for the ProUroScan System procedure out of
their personal funds in sufficient numbers to support the launch of our product
in advance of receiving favorable coverage decisions from third-party
insurers. Over time, we expect to establish the market value of the
ProUroScan imaging procedure and pursue government and other third-party
reimbursement coverage.
Leverage our
Imaging Technology for Additional Clinical Applications and Indications.
We intend to continue to conduct research and development
through Artann and other development partners that will enable us to expand our
indications for use. For example, we plan to study and develop enhanced versions
of the system that may be able to monitor changes in prostate tissue over time,
guide prostate biopsies, do prostate disease screening and assess changes in
prostate size following drug treatment for (“BPH”). We believe that the
underlying technology also has potential applications in other organ systems in
addition to the prostate. We will need to obtain FDA clearance for
any such expanded claims or applications.
ProUroScan
System Regulatory Status
The first
generation ProUroScan System has been tested in laboratory experiments on
prostate models and in a pre-clinical study. In addition, the system was used
for over two years on approximately 168 patients at the Robert Wood Johnson
Medical Center in New Brunswick, New Jersey. In 2008, an article
authored by Artann scientists and published in the peer- reviewed journal Urology reported that in 84%
of the cases in this pre-clinical study, the ProUroScan System was able to
construct three-dimensional (3D) and 2D cross-sectional images of the
prostate.
In 2009,
we completed a multi-site clinical study of the ProUroScan imaging system
designed to provide documentation to the FDA of the system’s effectiveness in
visualizing and documenting abnormalities of the prostate detected by
DRE. The trial included a final patient count of 56 patients assessed
at the following medical centers:
|
·
|
Veterans
Affairs Medical Center, Minneapolis,
MN;
|
4
|
·
|
Robert
Wood Johnson Medical School Division of Urology, New Brunswick,
NJ;
|
|
·
|
Mayo
Clinic, Rochester, MN;
|
|
·
|
AccuMed
Research Associates, Garden City, NY; and
|
|
·
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Urological
Associates of Lancaster, Lancaster,
PA.
|
The
ProUroScan System is not currently marketed or sold and has not yet been cleared
for marketing by the FDA. Our goal is to have the ProUroScan System regulated by
the FDA as a Class II device. A Class II device is one in which
general and specific controls exist to ensure that the device is safe and
effective. In a 510(k) application, applicants must demonstrate that
the proposed device is substantially equivalent to an existing approved product,
or “predicate device.” Products that employ new or novel
technologies, and for which through the 510(k) review process is found to have
no comparable predicate device, may be cleared for marketing under Section
513(f) of the Federal Food, Drug, and Cosmetic Act (“FDCA”). This
path, referred to as a “de
novo” application, is intended to allow new or novel technology devices
to be cleared for marketing when an appropriate predicate device does not
exist.
In
November 2009, a 510(k) application for market clearance was filed with the FDA
that incorporated a basic imaging and documentation claim. From that
submission, the FDA determined that the ProUroScan System is not substantially
equivalent (“NSE”) to a device currently being marketed. As required
by Section 513(f)(2) of the FDCA Act, a submission was made in May 2010 to
request 510(k) clearance under the de novo process. This
request asked the FDA to define mechanical imaging systems as devices that are
intended to produce an elasticity image of the prostate as an aid in documenting
abnormalities of the prostate that are initially identified by digital rectal
examination and to be used by physicians as a documentation tool. The
de novo submission also
recommended that the classification regulation state that a “mechanical imaging
system” device consists of a trans-rectal probe with pressure sensor arrays and
a motion tracking system that provides real time images of the
prostate. These proprietary components are unique to the ProUroScan
System.
The de novo application remains
under review by the FDA. To date, we have not received any requests
for additional information from FDA regarding the de novo
application.
Under the
terms of its contract with us, Artann is responsible for submitting and
obtaining the initial regulatory clearance for the ProUroScan System for the
basic imaging and documentation claim. Once cleared and upon
ProUroCare’s first commercial sale of a ProUroScan System, Artann will transfer
the 510(k) to ProUroCare. Once cleared, the ProUroScan may serve as a predicate
for future filings and expanded indications for use.
Physician
Advisory Council
Our
Physician Advisory Council will be made up of urologists from leading medical
centers in the U.S., Canada and Europe. Most of the participating
physicians will be those who devote a significant portion of their practice
focused on the diagnosis and treatment of prostate disease, primarily prostate
cancer, and also participate on scientific committees and other organizations
that are attempting to advance the tools and technologies available to
physicians and patients fighting prostate disease.
Our
Physician Advisory Council will play a central role in advancing this
technology. In the short run, council members will contribute to the
development of training protocols and in-service education
programs. They will also provide additional support to the company by
participating in future clinical studies, serving as principal investigators and
authors of scientific articles and meeting presentations. In the long
term they will advise the company on health care trends, unmet clinical needs
and new clinical or market opportunities.
Marketing
and Distribution
We
believe that the cost of establishing our own direct sales force of sufficient
size and with the capability to commercialize the ProUroScan System worldwide
would require a considerable period of time and significant
funding. As an effective way to develop our understanding the
requirements of international markets and accelerate sales and marketing
activities we plan to establish a distribution agreement with a large urology or
diagnostic products company. We believe that establishing such a
relationship would allow us to penetrate markets more quickly and afford us an
opportunity to obtain additional financial support in the form of licensing
fees, equity investments and “in kind assistance” from key functional groups
within the licensing organization. We have begun exploring marketing
opportunities with four of the eight to ten potential partner companies we have
targeted.
5
In
advance of establishing such a distribution agreement, we plan to hire a small
direct sales force in the United States that will focus on large urology
practices in major metro markets. The concentration of large urology
group practices in the U.S. enables us to access a disproportionate number of
physicians with a highly targeted sales force. Once a distribution
partner has been identified and a distribution agreement put in place, our sales
force will be used in business-to-business support to the partnering
organization. They will also be used to assist in the initial
analysis and development of other markets.
We
anticipate that, in time, the majority of our revenue will be generated from
testing fees bundled together with the sale of disposable supplies consumed in
the scanning process. Additional revenue will be generated by the
sale of ProUroScan Systems, which likely will be placed in clinics under a
variety of programs, which may include outright sales, operating leases,
financing leases or arrangements where payments are based upon the usage of the
system.
Patient
Pay and Third-Party Reimbursement Strategy
Initially,
we anticipate using a “patient pay model” for physicians to receive payment for
performing the ProUroScan System procedure. Under a patient pay model, in the
absence of coverage from their health insurance, patients pay for the scan out
of their own funds. Medicare beneficiaries would sign an Advanced Beneficiary
Notice (“ABN”) that would allow the provider to collect from the patient. Only
one in four biopsies performed based on an abnormal PSA reading reveal prostate
cancer, and only 50 percent of suspicious lesions found by DRE presented
cancer on prostate biopsy. Given these statistics, in cases where patients have
abnormal DRE or PSA test results or when a test result may not be clear, there
is a high incentive to seek additional information so that patients can make an
informed and reasonable decision for themselves and their family. We believe
that a sufficient number of patients will be willing to pay for the ProUroScan
System procedure out of their personal funds to support the launch of our
product in advance of receiving favorable coverage decisions from third-party
insurers. The concept of a patient pay model has been used successfully for
other procedures (e.g., computer-aided detection (“CAD”) for mammography),
and we expect this to be our approach for generating revenues during the early
phases of product rollout.
In the
U.S., health care providers that use the ProUroScan System will generally rely
on third-party payors, including private payors and governmental payors such as
Medicare and Medicaid, to cover and reimburse all or part of the cost of using
the ProUroScan System. Consequently, sales of the ProUroScan System depend in
part on the availability of coverage and reimbursement from third-party payors.
The manner in which reimbursement is sought and obtained varies based upon the
type of payor involved and the setting in which the procedure is furnished. In
general, third-party payors will provide coverage and reimbursement for
medically reasonable and necessary procedures and tests. In
determining payment rates, third-party payors increasingly are scrutinizing the
amount charged for medical procedures.
Current
Procedural Terminology (“CPT”) codes are used by physicians and other providers
to submit claims. At the outset, however, there will not be a unique
CPT code for the ProUroScan procedure. During this period of time, physicians
will have the option of submitting claims under a “miscellaneous” CPT code with
proper documentation. During the initial patient pay phase of our
market introduction, we will collect the clinical and economic data necessary in
order to apply for a unique CPT code from the American Medical Association
(“AMA”). Our initial commercial rollout will focus on urologists in
the United States. By focusing on urologists, we expect to establish the
clinical and economic value of the scan for patients, and to demonstrate to both
private and government payors the rationale and parameters for establishing a
CPT code and that the scan should be covered and adequately
reimbursed.
We
anticipate that the ProUroScan System may be covered by Medicare as a detection
test for patients who have clinical signs or symptoms of disease. We anticipate
that the first generation of the ProUroScan System will be used to image the
prostate and to maintain historical records for future tracking for men who have
an abnormal DRE or other signs or symptoms of disease. Thus, providers who
perform prostate imaging using the first generation ProUroScan System likely
will seek Medicare coverage as a detection, rather than a screening test,
presuming that the patient presents with a sign or symptom of
disease.
We expect
that procedures using the ProUroScan System will be reimbursed either based upon
the value of their unique billing and procedure code or as part of an office
visit. Until a unique billing and procedure code is established, we expect that
providers will be able to bill for the procedure using a miscellaneous CPT code.
Claims submitted under a miscellaneous code are processed manually and the
provider must include additional information to be used by the payor in
determining the medical appropriateness of the procedure.
6
The
process of obtaining a new CPT code typically takes one or two years. In
order to apply for a new, unique code, an application must be submitted to the
AMA’s CPT Editorial Panel. CMS then takes these recommendations
into account when establishing the Medicare Physician Fee Schedule values. The
amount of reimbursement the provider receives generally depends on the value
assigned to the procedure by the AMA’s Relative Value Scale Update Committee.
Most private payors also base their payment rates based on these
values.
Many
private payors look to Medicare as a guideline in setting their coverage
policies and payment amounts. Unlike the Medicare program, however, private
payors have no statutory impediment to covering screening tests. The
current coverage policies of these private payors may differ from the Medicare
program, and the payment rates they make may be higher, lower or the same as the
Medicare program. If CMS or other agencies decrease or limit reimbursement
payments for physicians, this may affect coverage and reimbursement
determinations by private payors. Additionally, some private payors do not
follow the Medicare guidelines, and those payors may reimburse only a portion of
the costs associated with the use of our products, or not at all.
Intellectual
Property
Our
objective as a medical device company is to effectively and aggressively obtain,
maintain and enforce patent protection for our products, formulations,
processes, methods and other proprietary technologies, preserve our trade
secrets and licenses, and operate without infringing the proprietary rights of
other parties both in the United States and in all other countries where we may
do business. We seek to obtain, where appropriate and financially feasible, the
broadest intellectual property protection possible for our products, proprietary
information and proprietary technology through a combination of contractual
arrangements, licenses, and patents, both in the United States and throughout
the rest of the world.
We also
depend upon the skills, knowledge and experience of scientific and technical
personnel that we hire or outside organizations with whom we contract, as well
as our advisors and consultants. To help protect our proprietary know-how that
is not patentable, and for inventions for which patents may be difficult to
enforce, we rely on trade-secret protection and confidentiality agreements. To
this end, it is our practice to require employees, consultants, advisors and
other contractors, as appropriate, to enter into confidentiality agreements that
prohibit the disclosure of confidential information and, where applicable,
require disclosure and assignment to us of the ideas, developments, discoveries
and inventions important to our business.
We own
patents, patent applications and know-how associated with mechanical
prostate-imaging systems. These patents and patent applications include U.S.
Patent Nos. 6,569,108 (“Real Time Mechanical Imaging of the Prostate”),
5,785,663 (“Method and Device for Mechanical Imaging of the Prostate”),
5,524,636 (“Method and Device for Elasticity Imaging”), 5,836,894 (“Apparatus
for Measuring Mechanical Parameters of the Prostate and for Imaging the Prostate
Using Such Parameters”), 6,142,959 (“Device for Palpation and Mechanical Imaging
of the Prostate”), and 5,922,018 (“Method for Using a Transrectal Probe to
Mechanically Image the Prostate Gland”). Together, our mechanical imaging
technology is protected by seven U.S. patents (plus seven foreign patents
and two foreign patent applications that are related to the U.S. patents) and,
along with the Artann patent and applications discussed below, is the basis for
the imaging technology used in our ProUroScan System. We own similar patents,
patent applications and know-how associated with breast imaging. However, we do
not intend to pursue any such applications within our near-term business plan.
Under the Artann License Agreement, we agreed to grant Artann a non-exclusive,
fully paid license to make, use or sell any imaging system for the diagnosis or
treatment of disorders of the human breast.
Additionally,
Artann has two U.S. patent and three U.S. patent applications that are
licensed to us under the Artann License Agreement. The patents are U.S.
Patent Nos. 7,819,824 (“Method and Dual-Array Transducer Probe for Real Time
Imaging of Prostate”) and D609,801 (“Calibration Chamber for Prostate Mechanical
Imaging Probe”). The applications are U.S. Patent Application Nos.
11/123,999; 12/885,688; and 13/005,401.
ProUroScan
System Development Partner
The
ProUroScan System is based on work originally performed by Artann and its
affiliate, ArMed LLC. In 2002, we licensed the rights to this technology
developed by Artann from its owner, Profile LLC (“Profile”), a technology
holding company, and since then have worked with Artann and our other technology
partners on its development. In April 2008, we acquired the patents, patent
applications and other know-how associated with this technology previously
licensed from Profile. In July 2008, we entered into two new agreements
with Artann relating to this technology, namely, a license agreement (the
“Artann License Agreement”) and a development and commercialization agreement
(the “Artann Development Agreement”). In December 2008 and November
2009, we amended these agreements to revise the effective dates of the
agreements and alter the timing of certain payments to be made under the
agreements.
7
Under the
Artann License Agreement, Artann has granted us an exclusive, worldwide,
sub-licensable license to certain patent applications and other know-how needed
to make, use and market certain mechanical imaging products for the diagnosis or
treatment of urologic disorders of the prostate, kidney or liver. Artann also
agreed to transfer to us possession of five clinical prostate imaging systems
and grant us full access to all relevant documentation. As an upfront license
fee pursuant to the Artann License Agreement, on January 14, 2009 we paid Artann
$600,000 in cash and $500,000 in shares of our common stock. In
addition, we have agreed to pay Artann:
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a
royalty fee equal to 4% of the first $30,000,000 of net cumulative sales
of licensed products, 3% of the next $70,000,000 of net cumulative sales
and 2% of net cumulative sales over $100,000,000;
and
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a
technology royalty fee of 1% of net sales of the prostate imaging system
products through the earlier of December 31, 2016 or the date of last
commercial sale of such
products.
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The
combined royalties are subject to a minimum annual royalty equal to $50,000 per
year for each of the first two years after FDA clearance for commercial sale and
$100,000 per year for each year thereafter until termination or expiration of
the Artann License Agreement. We also agreed to grant Artann a non-exclusive,
fully paid, sub-licensable, worldwide license to our patents, patent
applications and know-how relating to the manufacture, use or sale of any
mechanical imaging system for the diagnosis or treatment of disorders of the
female breast.
Under the
Artann Development Agreement, we will collaborate with Artann to develop,
commercialize and market prostate imaging systems. Artann will conduct and
complete all pre-clinical activities and testing on the prostate imaging system,
conduct clinical trials, prepare and submit FDA regulatory submissions and
provide hardware and software development, refinement and debugging services to
ready the prostate imaging system for commercial sale. For these development
services, we paid Artann:
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$250,000
in cash upon initiation of the clinical study to support the basic imaging
and documentation claim;
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$250,000
in cash as a milestone payment upon completion of that study and
submission of the 510(k) application to support the basic imaging and
documentation claim;
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fees
totaling $360,000 for technical advice and training by Artann personnel;
and
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769,231
shares of our common stock as a milestone payment upon submission of the
510(k) application.
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A future
payment of $750,000 is to be made under the Artann Development Agreement upon
FDA clearance that allows the ProUroScan System to be commercially sold in the
United States.
The
Artann License Agreement and the Artann Development Agreement each became
effective on December 23, 2008. Under the Artann License Agreement, we have
a 30-day cure period from the date of receipt of written notice from Artann of a
breach of our payment obligations under either the Artann License Agreement or
Artann Development Agreement. If we do not cure a breach of our payment
obligations by the end of the 30-day cure period, the licenses granted under the
Artann License Agreement will terminate. If we have not cured such payment
breach within five days of receipt of the Artann notice, the exclusive licenses
convert to non-exclusive licenses; however, neither party may sub-license or
grant additional licenses for a period of 60 days after receipt of such
notice. Under the Artann Development Agreement, we have a 60-day cure
period from the date of receipt of written notice from Artann of a breach of any
material obligation, representation, warranty or covenant
thereof. Subject to earlier termination due to breach, bankruptcy and
certain other events, the Artann License Agreement will terminate upon
expiration of all royalty obligations, and the Artann Development Agreement will
terminate on its third anniversary, subject to renewal for additional one year
terms upon mutual agreement of us and Artann.
Planned
Development of the ProUroScan System
We
believe that the ProUroScan System’s existing technology provides a platform on
which to develop multiple future generation systems. Once FDA clearance is
obtained for a basic imaging and documentation claim, the 510(k) will be
transferred to us from Artann. In the future, we intend to work with
Artann to develop more enhanced labeling claims and product features. Future
generation systems will require us to obtain regulatory approval or clearance
for use of the ProUroScan System for additional prostate related indications and
file additional submissions with the FDA to obtain expanded labeling claims.
Such regulatory clearances or approvals may require us to perform additional
clinical studies. Future generations of the ProUroScan System may also require
us to secure rights to additional intellectual property.
8
Active Surveillance
We
believe that one of the more valuable future applications for the ProUroScan
System, assuming we obtain any necessary FDA clearance or approval, will be to
allow physicians to monitor changes in the prostate over time. The ProUroScan
System is designed to produce a digital image of the prostate showing the size
and symmetry of the prostate and the location of abnormalities within the
prostate. The ProUroScan System creates a digital record of the exam that can be
stored and used for comparison to subsequent exams. We believe its ability to
digitally store not only the scan results but all of the individual pressure
readings taken during the course of the procedure should facilitate a
quantitative analysis of the progression of the disease over time. By comparing
the data taken in a baseline examination to subsequent examinations during the
course of active surveillance, we believe the urologist will gain valuable
information about changes in the patient’s condition that can influence their
decision to pursue additional treatment or continue surveillance. We believe
that this expanded use of the ProUroScan System will provide consistent imaging
over time as compared to variations resulting from differences in technique and
experience of clinicians performing DREs. We believe this will enable physicians
to compare and contrast the patient’s results from exam to exam, and to get
second opinions on the patient’s status in regards to the diagnosis without an
additional office visit. We believe that comparisons of multiple scans over time
will also enable physicians to make longitudinal assessments of the patient’s
disease.
Three-Dimensional Imaging
We
believe that another future enhancement of the current generation system may be
the capability to identify the specific three-dimensional location of lesions
found in the prostate. This can be accomplished by creating a three-dimensional
image of the position of the lesions allowing physicians to rotate the image to
assist in identifying the actual position of the lesion in the prostate gland.
We believe that having this capability may prove helpful in providing a
diagnosis of the patient’s condition in conjunction with other commercially
available diagnostic tools.
Guiding Biopsy
We
believe that use of three-dimensional imaging may facilitate guiding biopsy
needles to specific areas in the prostate where there are suspicious lesions.
Having this capability increases the likelihood of finding cancerous tissue
while also potentially minimizing the number of biopsies that are taken on an
individual patient. According to Oregon Health and Science University,
approximately one million prostate biopsies are performed each year in the
United States, but only 25 percent of biopsy procedures performed detect
the presence of cancer and another 25 percent are given a false negative,
meaning that no cancer is detected even when later it is found that a patient
does have cancer.
Screening
Device
The first
step in identifying men with prostate disease is usually an initial examination
by the patient’s general or family physician. As previously
mentioned, this is usually done beginning at age 50 during the patient’s annual
physical examination. There are many deficiencies of existing
screening tools (see “Limitations of Current Prostate
Cancer Screening and Diagnosis,” above). We see a major
market need to be able to make this process more objective and less prone to
error because of the vagaries of the techniques used by physicians performing
the exam.
We
believe that our current mechanical imaging technology platform will enable us
to develop a screening test that can be performed using a simple disposable
rectal probe. The test would be conducted in a manner similar to our
existing ProUroScan System but employing a simplified prostate assessment
technique. The system would collect data and compare the hardest and
softest tissue that is found. The ratio between the measured
elasticity of the hardest and the softest tissue sampled, or “elasticity
contrast,” would be a significant indicator of the presence or absence of an
abnormality requiring further evaluation.
Evaluating
Drug Treatment for BPH Patients
For
patients who have symptoms of BPH, we believe that future generations of the
ProUroScan System may also be used to monitor changes in prostate size before
and during the course of drug treatments, allowing physicians to more quickly
assess the effectiveness of alternative therapeutic approaches. Assuming future
FDA approval or clearance is granted, use of the ProUroScan System in patients
diagnosed with BPH will allow physicians to monitor changes in the size and
volume of the prostate following treatment with drugs or other tissue reducing
technologies. Timely, accurate assessment of prostate volume changes and the
effectiveness of treatment should enable physicians to recommend alternative
treatments sooner than current assessment methods, and thus provide more
immediate relief to patients.
9
Manufacturing
We have
contracted with Logic (Minneapolis, MN), a contract engineering and
manufacturing firm that is Quality Systems Regulation (“QSR”) compliant, to
initiate production on the first commercial ProUroScan Systems. The QSR requires
manufacturers, including certain third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance procedures
during all aspects of the manufacturing process. In January 2011,
Logic successfully completed pre-production manufacturing of three ProUroScan
Systems.
Because
of the unique nature of the two major proprietary components of the ProUroScan
System, it is likely that one or more additional third-party manufacturers will
be chosen to assemble the certain components or sub-assemblies. Our goal is to
reduce the cost of producing systems over the first two years, taking advantage
of manufacturing scale and purchasing discounts, as well as engineering changes
designed to eliminate components and reduce component costs.
Competition
Although
we expect competition to intensify in the prostate imaging and prostate disease
detection market, we are not aware of any competitive product currently being
sold based on the same technology platform with comparable real-time color
images or other product features that the ProUroScan System provides. In
addition, we do not expect to market the ProUroScan System as a general
screening tool, and therefore will not be positioning the system to compete
directly with currently available screening tests, including the DRE and PSA
tests. The ProUroScan System will be positioned as an “adjunctive” tool
following an abnormal DRE to create an image and document abnormalities of the
prostate detected by a DRE.
A
majority of the innovation occurring in the prostate disease market can be
grouped into two categories, improvements in current blood tests and
modification of Magnetic Resonance Imaging (“MRI”) technology. In the
first case, it is likely that improvements in the measurement of antigens or
other substance in the blood will result in high sensitivity and specificity for
the detection of prostate cancer. These types of tests are often
defined as “derived tests,” meaning that the result is derived by the detection
of a factor presumed to be associated with the presence of prostate
cancer. However, these tests do not tell the physician or patient
where the lesion or abnormality is, how big it is or how close it is to the wall
of the prostate gland. Better screening tests may prove to be a
positive driver in the market for our technology rather than competitive, as
more patients may be identified who could benefit from the type of objective
documentation the ProUroScan can provide.
One such
test that uses inferred data to identify prostate cancer, yet to be approved in
the United States, is the PCA3 Marker (the “PCA3”). The PCA3 is a
non-coding ribonucleic acid (“RNA”) believed to be a more accurate marker of
prostate cancer than currently used diagnostics tests. The PCA3 marker was
licensed in 2000 by DiagnoCure Inc. of Quebec, Canada. In 2003, DiagnoCure
granted a worldwide license to Gen-Probe, based in San Diego, CA, for the
development and licensing of a second generation PCA3-based test using their
proprietary platform. In 2006, Gen-Probe made the test available in analyte
specific reagent format to U.S. laboratories and launched a full CE-marked
PCA3 test in Europe. Although this test has not been approved in the United
States, it potentially represents a significant advance in the development of
more sophisticated and sensitive detection methods for identifying early stage
prostate cancer. Gene fusion is another discovery that may lead to a test that
potentially will be used to diagnose prostate cancer more accurately than
current tests as well as predict prognosis. Gen-Probe has licensed this
technology as well.
In
contrast to the DRE, PSA and PCA3 tests, the ProUroScan System creates a visual
and physical record of the prostate gland. We will seek expanded labeling claims
on future generations of the ProUroScan System so that it can also be used to
conduct ongoing monitoring and surveillance of the status of the abnormalities
found by either a DRE or with the ProUroScan System. We believe that the current
generation of the ProUroScan System will have several features that are
complementary to a traditional DRE examination, such as:
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it
is designed to produce a real-time color image of the prostate;
and
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it
is designed to enable physicians to electronically store the images in
patient files.
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Tests
using MRI technology have the potential for defining where lesions or
abnormalities exist but have a significant disadvantage in that the underlying
technology used to perform these tests is very expensive and access to MRI
technology for this type of application is limited. The current
approaches also require the use of other components like liquid nitrogen making
the overall test significantly more complicated. Aside from MRI and
other large-scale imaging modalities such as computed tomography and nuclear
medicine, which due to their cost and limited availability will not be direct
competitors of the ProUroScan System, the only imaging system in common use for
prostates is the transrectal ultrasound (“TRUS”). TRUS is employed by urologists
following the referral of a patient that has had a positive result from a DRE or
PSA test, primarily to guide the placement of prostate biopsy needles. We
believe that the ProUroScan System will be easier to operate and require less
training than TRUS. We also believe it will be less costly to acquire
and maintain in a traditional medical office setting.
Subject
to FDA clearance or approval, we believe that future uses of the ProUroScan
System will include providing a permanent record of the prostate that can be
used to identify changes over time. Nevertheless, technology is rapidly changing
in the prostate imaging and the prostate disease diagnostic market, and other
technology could come to market potentially displacing the ProUroScan
System.
Government
Regulation
The
ProUroScan System is subject to the FDCA as implemented and enforced by the FDA
and by comparable agencies in various states and various foreign countries. To
ensure that medical products distributed domestically and internationally are
safe and effective for their intended use, FDA and comparable authorities in
other countries have imposed regulations that govern, among other things, the
following activities that we or our third-party manufacturers and suppliers
perform or will perform:
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product
design and development;
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product
testing;
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product
manufacturing;
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product
labeling;
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product
storage;
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premarket
clearance or approval;
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advertising
and promotion;
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product
marketing, sales and distribution;
and
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post-market
surveillance reporting death or serious injuries and medical device
reporting.
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Pervasive
and Continuing Regulation
After a
device is placed on the market, numerous regulatory requirements apply. These
include:
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product
listing and establishment registration, which helps facilitate FDA
inspections and other regulatory
action;
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QSR,
which requires manufacturers, including third-party manufacturers, to
follow stringent design, testing, control, documentation and other quality
assurance procedures during all aspects of the manufacturing
process;
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labeling
regulations and FDA prohibitions against the promotion of products for
uncleared, unapproved or off-label use or
indication;
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clearance
of product modifications that could significantly affect safety or
efficacy or that would constitute a major change in intended use of our
cleared devices;
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approval
of product modifications that affect the safety or effectiveness of our
approved devices;
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medical
device reporting regulations, which require that manufacturers comply with
FDA requirements to report if their device may have caused or contributed
to a death or serious injury, or has malfunctioned in a way that would
likely cause or contribute to a death or serious injury if the malfunction
of the device or a similar device were to
recur;
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post-approval
restrictions or conditions, including post-approval study
commitments;
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post-market
surveillance regulations, which apply when necessary to protect the public
health or to provide additional safety and effectiveness data for the
device; and
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the
FDA’s recall authority, whereby it can ask, or under certain conditions
order, device manufacturers to recall from the market a product that is in
violation of governing laws and
regulations.
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Advertising
and promotion of medical devices, in addition to being regulated by the FDA, are
also regulated by the Federal Trade Commission and by state regulatory and
enforcement authorities. Recently, promotional activities for FDA-regulated
products of other companies have been the subject of enforcement action brought
under healthcare reimbursement laws and consumer protection statutes. In
addition, under the federal Lanham Act and similar state laws, competitors and
others can initiate litigation relating to advertising claims.
The FDA
has broad post-market and regulatory enforcement powers. Our facilities and the
manufacturing facilities of our subcontractors will be subject to unannounced
inspections by the FDA to determine our level of compliance with the QSR and
other regulations. Failure by us or by our third-party manufacturers and
suppliers to comply with applicable regulatory requirements can result in
enforcement action by the FDA or other regulatory authorities, which may result
in sanctions including, but not limited to:
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warning
letters or untitled letters;
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fines,
injunctions and civil penalties;
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withdrawal
or suspension of approval of our products or those of our third-party
suppliers by the FDA or other regulatory
bodies;
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product
recall or seizure;
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orders
for physician notification or device repair, replacement or
refund;
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interruption
of production;
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operating
restrictions, partial suspension or total shutdown of production or
clinical trials;
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criminal
prosecution.
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Fraud and Abuse Laws
Because
of the significant federal funding involved in Medicare and Medicaid, Congress
and the states have enacted, and actively enforce, a number of laws whose
purpose is to eliminate fraud and abuse in federal health care programs. Once we
commercialize the ProUroScan System, our business is subject to compliance with
these laws.
The
federal healthcare programs Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving or providing
remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual, or the furnishing or arranging for a good or service,
for which payment may be made under a federal healthcare program such as
Medicare or Medicaid. Penalties for violations include criminal
penalties and civil sanctions such as fines, imprisonment and possible exclusion
from Medicare, Medicaid and other federal healthcare programs.
Another
development affecting the healthcare industry is the increased use of the
Federal Civil False Claims Act (the “False Claims Act”) and, in particular,
actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The
False Claims Act imposes liability on any person or entity who, among other
things, knowingly presents, or causes to be presented, a false or fraudulent
claim for payment by a federal healthcare program. The qui tam provisions of the
False Claims Act allow a private individual to bring actions on behalf of the
federal government alleging that the defendant has submitted a false claim to
the federal government and to share in any monetary recovery. In recent years,
the number of suits brought against healthcare providers by private individuals
has increased dramatically. In addition, various states have enacted false claim
laws analogous to the False Claims Act, although many of these state laws apply
where a claim is submitted to any third-party payor and not merely a federal
healthcare program. We are unable to predict whether we would be
subject to actions under the False Claims Act or a similar state law, or the
impact of such actions. However, the costs of defending such claims, as well as
any sanctions imposed, could significantly affect our financial
performance.
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HIPAA and Other Fraud and Privacy
Regulations
Among
other things, the Health Insurance Portability and Accountability Act of 1996,
or HIPAA, created two new federal crimes: healthcare fraud and false statements
relating to healthcare matters. The HIPAA health care fraud statute prohibits,
among other things, knowingly and willfully executing, or attempting to execute,
a scheme to defraud any healthcare benefit program, including private payors. A
violation of this statute is a felony and may result in fines, imprisonment
and/or exclusion from government-sponsored programs. The HIPAA false statements
statute prohibits, among other things, knowingly and willfully falsifying,
concealing or covering up a material fact or making any materially false,
fictitious or fraudulent statement or representation in connection with the
delivery of or payment for healthcare benefits, items or services. A violation
of this statute is a felony and may result in fines and/or
imprisonment.
In
addition to creating the two new federal healthcare crimes, regulations
implementing HIPAA also establish uniform standards governing the conduct of
certain electronic healthcare transactions and protecting the security and
privacy of individually identifiable health information maintained or
transmitted by healthcare providers, health plans and healthcare clearinghouses,
which are referred to as “covered entities.” Although we are not a covered
entity and therefore not directly subject to these standards, we expect that our
customers generally will be covered entities and may ask us to contractually
comply with certain aspects of these standards, particularly because we expect
that the ProUroScan System will store patient information and scan results. The
government intended this legislation to reduce administrative expenses and
burdens for the healthcare industry; however, our compliance with certain
provisions of these standards entails significant costs for us.
In
addition to federal regulations issued under HIPAA, some states have enacted
privacy and security statutes or regulations that, in some cases, are more
stringent than those issued under HIPAA. In those cases, it may be necessary to
modify our planned operations and procedures to comply with the more stringent
state laws. If we fail to comply with applicable state laws and regulations, we
could be subject to additional sanctions.
Corporate
Information
ProUroCare
Inc. (“PUC”) was incorporated in 1999 as a Minnesota corporation. In
January 2002, PUC licensed the rights to certain advanced prostate mechanical
imaging technology, and became engaged in the business of developing this
technology for assessing characteristics of the prostate. In 2004,
through a reverse merger transaction with Global Internet Communications
(“Global”), a Nevada corporation, PUC became the wholly owned and sole operating
subsidiary of Global, which was then renamed ProUroCare Medical
Inc.
Our
executive offices are located at 6440 Flying Cloud Drive, Suite 101, Eden
Prairie, Minnesota 55344. Our telephone number is (952) 476-9093, and our
Internet site is www.prourocare.com. The information contained in our
Internet site is not a part of this annual report.
Employees
We
currently have two full-time employees, and to date have conducted much of our
research and development, market research, clinical and regulatory function, and
other business operations through the use of a variety of consultants and
medical-device development contractors. We have found that using consultants and
contractors to perform these functions during our development stage has allowed
us to engage specialized talent and capabilities as needed by the business while
providing the flexibility to engage them as our financial resources have
permitted. Upon receipt of FDA clearance of the ProUroScan System, we
anticipate hiring employees in the areas of marketing, sales and sales training,
quality assurance, engineering, software development and
administration. Some or all of these functions may be performed by
contracted individuals or consultants as management deems most effective. We are
conducting our research and development activities related to our acquired
technologies and proposed products on a contract basis with Artann and
Logic.
13
Important
Notices to Investors; Safe Harbor Statement
Statements
in this Annual Report on Form 10-K which are not purely historical are
forward-looking statements. These statements with respect to the
goals, plan objectives, intentions, expectations, financial condition, results
of operations, future performance and business of our Company, including,
without limitation: (i) our ability to successfully complete all clinical trials
and commercial development of our products and secure all necessary federal and
other regulatory approvals to introduce and market our products in the United
States and around the world; (ii) our ability to fund our working capital needs
over the next 12 to 24 months; (iii) our ability to successfully introduce our
products into the medical device markets; and (iv) all statements preceded by,
followed by or that include the words "may," "would," "could," "should,"
"expects," "projects," "anticipates," "believes," "estimates," "plans,"
"intends," "targets" or similar expressions. For these statements, the Company
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking
statements involve inherent risks and uncertainties, and important factors (many
of which are beyond our control) that could cause actual results to differ
materially from those set forth in the forward-looking statements, including the
following, in addition to those contained in our Company's reports on file with
the Securities and Exchange Commission: general economic or industry conditions,
nationally and in the physician, urology and medical device communities in which
we intend to do business; our ability to fund our working capital needs over the
next 12 to 24 months; our ability to complete the development of our existing
and proposed products on a timely basis if at all; legislation or regulatory
requirements, including our securing all FDA and other regulatory approvals on a
timely basis, if at all, prior to being able to market and sell our products in
the United States; competition from larger and more well established medical
device and other competitors; the development of products that may be superior
to the products offered by us; securing and protecting our intellectual property
and assets and enforcing breaches of the same; clinical results not anticipated
by management of the Company; the quality or composition of our products and the
strength and reliability of our contract vendors and partners; ability to raise
capital to fund our working capital needs and launch our products into the
marketplace in subsequent years; changes in accounting principles, policies or
guidelines; financial or political instability; acts of war or terrorism; and
other economic, competitive, governmental, regulatory and technical factors
affecting our operations, proposed products and prices.
Accordingly,
results actually achieved may differ materially from expected results in these
statements. Forward-looking statements speak only as of the date they
are made. We do not undertake, and specifically disclaim, any
obligation to update any forward-looking statements to reflect events or
circumstances occurring after the date of such statements.
Risks
Related to our Financial Condition and Capital Requirements
We
are a development stage company with limited operating history and our business
plan has not yet been fully tested. We anticipate incurring future losses and
may continue incurring losses after our products are completed, regulatory
clearance or approval is secured and our products are introduced and accepted in
the United States and worldwide markets.
We are a
development stage company. We have just begun to produce pre-commercial systems
and have yet to sell any products associated with the proprietary urology-based
imaging technologies that we intend to market. We have no prior operating
history from which to evaluate our likelihood of success in operating our
business, generating any revenues or achieving profitability. As of December 31,
2010, we have generated no revenue and have recorded losses since inception of
approximately $33.9 million. There can be no assurance that our plans for
developing and marketing our urology-based products will be successful, or that
we will ever attain significant sales or profitability. We anticipate that we
will incur losses in the near future.
We
have a history of operating losses and have received a “going-concern”
qualification from our independent registered public accounting
firm.
We have
incurred operating losses and negative cash flows from operations since
inception. As of December 31, 2010, we had an accumulated deficit of
approximately $33.9 million. We have not yet generated any revenues. These
factors, among others, raise substantial doubt about our ability to continue as
a going concern. Our consolidated financial statements included in this Annual
Report on Form 10-K do not include any adjustments related to recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should we be unable to continue as a going
concern.
14
Our
independent registered public accounting firm included an explanatory paragraph
in their report on our financial statements for the year ended December 31, 2010
indicating that such deficit accumulated during the development stage raises
substantial doubt as to our ability to continue as a going concern. The
likelihood of our success must be considered in light of the expenses,
difficulties and delays frequently encountered in connection with development
stage businesses and the competitive environment in which we will operate. Our
ability to achieve profitability is dependent in large part on obtaining FDA
clearance or approval for the ProUroScan System, implementing a “patient pay”
sales model, achieving third-party coverage and reimbursement, establishing
distribution channels, forming relationships with third-party manufacturers and
gaining market acceptance of the ProUroScan System. There can be no assurance
that the Company will successfully market the ProUroScan System or operate
profitably.
We
will need additional financing, and any such financing will likely be dilutive
to our existing shareholders.
We will
need additional financing to fund operations while we ramp up production of the
ProUroScan System and begin to enter the market. We will also need
funding to pay, for example, the $750,000 payment due to Artann upon achieving
the FDA market clearance milestone. If we fail to secure a
distribution partner on terms acceptable to us, or at all, we could be required
to undertake distribution activity at our expense, which could significantly
increase our capital requirements and may delay the commercialization of our
products.
As of
December 31, 2010, we had approximately $419,000 of cash on hand. In
addition, on that date we had 3,590,894 currently redeemable warrants
outstanding. These warrants have an exercise price of $1.30 per
share. Upon our exercise of our right to redeem the warrants, holders
of the warrants will have a period of 30 days to exercise their warrants. We
could realize up to approximately $4.7 million depending on the number of shares
actually exercised. We may call these warrants in 2011 to meet our financing
needs outlined above. In addition, we will gain the ability to redeem
2,840,412 warrants with a $1.30 exercise price if the last sale price of our
common stock were to equal or exceed $4.00 per share for a period of 10
consecutive trading days. If we were to subsequently exercise our
redemption right on these warrants, we could realize up to an additional $3.7
million depending on the number of shares actually exercised pursuant to such
redemption. There can be no assurance that we will be able to redeem
the warrants, or how much would be realized if such redemption were
made.
On
September 28, 2010, the Company entered into a $3.125 million Securities
Purchase Agreement (the “SPA”) with Seaside 88, LP
(“Seaside”). Concurrent with the execution of the SPA, the Company
closed on an $875,000 first tranche of the funding, selling 1,400,000
unregistered shares of its common stock to Seaside at $0.625 per
share. Under the terms of the SPA, the remaining $2.250 million
funding is to be provided in six tranches. At each of the future
closings, the Company will sell unregistered shares of its common stock to
Seaside at a cost that is 50 percent of the stock’s volume weighted average
selling price (“VWASP”) during the 10 trading days preceding each closing date,
subject to a floor VWASP of $2.50 per share below which the parties are not
obligated to close.
We plan
to identify a distribution partner during 2011 to help market our
products. We expect such a distribution partner may provide financial
support in the form of licensing fees, loans, equity investment or a combination
of these. In addition to financial support, a successful
collaboration with such a partner would allow us to gain access to downstream
marketing, manufacturing and sales support. There can be no assurance
that a distribution partner can be successfully identified and engaged during
2011, if at all.
In
addition to these actions, we may pursue additional public or private funding in
2011 and 2012 to finance additional product development and operations pursuant
to a commercial market launch. The amounts of such additional funding
will depend, in part, upon the amount of funding we receive from exercise of the
outstanding warrants and the amount of support we receive from a corporate
partner. The funding may be in the form of convertible debt, equity
securities, private debt or debt guarantees for which stock-based consideration
is paid, a public offering of our securities or a combination of
these. If any of these funding events should occur, existing
shareholders will likely experience dilution in their ownership
interest.
If
adequate funds are not available on a timely basis, we could potentially be
forced to cease operations.
If
adequate funds are not available on a timely basis, or are not available on
acceptable terms, we may be unable to repay our existing debt, to fund
expansion, or to develop or enhance our products. Until such time as we are able
to enter the market and achieve positive cash flow from operations, we will
continue to depend on our ability to obtain additional new investment to fund
operations. Ultimately, if adequate financing is not obtained, we
could potentially be forced to cease operations.
15
Our
assets are pledged to secure $900,000 of senior bank notes and $400,000 of notes
issued to an investor and a bank and, as a result, are not available to secure
other senior debt financing. Upon the occurrence of an event of default, the
bank’s security interests in our assets will be assigned to guarantors of the
bank notes and the holders of such $400,000 of promissory notes.
Our $900,000 senior debt financing
through Crown Bank, Minneapolis, Minnesota, has required us to pledge all of our
assets and certain licenses, as well as to provide personal guarantees of
certain shareholders. In addition, we have issued a total of $400,000 of
promissory notes to an individual investor and a bank that have subordinated
interests in all of our assets and certain licenses. Due to such
security interests, we will not be in a position in the future to pledge our
assets to secure any debt or lending facility, in the event we desire or need to
borrow such funds on a secured lending basis. It may be difficult for us to
obtain significant additional debt financing on an unsecured basis.
Moreover,
under the terms and conditions of the Crown Bank facility and our agreement with
the facility’s guarantors, in the event of any default by us with our senior
lender that causes the personal guarantees to be called and honored, all of the
bank’s security interests in our assets shall be assigned to such guarantors,
pro rata, in consideration of such breach and obligation to pay under the
respective guarantees. In addition, the holders and guarantor of $400,000 of
promissory notes have a subordinated security interest in our assets in the
event of a default under the note. Thus, our common shareholders, and any
existing and future investors in our common stock, would, if the foregoing
breach and circumstances occurred, not have access or recourse to the assets and
collateral, and thus, would likely face a complete loss of their investment in
the Company.
There
is no assurance that we will be able to close on $2.250 million of committed
funding from Seaside
Under the
terms of our September 28, 2010 SPA with Seaside, the remaining $2.250 million
of funding is to be provided in six tranches:
-$750,000
within 30 days following FDA clearance of the Company’s ProUroScan
System,
-$1.5
million provided in five subsequent closings of $300,000 in 30-day increments
following the previous closing.
At each
of the future closings, the Company will sell unregistered shares of its common
stock to Seaside at a cost that is 50 percent of the stock’s volume weighted
average selling price (“VWASP”) during the 10 trading days preceding each
closing date, subject to a floor VWASP of $2.50 per share below which the
parties are not obligated to close. There can be no assurance that
our stock’s VWASP will be above the $2.50 floor at the time of the future
closings. In addition, The SPA provides that Seaside will purchase
only the number of shares that will cause its beneficial ownership to remain
below 9.9% of the Company’s outstanding shares. After the first
closing, Seaside now holds approximately 8.8% of our outstanding
stock. Although Seaside has indicated their willingness to propose an
alternative investment vehicle to provide the financing in the event that a
subsequent closing would otherwise cause Seaside to exceed this ownership level,
as they have in other transactions, there can be no assurance that such an
alternative investment vehicle will be available or acceptable to
us.
Risks
Associated with Development and Commercialization of Our ProUroScan
System
There
is no guarantee that the FDA will grant timely market clearance of the
ProUroScan System, if at all, and failure to obtain such timely clearance would
adversely affect our ability to market that product in the United
States.
Our goal
is to have the ProUroScan System regulated by the FDA as a Class II
device. A Class II classification is designed for low risk devices in
which sufficient information exists to establish general and specific controls
that provide reasonable assurance of safety and effectiveness. In
November 2009, Artann filed a 510(k) application for market
clearance. In a 510(k) application, applicants must demonstrate that
the proposed device is substantially equivalent to an existing approved product,
or “predicate device.” If a product employs new or novel technology
such that no predicate device exists, the FDA will so notify the applicant and
automatically classify the device as a Class III device under regulatory
statute. The applicant may then request that a risk-based
classification determination be made for the device under Section 513(f)(2) of
the Food, Drug and Cosmetic Act (the “FDCA”). This process is also
known as a “de novo” or
“risk based” classification.
In April
2010, the FDA determined that a predicate device did not exist for the
ProUroScan System. In response, on May 21, 2010 Artann submitted a
request for FDA clearance under the de novo protocol as required
by the Section 513(f)(2) guidance document. This request asked the
FDA to define mechanical imaging systems as devices that are intended to produce
an elasticity image of the prostate as an aid in documenting abnormalities of
the prostate that are initially identified by digital rectal examination and to
be used by physicians as a documentation tool.
16
The
review of the de novo submission has experienced delays attributed to staffing
limitations and workload prioritization within the FDA. In addition,
recent, widely-publicized events concerning the safety of certain drug, food and
medical device products have raised concerns among members of Congress, medical
professionals, and the public regarding the FDA’s handling of these events and
its perceived lack of oversight over regulated products. The increased attention
to safety and oversight issues could result in a more cautious approach by the
FDA to clearances and approvals for devices such as ours.
There is
no guarantee that the FDA will grant market clearance or designate the
ProUroScan System as a Class II device in a timely manner, if at
all. Even if FDA clearance is received, Artann may encounter
significant delays in receiving such clearance. If unexpected
clearance delays occur, it could have a material adverse effect on our business,
requiring additional financing or potential discontinuance of our
operations.
Even
if clearance from the FDA is obtained, our products may not be commercially
viable or may not be accepted by the marketplace.
The
ProUroScan System and our future products may not prove to be as effective as
currently available medical or diagnostic products or those developed in the
future. The inability to successfully complete development of a product or
application or a determination by us, for financial, technical or other reasons
not to complete development of any product or application, particularly in
instances in which we have made sufficient capital expenditures, could have a
material adverse effect on our business. With respect to the ProUroScan System,
under our current Artann Development Agreement, Artann is to transfer the 510(k)
to us once we make the first commercial sale of the ProUroScan System. If we are
not able to procure a commercial sale of at least one ProUroScan System, Artann
would not be obligated to transfer the 510(k) to us and might not do so, thus
inhibiting our ability to develop future generations of the
product.
Even if
successfully developed, the ProUroScan System and our future products will be
competing against other imaging and diagnostic products in the medical device
marketplace, including those developed in the future that may render the
ProUroScan System obsolete. The digital rectal examination (“DRE”), in
combination with a Prostate Specific Antigen (“PSA”) test, is part of today’s
“standard of care” to evaluate patients over the age of 50 for prostate cancer
or other ailments relating to the prostate. In addition, other modalities that
can be used for diagnostic imaging include transrectal ultrasound, magnetic
resonance imaging, computed tomography and nuclear medicine. Therefore, there
can be no assurance that physicians, providers, patients, third-party payors or
the medical device market, in general, will accept our products.
Our
reliance upon Artann to obtain regulatory clearance of the ProUroScan System
could result in delays.
The
ProUroScan System is subject to regulation by the FDA and by comparable agencies
in various foreign countries. The process of complying with the requirements of
the FDA and comparable agencies is costly, time consuming and burdensome. Under
the terms of its contract with us, Artann is responsible for submitting and
obtaining initial FDA regulatory clearance for the ProUroScan
System. Once cleared and upon ProUroCare’s first commercial sale of a
ProUroScan System, Artann will transfer the clearance to
ProUroCare.
Our
reliance on Artann to obtain regulatory clearance of the ProUroScan System means
that we do not have sole control of the timing and content of FDA submissions
and interactions. If Artann fails to obtain market clearance of the
ProUroScan System, or if Artann encounters significant delays in receiving such
clearance, it could have a material adverse effect on our business, requiring
additional financing or potential discontinuance of our operations.
We
will depend upon others for the manufacturing of our products, which will
subject our business to the risk that we will be unable to fully control the
supply of our products to the market.
Our
ability to develop, manufacture and successfully commercialize our future
products depends upon our ability to enter into and maintain contractual and
collaborative arrangements with others. We do not intend to establish any of our
own manufacturing facilities for the ProUroScan System or any of our future
products. Instead, we intend to retain QSR-compliant and FDA-registered contract
manufacturers. We may also have to rely on a sole supplier for certain critical
components of our ProUroScan System. There can be no assurance that such
manufacturers will be able to supply our products in the required quantities, at
appropriate quality levels or at acceptable costs. We may be adversely affected
by any difficulties encountered by such third-party manufacturers that result in
product defects, production delays or the inability to fulfill orders on a
timely basis. If a manufacturer cannot meet our quality standards and delivery
requirements in a cost-efficient manner, we could suffer interruptions of
delivery while we arrange for alternative manufacturing sources. Any extended
disruption in the delivery of our products could result in our inability to
satisfy customer demand for our products. Consequently, our inability to obtain
alternative sources on a timely basis may have a material adverse effect on our
business.
17
A
failure to successfully implement a “patient pay” sales model prior to
establishing third-party reimbursement could have a material adverse effect on
our product sales and financial results.
Until
third-party reimbursement coverage for the ProUroScan System procedure is
established, if at all, we anticipate using a “patient pay model” for physicians
to receive payment. Under a patient pay model, in the absence of coverage from
their health insurance, patients pay for the scan out of their own funds. Any
failure to successfully establish a patient pay model could have a material
adverse effect on our product sales and financial results.
Rapid
technological change in our competitive marketplace may render the ProUroScan
System obsolete or may diminish our ability to compete in the
marketplace.
The
prostate cancer detection, imaging and medical device markets are extremely
competitive, dominated by large and well financed competition and are subject to
rapid technological advances and changes. The discovery of new technologies and
advances in the application of such technologies to the medical marketplace in
general, and the market for urology-based imaging products in particular, may
render our products obsolete or non-competitive. Any such changes and advances
could force us to abandon our currently proposed products, which would have a
material adverse effect on our business.
There
is no guarantee that the FDA will grant 510(k) clearance or PMA approval of our
future products and claims and failure to obtain necessary clearances or
approvals for our future products and claims would adversely affect our ability
to expand utilization of the technology in other prostate applications or in
other soft tissue organs in the body, which may affect our ability to grow our
business.
In the
future, we may seek to obtain additional indications for use of the ProUroScan
System beyond the basic imaging and documentation claim, as well as clearance
and approval of new products. Some of these expanded claims and future products
may require FDA clearance of a 510(k). Other claims and future products may
require FDA approval of a PMA. Moreover, some of our future products and the
additional claims on the ProUroScan System we may seek may require clinical
trials to support regulatory approval, and we may not successfully complete
these clinical trials. The FDA may not approve or clear these future products,
or future generations of the ProUroScan System for the indications that are
necessary or desirable for successful commercialization. Indeed, the FDA may
refuse our requests for 510(k) clearance or PMA approval of new products.
Failure to receive clearance or approval for additional claims for the
ProUroScan System, or for our future products, would have an adverse effect on
our ability to expand our business.
Clinical
trials necessary to support our future products and claims will be expensive and
may require the enrollment of large numbers of patients, and suitable patients
may be difficult to identify and recruit. These trials may require the
submission of an investigational device exemption, for which there is no
guarantee that the FDA will approve. Delays or failures in our clinical trials
will prevent us from commercializing any modified or new products and will
adversely affect our business, operating results and prospects.
Initiating
and completing clinical trials necessary to support 510(k)s or PMAs for future
generations of the ProUroScan System will be time consuming and expensive and
the outcome uncertain. Moreover, the results of early clinical trials are not
necessarily predictive of future results, and any product we advance into
clinical trials may not have favorable results in later clinical
trials.
Conducting
successful clinical studies may require the enrollment of large numbers of
patients, and suitable patients may be difficult to identify and recruit.
Patient enrollment in clinical trials and completion of patient participation
and follow-up depend on many factors, including: the size of the patient
population; the number of patients to be enrolled; the nature of the trial
protocol; the attractiveness of, or the discomforts and risks associated with,
the treatments received by enrolled subjects; the availability of appropriate
clinical trial investigators, support staff, and proximity of patients to
clinical sites; and the patients’ ability to meet the eligibility and exclusion
criteria for participation in the clinical trial and patient compliance. For
example, patients may be discouraged from enrolling in our clinical trials if
the trial protocol requires them to undergo extensive post-treatment procedures
or follow-up to assess the safety and effectiveness of our products or if they
determine that the treatments received under the trial protocols are not
attractive or involve unacceptable risks or discomforts. In addition, patients
participating in clinical trials may die before completion of the trial or
suffer adverse medical events unrelated to investigational
products.
18
Development
of sufficient and appropriate clinical protocols to demonstrate safety and
efficacy are required, and we may not adequately develop such protocols to
support clearance and approval. Significant risk trials will require the
submission and approval of an investigational device exemption (“IDE”) from the
FDA. There is no guarantee that the FDA will approve our future IDE submissions.
Further, the FDA may require us to submit data on a greater number of patients
than we originally anticipated and/or for a longer follow-up period or change
the data collection requirements or data analysis applicable to our clinical
trials. Delays in patient enrollment or failure of patients to continue to
participate in a clinical trial may cause an increase in costs and delays in the
approval and attempted commercialization of our products or result in the
failure of the clinical trial. In addition, despite considerable time and
expense invested in our clinical trials, the FDA may not consider our data
adequate to demonstrate safety and efficacy. Such increased costs and delays or
failures could adversely affect our business, operating results and
prospects.
We
have no manufacturing experience, and will rely on third parties to manufacture
the ProUroScan System in an efficient manner. If design specification changes
are needed to develop an efficient manufacturing process, those changes may
require FDA clearance of a new 510(k) or approval of a PMA, which we may not be
able to obtain in a timely manner, if at all.
To be
successful, the ProUroScan System will need to be manufactured in sufficient
quantities, in compliance with regulatory requirements and at an acceptable
cost. We have no manufacturing experience. We have identified a third-party
manufacturer to produce commercial units of the ProUroScan System for
distribution after 510(k) clearance or PMA approval is obtained. This
third-party manufacturer is in the process of developing and optimizing the
manufacturing process to produce commercial ProUroScan Systems. If device design
changes are required to implement an efficient manufacturing process, these
design changes will need to be evaluated and implemented in accordance with
applicable Quality Systems Regulation (“QSR”) requirements. If we implement
design changes after the FDA has cleared the ProUroScan System, we will need to
assess whether those design changes could significantly affect the safety or
effectiveness of the device, and require the submission and clearance of a new
510(k), or even require the submission of a PMA. If we determine that these
modifications require a new 510(k) clearance or PMA approval, we may not be able
to obtain this additional clearance in a timely manner, or at all. In general,
obtaining additional clearances can be a time consuming process, and delays in
obtaining required future clearances would adversely affect our ability to
market the ProUroScan System in a timely manner, which in turn would harm our
potential for future growth.
If
we or our third-party manufacturers or suppliers fail to comply with ongoing FDA
or other foreign regulatory authority requirements, or if we experience
unanticipated problems with our products, these products could be subject to
restrictions or withdrawal from the market.
Any
product for which we obtain FDA clearance or approval, and the manufacturing
processes, reporting requirements, post-approval clinical data and promotional
activities for such product, will be subject to continued regulatory review,
oversight and periodic inspections by the FDA and other domestic and foreign
regulatory bodies. In particular, we and our third-party manufacturers and
certain of our suppliers will be required to comply with the FDA’s QSR,
regulations for the manufacture of our products and other regulations which
cover the methods and documentation of the design, testing, production, control,
quality assurance, labeling, packaging, storage and shipping of any product for
which we obtain clearance or approval. Regulatory bodies, such as the FDA,
enforce the QSR and other regulations through periodic inspections. The failure
by us or one of our third-party manufacturers or suppliers to comply with
applicable statutes and regulations administered by the FDA and other regulatory
bodies, or the failure to timely and adequately respond to any adverse
inspectional observations or product safety issues, could result in, among other
things, any of the following enforcement actions:
•
|
warning
letters or untitled letters;
|
•
|
fines
and civil penalties;
|
•
|
unanticipated
expenditures to address or defend such
actions;
|
•
|
delays
in clearing or approving, or refusal to clear or approve, our
products;
|
|
•
|
withdrawal
or suspension of approval of our products or those of our third-party
suppliers by the FDA or other regulatory
bodies;
|
19
•
|
product
recall or seizure;
|
•
|
orders
for physician notification or device repair, replacement or
refund;
|
•
|
interruption
of production;
|
•
|
operating
restrictions;
|
•
|
injunctions;
and
|
•
|
criminal
prosecution.
|
If any of
these actions were to occur it would harm our reputation and cause our product
sales and profitability to suffer and may prevent us from generating revenue.
Furthermore, our third-party manufacturers and suppliers may not be in
compliance with all applicable regulatory requirements which could result in
failure to supply our products in required quantities, if at all.
Even if
regulatory clearance or approval of a product is granted, such clearance or
approval may be subject to limitations on the intended uses for which the
product may be marketed and reduce our potential to successfully commercialize
the product and generate revenue from the product. If the FDA determines that
our promotional materials, labeling, training or other marketing or educational
activities constitute promotion of an unapproved use, it could request that we
cease or modify our training or promotional materials or subject us to serious
regulatory enforcement actions, including some of those listed above. It is also
possible that other federal, state or foreign enforcement authorities might take
action if they consider our training or other promotional materials to
constitute promotion of an unapproved use, which could result in significant
fines or penalties under other statutory authorities, such as laws prohibiting
false claims for reimbursement.
In
addition, we may be required to conduct costly post-market testing and
surveillance to monitor the safety or effectiveness of our products, and we must
comply with medical device reporting requirements, including the reporting of
adverse events and malfunctions related to our products. Later discovery of
previously unknown problems with our products, including unanticipated adverse
events or adverse events of unanticipated severity or frequency, manufacturing
problems or failure to comply with regulatory requirements such as QSR, may
result in changes to labeling, restrictions on such products or manufacturing
processes, withdrawal of the products from the market or regulatory enforcement
actions.
Our
products may in the future be subject to product recalls that could harm our
reputation, business and financial results.
The FDA
and similar foreign governmental authorities have the authority to require the
recall of commercialized products in the event of material deficiencies or
defects in design or manufacture. In the case of the FDA, the authority to
require a mandatory recall must be based on an FDA finding that there is a
reasonable probability that the device would cause serious adverse health
consequences or death. In addition, foreign governmental bodies have the
authority to require the recall of our products in the event of material
deficiencies or defects in design or manufacture. Manufacturers may, under their
own initiative, initiate a field correction or removal, known as a recall, for a
product if any material deficiency in a device is found. A government mandated
or voluntary recall by us or one of our third-party manufacturers or suppliers
could occur as a result of component failures, manufacturing errors, design or
labeling defects or other deficiencies and issues. Recalls of any of our
products would divert managerial and financial resources and have an adverse
effect on our financial condition and results of operations. The FDA requires
that certain classifications of recalls be reported to the FDA within 10 working
days after the recall is initiated. Companies are required to maintain certain
records of recalls, even if they are not reportable to the FDA. We may initiate
voluntary recalls involving our products in the future that we determine do not
require notification of the FDA. If the FDA disagrees with our determinations,
they could require us to report those actions as recalls. A future recall
announcement could harm our reputation with customers and negatively affect our
sales. In addition, the FDA could take enforcement action for failing to report
the recalls when they were conducted.
If
our marketed products cause or contribute to a death or a serious injury, or
malfunction in certain ways, we will be subject to medical device reporting
regulations, which can result in voluntary corrective actions or agency
enforcement actions.
Under the
FDA medical device reporting regulation, medical device manufacturers are
required to report to the FDA information that a device has or may have caused
or contributed to a death or serious injury or has malfunctioned in a way that
would likely cause or contribute to death or serious injury if the malfunction
of the device or one of our similar devices were to recur. If we fail to report
these events to the FDA within the required timeframes, or at all, the FDA could
take enforcement action against us. Any such adverse event involving our
products also could result in future voluntary corrective actions, such as
recalls or customer notifications, or agency action, such as inspection or
enforcement action. Any corrective action, whether voluntary or involuntary, as
well as defending ourselves in a lawsuit, will require the dedication of our
time and capital, distract management from operating our business, and may harm
our reputation and financial results.
20
We
may incur significant liability if it is determined that we are promoting
off-label use of our products in violation of federal and state regulations in
the United States or elsewhere.
Artann
initially intends to seek clearance of the ProUroScan System from the FDA as a
device that is intended to produce an image to aid in documenting abnormalities
initially identified by digital rectal examination (“DRE”). We believe that
seeking clearance for this prostate indication is the most applicable definition
for how physicians will use the device in clinical practice. Once
clearance is obtained the ProUroScan System approval status will be transferred
to us from Artann, allowing us to begin active
commercialization. Other applications of this technology in the
prostate will require additional regulatory submissions and
clearances. Some of these clearances may require submission of a PMA
and significantly larger or more costly clinical studies. Unless and
until we receive regulatory clearance or approval for use of the ProUroScan
System in these applications, use of the ProUroScan System for other than basic
imaging and documentation will be considered off-label use. Under the
FDCA and other similar laws, we are prohibited from labeling or promoting our
products, or training physicians, for such off-label uses.
The FDA
and other regulatory agencies actively enforce regulations prohibiting promotion
of off-label uses and the promotion of products for which marketing clearance
has not been obtained. A company that is found to have improperly promoted
off-label uses may be subject to significant liability, including civil and
administrative remedies as well as criminal sanctions. Due to these legal
constraints, our sales and marketing efforts will focus only on the general
technical attributes and benefits of the ProUroScan System and the FDA cleared
indications for use.
Federal
regulatory reforms may adversely affect our ability to sell our products
profitably.
From time
to time, legislation is drafted and introduced in Congress that could
significantly change the statutory provisions governing the clearance or
approval, manufacture and marketing of a medical device. In addition, FDA
regulations and guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted or FDA
regulations, guidance or interpretations changed, and what the impact of such
changes, if any, may be.
The Food
and Drug Administration Amendments Act of 2007 (the “FDA Amendments Act”)
requires, among other things, that the FDA propose, and ultimately implement,
regulations that will require manufacturers to label medical devices with unique
identifiers unless a waiver is received from the FDA. Once implemented,
compliance with those regulations may require us to take additional steps in the
manufacture of our products and labeling. These steps may require additional
resources and could be costly. In addition, the FDA Amendments Act will require
us to, among other things, comply with clinical trial registration requirements
once our clinical trials are initiated.
The
financial success of the ProUroScan System and other future medical device
products will materially depend on our ability to obtain coverage and
reimbursement for them.
The
financial success of the ProUroScan System and other medical device products
will materially depend on the scope of coverage for each device and the ability
of medical service providers to obtain third-party reimbursement from private
and public insurance sources, such as Medicare, Medicaid and private payors. It
is difficult to predict the timing and outcome of coverage and reimbursement
decisions. There can be no assurance that coverage and reimbursement will be
obtained or will be obtained at a level that will provide a suitable return to
providers of services using our technology.
Because
the incidence of prostate cancer increases with age, we expect that a
significant percentage of our patients will be Medicare beneficiaries. Obtaining
Medicare coverage and reimbursement will be critical to our success. Ensuring
adequate Medicare coverage and reimbursement, however, can be a lengthy and
expensive endeavor and we cannot provide assurances that we will be
successful.
Significantly,
the U.S. Congress may pass laws that impact coverage and reimbursement for
healthcare services, including Medicare reimbursement to physicians and
hospitals. Furthermore, many private payors look to Medicare’s coverage and
reimbursement policies in setting their coverage policies and reimbursement
amounts. If the Centers for Medicare and Medicaid Services (“CMS”), the federal
agency that administers the Medicare program, or Medicare contractors limit
coverage or payments to physicians for the ProUroScan System, private payors may
similarly limit coverage or payments. In addition, state legislatures may enact
laws limiting or otherwise affecting the level of Medicaid reimbursement for
procedures using the ProUroScan System. As a result, physicians may not purchase
our ProUroScan System, and, consequently, our business and financial results
would be adversely affected.
21
We do not
currently receive coverage and reimbursement from any party for the use of our
products because we have no products fully developed and currently available for
sale in the marketplace. As a result, we have not taken any steps to obtain
approval for coverage and reimbursement for the use of the ProUroScan
System.
Our
failure to receive the third-party coverage for our products could result in
diminished marketability of our products.
Medicare
only covers and pays for items and services that are reasonable or necessary for
the diagnosis or treatment of illness or injury or to improve the functioning of
a malformed body member. This means that Medicare does not usually cover and pay
for preventative services, including routine screening tests for patients who do
not present with any signs or symptoms of disease. We anticipate that
the first generation of the ProUroScan System will be used to image the prostate
and to maintain historical records for future tracking for men who have an
abnormal DRE. Thus, providers who perform prostate imaging using the first
generation ProUroScan System likely will seek Medicare coverage and payment as a
detection test, rather than a screening test. Even as a detection
test, however, CMS or its contractors could determine that procedures using the
ProUroScan System are not medically necessary and therefore decide not to cover
them.
Even
if covered, our failure to receive appropriate reimbursement from third-party
payors could slow market uptake of our products.
In order
for physicians and providers who perform procedures using the ProUroScan System
to receive separate reimbursement, they must bill a Current Procedure
Terminology (“CPT”) code that appropriately describes the service performed.
Although initially physicians and providers will be able to bill a miscellaneous
code to submit claims for ProUroScan System procedures, eventually we will want
to apply for a unique CPT code. The CPT application process is lengthy, and
there is no guarantee that we will receive a unique CPT code or that we will
receive a unique CPT code in a timely manner. Should we receive a unique CPT
code, the code is then valued for purposes of receiving reimbursement by the
American Medical Association’s Relative Value Scale Update Committee. The
valuation process depends on the amount of time the procedure takes and
difficulty of work involved, the practice expense and the malpractice expense
associated with using the ProUroScan System. CMS then takes the recommendation
of this committee into account when establishing the reimbursement amount. The
amount of reimbursement the physician will receive generally depends on the
values assigned to the various components of the procedure multiplied by a
conversion factor. This value is updated annually as part of the Medicare
Physician Fee Schedule. There is no guarantee that this process will result in
an appropriate level of reimbursement or an amount that supports the price and
revenues we have projected.
Even
if a unique CPT code is obtained for the test, the level of reimbursement
established may not provide adequate economic incentive to physicians, which
could deter them from using our products and limit our sales
growth.
At this
time, we do not know the extent to which physicians or providers would consider
third-party reimbursement levels adequate to cover the cost of our products.
Failure by physicians or providers to receive an amount that they consider to be
adequate reimbursement could deter them from using our products and limit our
sales growth. In addition, Medicare Physician Fee Schedule payments may decline
over time, which could deter physicians from using the ProUroScan System. If
physicians or providers are unable to justify the costs of the ProUroScan System
or they are not adequately compensated for using our product, they may
experience an economic disincentive to purchase or use them, which would
significantly harm our business.
Notwithstanding
current or future FDA clearances, if granted, third-party payors may deny
reimbursement if the payor determines that the ProUroScan System is unnecessary,
inappropriate, not cost-effective or experimental, or is used for a non-approved
indication. Further, all third-party payors, whether governmental or private,
whether domestic or international, are developing increasingly sophisticated
methods of controlling healthcare costs. These cost control methods include
prospective payment systems, capitated rates, benefit redesigns, or
pre-authorization requirements. Increased scrutiny particularly is being placed
on medical imaging. Additionally, payors are emphasizing and covering wellness
and healthier lifestyle interventions and other cost-effective methods of
delivering healthcare in exchange for covering more procedures. These cost
control methods also potentially limit the amount that healthcare providers may
be willing to pay for medical technology which could, as a result, adversely
affect our business and financial results. In addition, in the U.S., no uniform
policy of coverage and reimbursement for medical technology exists among all
third-party payors. Therefore, coverage and reimbursement for medical technology
can differ significantly from payor to payor. There also can be no assurance
that current levels of reimbursement will not be decreased or eliminated in the
future, or that future legislation, regulation or reimbursement policies of
third-party payors will not otherwise adversely affect the demand for the
ProUroScan System or our ability to sell the ProUroScan System on a profitable
basis.
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If
we commercialize the ProUroScan System, we will be subject, directly or
indirectly, to federal and state healthcare fraud and abuse laws and regulations
and could face substantial penalties if we are unable to fully comply with such
laws.
Although
we do not control referrals of healthcare services or directly bill Medicare,
Medicaid or other third-party payors, many healthcare laws and regulations will
apply to our business. For example, we could be subject to healthcare fraud and
abuse and patient privacy regulation and enforcement by both the federal
government and the states in which we conduct our business. The healthcare laws
and regulations that may affect our ability to operate include:
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the
federal healthcare programs’ Anti-Kickback Law, which prohibits, among
other things, persons or entities from soliciting, receiving, offering or
providing remuneration, directly or indirectly, in return for or to induce
either the referral of an individual for, or the purchase order or
recommendation of, any item or service for which payment may be made under
a federal healthcare program such as the Medicare and Medicaid
programs;
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federal
false claims laws which prohibit, among other things, individuals or
entities from knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid or other third-party payors that are false
or fraudulent, or are for items or services not provided as claimed, and
which may apply to entities like us to the extent that our interactions
with customers may affect their billing or coding
practices;
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the
federal Health Insurance Portability and Accountability Act of 1996, or
HIPAA, which established new federal crimes for knowingly and willfully
executing a scheme to defraud any healthcare benefit program or making
false statements in connection with the delivery of or payment for
healthcare benefits, items or services, as well as leading to regulations
imposing certain requirements relating to the privacy, security and
transmission of individually identifiable health information;
and
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state
law equivalents of each of the above federal laws, such as anti-kickback
and false claims laws which may apply to items or services reimbursed by
any third-party payor, including commercial insurers, and state laws
governing the privacy of health information in certain circumstances, many
of which differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance
efforts.
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The
healthcare sector is, and in recent years has been, under heightened scrutiny as
the subject of government investigations and enforcement actions involving
manufacturers who allegedly offered unlawful inducements to potential or
existing customers in an attempt to procure their business, including
specifically arrangements with physician consultants. We may have arrangements
with physicians and other entities which may be subject to scrutiny. For
example, we may lease the ProUroScan System to physicians or others through
consulting agreements. Payment for these consulting services sometimes may be in
the form of cash, stock options or royalties. If our operations are found to be
in violation of any of the laws described above or any other governmental
regulations that apply to us, we may be subject to penalties, including civil
and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid
programs, and the curtailment or restructuring of our operations. Any penalties,
damages, fines, exclusions, curtailment or restructuring of our operations could
adversely affect our ability to operate our business and our financial results.
The risk of our being found in violation of these laws is increased by the fact
that many of these laws are broad and their provisions are open to a variety of
interpretations. Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur significant legal
expenses and divert our management’s attention from the operation of our
business. If the physicians or other providers or entities with whom we do
business are found to be non-compliant with applicable laws, they may be subject
to sanctions, which could also have a negative impact on our
business.
Any
failure in our efforts or our contractor’s efforts to train physicians or other
medical staff could result in lower than expected product sales.
A
critical component of our sales and marketing efforts is the training of a
sufficient number of physicians and other medical staff to properly use the
ProUroScan System. We rely on physicians and other medical staff to devote
adequate time to learn to use our products. Ensuring that physicians and other
medical staff will dedicate the time and energy for adequate training in the use
of our system may be challenging, and we cannot guarantee that this will occur.
If physicians and other medical staff are not properly trained, they may misuse
or ineffectively use our products. Insufficient training may result in
unsatisfactory patient outcomes, patient injury and related liability or
negative publicity, which could have an adverse effect on our product sales or
create substantial potential liabilities.
23
We
may not be able to enter into manufacturing agreements or other collaborative
agreements on terms acceptable to us, if at all, which could have a material
adverse effect on our business.
We cannot
be sure that we will be able to enter into manufacturing or other collaborative
arrangements with third parties on terms acceptable to us, if at all. If we fail
to establish such arrangements when, and as necessary, we could be required to
undertake these activities at our own expense, which would significantly
increase our capital requirements and may delay the development, manufacturing
and commercialization of our products. If we are unable to address these capital
requirements, it may have a material adverse effect on our
business.
We
expect to rely materially on Artann and other consultants and contractors, some
of whom may be partially or wholly paid through issuances of common stock
dilutive to our shareholders.
We
materially rely on consultants and contractors to perform a significant amount
of research and development, pre-manufacturing, clinical, regulatory and
marketing activities. Specifically, we issued 769,231 shares of our common stock
to Artann on March 15, 2010 related to the FDA 510(k) filing milestone. We
expect that certain other consultants and contractors will also accept payment
of a portion of their compensation in the form of our equity securities. Any
such issuances would be dilutive to shareholders.
We
incur significant costs as a result of operating as a public company, and our
management is required to devote substantial time to new compliance
initiatives.
As a
public company, we incur significant legal, accounting and other expenses. In
addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the SEC have imposed various requirements on public companies,
including establishment and maintenance of effective disclosure and financial
controls and changes in corporate governance practices. Our management and other
personnel devote a substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations result in increased legal and financial
compliance costs and will make some activities more time-consuming and
costly.
The
Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure. In
particular, we are required to perform system and process evaluation and testing
of our internal controls over financial reporting to allow management to report
on the effectiveness of our internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal
deficiencies in our internal controls over financial reporting that are deemed
to be material weaknesses. We have incurred and continue to expect to incur
significant expense and devote substantial management effort toward ensuring
compliance with Section 404. Moreover, if we do not comply with the
requirements of Section 404, or if we identify deficiencies in our internal
controls that are deemed to be material weaknesses, the market price of our
stock could decline and we could be subject to sanctions or investigations by
the SEC or other regulatory authorities, which would entail expenditure of
additional financial and management resources.
We
are highly dependent on the services provided by certain key
personnel.
We are
highly dependent upon the services of our executive officers, Richard Carlson
and Richard Thon. We have not obtained “key-man” life insurance policies
insuring the lives of either of these persons. We also do not have employment
agreements with either of these persons. If the services of either of
these persons become unavailable to us, for any reason, our business could be
adversely affected.
We
may not be able to successfully compete against companies in our industry with
greater resources, or with any competition.
If our
development plan is successful, we expect to experience significant competition
in the medical device market. Although we believe that we may currently have a
niche in the prostate imaging marketplace, many factors beyond our control will
likely encourage new competitors. In particular, there are several large
companies that have indicated an interest in the prostate imaging business.
Therefore, no assurance can be given that we will be able to successfully
compete with these, or any other companies in the marketplace, if at
all.
24
Our
ability to use operating loss carryforwards to offset income in future years may
be limited.
As of
December 31, 2010, the Company had generated net operating loss
carryforwards of approximately $8.2 million which, if not used, will begin to
expire in 2021. Federal and state tax laws impose significant
restrictions on the utilization of net operating loss carryforwards in the event
of a change in ownership of the Company that constitutes an “ownership change,”
as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the
“Code”). The Company has analyzed its equity ownership changes and
believes that such an ownership change occurred upon the completion of its 2009
public offering. The Company’s use of its net operating loss
carryforwards of approximately $5.3 million and built-in loss incurred prior to
the closing of the 2009 public offering will be limited as a result of this
change; however, the amount of limitation will not be known until a full Section
382 study can be completed.
Our
business and products subject us to the risk of product liability
claims.
The
manufacture and sale of medical products and the conduct of clinical trials
using new technology involve customary risks of product liability claims. There
can be no assurance that our insurance coverage limits will be adequate to
protect us from any liabilities which we might incur in connection with the
clinical trials or the commercialization of any of our products. Product
liability insurance is expensive and in the future may not be available on
acceptable terms, if at all. A successful product liability claim or series of
claims brought against us in excess of our insurance coverage would have a
material adverse effect on our business. In addition, any claims, even if not
ultimately successful, could have a material adverse effect on the marketplace’s
acceptance of our products.
Risks
Associated with Our Intellectual Property
If
we lose our right to license and use from Artann certain critical intellectual
property for any reason, our entire business would be in jeopardy.
If we
breach or fail to perform the material conditions including payment obligations
of, or fail to extend the term of, the agreement with Artann that licenses
critical intellectual property, we may lose all or some of our rights to such
critical intellectual property and our license may terminate. If we should lose
our right to license and use technology covered by such license that is critical
to our business, such loss would have a materially adverse effect on our
business. In such a case, the viability of the Company would be in question. Our
only alternatives would be to find existing and non-infringing technology to
replace that lost, if any exists, or develop new technology ourselves. The
pursuit of any such alternative would likely cause significant delay in the
development and introduction of our proposed products.
The
protections for our key intellectual property may be successfully challenged by
third parties.
We own
various key intellectual properties. No assurance can be given that any
intellectual property claims will not be successfully challenged by third
parties. Any challenge to our intellectual property, regardless of merit, would
likely involve costly litigation which could have a material adverse effect on
our business. If a successful challenge were made to intellectual property that
is critical to our proposed products, the pursuit of any such alternative would
likely cause significant delay in the development and introduction of such
products. Moreover, a successful challenge could call into question the validity
of our business.
As
we lose patent protection on our critical technologies, it may have a material
adverse effect on our business.
We rely
on certain patents to provide us with exclusive rights for our technology. The
first of our primary patents on our core technology will expire in December
2012. As we begin to lose certain patent protections on our prostate imaging
systems and related critical patented technologies, we may face strong
competition as a result, which could have a material adverse effect our
business.
The
government has rights to certain of our patents.
Certain
of our patents emanated from work performed by Artann under grants from the
National Institutes of Health (“NIH”). As a result, certain standard NIH grant
obligations apply, which are designed to ensure that the U.S. investment is used
in the interest of U.S. industry and labor and that inventions are reported to
NIH. Additionally, the U.S. government retains a non-exclusive license to these
patents. As a non-exclusive licensee of certain of these patents, the U.S.
government, in addition to utilizing the inventions itself, could in certain
limited circumstances, request additional licenses to the patents be granted to
other parties and, if such license request is refused, grant the licenses
itself. Any actions by the U.S. government to require the grant of additional
licenses could materially and adversely affect our business.
25
Risks
Associated with Ownership of Our Securities
We
do not meet the criteria to list our securities on an exchange such as The
NASDAQ Capital Market and our common stock is illiquid and may be difficult to
sell.
Our
common stock is quoted on the OTC Bulletin Board (“OTCBB”). Generally,
securities that are quoted on the OTCBB lack liquidity and analyst coverage.
This may result in lower prices for our common stock than might otherwise be
obtained if we met the criteria to list our securities on a larger or more
established exchange, such as The NASDAQ Capital Market and could also result in
a larger spread between the bid and asked prices for our common
stock.
In
addition, there has been only limited trading activity in our common stock. The
relatively small trading volume will likely make it difficult for our
stockholders to sell their common stock as, and when, they choose. As a result,
investors may not always be able to resell shares of our common stock publicly
at the time and prices that they feel are fair or appropriate.
Because
our stock is deemed a “penny stock,” you may have difficulty selling shares of
our common stock.
Our
common stock is a “penny stock” and is therefore subject to the requirements of
Rule 15g-9 under the Securities Exchange Act of 1934, as amended. Under this
rule, broker-dealers who sell penny stocks must provide purchasers of these
stocks with a standardized risk-disclosure document prepared by the SEC. The
penny stock rules severely limit the liquidity of securities in the secondary
market, and many brokers choose not to participate in penny stock transactions.
As a result, there is generally less trading in penny stocks and you may not
always be able to resell shares of our common stock publicly at the time and
prices that you feel are fair or appropriate. Under applicable regulations, our
common stock will generally remain a penny stock until such time as its
per-share price is $5.00 or more (as determined in accordance with SEC
regulations), or until we meet certain net asset or revenue thresholds. These
thresholds include the possession of net tangible assets (that is, total assets
less intangible assets and liabilities) in excess of $5,000,000, and the
recognition of average revenues equal to at least $6,000,000 for each of the
last three years. We do not anticipate meeting any of the thresholds in the
foreseeable future.
Our
outstanding options and warrants may have an adverse effect on the market price
of our common stock and increase the difficulty of effecting a future business
combination.
At
December 31, 2010, we had outstanding options and warrants to purchase 9,042,641
shares of common stock. The potential for the issuance of substantial numbers of
additional shares of common stock upon exercise of these warrants and options
could make us a less attractive acquisition target in the eyes of a prospective
business partner. Such securities, when exercised, will increase the number of
issued and outstanding shares of our common stock and reduce the value of the
shares issued. Additionally, the sale, or even the possibility of sale, of the
shares underlying the warrants and options could have an adverse effect on the
market price for our securities or on our ability to obtain future
financing.
The
price of our common stock may fluctuate significantly, which may make it
difficult for stockholders to resell common stock when they want or at a price
they find attractive.
We expect
that the market price of our common stock will fluctuate. Our common stock price
can fluctuate as a result of a variety of factors, many of which are beyond our
control. These factors include:
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actual
or anticipated variations in our quarterly operating
results;
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changes
in interest rates and other general economic
conditions;
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significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our
competitors;
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operating
and stock price performance of other companies that investors deem
comparable to us;
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news
reports relating to trends, concerns, litigation, regulatory changes and
other issues in our industry;
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geopolitical
conditions such as acts or threats of terrorism or military conflicts;
and
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relatively
low trading volume.
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There
is no assurance that our 2010 Replacement Warrants will be quoted on the Pink
Sheets or the OTCBB, and they may be illiquid and difficult to
sell.
The
replacement warrants (the “2010 Replacement Warrants”) issued pursuant to our
tender offer that closed on August 2, 2010 (the 2010 Warrant Tender Offer”) are
not currently quoted on the Pink Sheets or the OTCBB, and there is no assurance
that they will be quoted in the future. If the 2010 Replacement
Warrants are not quoted on the Pink Sheets or the OTCBB, it will likely be
difficult for our warrant holders to sell their 2010 Replacement
Warrants.
In
addition, generally, securities that are quoted on the Pink Sheets lack
liquidity and analyst coverage. This may result in lower prices for the 2010
Replacement Warrants than might otherwise be obtained if we met the criteria to
list them on a larger or more established exchange, such as The NASDAQ Capital
Market and could also result in a larger spread between the bid and asked prices
for such warrants.
In
addition, there has been only limited trading activity in the 2009 Replacement
Warrants. It is likely that there will be relatively small trading volume in the
2010 Replacement Warrants, if they are quoted, and this will likely make it
difficult for our stockholders to sell their 2010 Replacement Warrants as, and
when, they choose. As a result, investors may not always be able to resell such
warrants publicly at the time and prices that they feel are fair or
appropriate.
We
have never paid dividends and do not expect to pay dividends in the foreseeable
future.
We have
never paid dividends on our capital stock and do not anticipate paying any
dividends for the foreseeable future. Future debt covenants may prohibit payment
of dividends.
Not
applicable.
Although
we are subject to litigation or other legal proceedings from time to time in the
ordinary course of our business, we are not a party to any pending legal
proceedings and are not aware of any threatened legal proceeding.
General
Price
Range of Common Stock
We
currently have four equity securities that are quoted on the OTC Bulletin Board
(the “OTCBB”) or the Pink Sheets: common stock, Units, and two warrant
issues. Our common stock is quoted under the symbol “PUMD” on the
OTCBB. The Units, consisting of one share of common stock and one
five-year warrant to purchase a share of common stock at $1.30 per share, are
quoted under the symbol “PUMDU” on the Pink Sheets. Upon their
separation from the Units, the Public Warrants are separately quoted under the
symbol “PUMDW” (the “Public Warrants”) on the Pink Sheets. Finally,
the 2009 Replacement Warrants are quoted under the symbol “PUMWW” on the Pink
Sheets. The 2010 Replacement Warrants are not quoted on the OTCBB or
Pink Sheets.
27
The
following table lists the high and low bid information for our common stock as
quoted on the OTCBB, by quarter from January 1, 2009 through December 31,
2010. Our common stock began trading in December 2003. On
February 10, 2011, the last reported sale price of our common stock was $1.10.
No active market
exits for our Units, Public Warrants, 2009 Replacement Warrants and 2010
Replacement Warrants.
High
|
Low
|
|||||||
2009
|
||||||||
First
Quarter
|
$ | 1.21 | $ | 0.20 | ||||
Second
Quarter
|
$ | 0.70 | $ | 0.50 | ||||
Third
Quarter
|
$ | 1.45 | $ | 0.55 | ||||
Fourth
Quarter
|
$ | 4.00 | $ | 1.10 | ||||
2010
|
||||||||
First
Quarter
|
$ | 2.85 | $ | 1.90 | ||||
Second
Quarter
|
$ | 2.10 | $ | 0.95 | ||||
Third
Quarter
|
$ | 1.70 | $ | 0.95 | ||||
Fourth
Quarter
|
$ | 1.40 | $ | 0.75 |
The
quotations listed above reflect interdealer prices, without retail markup,
markdown or commission, and may not necessarily represent actual transactions.
As of December 31, 2010, there were approximately 143 stockholders of record of
our common stock.
Dividend
Policy
We have
never declared or paid any cash dividends on our capital stock and do not expect
to pay any dividends for the foreseeable future. We intend to use future
earnings, if any, in the operation and expansion of our business. Any future
determination relating to our dividend policy will be made at the discretion of
our board of directors, based on our financial condition, results of operations,
contractual restrictions, capital requirements, business properties,
restrictions imposed by applicable law and other factors our board of directors
may deem relevant. Future debt covenants may prohibit payment of
dividends.
Recent
Sales of Unregistered Securities
Sales of
the securities described above were made in compliance with the requirements of
Rule 506 of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”) and the exemption from registration provided under Section
4(2) of the Securities Act. In qualifying for such exemption, the
Company relied upon representations from the investors regarding their status as
“accredited investors” under Regulation D and the limited manner of the
offering.
ITEM
6:
|
SELECTED
FINANCIAL DATA
|
|
Not
applicable.
|
28
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements, and notes
thereto, included in this Annual Report on Form 10-K. This discussion should not
be construed to imply that the results discussed herein will necessarily
continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future.
Overview
ProUroCare
Medical Inc. (“ProUroCare,” the “Company,” “we” or “us,” which terms include
reference to our wholly owned subsidiary, ProUroCare Inc. (“PUC”)) is an
emerging medical device company that is in the process of obtaining FDA
clearance for its first product, an innovative prostate imaging system known as
the ProUroScan™ System. The ProUroScan System is an imaging system
designed for use as an aid to the physician in documenting abnormalities in the
prostate that have been previously detected by a digital rectal exam (“DRE”). As
an adjunct to DRE, the ProUroScan System will be used following an abnormal DRE
to generate a real-time image of the prostate. The final composite
image is saved as a permanent electronic record and can be conveniently
retrieved to view previous test results.
We own
patents and exclusively license patents and patent applications and know-how
related to the creation in real-time of two- and three-dimensional images of
soft tissue using special software to process data acquired by probes that
incorporate arrays of sensitive mechanical force sensors. The
ProUroScan System is our first embodiment of this technology, to be used to
image the prostate. We believe that this technology can be applied to
other soft tissue organs in the future.
The
ProUroScan System was developed over the past several years under agreements
with our development partner, Artann Laboratories, Inc. (“Artann”), a scientific
technology company focused on early-stage technology
development. During 2008 and 2009, our research and development
activities conducted through Artann were primarily directed toward completion of
the final configuration of the ProUroScan System and conducting clinical trials
for submission of a 510(k) application to the FDA. By agreement,
Artann is responsible for submission of the 510(k) and all follow-on activities
required to obtain FDA clearance in the United States. Once
cleared and upon ProUroCare’s first commercial sale of a ProUroScan System,
Artann will transfer the 510(k) to ProUroCare.
The
ProUroScan System is not currently marketed or sold and has not yet been cleared
for marketing by the FDA. Our goal is to have the ProUroScan System regulated by
the FDA as a Class II device. A Class II device is one in which
general and specific controls exist to ensure that the device is safe and
effective. In a 510(k) application, applicants must demonstrate that
the proposed device is substantially equivalent to an existing approved product,
or “predicate device.” Products that employ new or novel
technologies, and for which through the 510(k) review process are found to have
no comparable predicate device, may be cleared for marketing under Section
513(f) of the Food, Drug and Cosmetic Act (“FDCA”). This path,
referred to as a “de
novo” application, is intended to allow new or novel technology devices
to be cleared for marketing when an appropriate predicate device does not
exist.
In
November 2009, a 510(k) application for market clearance was filed with the FDA
that incorporated a basic documentation claim. From that submission,
the FDA determined that the ProUroScan System was not substantially equivalent
(“NSE”) to a device currently being marketed. Therefore, as required
by Section 513(f)(2) of the FDCA, a submission was made on May 21, 2010 to
request 510(k) clearance under the de novo process. This
request asked the FDA to define mechanical imaging systems as devices that are
intended to produce an elasticity image of the prostate as an aid in documenting
abnormalities of the prostate that are initially identified by digital rectal
examination and to be used by physicians as a documentation tool.
The de novo submission also
recommended that the classification regulation state that a “mechanical imaging
system” device consists of a trans-rectal probe with pressure sensor arrays and
a motion tracking system that provides real time images of the
prostate. These proprietary components are unique to the ProUroScan
System. Once cleared, the ProUroScan can serve as a predicate for
future filings and expanded indications for use.
We expect
to market the system in cooperation with a yet-to-be-determined medical device
company that has an established worldwide presence in the urology
market. We are actively engaged in discussions with several such
companies and intend to identify the final marketing partner in
2011. As we move into production and begin marketing our products, we
expect to add internal resources in the areas of sales and marketing,
engineering and quality control.
During
this pre-revenue stage, in addition to work performed by Artann, we have
conducted our development and clinical activities primarily through the use of
contracted resources that specialize in developing regulatory strategies,
managing the clinical trial process and counseling on FDA matters. We
have found that using consultants and contractors to perform these functions
during our development stage has allowed us to engage specialized talent and
capabilities as needed by the business while providing the flexibility to engage
them as our financial resources have permitted. For manufacturing, we
have identified a highly qualified company, Logic (Minneapolis, MN), to produce
the first commercial ProUroScan Systems. Logic has recently completed
the production of three pre-commercial systems to establish and validate the
manufacturing process.
29
An
important initiative for 2011 will be to produce additional pre-commercial
ProUroScan Systems and place them in the facilities of physicians on our
physician advisory council following FDA clearance. We believe that
the insights gained from the participation of these influential physicians will
prove invaluable to our success. We have identified the key opinion
leaders who will expand our base of clinical reference while evaluating
physician training and in-service programs.
In
addition to the research and development work, we incur ongoing expenses that
are directly related to being a public company, including professional audit and
legal fees, public and investor relations, financial printing, press releases
and transfer agent fees. We also incur costs associated with the
prosecution and maintenance of our intellectual property. Other
expenses incurred include executive officer compensation, travel, insurance,
telephone, supplies and other miscellaneous expenses.
Results
of Operations
The
following presents an analysis of the Company’s financial results for the years
ended December 31, 2010 and 2009.
Net
Loss
Our net loss for 2010 decreased 13
percent to $6,019,000 compared to $6,944,000 for 2009. Operating
expenses comprised of research and development expenses and general and
administrative expenses, as described below, decreased by 47 percent to
$2,113,000 in 2010 compared to $3,951,000 in 2009. Interest and other
expense increased 31 percent to $3,911,000 in 2010 from $2,994,000 in
2009.
Research
and Development Expense
Research
and development expense for 2010 decreased 90 percent to $235,000
compared to $2,240,000 for 2009. The high expense level in
2009 related to work done by Artann and others leading to the FDA 510k
application in November of that year, and milestone payments under the Artann
contracts. The FDA 510(k) application triggered a cash milestone
payment of $250,000, and an accrual of the issuance of 769,231 shares of common
stock valued on the submission date at approximately $1,565,000. In
addition, we expensed $235,000 for development work by Artann. During
2009 we also incurred approximately $137,000 of regulatory and clinical
consulting fees and contracted engineering fees of approximately
$34,000. In 2010, our clinical and regulatory work decreased
substantially as we waited for FDA review of the 510k submission. Our
regulatory and clinical consulting fees declined to $41,000, and work performed
under the Artann development agreement declined to
$75,000. Contracted engineering fees increased to approximately
$65,000 in 2010, and $49,000 was expensed related to the cost of systems
produced for clinical purposes.
General
and Administrative Expense
General
and administrative expenses for 2010 increased by 10 percent, or $167,000, to
$1,878,000 compared to $1,711,000 for 2009.
Our only
employees are our two executive officers. Cash-based compensation
expenses (salary, bonus, benefits and related payroll taxes) totaled $402,000 in
2010, including a total of approximately $38,000 paid to our officers to
reimburse them for additional income taxes they incurred when significant
amounts of their salary earned in 2006 and 2007 were deferred to 2008 and
2009. In 2009, we incurred $359,000 of compensation expense, which
included $40,000 of bonus expense. Stock options expense related to options
granted to our directors, officers and consultants in 2010 were valued at
$293,000 compared to $481,000 in 2009.
In 2010,
we engaged consulting resources to help us establish contract manufacturing in
Minneapolis and transfer know-how from Artann to the contract manufacturer,
Logic. The cost of the consulting resources used in this effort was
approximately $312,000.
We incur
costs related to being a public reporting company, including fees for securities
attorneys and our independent registered public accounting firm, proxy services,
transfer agent services, investor relations and directors and officer’s
(“D&O”) insurance costs. In 2010, we had fewer SEC registration
statement filings and, in response to resource constraints resulting from the
extended period of FDA 510k review, we reduced discretionary investor relations
expenses. Consequently, public company costs totaled $226,000 in
2010, representing a decrease of $99,000 compared to $325,000 incurred in
2009. In addition, directors’ fees increased from $41,000 in 2009 to
$81,000 in 2010, as the number of outside directors increased from three to
five, and we implemented a new director compensation program. The
directors elected to take all of their 2010 compensation in the form of Company
common stock.
30
We
increased our spending on patent related legal work from $62,000 in 2009 to
$107,000 in 2010 as we continue to maintain and strengthen our current patent
portfolio, both domestic and foreign, and expand our intellectual property
rights related to our current technology platform.
Interest
and Other Expense
Interest
expense for 2010 was $1,368,000, an increase of $147,000, or 12 percent,
compared to $1,221,000 in 2009. Our interest expense consists of the
interest charged by lenders on amounts we have borrowed plus the cost of
stock-based consideration we provided to lenders and loan guarantors, including
related parties. Interest charged by lenders totaled $98,000 in 2010,
a 49 percent reduction from $193,000 in 2009 following a reduction in interest
bearing loans outstanding. Additional interest expense in 2010
resulted from the recording of the Black-Scholes pricing model valuation of
warrants issued as interest pursuant to our June 11, 2010 private placement of
$885,000 debt. Under the debt terms, a total of 680,770 warrants
valued at $1,028,000 were issued on July 11, 2010. See “Liquidity and Capital
Resources- Recent
Financing Activity” below for a more complete description of the debt and
warrants.
The cost
of consideration provided to lenders and loan guarantors in the form of stock,
warrants or beneficial conversion features of convertible debt, is generally
recorded as original issue discount and amortized over the term of the
associated debt. The amortized cost is recorded either as interest or
debt extinguishment expense, according to the specifics of each transaction.
Debt extinguishment expense is incurred when the cost to refinance existing
loans, including changes in interest rates and the cost of consideration
provided to lenders and loan guarantors, in the form of stock, warrants or
beneficial conversion features of convertible debt, is significant enough that
we deem it to be a retirement of existing debt and creation of a new
loan. In 2010, $242,000 of such consideration was amortized as
interest, a decrease of $787,000, or 76 percent from the $1,028,000 recorded in
2009. Consideration amortized as debt extinguishment expense for 2010
was $302,000, a decrease of $114,000, or 27 percent, compared to $416,000 in
2009. Additional debt extinguishment expense was recognized upon the
conversion of a $600,000 loan from an individual investor and $97,546 of accrued
interest thereon into 381,173 equity units, with each unit consisting of one
share of the Company’s common stock and one warrant to purchase one share of
Company’s common stock. We recognized debt extinguishment expense of
$870,981 in this conversion, representing the excess fair value of the
securities issued over the carrying value of the debt and interest at the time
of the conversion.
Pursuant
to our 2010 Warrant Tender Offering that closed in August 2010 (see “Liquidity and Capital
Resources- Recent
Financing Activity,” below), we issued 1,007,529 2010 Replacement
Warrants. The $1,370,000 fair market value of the 2010 Replacement
Warrants, determined using the Black-Scholes pricing model, was expensed as an
incentive for early warrant exercise in 2010. Pursuant to our 2009
Warrant Tender Offering that closed in November 2009, we issued 1,244,829 2009
Replacement Warrants. The $1,357,000 fair market value of the 2009
Replacement Warrants, determined using the Black-Scholes pricing model, was
expensed as an incentive for early warrant exercise in 2009.
Liquidity
and Capital Resources
Assets;
Property Acquisitions and Dispositions
Our
primary assets are our intellectual property rights, including patents, patent
applications and our license and commercialization and development agreements
with Artann, which are the foundation for our proposed product offerings. These
assets secure $900,000 of senior bank notes and $400,000 of subordinated notes,
and as a result, are not available to secure additional senior debt
financing.
Recent
Financing Activity
On June
11, 2010, we closed on the sale of $885,000 of unsecured promissory notes (the
“June 2010 Notes”) in a private placement. During the first 30 days
of the June 2010 Notes’ terms, 10,000 warrants were accrued as interest for each
$13,000 of original principal amount outstanding. The warrants have
an exercise price of $1.30 per share, a three-year term and are immediately
exercisable. The Company may elect to redeem the warrants at any time
after the last sales price of the Company’s common stock equals or exceeds $4.00
for 10 consecutive trading days. Following the initial 30 days of the
June 2010 Notes’ terms, each June 2010 Note bore interest at a 6% annual rate,
payable in cash at maturity. Holders of $808,982 of the June 2010
Notes subsequently paid for their exercise of warrants in the 2010 Warrant
Tender Offer by the cancellation of the notes. On February 4, 2011 we
repaid a $65,000 June 2010 Note and on February 11, 2011, we refinanced the
remaining $11,018 June 2010 Note.
31
On June
28, 2010, we renewed a total of $1.0 million of our $1.2 million secured debt
with Crown Bank, and on July 6, 2010 we repaid the remaining
$200,000. $100,000 of the remaining $1.0 million debt was repaid on
October 6, 2010 and $900,000 is scheduled to mature on March 28,
2011.
On August
2, 2010, the Company closed a tender offer to holders of certain outstanding
warrants to provide additional consideration for the exercise of such warrants
(the “2010 Warrant Tender Offer”). The Company offered to holders of
the subject warrants the opportunity to exercise their existing warrants and
receive, in addition to the shares of common stock purchased upon exercise, new,
three-year replacement warrants. The replacement warrants have an
exercise price of $1.30 per share and will be redeemable at the Company’s
discretion at any time after the last sales price of its common stock equals or
exceeds $4.00 for ten consecutive trading days. A total of
approximately 1.0 million warrants were tendered by warrant holders and accepted
by us. Holders of approximately 809,000 warrants paid for their
warrant exercise by the cancellation of $1.1 million of amounts due them
pursuant to promissory notes from ProUroCare. Warrants to purchase
approximately 192,000 shares of common stock were exercised for cash, resulting
in gross proceeds to the Company of approximately $258,000.
On
September 28, 2010, the Company entered into a $3.125 million Securities
Purchase Agreement (the “SPA”) with Seaside 88, LP
(“Seaside”). Concurrent with the execution of the SPA, the Company
closed on an $875,000 first tranche of the funding, selling 1,400,000
unregistered shares of its common stock to Seaside at $0.625 per
share. Under the terms of the SPA, the remaining $2.250 million
funding is to be provided in six tranches:
|
·
|
$750,000
within 30 days following FDA clearance of the Company’s ProUroScan System,
currently in FDA review.
|
|
·
|
$1.5
million provided in five subsequent closings of $300,000 in 30-day
increments following the previous
closing.
|
At each
of the future closings, the Company will sell unregistered shares of its common
stock to Seaside at a cost that is 50 percent of the stock’s volume weighted
average selling price (“VWASP”) during the 10 trading days preceding each
closing date, subject to a floor VWASP of $2.50 per share below which the
parties are not obligated to close.
The SPA
provides that Seaside will purchase only the number of shares that will cause
its beneficial ownership to remain below 9.9% of the Company’s outstanding
shares. Seaside has indicated their willingness to propose an
alternative investment vehicle to provide the financing, as they have in other
transactions, should a subsequent closing otherwise cause Seaside to exceed this
ownership level. After the first closing, Seaside holds approximately
8.9% of our outstanding stock.
On
January 14, 2011, the Company renewed its $100,025 promissory note with Central
Bank. The renewed note bears interest at the prime rate plus one
percent, with a minimum rate of 6.0 percent and matures on January 17,
2012. The renewed promissory note remains guaranteed by an individual
guarantor, whose guaranty was collateralized by Company
assets. As consideration for providing the 2011 guaranty, the
Company issued to the guarantor 6,667 shares of stock and will accrue for
issuance 1,111 shares of its common stock for each month or portion thereof that
the principal amount of the loan remains outstanding beginning July 17,
2011.
On
February 8, 2011, the Company refinanced its $300,000 note payable with an
individual lender. The replacement note bears interest at 6.0 percent
per year, matures on August 8, 2012, and is convertible into shares of the
Company’s common stock at $1.30 per share. The company may prepay the
note at any time with 30-days’ notice, during which time the lender may exercise
his conversion rights under the terms of the convertible note. The
convertible note provides the lender with a subordinated security interest in
the Company’s assets.
On
February 10, 2011, the Company issued a $65,698 unsecured convertible promissory
note to a service provider in settlement of a $65,698 payable. The
unsecured promissory note bears interest at 6.0 percent per year, matures on
August 8, 2012, and is convertible into shares of the Company’s common stock at
$1.30 per share. The
Company may prepay the note at any time with 30-days’ notice, during which time
the holder may exercise its conversion rights under the terms of the
convertible note.
32
Balance
Sheet Changes
In
addition to the financing activities detailed above, the following transactions
resulted in material changes to our balance sheet during the year ended December
31, 2010:
On March
15, 2010, we issued 769,231 shares of common stock to Artann pursuant to a
development agreement. The $1,565,385 value of the shares had been
recorded as an accrued development fee as of December 31, 2009.
On March
26, 2010, we converted a $600,000 loan from the Smith Trust and $97,546 of
accrued interest thereon into 381,173 shares of our common stock and 381,173
warrants to purchase our common stock. As a result, notes payable and
accrued expenses were reduced accordingly.
Sources
and Uses of Cash
Net cash
used in operating activities was $2.2 million during the year ended December 31,
2010 compared to $3.1 million in 2009. In addition to operating
expenses, other uses of cash during the year ended December 31, 2010 included
payments that reduced accounts payable by $233,000 and an $86,000 prepayment of
the production of probe sensors to be used in future clinical
work. Cash used during the year ended December 31, 2009 included
payments to Artann totaling $1.1 million for licensing fees and milestone
achievements pursuant to our licensing and development agreements and payments
of $205,000 to Artann for development work.
Net cash
provided by financing activities was $1.6 million during the year ended December
31, 2010, resulting from the $885,000 proceeds of a private debt offering,
$735,000 of net proceeds from the SPA equity offering and proceeds of $510,000
from the exercise of warrants by certain warrant holders, including the 2010
Warrant Tender Offer. These financing sources were offset by $400,000
of bank debt repayments and $138,000 of offering costs. Proceeds from
the 2009 Public Offering less underwriter’s commissions and other payments for
expenses of the offering were $2.3 million, while net proceeds from warrant
exercises was $1.7 million. In addition, we borrowed a total of
$200,025 pursuant to two bank loans and $543,000 pursuant to two loans from
investors. Offsetting this was our retirement of a $400,000 bank debt
in March 2009.
Cash
Requirements
The
timing for market launch of the ProUroScan System is dependent upon receipt of
FDA market clearance and the time and resources required to scale-up
manufacturing, quality assurance, sales and marketing
activities. Prior to receiving market clearance, we are conserving
cash by incurring only expenses essential to obtain FDA clearance, to transfer
and validate manufacturing processes and to prepare detailed commercialization
scale-up plans. Once FDA clearance is obtained, we will implement all
phases of the commercialization plans as quickly as our available funding will
allow. We believe that it will take approximately four to five months
to complete these activities and begin commercial sales depending primarily on
funding availability.
As we
achieve our financing goals (see “Current Financing Plans,”
below) we expect to accelerate the development of a compact version of
the ProUroScan System, which will eventually become our primary commercial
product. We will also use incremental funding to enhance and expand
our patent positions on the current ProUroScan System and potential future
products and line extensions. In the interim, we plan to begin
placing clinical systems and training physicians who will serve as members of
our physician advisory council.
Our
ability to achieve these goals is dependent upon the amount and timing of
funding available to us both before and after FDA clearance is
received. Prior to receiving FDA clearance, we estimate that our cash
needs will average less than $100,000 per month. Following FDA
clearance, as we scale up operations for our commercial launch, we expect our
cash requirements to increase significantly. We estimate that we will
spend approximately $4.5 million during the nine months following FDA clearance
to accomplish the goals outlined above. In addition, we are required
to make a cash payment of $750,000 pursuant to the terms of the Artann
development agreement upon receipt of FDA regulatory clearance. Our
$900,000 secured promissory note with Crown Bank matures in March
2011. This note is guaranteed by shareholders that have been
instrumental in financing our funding needs over the past few
years. We anticipate we will be able to renew or refinance a
significant portion of this note if required.
33
Current
Financing Plans
Our
near-term financing goal is to raise a sufficient amount of capital prior to
receipt of FDA clearance of the ProUroScan System to fund existing operations
and certain activities in preparation for market entry. The amount of
such financing we will require is dependent upon when FDA clearance is
received. Interim financing may be in the form of private loans,
guaranteed bank loans, or private sales of our debt or equity
securities. Following FDA clearance, we expect to fund operations and
market entry through the calling of currently redeemable warrants, follow-on
financing arrangements pursuant to the Seaside SPA, potential support from a
corporate distribution partner and potential further private sale or public
offering of our debt or equity securities.
As of
December 31, 2010, we had approximately $419,000 of cash on hand. In
addition, on that date we had 3,590,894 currently redeemable warrants
outstanding. These warrants have an exercise price of $1.30 per
share. Upon our exercise of our right to redeem the warrants, holders
of the warrants will have a period of 30 days to exercise their warrants. We
could realize up to approximately $4.7 million depending on the number of shares
actually exercised. We may call these warrants in 2011 to meet our financing
needs outlined above. In addition, we will gain the ability to redeem
2,840,412 warrants with a $1.30 exercise price if the last sale price of our
common stock were to equal or exceed $4.00 per share for a period of 10
consecutive trading days. If we were to subsequently exercise our
redemption right on these warrants, we could realize up to an additional $3.7
million depending on the number of shares actually exercised pursuant to such
redemption. There can be no assurance that we will be able to redeem
the warrants, or how much would be realized if such redemption were
made.
As a
result of the Seaside SPA, we expect to close on $2.25 million of additional
financing during the six months following FDA clearance of the ProUroScan System
(see “Recent Financing
Activity”, above).
We plan
to identify a distribution partner to help market our products. We
expect such a distribution partner may provide financial support in the form of
loans, licensing fees, equity investment or a combination of
these. In addition to financial support, a successful collaboration
with such a partner would allow us to gain access to downstream marketing,
manufacturing and sales support.
In
addition to warrant exercises, the Seaside SPA and possible corporate partner
funding, we will likely pursue additional funding in 2011 following FDA
clearance to more aggressively scale up manufacturing and marketing activities
associated with our market launch, accelerate development of a portable system
and low cost sensors and expand clinical studies with our physician advisory
council. The additional funding may be from the issuance of equity
securities, convertible debt, private debt or debt guarantees for which
stock-based consideration is paid. If any of these funding events
occur, existing shareholders will likely experience dilution in their ownership
interest. If additional funds are raised by the issuance of debt or
certain equity instruments, we may become subject to certain operational
limitations, and such securities may have rights senior to those of our existing
holders of common stock. The Company intends to negotiate with Crown Bank and
loan guarantors and expects to refinance a majority of our $900,000 loan that is
due on March 28, 2011.
If our
funding from warrants or other private funding initiatives is delayed or proves
insufficient to allow an aggressive ramp-up toward market launch, or if FDA
clearance of the ProUroScan System is delayed, we will be forced to delay U.S.
commercialization activities.
Off-Balance
Sheet Arrangements
None.
Going
Concern
We have
incurred operating losses, accumulated deficit and negative cash flows from
operations since inception. As of December 31, 2010, we had an accumulated
deficit of approximately $33.9 million. These factors, among others, raise
substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements included in this Annual Report on Form 10-K do
not include any adjustments related to recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern.
Critical
Accounting Policies
Our
critical accounting policies are policies which have a high impact on the
reporting of our financial condition and results, and require significant
judgments and estimates. Our critical accounting policies relate to (a) the
valuation of stock-based compensation awarded to employees, directors, loan
guarantors and consultants, (b) the valuation of warrants issued as an incentive
for early-exercise of outstanding warrants and (c) the accounting for debt with
beneficial conversion features.
34
Valuation
of Stock-Based Compensation
Since
inception, we have measured and recognized compensation expense for all
share-based payment awards made to employees and directors including employee
stock options based on fair value. Our determination of fair value of
share-based payment awards is based on the date of grant using an option-pricing
model which incorporates a number of highly complex and subjective variables.
These variables include, but are not limited to, the expected volatility of our
stock price and estimates regarding projected employee stock option exercise
behaviors and forfeitures. We recognize the expense related to the fair value of
the award straight-line over the vesting period.
Valuation
of Warrants Issued as an Incentive for Early-Exercise of Outstanding
Warrants
We have
completed two tender offers pursuant to which we have issued warrants as an
incentive to certain warrant holders to exercise their existing warrants during
the offering periods. Our determination of fair value of the
replacement warrants is based on the date of grant using an option-pricing model
which incorporates a number of highly complex and subjective variables. These
variables include, but are not limited to, the expected volatility of our stock
price. We recognize the expense related to the fair value of the warrants
immediately upon issuance as incentive for early warrant exercise
expense.
Accounting
for Debt with Beneficial Conversion Features
The
beneficial conversion features of the promissory notes were valued using the
Black-Scholes pricing model. The resulting original issue discount is amortized
over the life of the promissory notes using the straight-line method, which
approximates the interest method.
|
Not
applicable.
|
35
ITEM
8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
following financial statements are included:
F-2 | ||||
Audited
Financial Statements:
|
||||
Consolidated
Balance Sheets
|
F-3 | |||
Consolidated
Statements of Operations
|
F-4 | |||
Consolidated
Statement of Shareholders’ Equity (Deficit)
|
F- 5 | |||
Consolidated
Statements of Cash Flows
|
F- 15 | |||
Notes
to Consolidated Financial Statements
|
F- 17 |
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders, Audit Committee and Board of Directors
ProUroCare
Medical Inc.
Eden
Prairie, MN
We have
audited the accompanying consolidated balance sheets of ProUroCare Medical Inc.
(a development stage company) as of December 31, 2010 and 2009, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years then ended and the period from August 17, 1999 (inception)
to December 31, 2010. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of its internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ProUroCare Medical Inc. as
of December 31, 2010 and 2009 and the results of their operations and their cash
flows for the years then ended and the period from August 17, 1999 (inception)
to December 31, 2010, in conformity with U.S. generally accepted accounting
principles.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3
to the consolidated financial statements, the Company has recurring operating
losses, negative cash flows from operations and requires additional working
capital to support future operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Baker
Tilly Virchow Krause, LLP
Minneapolis,
Minnesota
February
15, 2011
F-2
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Balance Sheets
December
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 419,136 | $ | 1,000,874 | ||||
Other
current assets
|
136,437 | 58,200 | ||||||
Total
current assets
|
555,573 | 1,059,074 | ||||||
Equipment
and furniture, net
|
15,232 | 1,470 | ||||||
Debt
issuance costs, net
|
4,400 | 27,383 | ||||||
$ | 575,205 | $ | 1,087,927 | |||||
Liabilities
and Shareholders’ Deficit
|
||||||||
Current
liabilities:
|
||||||||
Notes
payable, bank
|
$ | 900,000 | $ | 1,300,000 | ||||
Notes
payable
|
24,902 | 624,865 | ||||||
Accounts
payable
|
614,234 | 985,560 | ||||||
Accrued
license and development fees
|
— | 1,595,385 | ||||||
Accrued
expenses
|
186,343 | 269,230 | ||||||
Total
current liabilities
|
1,725,479 | 4,775,040 | ||||||
Commitments
and contingencies (Note 8):
|
||||||||
Long-term
note payable, bank
|
100,025 | 100,025 | ||||||
Long-term
note payable
|
376,018 | 300,000 | ||||||
Long-term
note payable - related party
|
— | 243,000 | ||||||
Total
liabilities
|
2,201,522 | 5,418,065 | ||||||
Shareholders’
deficit:
|
||||||||
Common
stock, $0.00001 par. Authorized 50,000,000 shares; issued and
outstanding 15,777,883 and 11,326,283 shares on December 31,
2010 and 2009, respectively
|
158 | 113 | ||||||
Additional
paid-in capital
|
32,272,782 | 23,549,626 | ||||||
Deficit
accumulated during development stage
|
(33,899,257 | ) | (27,879,877 | ) | ||||
Total
shareholders’ deficit
|
(1,626,317 | ) | (4,330,138 | ) | ||||
$ | 575,205 | $ | 1,087,927 |
See
accompanying notes to consolidated financial statements.
F-3
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Operations
Year
ended
December
31,
2010
|
Year
ended
December
31,
2009
|
Period
from
August
17,
1999
(inception)
to
December
31,
2010
|
||||||||||
Operating
expenses:
|
||||||||||||
Research
and development
|
$ | 235,398 | $ | 2,239,590 | $ | 7,930,295 | ||||||
General
and administrative
|
1,877,664 | 1,711,075 | 13,419,912 | |||||||||
Total
operating expenses
|
2,113,062 | 3,950,665 | 21,350,207 | |||||||||
Operating
loss
|
(2,113,062 | ) | (3,950,665 | ) | (21,350,207 | ) | ||||||
Incentive
for early warrant exercise
|
(686,313 | ) | (1,313,309 | ) | (1,999,622 | ) | ||||||
Incentive
for early warrant exercise - related parties
|
(683,926 | ) | (43,555 | ) | (727,481 | ) | ||||||
Interest
income
|
4,609 | 158 | 23,062 | |||||||||
Interest
expense
|
(721,049 | ) | (909,481 | ) | (5,445,004 | ) | ||||||
Interest
expense - related parties
|
(646,826 | ) | (311,230 | ) | (2,306,049 | ) | ||||||
Debt
extinguishment expense
|
(887,092 | ) | (68,162 | ) | (1,385,373 | ) | ||||||
Debt
extinguishment expense - related parties
|
(285,721 | ) | (347,820 | ) | (708,583 | ) | ||||||
Net
loss
|
$ | (6,019,380 | ) | $ | (6,944,064 | ) | $ | (33,899,257 | ) | |||
Net
loss per common share:
|
||||||||||||
Basic
and diluted
|
$ | (0.44 | ) | $ | (0.73 | ) | $ | (11.71 | ) | |||
Weighted
average number of shares outstanding:
|
||||||||||||
Basic
and diluted
|
13,558,591 | 9,574,914 | 2,894,652 |
F-4
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Balance
at inception, August 17, 1999
|
||||||||||||||||||||
Net
loss for the period from inception to December 31,
1999
|
— | $ | — | $ | — | $ | — | $ | — | |||||||||||
Balance,
December 31, 1999
|
— | — | — | — | — | |||||||||||||||
Net
loss for the year ended December 31, 2000
|
— | — | — | — | — | |||||||||||||||
Balance,
December 31, 2000
|
— | — | — | — | — | |||||||||||||||
Issuance
of common stock to founders at $33.33 per share on March 1,
2001
|
1.0 | — | 20 | — | 20 | |||||||||||||||
Cancellation
of founders’ shares, March 6, 2001
|
(1.0 | ) | — | (20 | ) | — | (20 | ) | ||||||||||||
Recapitalization
and transfer of common stock to Clinical Network, Inc. July 6,
2001
|
300,000 | 3 | (3 | ) | — | — | ||||||||||||||
Issuance
of common stock to CS Medical Technologies, LLC as consideration for
technology license agreement on July 6, 2001, valued at $1.58 per
share
|
300,000 | 3 | 474,997 | — | 475,000 | |||||||||||||||
Net
loss for the year ended December 31, 2001
|
— | — | — | (612,533 | ) | (612,533 | ) | |||||||||||||
Balance,
December 31, 2001
|
600,000 | 6 | 474,994 | (612,533 | ) | (137,533 | ) | |||||||||||||
Issuance
of common stock valued at $4.29 per share to Profile LLC for
technology license, January 14, 2002
|
400,000 | 4 | 1,713,596 | — | 1,713,600 | |||||||||||||||
Issuance
of common stock at $23.33 per share for services rendered, November
14, 2002
|
4,421 | — | 103,166 | — | 103,166 | |||||||||||||||
Issuance
of common stock for cash at $23.33 per share on November 22, 2002,
net of costs of $193,386
|
45,335 | 1 | — 864,418 | — | 864,419 | |||||||||||||||
Options
to purchase 90,000 shares issued to officers and directors, valued at
$4.60 per share, granted March 19, 2002; portion vested in
2002
|
— | — | 124,583 | — | 124,583 | |||||||||||||||
Options
to purchase 6,000 shares issued to consultants for services rendered,
valued at $4.60 per share, granted March 19, 2002; portion vested in
2002
|
— | — | 18,400 | — | 18,400 | |||||||||||||||
Warrant
for 3,000 shares valued at $4.60 per share, issued to a director on
April 19, 2002; portion vested in 2002
|
— | — | 4,025 | — | 4,025 | |||||||||||||||
Warrant
for 150 shares valued at $3.33 per share issued for services
rendered, November 11, 2002
|
— | — | 490 | — | 490 | |||||||||||||||
Net
loss for the year ended December 31, 2002
|
— | — | — | (3,613,003 | ) | (3,613,003 | ) | |||||||||||||
Balance,
December 31, 2002
|
1,049,756 | 11 | 3,303,672 | (4,225,536 | ) | (921,853 | ) | |||||||||||||
Stock
issued in lieu of cash for accounts payable, valued at $23.33 per
share, February 25, 2003
|
545 | — | 12,705 | — | 12,705 | |||||||||||||||
Warrants
for 19,286 shares valued at $3.00 per share, issued to bank line of
credit guarantors, March 1, 2003
|
— | — | 57,858 | — | 57,858 | |||||||||||||||
Warrant
for 2,143 shares valued at $3.00 per share, issued to director as a
bank line of credit guarantor, March 1, 2003
|
— | — | 6,429 | — | 6,429 | |||||||||||||||
Warrant
for 9,215 shares issued for services rendered, valued at $20.30 per
share, June 30, 2003
|
— | — | 187,060 | — | 187,060 | |||||||||||||||
Warrants
for 22,501 shares valued at $3.60 per share, issued to bank line of
credit guarantors, August 5, 2003
|
— | — | 81,003 | — | 81,003 | |||||||||||||||
Warrant
for 2,143 shares valued at $3.60 per share, issued to director as a
bank line of credit guarantor, August 5, 2003
|
— | — | 7,714 | — | 7,714 | |||||||||||||||
Warrants
for 6,429 shares valued at $3.40 per share, issued to bank line of
credit guarantors, September 11, 2003
|
— | — | 21,858 | — | 21,858 | |||||||||||||||
Warrant
for 11,789 shares valued at $3.50 per share, issued to bank line of
credit guarantor, December 22, 2003
|
— | — | 41,250 | — | 41,250 |
F-5
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Options
to purchase 90,000 shares issued to officers and directors, valued at
$4.60 per share, granted March 19, 2002; portion vested in
2003
|
— | — | 133,400 | — | 133,400 | |||||||||||||||
Options
to purchase 6,000 shares issued to consultants for services rendered,
valued at $4.60 per share, granted March 19, 2002; portion vested in
2003
|
— | — | 6,900 | — | 6,900 | |||||||||||||||
Warrant
for 3,000 shares valued at $4.60 per share, issued to a director on
April 19, 2002; portion vested in 2003
|
— | — | 6,900 | — | 6,900 | |||||||||||||||
Net
loss for the year ended December 31, 2003
|
— | — | — | (1,632,457 | ) | (1,632,457 | ) | |||||||||||||
Balance,
December 31, 2003
|
1,050,301 | 11 | 3,866,749 | (5,857,993 | ) | (1,991,233 | ) | |||||||||||||
Options
to purchase 3,000 shares issued to a consultant valued at $6.70 per
share, granted February 1, 2004, portion vested in
2004
|
— | — | 10,100 | — | 10,100 | |||||||||||||||
Options
to purchase 45,000 shares issued to officer valued at $6.70 per
share, granted February 1, 2004; portion vested in
2004
|
— | — | 84,173 | — | 84,173 | |||||||||||||||
Repurchase
of 90,000 shares pursuant to the exercise of dissenters' rights at
time of merger, April 5, 2004 in connection with $750,000 note
payable
|
(90,000 | ) | (1 | ) | (749,999 | ) | — | (750,000 | ) | |||||||||||
Issuance
of shares to shareholders of Global Internet Communications, Inc.
pursuant to merger April 5, 2004
|
209,700 | 2 | (2 | ) | — | — | ||||||||||||||
Issuance
of common stock for cash at $20.00 per share during 2004, net of
costs of $139,493
|
220,500 | 2 | 4,270,505 | — | 4,270,507 | |||||||||||||||
Cost
associated with Global Internet Communications, Inc. reverse merger
effective April 5, 2004
|
— | — | (162,556 | ) | — | (162,556 | ) | |||||||||||||
Effect
of anti-dilution and price-protection provisions of warrants issued
to loan guarantors in 2003, triggered by April 5, 2004 closing of
private placement; shares subject to warrants increased by 37,501;
exercise price reduced from $23.33 to $16.67 per share (see Note
14(g))
|
— | — | 320,974 | — | 320,974 | |||||||||||||||
Issuance
of common stock valued at $20.00 per share for accrued expenses in
lieu of cash, May 21, 2004
|
3,861 | — | 77,225 | — | 77,225 | |||||||||||||||
Warrants
for 10,000 shares issued for services rendered valued at $11.50 per
share on July 19, 2004
|
— | — | 114,914 | — | 114,914 | |||||||||||||||
Options
to purchase 20,000 shares issued to officer valued at $15.00 per
share, granted July 21, 2004; portion vested in 2004
|
— | — | 41,670 | — | 41,670 | |||||||||||||||
Issuance
of common stock valued at $20.00 per share for accrued interest in
lieu of cash, October 12, 2004
|
4,444 | — | 88,882 | — | 88,882 | |||||||||||||||
Warrants
for 20,000 shares issued for services rendered valued at $8.30 per
share on December 2, 2004
|
— | — | 166,172 | — | 166,172 | |||||||||||||||
Options
to purchase 90,000 shares issued to officers and directors, valued at
$4.60 per share, granted March 19, 2002; portion vested in
2004
|
— | — | 82,452 | — | 82,452 | |||||||||||||||
Warrant
for 3,000 shares valued at $4.60 per share, issued to a director on
April 19, 2002; portion vested in 2004
|
— | — | 1,150 | — | 1,150 | |||||||||||||||
Net
loss for the year ended December 31, 2004
|
— | — | — | (2,318,896 | ) | (2,318,896 | ) | |||||||||||||
Balance,
December 31, 2004
|
1,398,806 | 14 | 8,212,409 | (8,176,889 | ) | 35,534 |
F-6
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Options
to purchase 90,000 shares issued to officers and directors, valued at
$4.60 per share, granted March 19, 2002; portion vested in
2005
|
— | — | 5,734 | — | 5,734 | |||||||||||||||
Options
to purchase 45,000 shares issued to officer valued at $6.70 per
share, granted February 1, 2004; portion vested in
2005
|
— | — | 111,108 | — | 111,108 | |||||||||||||||
Options
to purchase 20,000 shares issued to officer valued at $15.00 per
share, granted July 21, 2004; portion vested in 2005
|
— | — | 100,008 | — | 100,008 | |||||||||||||||
Options
to purchase 15,000 shares issued to officer valued at $16.20 per
share, granted January 3, 2005; portion vested in
2005
|
— | — | 74,256 | — | 74,256 | |||||||||||||||
Options
to purchase 15,000 shares issued to officer valued at $6.70 per
share, granted September 6, 2005; portion vested in
2005
|
— | — | 6,625 | — | 6,625 | |||||||||||||||
Issuance
of common stock for services rendered at $10.20 per share on May 13,
2005
|
5,000 | — | 51,000 | — | 51,000 | |||||||||||||||
Issuance
of common stock for cash at $7.60 per share on June 15,
2005
|
6,579 | — | 50,001 | — | 50,001 | |||||||||||||||
Issuance
of common stock for deferred offering costs at $7.10 per share on
September 1, 2005
|
2,500 | — | 17,750 | — | 17,750 | |||||||||||||||
Issuance
of common stock in lieu of cash for accrued expenses at $8.90 per
share on December 31, 2005
|
4,541 | — | 40,418 | — | 40,418 | |||||||||||||||
Warrants
for 2,500 shares valued at $6.30 per share, issued to bank loan
guarantor, September 14, 2005
|
— | — | 15,750 | — | 15,750 | |||||||||||||||
Warrants
for 2,500 shares valued at $5.30 per share, issued in connection with
notes payable on September 21, 2005
|
— | — | 13,250 | — | 13,250 | |||||||||||||||
Warrants
for 20,000 shares valued at $4.80 per share, issued to bank loan
guarantors, October 19, 2005
|
— | — | 106,000 | — | 106,000 | |||||||||||||||
Net
loss for the year ended December 31, 2005
|
— | — | — | (2,028,056 | ) | (2,028,056 | ) | |||||||||||||
Balance,
December 31, 2005
|
1,417,426 | 14 | 8,804,309 | (10,204,945 | ) | (1,400,622 | ) | |||||||||||||
Options
to purchase 45,000 shares issued to officer valued at $6.70 per
share, granted February 1, 2004; portion vested in
2006
|
— | — | 101,008 | — | 101,008 | |||||||||||||||
Options
to purchase 20,000 shares issued to officer valued at $15.00 per
share, granted July 21, 2004; portion vested in 2006
|
— | — | 100,008 | — | 100,008 | |||||||||||||||
Options
to purchase 15,000 shares issued to officer valued at $16.20 per
share, granted January 3, 2005; portion vested in
2006
|
— | — | 81,006 | — | 81,006 | |||||||||||||||
Options
to purchase 15,000 shares issued to officer valued at $6.70 per
share, granted September 6, 2005; portion vested in
2006
|
— | — | 8,834 | — | 8,834 | |||||||||||||||
Options
to purchase 17,500 shares issued to officers and an employee valued
at $5.60 per share, granted March 1, 2006; portion vested in
2006
|
— | — | 48,215 | — | 48,215 |
F-7
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Options
to purchase 3,000 shares issued to a director valued at $5.90 per
share, granted May 30, 2006; portion vested in 2006
|
— | — | 5,163 | — | 5,163 | |||||||||||||||
Original
issue discount on convertible debt issued on February 16,
2006
|
— | — | 400,000 | — | 400,000 | |||||||||||||||
Warrants
for 5,000 shares valued at $4.60 per share, issued in connection with
notes payable on January 25, 2006
|
— | — | 23,000 | — | 23,000 | |||||||||||||||
Issuance
of common stock for deferred offering costs at $9.10 per share on
February 22, 2006
|
2,500 | — | 22,750 | — | 22,750 | |||||||||||||||
Original
issue discount on convertible debt issued on February 29,
2006
|
— | — | 333,334 | — | 333,334 | |||||||||||||||
Issuance
of common stock for services rendered at $6.40 per share on April 21,
2006
|
7,000 | — | 44,800 | — | 44,800 | |||||||||||||||
Warrants
for 3,750 shares valued at $6.80 per share, issued in connection with
notes payable on June 1, 2006
|
— | — | 25,500 | — | 25,500 | |||||||||||||||
Warrants
for 375 shares valued at $5.40 per share, issued in connection with
notes payable on July 21, 2006
|
— | — | 2,025 | — | 2,025 | |||||||||||||||
Warrants
for 500 shares valued at $4.60 per share, issued in connection with
notes payable on August 30, 2006
|
— | — | 2,300 | — | 2,300 | |||||||||||||||
Issuance
of common stock for cash at $4.30 per share on September 7,
2006
|
11,628 | — | 50,000 | — | 50,000 | |||||||||||||||
Issuance
of common stock for services rendered at $6.30 per share on September
8, 2006
|
1,415 | — | 8,938 | — | 8,938 | |||||||||||||||
Warrants
for 5,000 shares valued at $4.50 per share, issued in connection with
notes payable on November 30, 2006
|
— | — | 22,500 | — | 22,500 | |||||||||||||||
Warrants
for 5,171 shares valued at $5.40 per share, accrued for issuance in
connection with a note payable as of December 31,
2006
|
— | — | 27,922 | — | 27,922 | |||||||||||||||
Net
loss for the year ended December 31, 2006
|
— | — | — | (2,959,853 | ) | (2,959,853 | ) | |||||||||||||
Balance,
December 31, 2006
|
1,439,969 | 14 | 10,111,612 | (13,164,798 | ) | (3,053,172 | ) | |||||||||||||
Options
to purchase 45,000 shares issued to officer valued at $6.70 per
share, granted February 1, 2004; portion vested in
2007
|
— | — | 16,811 | — | 16,811 | |||||||||||||||
Options
to purchase 20,000 shares issued to officer valued at $15.00 per
share, granted July 21, 2004; portion vested in 2007
|
— | — | 58,314 | — | 58,314 | |||||||||||||||
Warrants
for 5,000 shares valued at $4.50 per share, issued in connection with
debt extinguishment on January 3, 2007
|
— | — | 22,500 | — | 22,500 | |||||||||||||||
Options
to purchase 15,000 shares issued to officer valued at $16.20 per
share, granted January 3, 2005; portion vested in
2007
|
— | — | 81,007 | — | 81,007 | |||||||||||||||
Options
to purchase 17,500 shares issued to officers and an employee valued
at $5.60 per share, granted March 1, 2006; portion vested in
2007
|
— | — | 33,245 | — | 33,245 | |||||||||||||||
Issuance
of investment units consisting of common stock and warrants for
62,500 shares issued for cash at $4.00 per share on January 18,
January 23, February 28 and May 1, 2007, net of costs of
$52,388
|
125,000 | 2 | 447,610 | — | 447,612 |
F-8
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Options
to purchase 20,000 shares issued to officer valued at $3.40 per
share, granted February 1, 2007; portion vested in
2007
|
— | — | 32,857 | — | 32,857 | |||||||||||||||
Warrants
for 5,000 shares valued at $3.60 per share, issued in connection with
debt extinguishment on February 1, 2007
|
— | — | 18,000 | — | 18,000 | |||||||||||||||
Issuance
of common stock in lieu of cash for a loan from a director at $4.10
per share on February 9, 2007
|
1,707 | — | 7,000 | — | 7,000 | |||||||||||||||
Modification
of warrant term of warrant to purchase 30,000 shares pursuant to
separation agreement of employee dated March 15, 2007, valued at
$3.20 per share
|
— | — | 96,000 | — | 96,000 | |||||||||||||||
Issuance
of common stock in lieu of cash for accrued expenses at $4.00 per
share on March 21, 2007
|
12,478 | — | 49,911 | — | 49,911 | |||||||||||||||
Warrants
for 6,240 shares issued pursuant to amendment of convertible debt
valued at $4.30 per share on March 21, 2007
|
— | — | 26,829 | — | 26,829 | |||||||||||||||
Issuance
of common stock for accounts payable $5.00 per share on April 2,
2007
|
4,141 | — | 20,704 | — | 20,704 | |||||||||||||||
Warrants
for 20,000 shares issued for services rendered valued at $3.60 per
share on April 16, 2007
|
72,000 | — | 72,000 | |||||||||||||||||
Modification
of option term to purchase 45,000 shares pursuant to separation
agreement of officer dated May 11, 2007, valued at $2.30 per
share
|
— | — | 103,500 | — | 103,500 | |||||||||||||||
Modification
of option term to purchase 45,000 shares pursuant to separation
agreement of officer dated May 11, 2007, valued at $2.60 per
share
|
— | — | 117,000 | — | 117,000 | |||||||||||||||
Options
to purchase 3,000 shares issued to a director valued at $5.90 per
share, granted May 30, 2006; portion vested in 2007
|
— | — | 8,850 | — | 8,850 | |||||||||||||||
Options
to purchase 3,000 shares issued to a director valued at $2.40 per
share, granted June 14, 2007; portion vested in 2007
|
— | — | 1,800 | — | 1,800 | |||||||||||||||
Issuance
of common stock in lieu of cash for director's fees at $3.00 per
share on September 10, 2007
|
20,694 | — | 62,082 | — | 62,082 | |||||||||||||||
Issuance
of common stock in lieu of cash for loans from directors at $3.00 per
share on September 10, 2007
|
1,100 | — | 3,300 | — | 3,300 | |||||||||||||||
Issuance
of common stock as debt issuance cost at $2.00 per share on November
7, 2007
|
33,333 | — | 66,666 | — | 66,666 | |||||||||||||||
Warrants
for 6,050 shares valued at $2.80 per share, issued in connection with
notes payable on December 27, 2007
|
— | — | 16,940 | — | 16,940 | |||||||||||||||
Warrants
for 5,800 shares valued at $1.70 per share, issued in connection with
notes payable on December 27, 2007
|
— | — | 9,860 | — | 9,860 | |||||||||||||||
Warrants
for 700 shares valued at $2.20 per share, issued in connection with
notes payable on December 27, 2007
|
— | — | 1,540 | — | 1,540 | |||||||||||||||
Original
issue discount on convertible debt issued on December 27,
2007
|
— | — | 595,666 | — | 595,666 | |||||||||||||||
Original
issue discount attributable to warrants for 240,000 shares issued on
December 27, 2007
|
— | — | 88,576 | — | 88,576 | |||||||||||||||
Issuance
of common stock as compensation for loan guarantees at $1.00 per
share on December 28, 2007
|
88,889 | 1 | 88,888 | — | 88,889 | |||||||||||||||
Warrants
for 15,400 shares valued at $4.00 per share, accrued for issuance in
addition to interest on a note payable as of December 31,
2007
|
— | — | 61,600 | — | 61,600 | |||||||||||||||
Warrants
for 51,010 shares valued at $3.60 per share, accrued for issuance in
connection with debt extinguishment as of December 31,
2007
|
— | — | 183,637 | — | 183,637 |
F-9
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Warrants
for 15,221 shares valued at $5.40 per share, accrued for issuance in
connection with debt extinguishment as of December 31,
2007
|
— | — | 82,191 | — | 82,191 | |||||||||||||||
Net
loss for the year ended December 31, 2007
|
— | — | — | (3,113,298 | ) | (3,113,298 | ) | |||||||||||||
Balance,
December 31, 2007
|
1,727,311 | 17 | 12,586,496 | (16,278,096 | ) | (3,691,583 | ) | |||||||||||||
Original
issue discount on convertible debt issued between Jan 4, 2008 and
July 30, 2008
|
— | — | 350,873 | — | 350,873 | |||||||||||||||
Warrants
for 160,000 shares valued at $0.47 to $1.10 per share issued in
connection with convertible debt between Jan 4, 2008 and July 30,
2008
|
— | — | 65,160 | — | 65,160 | |||||||||||||||
Warrants
for 14,500 shares valued at $1.00 per share issued to former employee
pursuant to a termination agreement on January 4,
2008
|
— | — | 14,500 | — | 14,500 | |||||||||||||||
Warrants
for 52,357 shares valued at $3.60 per share, connection with debt
extinguishment on January 16, 2008; portion expensed in
2008
|
— | — | 4,848 | — | 4,848 | |||||||||||||||
Rounding
of common stock due to reverse stock split on February 14,
2008
|
39 | — | — | — | — | |||||||||||||||
Warrants
for 75,000 shares valued at $0.92 per share, issued in connection
with notes payable on April 3, 2008
|
— | — | 42,768 | — | 42,768 | |||||||||||||||
Options
to purchase 20,000 shares issued to officers valued at $0.79 per
share, granted July 11, 2008
|
— | — | 15,800 | — | 15,800 | |||||||||||||||
Cancellation
of an officer's options to purchase 20,000 shares valued at $0.27 per
share on July 11, 2008
|
— | — | (5,400 | ) | — | (5,400 | ) | |||||||||||||
Cancellation
of an officer's options to purchase 15,000 shares valued at $0.31 per
share on July 11, 2008
|
— | — | (4,650 | ) | — | (4,650 | ) | |||||||||||||
Options
to purchase 3,000 shares issued to directors valued at $0.71 per
share, granted July 11, 2008
|
— | — | 2,130 | — | 2,130 | |||||||||||||||
Issuance
of common stock valued at $1.00 per share in lieu of cash for
directors' fees on July 11, 2008
|
59,634 | 1 | 59,633 | — | 59,634 | |||||||||||||||
Extension
of note payable modified with a conversion feature added and recorded
as debt extinguishment on September 12, 2008
|
— | — | 48,214 | — | 48,214 | |||||||||||||||
Original
issue discount on convertible debt issued between September 16, 2008
and December 11, 2008
|
— | — | 145,743 | — | 145,743 | |||||||||||||||
Warrants
for 95,500 shares valued at $0.89 to $1.31 per share issued in
connection with convertible debt between September 16, 2008 and
December 11, 2008
|
— | — | 75,819 | — | 75,819 | |||||||||||||||
Original
issue discount attributable to warrants for 100,000 shares valued at
$0.47 per share, issued on September 25, 2008
|
— | — | 46,604 | — | 46,604 | |||||||||||||||
Warrants
for 31,817 shares valued at $5.40 per share, issued on September 30,
2008 in connection with debt extinguishment expensed and accrued from
previous years; portion expensed in 2008
|
— | — | 61,700 | — | 61,700 | |||||||||||||||
Warrants
for 3,000 shares valued at $1.32 per share, issued in connection with
debt extinguishment on October 24, 2008
|
— | — | 3,960 | — | 3,960 | |||||||||||||||
Issuance
of common stock as compensation for loan guarantees at $1.00 per
share on October 31, 2008
|
17,778 | — | 17,778 | — | 17,778 | |||||||||||||||
Warrants
for 44,445 shares valued at $0.77 per share issued as compensation
for loan guarantees on October 31, 2008
|
— | — | 34,223 | — | 34,223 | |||||||||||||||
Issuance
of common stock valued at $1.00 per share for debt issuance cost on
October 31, 2008
|
6,667 | — | 6,667 | — | — 6,667 | |||||||||||||||
Warrants
for 16,667 shares valued at $0.77 per share issued as debt issuance
costs on October 31, 2008
|
— | — | 12,834 | — | — 12,834 | |||||||||||||||
Warrants
for 3,836 shares valued at $1.32 per share, accrued for issuance in
connection with debt extinguishment as of December 31,
2006
|
— | — | 5,063 | — | 5,063 | |||||||||||||||
Options
to purchase 17,500 shares issued to officers and an employee valued
at $5.60 per share, granted March 1, 2006; portion vested in
2008
|
— | — | 9,663 | — | 9,663 |
F-10
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Options
to purchase 3,000 shares issued to a director valued at $5.90 per
share, granted May 30, 2006; portion vested in 2008
|
— | — | 3,687 | — | 3,687 | |||||||||||||||
Options
to purchase 3,000 shares issued to a director valued at $2.40 per
share, granted June 14, 2007; portion vested in 2008
|
— | — | 3,600 | — | 3,600 | |||||||||||||||
Options
to purchase 5,000 shares issued to officer valued at $3.40 per share,
granted February 1, 2007; portion vested in 2008
|
— | — | 8,869 | — | 8,869 | |||||||||||||||
Options
to purchase 15,000 shares issued to officer valued at $16.20 per
share, granted January 3, 2005; portion vested in
2008
|
— | — | 6,731 | — | 6,731 | |||||||||||||||
Options
to purchase 85,000 shares issued to officers valued at $0.85 per
share, granted July 11, 2008; portion expensed in
2008
|
— | — | 12,042 | — | 12,042 | |||||||||||||||
Reversal
of expense associated with performance-based option of an officer
that did not vest
|
— | — | (7,727 | ) | — | (7,727 | ) | |||||||||||||
Warrants
for 12,576 shares valued at $4.00 per share, accrued for issuance in
addition to interest on a note payable; portion expensed in
2008
|
— | — | 50,304 | — | 50,304 | |||||||||||||||
Net
loss for the year ended December 31, 2008
|
— | — | — | (4,657,717 | ) | (4,657,717 | ) | |||||||||||||
Balance,
December 31, 2008
|
1,811,429 | 18 | 13,677,932 | (20,935,813 | ) | (7,257,863 | ) | |||||||||||||
Issuance
of common stock in conversion of convertible debt at $0.70 per share
upon the January 7, 2009 effective date of the 2009 Public
Offering
|
2,743,535 | 28 | 1,920,446 | — | 1,920,474 | |||||||||||||||
Issuance
of common stock in conversion of convertible debt at $0.50 per share
upon the January 7, 2009 effective date of the 2009 Public
Offering
|
314,846 | 3 | 157,405 | — | 157,408 | |||||||||||||||
Adjustment
to original issue discount on 2007 and 2008 prive placement debt
offerings based on final 2009 Public Offering closing
price
|
— | — | 47,046 | — | 47,046 | |||||||||||||||
Issuance
of common stock pursuant to the January 12, 2009 closing of the 2009
Public Offering at $1.00 per share net of closing costs of
$1,259,558
|
3,050,000 | 31 | 1,790,441 | — | 1,790,472 | |||||||||||||||
Underwriter's
warrants to acquire 305,000 Units issued upon close of 2009 Public
Offering
|
— | — | 50 | — | 50 | |||||||||||||||
Issuance
of common stock in conversion of convertible debt at $3.00 per share
upon the January 12, 2009 closing date of the 2009 Public
Offering
|
292,384 | 3 | 877,146 | — | 877,149 | |||||||||||||||
Warrants
for 459 shares valued at $1.32 per share, issued on January 13, 2009
in addition to interest on a note payable
|
— | — | 607 | — | 607 | |||||||||||||||
Issuance
of common stock valued at $1.10 per share for contracted development
costs on January 15, 2009
|
454,546 | 5 | 499,995 | 500,000 | ||||||||||||||||
Issuance
of common stock in conversion of convertible debt at $0.70 per share
on January 20, 2009
|
42,143 | — | 29,500 | — | — 29,500 | |||||||||||||||
Warrants
for 680 shares valued at $4.00 per share, issued on January 20, 2009
in addition to interest on a note payable
|
— | — | 2,720 | — | 2,720 | |||||||||||||||
Issuance
of common stock in conversion of convertible debt at $0.70 per share
on February 6, 2009
|
441,165 | 4 | 308,809 | — | 308,813 | |||||||||||||||
Adjustment
to original issue discount on convertible debt issued in put offering
based on final conversion price
|
— | — | 81,059 | — | 81,059 | |||||||||||||||
Issuance
of common stock to guarantors of bank debt and a lender on March 19,
2009, valued at $0.50 per share
|
200,001 | 2 | 99,998 | — | 100,000 | |||||||||||||||
To
record original issue discount on debt upon retirement of related
note payable
|
— | — | 103,396 | — | 103,396 | |||||||||||||||
Original
issue discount on convertible debt issued March 19,
2009
|
— | — | 123,000 | — | 123,000 |
F-11
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Issuance
of common stock valued at $0.74 per share in lieu of cash for
directors' fees on April 3, 2009
|
27,366 | — | 20,251 | — | 20,251 | |||||||||||||||
Issuance
of common stock in conversion of convertible debt at $0.55 per share
on May 26, 2009
|
510,909 | 5 | 280,995 | — | 281,000 | |||||||||||||||
Issuance
of common stock to guarantor of bank debt on June 16, 2009, valued at
$0.82 per share
|
6,667 | — | 5,467 | — | 5,467 | |||||||||||||||
Issuance
of common stock as consideration to lender on September 21, 2009,
valued at $1.43 per share
|
19,833 | — | 28,262 | — | 28,262 | |||||||||||||||
Issuance
of common stock as consideration to lender on September 23, 2009,
valued at $1.35 per share
|
20,000 | — | 27,000 | — | 27,000 | |||||||||||||||
Issuance
of common stock to guarantor of bank debt on September 23, 2009,
valued at $1.35 per share
|
6,667 | — | 9,000 | — | 9,000 | |||||||||||||||
Issuance
of common stock valued at $1.50 per share in lieu of cash for
directors' fees on September 29, 2009
|
4,834 | — | 7,250 | — | 7,250 | |||||||||||||||
Warrants
for 30,000 shares valued at $0.88 per share, issued on September 30,
2009 for services rendered
|
— | — | 26,400 | — | 26,400 | |||||||||||||||
Issuance
of common stock pursuant to closing of early warrant exercise
offering on November 6, 2009, net of offering expenses of $171,865;
$1.30 per share exercise price
|
1,244,829 | 13 | 1,446,400 | — | 1,446,413 | |||||||||||||||
Issuance
of replacement warrants pursuant to closing of early warrant exercise
offering
|
— | — | 1,356,864 | — | 1,356,864 | |||||||||||||||
Issuance
of common stock valued at $1.43 per share for interest on note
payable on November 6, 2009
|
925 | — | 1,322 | — | 1,322 | |||||||||||||||
Issuance
of common stock pursuant to options exercised during November,
2009
|
22,229 | — | — | — | — | |||||||||||||||
Issuance
of common stock pursuant to warrants exercised during December,
2009
|
101,975 | 1 | 132,567 | — | 132,568 | |||||||||||||||
Issuance
of common stock valued at $0.74 per share on December 3, 2009 for
services rendered
|
10,000 | — | 7,425 | — | 7,425 | |||||||||||||||
Options
to purchase 3,000 shares issued to a director valued at $2.40 per
share, granted June 14, 2007; portion vested in 2009
|
— | — | 1,800 | — | 1,800 | |||||||||||||||
Options
to purchase 17,500 shares issued to officers and an employee valued
at $5.60 per share, granted March 1, 2006; portion vested in
2009
|
— | — | 2,823 | — | 2,823 | |||||||||||||||
Options
to purchase 85,000 shares issued to officers valued at $0.85 per
share, granted July 11, 2008; portion expensed in
2009
|
— | — | 24,083 | — | 24,083 | |||||||||||||||
Options
to purchase 215,000 shares issued to officers and directors, valued
at $0.68 per share, granted March 3, 2009
|
— | — | 146,400 | — | 146,400 | |||||||||||||||
Options
to purchase 6,500 shares issued to a consultant valued at $0.87 per
share, granted July 23, 2009
|
— | — | 5,655 | — | 5,655 | |||||||||||||||
Options
to purchase 100,000 shares issued to a consultant granted July 23,
2009; 50,000 shares valued at $0.97 per share, 50,000 shares valued
at $2.14 per share in 2009
|
— | — | 64,792 | — | 64,792 | |||||||||||||||
Options
to purchase 3,000 shares issued to directors valued at $1.00 per
share, granted August 11, 2009
|
— | — | 3,000 | — | 3,000 | |||||||||||||||
Options
to purchase 320,000 shares issued to officers and directors, valued
at $1.21 per share, granted September 29, 2009; portion vested in
2009
|
— | — | 232,320 | — | 232,320 | |||||||||||||||
Net
loss for the year ended December 31, 2009
|
— | — | — | (6,944,064 | ) | (6,944,064 | ) | |||||||||||||
Balance,
December 31, 2009
|
11,326,283 | 113 | 23,549,626 | (27,879,877 | ) | (4,330,138) |
F-12
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Issuance
of common stock pursuant to warrants exercised during 2010 at an
exercise price of $1.30 per share
|
279,870 | 3 | 344,628 | — | 344,631 | |||||||||||||||
Issuance
of common stock that was accrued on November 18, 2009, pursuant to a
development agreement on March 15, 2010, valued at $2.035 per
share
|
769,231 | 8 | 1,565,377 | — | 1,565,385 | |||||||||||||||
Issuance
of common stock as consideration to lender on March 26, 2010, valued
at $0.50 per share
|
66,666 | 1 | 33,332 | — | 33,333 | |||||||||||||||
Issuance
of units upon conversion of debt on March 26, 2010, valued at $1.83
per share
|
381,173 | 4 | 1,568,523 | — | 1,568,527 | |||||||||||||||
Issuance
of common stock pursuant to cashless execise of 381,173 warrants on
March 26, 2010
|
102,154 | 1 | (1 | ) | — | — | ||||||||||||||
Issuance
of common stock to guarantor of bank debt on May 7, 2010, valued at
$0.91 per share
|
3,333 | — | 3,033 | — | 3,033 | |||||||||||||||
Issuance
of common stock to guarantor of bank debt on May 7, 2010, valued at
$2.50 per share
|
1,111 | — | 2,778 | — | 2,778 | |||||||||||||||
Issuance
of common stock to guarantors of bank debt on June 25, 2010, valued
at $0.50 per share
|
133,332 | 2 | 66,664 | — | 66,666 | |||||||||||||||
Issuance
of common stock to guarantor of bank debt on June 25, 2010, valued at
$1.675 per share
|
2,222 | — | 3,722 | — | 3,722 | |||||||||||||||
Issuance
of common stock valued at $1.60 per share in lieu of cash for
directors' fees on July 2, 2010
|
22,762 | — | 36,416 | — | 36,416 | |||||||||||||||
Issuance
of common stock to guarantors of bank debt on July 12, 2010, valued
at $0.50 per share
|
22,222 | — | 11,112 | — | 11,112 | |||||||||||||||
Issuance
of common stock to guarantor of bank debt on July 12, 2010, valued at
$2.50 per share
|
22,222 | — | 55,556 | — | 55,556 | |||||||||||||||
Issuance
of common stock to guarantor of bank debt on July 12, 2010, valued at
$1.925 per share
|
131,110 | 2 | 252,386 | — | 252,388 | |||||||||||||||
Issuance
of common stock to guarantor of bank debt on July 12, 2010, valued at
$1.675 per share
|
44,444 | — | 74,444 | — | 74,444 | |||||||||||||||
Issuance
of common stock to individual lender on July 12, 2010, valued at
$1.425 per share
|
31,302 | — | 44,605 | — | 44,605 | |||||||||||||||
Issuance
of 680,770 warrants values at $1.51 per share as interest expense to
debt holders on July 12, 2010
|
— | — | 1,027,962 | — | 1,027,962 | |||||||||||||||
Issuance
of common stock pursuant to closing of early warrant exercise
offering on August 2, 2010, net of offering expenses of $92,377;
$1.30 per share exercise price
|
1,007,529 | 10 | 1,217,400 | — | 1,217,410 | |||||||||||||||
Value
of replacement warrants at $1.36 per warrant issued as incentive for
early warrant exercise offering pursuant to closing on August 2,
2010
|
— | — | 1,370,239 | — | 1,370,239 | |||||||||||||||
Sale
of common stock pursuant to private placement on, September 28, 2010
at $0.625 per share, net of offering expenses of
$56,278
|
1,400,000 | 14 | 822,104 | — | 822,118 | |||||||||||||||
Issuance
of common stock and payment of fees to agent pursuant to private
placement on September 30, 2010
|
20,000 | — | (87,500 | ) | — | (87,500 | ) | |||||||||||||
Issuance
of common stock valued at $1.58 per share in lieu of cash for
directors' fees on October 12, 2010
|
10,917 | — | 17,250 | — | 17,250 | |||||||||||||||
Options
to purchase 17,500 shares issued to officers and an employee valued
at $5.60 per share, granted March 1, 2006; portion vested in
2010
|
— | — | 209 | — | 209 | |||||||||||||||
Options
to purchase 85,000 shares issued to officers valued at $0.85 per
share, granted July 11, 2008; portion expensed in
2010
|
— | — | 24,084 | — | 24,084 | |||||||||||||||
Options
to purchase 100,000 shares issued to a consultant granted July 23,
2009; 50,000 shares valued at $0.97 per share, 50,000 shares valued
at $1.01 per share; portion expensed in 2010
|
— | — | 34,208 | — | 34,208 |
F-13
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
Common
stock
|
Additional
paid-in
|
Deficit
accumulated
during
the
development
|
Total
shareholders’
equity
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
stage
|
(deficit)
|
||||||||||||||||
Options
to purchase 320,000 shares issued to officers and directors, valued
at $1.21 per share, granted September 29, 2009; portion vested in
2010
|
— | — | 122,613 | — | 122,613 | |||||||||||||||
Options
to purchase 20,748 shares issued to directors valued at $1.97 per
share, granted March 1, 2010; portion vested in 2010
|
— | — | 15,354 | — | 15,354 | |||||||||||||||
Options
to purchase 72,675 shares issued to directors, valued at $1.33 per
share, granted August 10, 2010
|
— | — | 96,658 | — | 96,658 | |||||||||||||||
Net
loss for the year ended December 31, 2010
|
— | — | — | (6,019,380 | ) | (6,019,380 | ) | |||||||||||||
Balance,
December 31, 2010
|
15,777,883 | $ | 158 | $ | 32,272,782 | $ | (33,899,257 | ) $ | (1,626,317 | ) |
See
accompanying notes to consolidated financial statements.
F-14
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows
Year
Ended
December
31,
2010
|
Year
Ended
December
31,
2009
|
Period
from
August 17,
1999
(inception)
to
December
31,
2010
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$ | (6,019,380 | ) | $ | (6,944,064 | ) | $ | (33,899,257 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
and amortization
|
552 | 186 | 21,535 | |||||||||
Gain
on sale of furniture and equipment
|
— | — | (2,200 | ) | ||||||||
Stock-based
compensation
|
293,126 | 480,873 | 2,538,346 | |||||||||
Common
stock issued for services rendered
|
53,666 | 14,675 | 275,712 | |||||||||
Common
stock issued to related parties for interest
|
16,145 | 1,322 | 17,467 | |||||||||
Common
stock issued for debt guarantees
|
— | — | 106,667 | |||||||||
Common
stock issued for debt issuance cost
|
— | — | 6,667 | |||||||||
Common
stock issued for debt extinguishment
|
— | 33,333 | 33,333 | |||||||||
Notes
payable issued for intangibles expensed as research and
development
|
— | — | 150,000 | |||||||||
Warrants
issued for services
|
— | 26,400 | 567,036 | |||||||||
Warrants
issued for debt guarantees
|
— | — | 355,197 | |||||||||
Warrants
issued for interest
|
710,862 | — | 710,862 | |||||||||
Warrants
issued for interest -related parties
|
317,100 | — | 317,100 | |||||||||
Warrants
issued for debt extinguishment
|
— | 607 | 360,007 | |||||||||
Warrants
issued for debt extinguishment-related parties
|
— | — | 26,828 | |||||||||
Warrants
issued for debt issuance cost
|
— | — | 12,834 | |||||||||
Warrants
issued for early warrant exercise incentive
|
1,370,239 | 1,356,864 | 2,727,103 | |||||||||
Units
issued for interest
|
8,700 | — | 8,700 | |||||||||
Units
issued for interest-debt extinguisment
|
870,981 | — | 870,981 | |||||||||
Amortization
of note payable-original issue discount
|
— | — | 152,247 | |||||||||
Amortization
of note payable-related parties original issue
discount
|
— | 2,720 | 142,964 | |||||||||
Amortization
of convertible debt-original issue discount
|
— | 507,902 | 1,146,587 | |||||||||
Amortization
of convertible debt-related parties original issue
discount
|
— | 444,328 | 1,194,132 | |||||||||
Amortization
of debt issuance costs
|
91,759 | 249,271 | 1,892,572 | |||||||||
Amortization
of debt issuance costs-related parties
|
446,824 | 193,890 | 794,905 | |||||||||
Bargain
conversion option added to note payable- related parties for debt
extinguishment
|
— | — | 48,214 | |||||||||
Write-off
debt issuance cost for debt extinguishment
|
— | — | 42,797 | |||||||||
Write-off
of deferred offering cost
|
— | — | 59,696 | |||||||||
License
rights expensed as research and development, paid by issuance of
common stock to CS Medical Technologies, LLC
|
— | — | 475,000 | |||||||||
License
rights expensed as research and development, paid by issuance of
common stock to Profile, LLC
|
— | — | 1,713,600 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Other
current assets
|
(78,370 | ) | 54,779 | (79,253 | ) | |||||||
Accounts
payable
|
(233,187 | ) | (52,009 | ) | 644,638 | |||||||
Accrued
development expense
|
(30,000 | ) | 767,550 | 2,065,385 | ||||||||
Accrued
expenses
|
21,851 | (288,359 | ) | 873,288 | ||||||||
Net
cash used in operating activities
|
(2,159,132 | ) | (3,149,732 | ) | (13,628,310 | ) |
F-15
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (Continued)
Year
Ended
December
31,
2010
|
Year
Ended
December
31,
2009
|
Period
from August 17, 1999
(inception)
to
December
31,
2010
|
||||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of equipment and furniture
|
(14,314 | ) | (1,656 | ) | (36,767 | ) | ||||||
Deposit
into a restricted cash account
|
— | — | (44,214 | ) | ||||||||
Withdrawal
from a restricted cash account
|
— | 44,214 | 44,214 | |||||||||
Net
cash provided by (used in) investing activities
|
(14,314 | ) | 42,558 | (36,767 | ) | |||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
of note payable, bank
|
— | 100,000 | 600,000 | |||||||||
Payments
of note payable, bank
|
(400,000 | ) | (400,000 | ) | (1,300,000 | ) | ||||||
Proceeds
of notes payable
|
563,345 | — | 903,845 | |||||||||
Payment
of notes payable
|
(81,308 | ) | (90,905 | ) | (1,542,731 | ) | ||||||
Proceeds
of notes payable - related parties
|
403,000 | 93,638 | 1,056,738 | |||||||||
Payments
of notes payable - related parties
|
— | (79,500 | ) | (282,800 | ) | |||||||
Proceeds
from long-term notes payable and bank debt
|
— | 400,025 | 4,207,362 | |||||||||
Proceeds
from long-term notes payable, related parties
|
— | 243,000 | 1,363,500 | |||||||||
Payments
on long-term bank debt
|
— | — | (600,000 | ) | ||||||||
Net
proceeds from warrants
|
— | — | 104,500 | |||||||||
Proceeds
from exercise of warrants
|
510,192 | 1,713,596 | 2,223,788 | |||||||||
Payments
for debt issuance costs
|
— | (92,790 | ) | (766,227 | ) | |||||||
Payment
for rescission of common stock
|
— | — | (100,000 | ) | ||||||||
Payments
for offering expenses
|
(138,139 | ) | (396,516 | ) | (651,962 | ) | ||||||
Cost
of reverse merger
|
— | — | (162,556 | ) | ||||||||
Net
proceeds from issuance of common stock
|
734,618 | 2,613,600 | 9,030,756 | |||||||||
Net
cash provided by financing activities
|
1,591,708 | 4,104,148 | 14,084,213 | |||||||||
Net
increase (decrease) in cash
|
(581,738 | ) | 996,974 | 419,136 | ||||||||
Cash,
beginning of the period
|
1,000,874 | 3,900 | — | |||||||||
Cash,
end of the period
|
$ | 419,136 | $ | 1,000,874 | $ | 419,136 |
F-16
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (Continued)
Year
Ended
December
31,
2010
|
Year
Ended
December
31,
2009
|
Period
from August 17, 1999
(inception)
to
December
31,
2010
|
||||||||||
Supplemental
cash flow information:
|
||||||||||||
Cash
paid for interest
|
$ | 79,701 | $ | 122,643 | $ | 918,753 | ||||||
Non-cash
investing and financing activities:
|
||||||||||||
Offering
costs included in accounts payable
|
(138,139 | ) | (61,497 | ) | 371,808 | |||||||
Offering
costs included in accrued expenses
|
— | (70,000 | ) | — | ||||||||
Deferred
offering costs offset against gross proceeds of
offering
|
— | 823,078 | 823,078 | |||||||||
Debt
issuance costs included in accounts payable
|
— | — | 114,156 | |||||||||
Warrants
issued pursuant to notes payable
|
— | 3,327 | 467,191 | |||||||||
Warrants
issued for debt issuance costs
|
— | — | 298,021 | |||||||||
Warrants
issued in lieu of cash for accrued expenses
|
— | — | 1,250 | |||||||||
Warrant
exercise cost paid in lieu of cash for services rendered-related
party
|
— | 11,250 | 11,250 | |||||||||
Prepaid
expenses financed by note payable
|
— | 81,345 | 246,871 | |||||||||
Issuance
of note payable for redemption of common stock
|
— | — | 650,000 | |||||||||
Notes
payable-related party tendered for warrant exercise
|
646,000 | 26,000 | 672,000 | |||||||||
Notes
payable tendered for warrant exercise
|
405,982 | — | 405,982 | |||||||||
Conversion
of notes payable to units
|
600,000 | — | 600,000 | |||||||||
Conversion
of accounts payable to note payable
|
— | 12,293 | 253,906 | |||||||||
Conversion
of accrued expenses to note payable
|
— | 13,569 | 13,569 | |||||||||
Convertible
debt issued in lieu of cash for accrued expenses
|
— | — | 31,413 | |||||||||
Convertible
debt issued as debt issuance costs related to guarantee of long-term
debt (recorded as a beneficial conversion in additional paid-in
capital) applied to accounts payable
|
— | — | 733,334 | |||||||||
Conversion
of convertible debt to units
|
— | 1,638,750 | 1,638,750 | |||||||||
Conversion
of accrued expenses to units
|
88,846 | 331,261 | 420,107 | |||||||||
Conversion
of convertible debt-related parties to units
|
— | 1,323,334 | 1,323,334 | |||||||||
Conversion
of convertible debt-related parties to common stock
|
— | 281,000 | — | |||||||||
Conversion
of notes payable, related parties into convertible
debentures
|
— | — | 200,000 | |||||||||
Common
stock issued in lieu of cash for accrued expenses
|
— | 20,250 | 259,053 | |||||||||
Common
stock issued in lieu of cash for accounts payable
|
— | — | 122,291 | |||||||||
Common
stock issued in lieu of cash for accrued development
cost
|
1,565,385 | 500,000 | 2,065,385 | |||||||||
Common
stock issued in lieu of cash for notes payable-related
parties
|
— | — | 10,300 | |||||||||
Common
stock issued for debt issuance cost
|
— | 136,396 | 301,230 | |||||||||
Common
stock issued pursuant to notes payable
|
515,600 | — | 515,600 | |||||||||
Deposits
applied to note payable and accrued interest
|
— | — | 142,696 | |||||||||
Deposits
applied to accounts payable
|
— | — | 45,782 | |||||||||
Assumption
of liabilities in the Profile, LLC transaction
|
— | — | 25,000 | |||||||||
Proceeds
from sale of furniture and equipment
|
— | — | 2,200 | |||||||||
Deposits
applied to accrued expenses
|
— | — | 1,076 |
See
accompanying notes to consolidated financial statements.
F-17
ProUroCare
Medical Inc.
A
Development Stage Company
Notes
to Consolidated Financial Statements
December
31, 2010 and 2009 and the period from
August
17, 1999 (inception) to December 31, 2010
(1) Description
of Business and Summary of Significant Accounting Policies
|
(a)
|
Description
of Business, Development Stage Activities and Basis of
Presentation
|
ProUroCare
Medical Inc. (“ProUroCare,” the “Company,” “we” or “us”) is engaged in the
business of developing for market innovative products for the detection and
characterization of male urological prostate disease. The primary
focus of the Company is currently the ProUroScanTM
prostate imaging system, designed for use as an aid to the physician in
visualizing and documenting tissue abnormalities in the prostate that have been
previously detected by a digital rectal exam. The Company’s
developmental activities, conducted by its wholly owned operating subsidiary
ProUroCare Inc. (“PUC”), have included the acquisition of several technology
licenses, the purchase of intellectual property, the development of a strategic
business plan and a senior management team, product development and fund raising
activities. Through its development partner, Artann Laboratories, Inc.
(“Artann”), clinical trials of the ProUroScan have been completed and a 510k
application for market clearance has been submitted to the U.S. Food and Drug
Administration (“FDA”), where it is currently being reviewed.
PUC had
no activities from its incorporation in August 1999 until July 2001, when it
acquired a license to certain microwave technology from CS Medical Technologies,
LLC (“CS Medical”). In January 2002, PUC acquired a license to
certain prostate imaging technology from Profile, LLC (“Profile”).
Pursuant
to a merger agreement effective April 5, 2004 (the “Merger”), PUC became a
wholly owned operating subsidiary of Global Internet Communications, Inc.
(“Global”), which changed its name to ProUroCare Medical Inc. on April 26,
2004. In connection with the Merger, the Company completed a private
placement of 220,500 shares, as adjusted for the Reverse Split (as defined
below), of common stock (the “2004 Private Placement”) pursuant to Rule 506
under the Securities Act of 1933, as amended (the “Securities
Act”).
On
December 27, 2007, the Company’s shareholders approved a one-for-ten reverse
split of the Company’s common stock without a corresponding reduction in the
number of authorized shares of the Company capital stock (the “Reverse
Split”). The Reverse Split became effective on February 14,
2008. The exercise price and the number of shares of common stock
issuable under the Company's outstanding convertible debentures, options and
warrants were proportionately adjusted to reflect the Reverse Split for all
periods presented.
Between
December 27, 2007 and December 11, 2008, the Company closed on a total of $2.0
million of private placements of investment units (the “2007 and 2008 Private
Placements”) and $315,000 of private placements of convertible debentures in a
unit put arrangement (the “2008 Unit Put Arrangement”) each consisting of
convertible debentures and warrants (see Notes 2 and 14(e)). Upon the
closing of the Company’s 2009 Public Offering (as defined below), the
convertible debentures issued in these private placements were automatically
converted into equity (see Note 2).
On
January 12, 2009, the Company closed a public offering of 3,050,000 units at
$1.00 per unit (the “2009 Public Offering”). Each unit sold (the
“2009 Units”) consisted of one share of common stock and one redeemable warrant
to purchase one share of common stock at an exercise price of $1.30 per
share. Upon the January 7, 2009 effective date of the 2009 Public
Offering, $1.9 million of convertible promissory notes issued in
private placements during 2007 and 2008 along with $177,882 of interest accrued
thereon automatically converted into 3,058,381 units identical to the 2009 Units
(see Note 13(e)).
On
September 28, 2010, the Company entered into a $3.125 million Securities
Purchase Agreement (the “SPA”) with Seaside 88, LP
(“Seaside”). Concurrent with the execution of the SPA, the Company
closed on an $875,000 first tranche of the funding, selling 1,400,000
unregistered shares of its common stock to Seaside at $0.625 per
share. Under the terms of the SPA, the remaining $2.250 million
funding is to be provided in six tranches:
-$750,000
within 30 days following FDA clearance of the Company’s ProUroScan
System,
F-18
|
-$1.5
million provided in five subsequent closings of $300,000 in 30-day
increments following the previous
closing.
|
At each
of the future closings, the Company will sell unregistered shares of its common
stock to Seaside at a cost that is 50 percent of the stock’s volume weighted
average selling price (“VWASP”) during the 10 trading days preceding each
closing date, subject to a floor VWASP of $2.50 per share below which the
parties are not obligated to close.
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, PUC. Significant
inter-company accounts and transactions have been eliminated in
consolidation.
|
(b)
|
Restatement
of Share Data
|
All share
data has been restated to give effect to the Reverse Split.
At the
effective time of the Merger, all 350,100 shares of common stock of PUC that
were outstanding immediately prior to the Merger and held by PUC shareholders
were cancelled, with one share of ProUroCare common stock issued to
Global. Simultaneously, the non-dissenting shareholders of PUC
received an aggregate of 960,300 shares of common stock of Global in exchange
for their aggregate of 320,100 shares of PUC. The share data in this
paragraph has been restated to give effect to the Reverse Split, as noted
above.
All share
data has been restated to give effect to the Merger under which each PUC share
was converted into three shares of Global.
|
(c)
|
Accounting
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 the 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 periods. The Company’s significant estimates include the determination
of the fair value of its common stock and stock-based compensation awarded to
employees, directors, loan guarantors and consultants, the determination of the
fair value of warrants issued as an incentive for early-exercise of outstanding
warrants and the accounting for debt with beneficial conversion features. Actual
results could differ from those estimates.
Valuation of Stock-Based
Compensation. Since inception, the Company has measured and
recognized compensation expense for all share-based payment awards made to
employees and directors including employee stock options based on fair
values. The Company’s determination of fair value of share-based
payment awards is based on the date of grant using an option-pricing model which
incorporates a number of highly complex and subjective
variables. These variables include, but are not limited to, the
Company’s expected stock price volatility and estimates regarding projected
employee stock option exercise behaviors and forfeitures. The Company
recognizes the expense related to the fair value of the award straight-line over
the vesting period.
Valuation of Warrants Issued as an
Incentive for Early-Exercise of Outstanding Warrants. We have
completed two tender offers pursuant to which we have issued warrants as an
incentive to certain warrant holders to exercise their existing warrants during
the offering periods. Our determination of fair value of the
replacement warrants is based on the date of grant using an option-pricing model
which incorporates a number of highly complex and subjective variables. These
variables include, but are not limited to, the expected volatility of our stock
price. We recognize the expense related to the fair value of the warrants
immediately upon issuance as incentive for early warrant exercise
expense.
Debt with Beneficial Conversion
Features. The beneficial conversion features of convertible
promissory notes were valued using the Black-Scholes pricing model, which is
considered the Company’s equivalent to the fair value of the conversion. The
resulting original issue discount is amortized over the life of the promissory
notes (generally no more that 24 months) using the straight-line method, which
approximates the interest method.
F-19
|
(d)
|
Net
Loss Per Common Share
|
Basic and
diluted loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding for the reporting
period. These calculations reflect the effects of the Reverse Split
(see Note 1(a)). Dilutive common-equivalent shares have not been
included in the computation of diluted net loss per share because their
inclusion would be antidilutive. Antidilutive common equivalent
shares issuable based on future exercise of stock options or warrants could
potentially dilute basic loss per common share in subsequent
years. All options and warrants outstanding were antidilutive for the
years ended December 31, 2010 and 2009 and the period from August 17, 1999
(inception) to December 31, 2010 due to the Company’s net
losses. 9,042,641 and 8,532,058 shares of common stock issuable under
our stock options, warrants, convertible debt and contingent shares and warrants
issuable under agreements with loan guarantors were excluded from the
computation of diluted net loss per common share for the years ended December
31, 2010 and 2009, respectively.
|
(e)
|
Comparative
Figures
|
Certain
comparative figures have been reclassified to conform to the financial statement
presentation adopted in the current year.
|
(f)
|
Cash
|
The
Company maintains its cash in financial institutions. The balances,
at times, may exceed federally insured limits.
|
(g)
|
Equipment
and Furniture
|
Equipment
and furniture are stated at cost and depreciated using the straight-line method
over the estimated useful lives ranging from three to seven years. Maintenance,
repairs, and minor renewals are expensed as incurred.
|
(h)
|
License
Agreements
|
The costs
associated with acquisition of licenses for technology are recognized at the
fair value of stock and cash used as consideration. Costs of
acquiring technology which has no alternative future uses are expensed
immediately as research and development expense.
|
(i)
|
Stock-Based
Compensation-Stock Options
|
The
Company’s policy is to grant stock options at fair value at the date of grant
and to record stock-based employee compensation expense at fair
value. The Company recognizes the expense related to the fair value
of the award on a straight-line basis over the vesting period. From
time to time, the Company issues options to consultants. The fair
value of options issued to non-employees (typically consultants) is measured on
the earlier of the date the performance is complete or the date the consultant
is committed to perform. In the event that the measurement date
occurs after an interim reporting date, the options are measured at their
then-current fair value at each interim reporting date. The fair
value of options so determined is expensed on a straight-line basis over the
associated performance period.
The
Company uses the Black-Scholes option-pricing model to estimate the fair value
of options. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option pricing models require the input
of highly subjective assumptions. Because the Company’s employee and consultant
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, the existing models may not necessarily provide
a reliable single measure of the fair value of the Company’s stock
options.
F-20
In
determining the compensation cost of the options granted for the years ended
December 31, 2010 and 2009, the fair value of each option grant has been
estimated on the date of grant using the Black-Scholes pricing model and the
weighted-average assumptions used in these calculations are summarized as
follows:
For
the years ended December 31,
|
|||||
2010
|
2009
|
||||
Risk-free
Interest Rate
|
1.07%
|
1.73%
|
|||
Expected
Life of Options Granted
|
3.4
years
|
3.6
years
|
|||
Expected
Volatility
|
128.5%
|
134.6%
|
|||
Expected
Dividend Yield
|
0
|
0
|
The
expected life of the options is determined using a simplified method, computed
as the average of the option vesting periods and the contractual term of the
option, as the company does not have sufficient historical data to estimate the
expected term of share-based awards. For performance-based options
that vest upon the occurrence of an event, the Company uses an estimate of when
the event will occur as the vesting period used in the Black-Scholes calculation
for each option grant. Expected volatility is based on a simple
average of weekly price data since the date of the Merger. Since the
Company has only two employees, management expects and estimates that
substantially all employee stock options will vest, and therefore the forfeiture
rate used was zero. The risk-free rates for the expected terms of the
stock options and awards are based on the U.S. Treasury yield curve in effect at
the time of grant.
Stock-based
compensation expense related to options was $293,126, 480,873 and $2,415,771 for
the years ended December 31, 2010 and 2009, and the period from August 17, 1999
(inception) to December 31, 2010, respectively. The Company estimates
the amount of future stock-based compensation expense related to currently
outstanding options to be approximately $65,000 and $6,000 for the years ending
December 31, 2011 and 2012, respectively. Shares issued upon the
exercise of stock options are newly issued from the Company’s authorized
shares.
|
(j)
|
Stock-Based
Compensation-Warrants
|
The
Company has elected to utilize the fair-value method of accounting for warrants
issued to non-employees as consideration for goods or services received,
including warrants issued to lenders and guarantors of Company debt (see Notes
12(f) and 12(g)).
On June
11, 2010, the Company closed an $885,000 private offering of promissory notes
pursuant to which 680,770 warrants were issued as interest expense (see Notes 10
and 12(g)). Excluding these warrants and warrants issued as a
component of units issued upon the conversion of a loan into equity securities
(see Note 10), no other warrants were issued during the year ended December 31,
2010.
Expenses
related to warrants issued to non-employees for services provided were $0,
$26,400 and $566,950 for the years ended December 31, 2010 and 2009, and the
period from August 17, 1999 (inception) to December 31, 2010, respectively, or
$0.00, $0.00, and $0.20 on a per share basis.
Stock-based
compensation cost related to stock warrants was $0, $0 and $122,575 for the
years ended December 31, 2010 and 2009, and the period from August 17, 1999
(inception) to December 31, 2010, respectively, or $0.00, $0.00, and $0.04 on a
per share basis.
Consideration
and interest paid to lenders and loan guarantors in the form of warrants,
including the warrants issued pursuant to the $885,000 private offering of
promissory notes described above, was $1,027,963, $3,326, and $2,492,024 for the
years ended December 31, 2010 and 2009, and the period from August 17, 1999
(inception) to December 31, 2010, respectively, or $0.08, $0.00, and $0.86 on a
per share basis.
F-21
The
weighted-average fair value of the warrants granted during the years ended
December 31, 2010 and 2009 was $1.51 and $0.95, respectively, and such warrants
were immediately vested and exercisable on the date of grant. The
fair value of stock warrants is the estimated present value at grant date using
the Black-Scholes pricing model with the following weighted average
assumptions:
For
the years ended December 31,
|
|||||
2010
|
2009
|
||||
Risk-free
Interest Rate
|
1.24%
|
1.18%
|
|||
Expected
Life of Warrants Issued1
|
3.0
years
|
2.1
years
|
|||
Expected
Volatility
|
129.5%
|
135.2%
|
|||
Expected
Dividend Yield
|
0
|
0
|
1 The
contractual term of the warrants.
The
expected volatility is based on weekly price data since the date of the Merger
on April 5, 2004. The risk-free rates for the expected terms of the
stock warrants are based on the U.S. Treasury yield curve in effect at the time
of grant.
|
(k)
|
Financial
Instruments
|
The
carrying amount for all financial instruments approximates fair value. The
carrying amounts for cash, notes payable, accounts payable and accrued
liabilities approximate fair value because of the short maturity of these
instruments. The carrying amounts for long-term debt, and other obligations
approximates fair value as the interest rates and terms are substantially
similar to rates and terms which could be obtained currently for similar
instruments.
|
(l)
|
Research
and Development
|
Expenditures
for research and product development costs, including certain upfront license
fees for technologies under development, are expensed as incurred.
|
(m)
|
Debt
Issuance Costs
|
The
Company has issued common stock and warrants as consideration to various
individual lenders and loan guarantors of its bank debt (see Note
13(g)). The fair value of the equity consideration along with loan
initiation fees is recorded on the balance sheet as debt issuance
cost. Debt issuance costs are amortized over the term of the related
debt as interest expense using the straight-line method, which approximates the
interest method.
|
(n)
|
Income
Taxes
|
The
Company utilizes the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the
financial statement and income tax reporting bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance to the extent that
realization is not assured.
(2)
|
2009 Public Offering; Automatic
Conversion of Convertible
Debt.
|
On
January 7, 2009, the 2009 Public Offering was declared effective by the SEC, and
on January 12, 2009 the 2009 Public Offering was closed. In the
offering, the Company sold 3,050,000 of 2009 Units at $1.00 per unit resulting
in net cash received of $1,790,472, after offering costs of
$1,259,528.
The
completion of the 2009 Public Offering triggered automatic conversion provisions
of several outstanding convertible debt instruments:
|
·
|
Upon
the January 7, 2009 effective date of the 2009 Public
Offering, $733,334 of convertible debentures originally issued as
consideration to guarantors of its bank debt, along with $143,815 interest
accrued thereon, converted into 292,384 shares of the Company’s common
stock. Unamortized original issue discount relating to the
convertible debentures totaling $33,796 was expensed as interest expense
upon the conversion.
|
F-22
|
·
|
Upon
the January 12, 2009 closing of the 2009 Public Offering, the $1,757,500
aggregate amount of promissory notes issued in the 2007 and 2008 Private
Placement, along with $162,959 of interest accrued thereon, automatically
converted into 2,743,535 units identical to the 2009 Units (based on 70
percent of the offering price, or $0.70 per share). In
addition, a $142,500 promissory note issued as part of the 2007 Private
placement to James Davis, a greater than ten percent shareholder of the
Company, on December 27, 2007, along with $14,923 of interest accrued
thereon, automatically converted into 314,846 units identical to the 2009
Units (based on 50 percent of the offering price, or $0.50 per
share). The closing of the 2009 Public Offering resolved a
contingent conversion feature of the promissory
notes. Consequently, the valuation of the beneficial conversion
feature of the promissory notes was recalculated, resulting in the
recording of a $47,046 increase in the original issue
discount. Unamortized original issue discount relating to the
warrants and the beneficial conversion feature of these notes (including
the adjustment resulting from the new valuation) totaling $434,215 and
unamortized debt issuance cost of $207,575 was expensed as interest
expense upon the conversion.
|
|
·
|
On
February 6, 2009 (30 days after the effective date of the 2009 Public
Offering), the $299,250 outstanding promissory notes issued pursuant to
the Company’s 2008 Unit Put Arrangement, along with the $9,563 interest
accrued thereon, automatically converted into 441,165 shares of the
Company’s common stock. The notes and accrued interest
converted at 70 percent of the 2009 Public Offering price, or $0.70 per
share. The closing of the 2009 Public Offering resolved a
contingent conversion feature of the promissory
notes. Consequently, the valuation of the beneficial conversion
feature of the promissory notes was recalculated, resulting in the
recording of an $81,059 increase in the original issue
discount. Unamortized original issue discount relating to the
warrants and the beneficial conversion feature of the notes (including the
adjustment resulting from the new valuation) totaling $209,879 and
unamortized debt issuance cost of $44,686 was expensed as interest expense
upon the conversion.
|
(3)
|
Going
Concern; Management’s Plan to Fund Working Capital
Needs
|
The
Company incurred net losses of $6,019,380, $6,944,064 and $33,899,257 and
negative cash flows from operating activities of $2,159,132, $3,149,732, and
$13,628,310 for the years ended December 31, 2010 and 2009 and for the
period from August 17, 1999 (inception) to December 31, 2010, respectively. The
Company has completed the development of its first product and recently
submitted a 510(k) premarket notification application to the FDA for a basic
mapping and data maintenance labeling claim. Assuming that FDA
clearance is obtained on a timely basis, the Company expects to increase its
expenditures as it establishes the production and marketing capabilities through
both contracted and internal resources. The Company’s business plan
is dependent upon its ability to obtain sufficient capital to fund its
transition from product development to production and marketing its
products.
Management’s
near-term financing goal is to raise a sufficient amount of capital prior to
receipt of FDA clearance of the ProUroScan System to fund existing operations
and certain activities in preparation for market entry. The amount of
such financing the Company will require is dependent upon when FDA clearance is
received. During this period, management estimates that the Company’s
cash needs will average less than $100,000 per month. Interim
financing may be in the form of private loans, guaranteed bank loans, or private
sales of our debt or equity securities. Following FDA clearance, the
Company expects to fund operations and market entry through the calling of
currently redeemable warrants, follow-on financing arrangements pursuant to the
Seaside SPA, potential support from a corporate distribution partner and
potential further private sale or public offering of our debt or equity
securities.
As of
December 31, 2010, the Company had approximately $419,000 of cash on
hand. In addition, on that date there were 3,590,894 currently
redeemable warrants outstanding. These warrants have an exercise
price of $1.30 per share. Upon the Company’s exercise of its right to
redeem the warrants, holders of the warrants will have a period of 30 days to
exercise their warrants. The Company could realize up to approximately $4.7
million depending on the number of shares actually exercised. In
addition, the Company will gain the ability to redeem 2,840,412 warrants with a
$1.30 exercise price if the last sale price of its common stock were to equal or
exceed $4.00 per share for a period of 10 consecutive trading
days. If redemption rights on these warrants were to be subsequently
exercised, the Company could realize up to an additional $3.7 million depending
on the number of shares actually exercised pursuant to such
redemption. There can be no assurance that the Company will be able
to redeem the warrants, or how much would be realized if such redemption were
made.
Pursuant
to the Seaside SPA, the Company expects to close on $2.25 million of additional
financing during the six months following FDA clearance of the ProUroScan
System.
F-23
The
Company is working to identify a distribution partner to help market its
products. The Company expects such a distribution partner may provide
financial support in the form of loans, licensing fees, equity investment or a
combination of these. In addition to financial support, a successful
collaboration with such a partner would allow the Company to gain access to
downstream marketing, manufacturing and sales support.
In
addition to warrant exercises, the Seaside SPA and possible corporate partner
funding, the Company will likely pursue additional funding in 2011 following FDA
clearance to more aggressively scale-up manufacturing and marketing activities
associated with our market launch, accelerate development of a portable system
and low cost sensors and expand clinical studies with the Company’s physician
advisory council. The additional funding may be from the issuance of
equity securities, convertible debt, private debt or debt guarantees for which
stock-based consideration is paid. The Company intends to negotiate
with Crown Bank and loan guarantors and expects to refinance a majority of our
$900,000 loan that is due on March 28, 2010.
If an
insufficient number of warrants are exercised, or if adequate financial support
from a distribution partner is not received, the Company will likely pursue one
or more additional rounds of funding in 2010. If additional funds are raised by
the issuance of convertible debt or equity securities, or by the exercise of
outstanding warrants, then existing shareholders will experience dilution in
their ownership interest. If additional funds are raised by the issuance of debt
or certain equity instruments, the Company may become subject to certain
operational limitations, and such securities may have rights senior to those of
our existing holders of common stock.
If
adequate funds are not available through these initiatives on a timely basis, or
are not available on acceptable terms, The Company may be unable to fund
expansion and may be forced to delay market entry. Ultimately, if no
additional financing is obtained beyond what has been secured to date, the
Company likely would be forced to cease operations. There can be no assurance
the Company will be successful in raising such funds.
(4)
|
Equipment
and Furniture
|
Equipment
and furniture consisted of the following at December 31:
2010
|
2009
|
|||||||
Computer
equipment
|
$ | 4,473 | $ | 4,473 | ||||
Furniture
|
4,279 | 4,279 | ||||||
Tooling
and molds
|
14,314 | -- | ||||||
|
23,066 | 8,752 | ||||||
Less
accumulated depreciation
|
(7,834 | ) | (7,282 | ) | ||||
$ | 15,232 | $ | 1,470 |
Depreciation
expense was $552, $186 and $21,535 for the years ended December 31, 2010 and
2009 and the period from August 17, 1999 (inception) to December 31, 2010,
respectively.
(5)
|
Debt
Issuance Cost
|
On
December 28, 2007, $1.2 million of the Company’s Crown Bank promissory notes
were modified to extend the maturity date of the notes to February 28,
2009. It was determined that the modification was not a substantial
modification of the terms of the notes, as the present value of the cash flows
under the new convertible promissory note was less than 10 percent different
from the present value of the cash flows under the original
note. Accordingly, the remaining $36,370 of unamortized debt issuance
cost from the old debt was carried forward, and together with $12,000 of bank
fees associated with the extension, was amortized over the new term of the notes
as interest expense. $0, $6,785, and $48,370 was amortized during the
years ended December 31, 2010 and 2009 and the period from August 17, 1999
(inception) to December 31, 2010, respectively.
On
October 15, 2007, the Company borrowed $600,000 pursuant to a promissory note
issued an individual investor that matured on February 28, 2009. In
consideration for this loan, on November 7, 2007 the Company agreed to issue
33,333 shares of its common stock to the lender. The $66,666 value of
this consideration was recorded as debt issuance cost and was amortized over the
term of the loan as interest expense, of which $7,836 was recorded during the
year ended December 31, 2009. On March 19, 2009, the note was renewed
to mature on March 28, 2010. As consideration to the lender for
renewing the loan, the Company accrued for issuance 44,444 shares during the
year ended December 31, 2009. During the year ended December 31,
2010, the Company issued the 44,444 accrued shares and 22,222 additional
shares. It was determined that a substantial modification of the
terms of the note was made as the present value of the cash flows under the new
convertible promissory note was greater than 10 percent different from the
present value of the cash flows under the original note. Accordingly,
the $22,222 and $11,111 value of the shares issued and accrued during the years
ended December 31, 2010 and 2009, respectively, was recorded as debt issuance
cost and amortized as debt extinguishment expense over the term of the
note. Of this, $22,222 and $11,111 was amortized during the years
ended December 31, 2010 and 2009, respectively.
F-24
Direct
costs of the 2007 and 2008 Private Placements and 2008 Unit Put Arrangement
offerings totaling $586,201, including underwriting fees, legal fees, accounting
expenses and printing costs, along with the value of warrants issued in
connection with the origination of the unit put financing facility, were
recorded as a debt issuance cost asset and amortized as interest expense over
the term of the related debt. During the year ended December 31,
2009, $138,712 of unamortized debt issuance cost was expensed upon the automatic
conversion of the convertible debt following the closing of the 2009 Public
Offering.
From
March 1, 2009 through November 28, 2010, pursuant to guaranties received from
James Davis and William Reiling relating to the Company’s $1.2 million Crown
Bank promissory note and renewals thereof (see Note 11), the Company issued an
aggregate of 22,222 shares of its common stock per month to the guarantors
. Beginning November 28, 2010 the Company is accruing for issuance
and aggregate 20,000 shares per month pursuant to this
arrangement. Accordingly, the Company issued 133,334 shares and
accrued for issuance 88,888 shares during the year ended December 31,
2009. During the year ended December 31, 2010, the Company issued the
88,888 accrued shares and the 264,442 additional shares. The issued
and accrued shares, valued at $415,721 and $111,111 during the years ended
December 31, 2010 and 2009, respectively, were recorded on the balance sheet as
debt issuance cost and was amortized on a straight-line basis over the term of
the note. Of this, $415,721 and $111,111 was amortized during the
years ended December 31, 2010 and 2009, respectively. In addition,
the $600 loan origination fee was expensed in the year ended December 31,
2009.
On June
16, 2009, pursuant to a guarantee received relating to a $100,000 Crown Bank
promissory note, the Company issued to the guarantor 6,666 and 6,667 shares of
its common stock valued at $9,533 and $5,467 during the years ended December 31,
2010 and 2009, respectively. The value of the shares was recorded on
the balance sheet as debt issuance cost and was amortized on a straight-line
basis over the term of the note. Of this, $9,533 and $5,467 was
amortized during the years ended December 31, 2010 and 2009,
respectively. In addition, the $600 loan origination fee was expensed
in the year ended December 31, 2009.
On
September 21, 2009, pursuant to a $243,000 loan from James Davis (see Note 10),
the Company issued to Mr. Davis 13,500 and 19,833 shares of its common stock
valued at $19,235 and $28,262 during the years ended December 31, 2010 and 2009,
respectively. The value of the shares was recorded as debt issuance
cost and amortized on a straight-line basis over the term of the
note. Of this, $31,103 and $16,394 was amortized during the years
ended December 31, 2010 and 2009, respectively.
On
September 23, 2009, pursuant to a guarantee received relating to a $100,025 bank
loan (see Note 11), the Company issued to a guarantor 6,667 shares of its common
stock valued at $9,000 during the year ended December 31, 2009, and accrued for
issuance 11,111 shares valued at $15,000 during the year ended December 31,
2010. The value of the shares was recorded as debt issuance cost and
amortized on a straight-line basis over the term of the note. Of
this, $17,779 and $5,121 was amortized during the years ended December 31, 2010
and 2009, respectively.
On
September 23, 2009, pursuant to a $300,000 loan from an individual lender (see
Note 10), the Company issued to the lender 20,000 shares valued at $27,000
during the year ended December 31, 2009, and accrued for issuance 33,333 shares
valued at $45,000 during the year ended December 31, 2010. The value
of the shares was recorded as debt issuance cost and amortized on a
straight-line basis over the term of the note. Of this, $53,336 and
$15,364 was amortized during the years ended December 31, 2010 and 2009,
respectively.
F-25
Debt
issuance costs are summarized as follows:
For
the years ended
December
31,
|
||||||||
2010
|
2009
|
|||||||
Debt
issuance costs
|
$ | 719,262 | $ | 203,662 | ||||
Less
amortization
|
(714,862 | ) | (176,279 | ) | ||||
Debt
issuance costs, net
|
$ | 4,400 | $ | 27,383 |
|
Amortization
expense related to debt issuance costs was $538,583, $443,161, and
$2,687,477 for the years ended December 31, 2010 and 2009 and the period
from August 17, 1999 (inception) to December 31, 2010,
respectively.
|
(6)
|
Accrued
Expenses
|
Accrued
expenses consisted of the following at December 31:
2010
|
2009
|
|||||||
Accrued
stock to be issued for loan consideration
|
$ | 60,000 | $ | 22,222 | ||||
Accrued
interest
|
52,897 | 148,129 | ||||||
Audit
fees
|
30,000 | 14,000 | ||||||
Legal
fees
|
15,205 | 19,710 | ||||||
Directors’
fees
|
15,000 | — | ||||||
Accrued
compensation
|
10,168 | — | ||||||
Accrued
use tax
|
1,354 | — | ||||||
Consulting
fees
|
1,219 | 11,500 | ||||||
Other
|
500 | — | ||||||
Accrued
stock to be issued for loan guarantees – related parties
|
— | 44,444 | ||||||
Accrued
interest-related party
|
— | 9,225 | ||||||
$ | 186,343 | $ | 269,230 |
(7)
|
Agreements
with Artann Laboratories Inc.
|
The
Company has developed its ProUroScan System under contracts with Artann, a
scientific technology company based in Trenton, New Jersey, that is focused on
early stage technology development.
Artann
2008 License Agreement
On July
25, 2008, the Company entered into two agreements with Artann. Under
the first agreement, the “License Agreement,” Artann granted to the Company an
exclusive, worldwide, sublicensable license to certain patent applications,
trade secrets and technology to make, use and market certain mechanical imaging
products in the diagnosis or treatment of urologic disorders of the prostate,
kidney or liver field of use. Artann also agreed to transfer
possession of five fully functional prostate imaging systems to the Company and
grant the Company full access to all relevant documentation
thereto. The License Agreement became effective on December 23,
2008. As consideration, the Company agreed to pay, on the effective
date of the agreement, an upfront cash license fee of $600,000 and shares of the
Company’s common stock valued at $500,000. The total $1,100,000
license fee was recorded as a general and administrative expense in the year
ended December 31, 2008. In addition, the Company agreed to pay
Artann a royalty equal to four percent of the first $30 million of net
cumulative sales of licensed products, three percent of the next $70 million of
net cumulative sales and two percent of net cumulative sales over $100
million. Further, the Company will pay Artann a technology royalty of
one percent of net sales on prostate imaging system products through December
31, 2016. The combined royalties are subject to a minimum annual
royalty equal to $50,000 per year for each of the first two years after
clearance from the FDA for commercial sale and $100,000 per year for each year
thereafter until termination or expiration of the License
Agreement. The Company also agreed to grant Artann a non-exclusive
fully paid up, sublicensable, royalty-free and worldwide license for Artann to
make, use or sell any mechanical imaging system for the diagnosis or treatment
of disorders of the female human breast. The License Agreement will
terminate upon the expiration of all royalty obligations, by failure of either
party to cure a breach of the agreement within a 60-day cure period, if the
Company fails to make a payment to Artann and such failure is not cured within a
30-day cure period or should one of the parties become insolvent, go into
liquidation or receivership or otherwise lose legal control of its
business.
F-26
Artann
2008 Development Agreement
Under the
second Artann agreement, the “Development and Commercialization Agreement,” the
parties are collaborating to develop, commercialize and market prostate
mechanical imaging systems. During 2008 and 2009, Artann completed
all pre-clinical activities and testing on the prostate imaging system,
conducted clinical trials and filed an FDA 510(k) submission. For the
services provided, the Company made cash milestone payments to Artann of
$250,000 upon initiation of an FDA approved clinical study and $250,000 upon
Artann’s November 18, 2009 completion of the FDA study and submission of the
510(k) approval application on the prostate imaging system. The
Company also accrued for issuance to Artann 769,231 shares of common stock of
the Company valued at $1,565,385 following the 510(k) submission, which was
recorded as research and development expense in the year ended December 31,
2009. On March 15, 2010, the Company issued the 769,231 accrued
shares of common stock. Further, as a success bonus, the Company will
make a $750,000 cash payment upon receiving FDA clearance allowing the prostate
imaging system to be commercially sold in the United States. The
Company also recorded as research and development expense fees for technical
advice provided by Artann of $75,000, $235,000 and $360,000 during the years
ended December 31, 2010 and 2009 and the period from August 17, 1999 (inception)
to December 31, 2010, respectively.
Additionally,
Artann will provide manufacturing and scale-up services to the Company’s
contract manufacturing partner to facilitate the commercial manufacture of the
prostate imaging systems, at a cost of $1,200 per day per individual for such
services.
The
initial term of the Development and Commercialization Agreement is for three
years and may thereafter be renewed for additional one year terms upon mutual
agreement of the parties. The Development and Commercialization
Agreement may also terminate if the Company fails to make a payment to Artann
and such failure is not cured within a 60-day cure period or should one of the
parties become insolvent, go into liquidation or receivership or otherwise lose
legal control of its business.
Accrued
License and Development Fees
Accrued
license and development fees as of December 31, 2009 consisted of $1,565,385 of
an accrued development milestone stock payment and $30,000 of accrued technical
advisory fees due to Artann under the License Agreement and the Development and
Commercialization Agreement.
(8)
|
Commitments
and Contingencies
|
The
Company rents a small amount of office space on a month-to-month basis at a cost
of approximately $1,000 per month, which is the market price for similar office
space in Minneapolis, Minnesota. Rent expense for the years ended
December 31, 2010 and 2009, and the period from August 17, 1999 (inception) to
December 31, 2010 was $11,800, $10,668 and $278,874, respectively.
(9) Income
Taxes
The
Company has generated net operating loss carryforwards of approximately $8.2
million which, if not used, will begin to expire in 2021. Federal and
state tax laws impose significant restrictions on the utilization of net
operating loss carryforwards in the event of a change in ownership of the
Company that constitutes an “ownership change,” as defined by Section 382 of the
Code. The Company has analyzed its equity ownership changes and
believes that such an ownership change has occurred. The Company’s
use of its net operating loss carryforwards of approximately $5.3 million and
built-in loss incurred prior to the closing of the 2009 public offering will be
limited as a result of this change; however, the amount of limitation will not
be known until a full Section 382 study can be completed.
F-27
The
Company has recorded a full valuation allowance against its deferred tax assets
and deferred tax liability due to the uncertainty of realizing the related
benefits and costs as follows:
2010
|
2009
|
|||||||
Deferred
tax assets
|
||||||||
Net
operating loss carryforwards
|
$ | 3,167,000 | $ | 2,559,000 | ||||
Capitalized
start up costs
|
4,261,000 | 3,570,000 | ||||||
Expenses
paid with options and warrants
|
1,037,000 | 722,000 | ||||||
Capitalized
licenses
|
724,000 | 804,000 | ||||||
Accrued
expenses to be paid in stock
|
40,000 | 625,000 | ||||||
Less:
valuation allowance
|
(9,229,000 | ) | (8,280,000 | ) | ||||
Net
deferred tax assets
|
$ | 0 | $ | 0 |
The
change in the valuation allowance was $949,000, $1,874,000 and $9,229,000 for
the years ended December 31, 2010 and 2009 and the period from August 17, 1999
(inception) to December 31, 2010, respectively.
Reconciliation
between the federal statutory rate and the effective tax rates for the years
ended December 31, 2010 and 2009 and the period from August 17, 1999 (inception)
to December 31, 2010 is as follows:
2010
|
2009
|
Period
from
August
17,
1999
(inception) to
December
31,
2010
|
||||||||||
Federal
statutory tax rate
|
(34.0 | ) % | (34.0 | ) % | (34.0 | ) % | ||||||
State
taxes, net of federal benefit
|
(4.5 | ) | (4.5 | ) | (4.5 | ) | ||||||
Employee
incentive stock options
|
0.3 | 1.0 | 1.4 | |||||||||
Expired
warrants and options
|
1.7 | 1.6 | 1.5 | |||||||||
Replacement
warrants issued as an incentive to early exercise warrants
|
8.8 | 7.5 | 3.1 | |||||||||
Capitalized
license fees
|
— | — | 0.5 | |||||||||
Beneficial
conversion feature of convertible debt
|
— | 5.1 | 2.5 | |||||||||
Deductible
expense for stock and warrants issued less than book
expense
|
11.7 | — | 2.1 | |||||||||
Change
in valuation allowance
|
16.0 | 23.3 | 27.4 | |||||||||
Effective
tax rate
|
0.0 | % | 0.0 | % | 0.0 | % |
The
Company has adopted the policy of classifying interest expense for uncertain tax
positions as interest expense. Any penalties would be classified as
general and administrative expense.
The
Company had no significant unrecognized tax benefits as of December 31, 2010 or
December 31, 2009 and, likewise, no significant unrecognized tax benefits that,
if recognized, would affect the effective tax rate.
The
Company had no positions for which it deemed that it is reasonably possible that
the total amounts of the unrecognized tax benefit will significantly increase or
decrease.
F-28
The tax
years that remain subject to examination by major tax jurisdictions currently
are:
Federal
2007 - 2010
State of
Minnesota 2007 - 2010
(10)
|
Notes
Payable
|
The
following summarizes notes payable balances at December 31, 2010 and 2009, and
the related activity during the year ended December 31, 2010:
Year
Ended December 31,
|
|||||||||
2010
|
2009
|
2010
Activity
|
|||||||
Short
term notes payable:
|
|||||||||
Note payable dated October 15,
2007
|
$ | — | $ | 600,000 |
Retired
pursuant to an equity conversion as described below
|
||||
Note payable dated June 11,
2010
|
$ | 65,000 | $ | — |
See
description of June 2010 Notes, below
|
||||
Insurance policy
financing
|
24,902 | 24,865 |
2009
balance paid in full; 2010 balance per description
below
|
||||||
Total notes payable-short
term
|
$ | 24,902 | $ | 624,865 | |||||
Long
term notes payable:
|
|||||||||
Note payable dated June 11,
2010
|
$ | 11,018 | $ | — |
See
description of June 2010 Notes, below
|
||||
Note payable dated September
23, 2009
|
300,000 | 300,000 |
Refinanced
in January 2011
|
||||||
Total notes payable-long
term
|
$ | 376,018 | $ | 300,000 | |||||
Long-term
note payable – related party:
|
|||||||||
Note payable dated September
21, 2009
|
$ | — | $ | 243,000 |
The
debt was used to exercise warrants pursuant to the Company’s 2010 Warrant
Tender Offering
|
On
October 31, 2007, the Company issued a promissory note for $600,000 in favor of
an individual lender. As consideration to the lender for making this
loan and amendments thereto, the Company issued shares of its common stock and
warrants to acquire shares of its common stock. On March 26, 2010,
the Company converted the promissory note and $97,546 of accrued interest
thereon into 381,173 equity units (see Note 13(g)). Interest expense
related to the promissory note was $8,700, $40,800 and $97,546 during the years
ended December 31, 2010 and 2009 and the period from August 17, 1999 (inception)
to December 31, 2010, respectively.
Between
May 1, 2009 and September 16, 2009, James Davis, a director and greater than 10
percent shareholder of the Company, made various payments for the benefit of the
Company and provided the Company with certain cash advances totaling
approximately $243,000. On September 21, 2009, Mr. Davis and the
Company executed a promissory note in the principal amount of $243,000 (the
“Davis Note”) to formalize the Company’s obligation to Mr. Davis for these
amounts. On August 2, 2010, the Davis Note was tendered as payment of
the exercise price of warrants pursuant to the Company’s 2010 Warrant Tender
Offering (see Note 13(h)). In lieu of cash interest the Company
accrued 1,618 shares of its common stock for issuance to Mr. Davis for each
month or portion thereof that the principal amount of the Davis Note was
outstanding. The Company issued 17,802 shares of stock to Mr. Davis
pursuant to this arrangement. Interest expense related to these
shares of $16,145 and $9,225 was recorded during the years ended December 31,
2010 and 2009, respectively.
F-29
On
September 23, 2009, the Company borrowed $300,000 from an individual lender
pursuant to a secured promissory note. In lieu of cash interest, the
Company is accruing 1,998 shares of its common stock for issuance to the
investor for each month or portion thereof that the principal amount of the loan
remains outstanding. As of December 31, 2010, 31,968 shares of common
stock were accrued for issuance pursuant to this arrangement. All
accrued shares will be issued upon repayment of the loan. Interest
expense related to these shares of $32,365 and $10,789 was recorded during the
years ended December 31, 2010 and 2009, respectively. The promissory
note matures on March 28, 2011 and provides the lender with a subordinated
security interest in the Company’s assets. On February 8, 2011, the
$300,000 note was replaced by a convertible note with a maturity date of August
8, 2012 (see Note 15).
On June
1, 2010, the Company borrowed $81,345 pursuant to an unsecured insurance policy
financing agreement. The financing agreement is payable in 10 monthly
installments of $8,398 per month and bear interest at 7.0 percent.
On June
11, 2010, the Company closed on the sale of $885,000 of unsecured promissory
notes (the “June 2010 Notes”) in a private placement. Each June 2010
Note bore interest payable in warrants to purchase shares of the Company’s
common stock during the first 30 days of their terms. For every
$13,000 original principal amount of June 2010 Notes, 10,000 warrants were
issued as interest expense (see Note 13(g)). Following the initial 30
days of their terms, each June 2010 Note bore interest at 6% annually, payable
in cash at maturity. During the year ended December 31, 2010, $5,158
of cash interest expense on the June 2010 Notes was recorded. On
August 2, 2010, holders of $808,982 of the June 2010 Notes tendered their notes
as payment of the exercise price of warrants pursuant to the Company’s 2010
Warrant Tender Offering (see Note 13(h)). On February 4, 2011, we
repaid a $65,000 June 2010
Note. On February 11, 2011, a $11,018 June 2010 note was replaced by
an unsecured convertible note with a maturity date of August 11, 2012 (see Note
15).
On
February 10, 2011, the Company issued a $65,698 unsecured convertible promissory
note to a creditor as part of a settlement of an outstanding account payable
(see Note 15).
The
Company has provided equity consideration to the individual
lenders. See Note 13(g) for more information regarding the equity
consideration issued. See Note 14 for information regarding related
party transactions and loans.
(11)
|
Notes
Payable - Bank
|
The
following summarizes bank notes payable balances at December 31, 2010 and 2009,
and the related activity during the year ended December 31, 2009:
Year
Ended December 31,
|
|||||||||
2010
|
2009
|
2010
Activity
|
|||||||
Short
term note payable – bank:
|
|||||||||
Crown
Bank note
|
$ | 900,000 | $ | 1,200,000 |
Paid
$300,000; amended to extend maturity date to March 28,
2011
|
||||
Crown
Bank note
|
— | 100,000 |
Paid
in full
|
||||||
Total
notes payable bank-short term
|
$ | 900,000 | $ | 1,300,000 | |||||
Long
term note payable – bank:
|
|||||||||
Central
Bank note
|
$ | 100,025 | $ | 100,025 |
Maturity
extended to January 2012
|
The
maturity dates of the Company’s $1.2 million and $100,000 Crown Bank promissory
notes were extended on March 26, 2010 and April 28, 2010 with no changes to
other existing note terms. Two $50,000 principal reductions were made
against the $1.2 million note on April 28, 2010 and May 28, 2010. On
June 28, 2010, following a further $200,000 principal reduction, the remaining
$900,000 promissory note balance was renewed to mature on March 28,
2011. Also on June 28, 2010, the $100,000 Crown Bank promissory
note’s maturity date was extended to November 28, 2010, and on October 12, 2010
was paid in full. All of the Crown Bank notes bear interest at the
prime rate plus one percent, but never less than 6.00
percent (6.0 percent at both December 31, 2010 and 2009). The note
remains collateralized by all Company assets and guaranteed by two individual
guarantors.
F-30
Pursuant
to guarantees received relating to the Company’s extensions of the Crown Bank
promissory notes on March 26 and April 28 of 2010, the Company agreed to
continue to provide 23,333 shares of its common stock per month to the
guarantors through June 28, 2010. It was determined that the
modifications to the maturity dates of the notes were not substantial
modifications of the terms of the notes, as the present value of the cash flows
under the new convertible promissory notes was less than 10 percent different
from the present value of the cash flows under the original notes. The $136,500
value of the shares was expensed as interest expense during the year ended
December 31, 2010.
Pursuant
to guarantees received relating to the Company’s June 28, 2010 renewal of
the Crown Bank promissory notes, the Company agreed to continue to provide
22,222 shares of its common stock per month to the guarantors through November
28, 2010 and 20,000 shares of its common stock per month from November 28, 2010
through March 28, 2011, with a minimum of six months of consideration to be
paid. It was determined that the modifications to the maturity dates
of the notes were substantial modifications of the terms of the notes,
as the present value of the cash flows under the new convertible promissory
notes was greater than 10 percent different from the present value of the cash
flows under the original notes. The shares, valued at $1.93 per share
on the loan renewal date, are being recorded as debt extinguishment expense over
the term of the loan. Debt extinguishment expense of $252,387 was
recorded during the year ended December 31, 2010 related to the June 28, 2010
Crown Bank promissory note renewal.
On
September 23, 2009, the Company borrowed $100,025 from Central Bank pursuant to
an unsecured promissory note. The promissory note matured on January 17, 2011,
and bears interest at the prime rate plus one percent, with a minimum rate of
6.0 percent (6.0 percent at both December 31, 2010 and 2009). The
promissory note was guaranteed by an individual guarantor, whose guaranty was
collateralized by Company assets. On January 14, 2011, the maturity
date of the Central Bank note was extended to January 17, 2012 (see Note
15).
The
Company has provided shares of its common stock as consideration to the
guarantors of its bank debt (see Note 13(g).
(12)
|
Future
Maturities of Long term Debt
|
Future
maturities of long-term notes for the years succeeding December 31, 2010 are as
follows:
Year
|
Notes
Payable
|
Notes
Payable- Bank
|
Total
|
|||||||||
2011
|
$ | — | $ | — | $ | — | ||||||
2012
|
311,018 | 100,025 | 411,043 | |||||||||
Total
|
$ | 311,018 | $ | 100,025 | $ | 411,043 |
(13)
|
Shareholders’
Equity (Deficit)
|
|
(a)
|
Common
stock issued related to formation and licensing
activities
|
The
Company issued 300,000 shares to Clinical Network Inc. in July 2001. In
connection with the Company’s license agreements with CS Medical and Profile,
the Company issued 300,000 and 400,000 shares of common stock in 2001 and 2002,
respectively.
|
(b)
|
Common
Stock and Warrants issued related to 2002 Private
Placement
|
In
connection with a private placement to accredited investors, the Company issued
45,335 shares of common stock in 2002. In addition, the Company
issued warrants to purchase 4,535 shares of common stock to three individuals
related to services rendered in connection with the private
placement. These warrants expired unexercised.
F-31
|
(c)
|
Common
Stock and Warrants issued related to Merger and 2004 Private
Placement
|
Merger
Agreement
Prior to
the April 5, 2004 Merger (see Note 1(a)), Profile had notified the Company of a
possible breach of its license agreement with the Company, and had also
dissented from the Merger proposal as the registered holder of securities
beneficially owned by certain shareholders holding, in the aggregate, 30,847
(pre-merger) shares of PUC’s common stock. Effective on April 4,
2004, the parties reached an agreement pursuant to which Profile waived any
existing defaults under the Profile license agreement, and the Company agreed to
purchase 30,000 of the 30,847 (pre-conversion) shares with respect to which
dissenters’ rights were exercised for an aggregate purchase of
$750,000. Of that amount, $100,000 was paid upon the initial closing
of the private placement (described below) and the balance of $650,000 was paid
pursuant to the delivery of a promissory note, which was paid in full in October
2004. The remaining 847 (pre-conversion) shares with respect to which
dissenters’ rights were originally exercised withdrew their dissents and
participated in the Merger.
At the
effective time of the Merger all 350,100 (pre-conversion) shares of common stock
of PUC that were outstanding immediately prior to the Merger and held by PUC
shareholders were cancelled, with one share of PUC common stock issued to
Global. Simultaneously, the former shareholders of PUC common stock
received an aggregate of 960,300 shares of common stock of Global, representing
approximately 82.1 percent of Global’s common stock outstanding immediately
after the Merger.
Global
was a non-operating public shell company at the time of the
Merger. Accordingly, the Merger transaction was recorded as a
recapitalization rather than a business combination. The assets and
liabilities resulting from the reverse acquisition were the former PUC assets
and liabilities (at historical cost) plus a $13,500 accrued Global liability
(assumed at historical cost). There were no other assets or
liabilities on Global’s books at the time of the Merger. The Company
recorded costs associated with the Merger totaling $162,556 during
2004.
2004 Private Placement of
Common Stock.
In
connection with the Merger, the Company completed a private placement offering
of 220,500 shares of common stock pursuant to Rule 506 promulgated under the
Securities Act. The initial closing occurred on April 5, 2004, at which time the
Company issued 198,000 shares at $20.00 per share, aggregating to gross proceeds
of $3.96 million. Subsequent to April 5, 2004, the Company issued an
additional 22,500 shares at $20.00 per share, aggregating to gross proceeds of
$450,000. Costs associated with the private placement (including the
subsequent registration costs) were $139,493.
As part
of the private placement, the Company engaged a consultant to provide
financial-advisory services. Under terms of the arrangement, the
consultant was paid $27,000 and was issued a warrant for 30,000 shares of common
stock upon the first closing of the private placement. The warrant
had a three-year term and was exercisable at $20.00 per share.
|
(d)
|
Private
sales of Common Stock
|
|
·
|
On
June 15, 2005, the Company sold 6,579 shares of its common stock to an
accredited investor in a non-public offering. The per share
selling price of $7.60 was based on the last selling price prior to this
sale as reported on the Over-the-Counter Bulletin Board. Net
proceeds received from this placement were
$50,000.
|
|
·
|
On
September 7, 2006, the Company sold 5,814 shares of its common stock to
Scott Smith, a director of the Company, and 5,814 shares of our common
stock to an investor. The per share selling price of $4.30 was
based on the last selling price prior to this sale as reported on the
Over-the-Counter Bulletin Board. Net proceeds received from
these investments were $50,000.
|
|
·
|
During
the year ended December 31, 2007, the Company sold 125,000 of the
Company’s Investment Units at a price of $4.00 per unit, with total gross
proceeds of $500,000. The Investment Units were sold in
tranches of 31,250 Units each to four investors on January 18, January 23,
February 28 and May 1, 2007. Each Investment Unit consists of
one share of the Company’s common stock and a 3-year warrant (immediately
exercisable) to acquire 0.5 shares of the Company’s common stock for $2.50
($5.00 per share). Costs of this sale totaled
$52,388.
|
F-32
|
·
|
On
February 12, 2007, the Company sold 1,707 shares of its common stock to
Scott Smith, a director of the Company. The per share selling
price of $4.10 was based on the last selling price prior to this sale as
reported on the Over-the-Counter Bulletin Board. The
subscription price was paid by the conversion of a $7,000 loan to the
Company from Mr. Smith.
|
|
·
|
On
March 21, 2007, the Company and the four guarantors of the Company’s Crown
Bank promissory notes (see Note 11) agreed to amend the related debenture
agreements. Pursuant to the revised debenture agreements, among
other things, the Company issued a total of 12,478 shares of its
Investment Units to the four guarantors in lieu of $49,911 of accrued
interest. The 6,240 warrants were valued at $26,829 using the
Black-Scholes method and were recorded as debt extinguishment
expense.
|
|
·
|
On
September 10, 2007, the Company sold a total of 1,100 shares of its common
stock to Mr. Carlson and Mr. Smith. The per share selling price
of $3.00 was based on the last selling price prior to this sale as
reported on the Over-the-Counter Bulletin Board. The
subscription price was paid by the conversion of a $3,300 of loans to the
Company from Mr. Carlson and Mr.
Smith.
|
|
·
|
On
September 28, 2010, the Company entered into a $3.125 million Securities
Purchase Agreement with Seaside 88, LP. Concurrent with the
execution of the SPA, the Company closed on an $875,000 first tranche of
the funding, selling 1,400,000 unregistered shares of its common stock to
Seaside at $0.625 per share. Under the terms of the SPA, the
remaining $2.250 million funding is to be provided in six
tranches:
|
-$750,000
within 30 days following FDA clearance of the Company’s ProUroScan
System,
-$1.5
million provided in five subsequent closings of $300,000 in 30-day increments
following the previous closing.
At each
of the future closings, the Company will sell unregistered shares of its common
stock to Seaside at a cost that is 50 percent of the stock’s volume weighted
average selling price (“VWASP”) during the 10 trading days preceding each
closing date, subject to a floor VWASP of $2.50 per share below which the
parties are not obligated to close. Net proceeds to the Company,
after cash expenses of $143,778, were $734,618. The Company also
issued 20,000 shares of its common stock to a placement agent upon the closing
of the SPA.
|
(e)
|
Common
stock and warrants issued pursuant to the 2007 and 2008 Private
Placements, the 2008 Unit Put Arrangement and the 2009 Public
Offering
|
|
·
|
Between
December 27, 2007 and July 30, 2008, the Company closed on the sale of an
aggregate $1,850,000 of units under its 2007 and 2008 Private Placements
(see Note 1(a)), and converted $150,000 of existing loans from James Davis
into similar units. At the closings, the Company issued
warrants to purchase a total of 400,000 shares of common stock to the
investors. The exercise price of the warrants was set upon the
January 7, 2009 effective date of the 2009 Public Offering at $0.50 per
share (based on 50 percent of the offering price). All of these
warrants became exercisable upon the January 12, 2009 closing of the 2009
Public Offering and will remain exercisable until December 31,
2012.
|
The
$153,735 relative fair value of the aggregate 400,000 warrants issued were
recorded as an original issue discount as defined in Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 470
against the convertible debt liability, and were amortized as interest expense
over the term of the convertible debentures. The unamortized original
issue discount relating to the warrants was expensed as interest expense upon
the January 12, 2009 closing of the 2009 Public Offering.
|
·
|
On
September 16, 2008, pursuant to the Company’s 2008 Unit Put
Arrangement (see Note 1(a)), the Company issued warrants, exercisable
until December 31, 2012 at an exercise price of $1.00 per share, to
purchase an aggregate 32,500 shares of our common stock (the “Origination
Warrants”). Of these, 31,500 Origination Warrants became
exercisable when the Company exercised its put options and closed on
$315,000 of the 2008 Unit Put Arrangement, while 1,000 Origination
Warrants were forfeited when an investor failed to meet a $10,000 unit put
obligation. The Origination Warrants, valued at $42,575 using
the Black-Scholes pricing model, were recorded as a debt issuance cost
asset and amortized as interest expense over the term of the 2008 Unit Put
Arrangement (see Note 5).
|
F-33
Each unit
issued in the 2008 Unit Put Arrangement included a warrant that will remain
exercisable until December 31, 2012 at an exercise price of $1.00 per share (a
“Unit Put Warrant”). The purchase price of the warrant portion of each unit was
$500.
Between
September 16, 2008 and December 11, 2008, the Company exercised $315,000 of its
put options under the Unit Purchase Agreement and issued 63,000 Unit Put
Warrants. The $17,493 relative fair value of the Unit Put Warrants
was recorded as an original issue discount as defined in ASC Topic 470 against
the convertible debt liability, and was amortized as interest expense over the
term of the convertible debentures. On February 6, 2009, the $299,250
outstanding promissory notes issued pursuant to the Company’s 2008 Unit Put
Arrangement, along with the $9,563 interest accrued thereon, automatically
converted into 441,165 shares of the Company’s common stock. The
unamortized original issue discount was expensed as interest cost upon this
conversion.
|
·
|
On
January 7, 2009, the 2009 Public Offering was declared effective by the
United States Securities and Exchange Commission, and January 12, 2009 the
2009 Public Offering was closed (see Note 2). In the offering,
the Company sold 3,050,000 units at $1.00 per unit, with each unit
consisting of one share of common stock and one redeemable warrant to
purchase one share of common stock at an exercise price of $1.30 per share
resulting in net cash of $1,790,472, after costs of
$1,259,528.
|
|
·
|
As
additional compensation pursuant to the 2009 Public Offering, the Company
sold to the underwriter, Feltl & Company, for nominal consideration, a
warrant (the “Underwriter’s Warrant”) to purchase up to
305,000 units. The Underwriter’s Warrant is exercisable until January
7, 2015 at $1.20 per share.
|
|
·
|
On
the January 7, 2009 effective date of the 2009 Public Offering, the
$1,757,500 aggregate amount of notes from the 2007 and 2008 Private
Placements, along with $162,974 of interest accrued thereon, automatically
converted into 2,743,535 units identical to those sold in the 2009 Public
Offering (based on 70 percent of the offering price, or $0.70 per
share). On the same date, the $142,500 of Davis Note, along
with $14,908 of interest accrued thereon, automatically converted into
314,846 units identical to those sold in the 2009 Public Offering (based
on 50 percent of the offering price, or $0.50 per
share).
|
|
·
|
The
exercise price of the Davis Warrants and the warrants from the 2007 and
2008 Private Placements was set upon the January 7, 2009 effective date of
the 2009 Public Offering at $0.50 per share (based on 50 percent of the
offering price. All of these warrants became exercisable upon
the January 12, 2009 closing of the 2009 Public Offering and will remain
exercisable until December 31, 2012. Unamortized original issue
discount relating to the warrants and the beneficial conversion feature of
the notes totaling $387,169 and unamortized debt issuance cost of $207,575
was expensed as interest expense upon the
conversion.
|
|
(f)
|
Common
Stock and Warrants issued for services and
liabilities
|
|
·
|
In
March 2002, the Company granted a warrant to purchase 3,000 shares of
common stock to a former director that was exercisable at $11.33 per
share. This warrant expired unexercised. An aggregate of
$12,075 of stock-based compensation expense related to this warrant was
recognized in the period from August 17, 1999 (inception) to December 31,
2010.
|
|
·
|
In
November 2002, the Company granted a warrant to purchase 150 shares of
common stock at an exercise price of $23.33 per share to a consultant, for
services rendered. This warrant expired
unexercised. An aggregate of $490 of stock-based compensation
expense related to this warrant was recognized in the period from August
17, 1999 (inception) to December 31,
2010.
|
|
·
|
In
February 2003, the Company issued 545 common shares to a consultant, in
lieu of $12,705 cash for accounts
payable.
|
F-34
|
·
|
In
June 2003, under the terms of an agreement with a supplier, the Company
issued a warrant to purchase 9,215 shares of common stock at an exercise
price of $3.33 per share. This warrant expired
unexercised. The value of $187,060 related to this warrant was
recognized as research and development expense in the year ended December
31, 2003.
|
|
·
|
In
May 2004, a vendor was issued 3,861 shares of the Company’s common stock
as payment for product development work valued at
$77,225.
|
|
·
|
In
July 2004, the Company entered into a research and development agreement
for the development of the ProUroScan System. Under this
agreement, warrants for the purchase of 10,000 shares of the Company’s
common stock upon the execution of the agreement and warrants for the
purchase of 20,000 shares of the Company’s common stock in December 2004.
The warrants were fully vested, five-year warrants at a per share exercise
price of $20.00 per share value. The total value of these
warrants computed using the Black-Scholes pricing model was
$281,086. The value of the warrants was recorded as research
and development expense in the year ended December 31,
2004.
|
|
·
|
In
October 2004, another vendor was issued 4,444 shares of the Company’s
common stock in lieu of $88,882 cash for accounts
payable.
|
|
·
|
On
April 11, 2005, the Company entered into a placement agency agreement with
an investment firm to raise working capital for the
Company. Pursuant to the agreement, on May 13, 2005 the Company
issued 5,000 shares of the Company’s common stock to the placement
agent. The 5,000 shares were valued at $51,000 using the stock
price on the date of grant and were recorded as general and administrative
expense during the year ended December 31,
2005.
|
|
·
|
On
December 30, 2005, the Company issued 4,541 shares of common stock to our
current and former directors in satisfaction of accrued director’s fees in
the amount of $40,418.
|
|
·
|
On
April 21, 2006, the Company issued 7,000 shares of its common stock to its
former Vice-President of Engineering, upon his resignation, pursuant to
his employment agreement. The shares were valued at $44,800
based on the average closing share price during the five days before and
after the issuance date, and were recorded as compensation expense during
the year ended December 31, 2006.
|
|
·
|
On
September 8, 2006, the Company issued 1,415 shares of its common stock to
a vendor, as payment for product development work valued at
$8,938.
|
|
·
|
On
April 2, 2007, the Company issued 4,141 shares of its common stock to a
vendor, as payment for product development work valued at
$20,704.
|
|
·
|
On
April 16, 2007, the Company issued to Artann five-year warrants
(immediately exercisable) to acquire 20,000 shares of its common stock at
$4.10 per share pursuant to an agreement with Artann. The
warrants were valued at $72,000 by the Black-Scholes pricing model and
recorded as research and development expense during the year ended
December 31, 2007.
|
|
·
|
On
September 10, 2007, the Company issued a total of 20,694 shares of its
common stock to its directors and former directors as payment for $62,082
of accrued directors’ fees.
|
|
·
|
On
January 4, 2008, pursuant to a final separation agreement with a former
employee of the Company, the Company issued to the former employee
five-year warrants (immediately exercisable) to acquire up to 14,500
shares of the Company’s common stock at an exercise price of $5.00 per
share, and amended a previously issued warrant to acquire up to 30,000
shares of the Company’s common stock to provide for cashless exercise
thereof. The warrants, valued at $14,500 using the
Black-Scholes pricing model, were recorded as compensation expense during
the year ended December 31, 2008.
|
|
·
|
On
July 11, 2008, the Company’s directors received 21,667 of shares of the
Company’s common stock in lieu of cash for $21,667 of unpaid director’s
fees accrued through June 30, 2008. The shares were valued at
$1.00 per share and expensed during the period of
service.
|
F-35
|
·
|
On
July 11, 2008, the Company issued a total of 37,967 shares of the
Company’s common stock to its directors in recognition of extraordinary
amount of time and effort they spent on the Company’s restructuring and
refocusing efforts since January 2007. The shares were valued
at $1.00 per share and expensed on the date of
issuance.
|
|
·
|
On
January 15, 2009, the Company issued 454,546 shares of common stock to
Artann in satisfaction of a $500,000 liability pursuant to its license
agreement with Artann.
|
|
·
|
On
April 13, 2009, the Company issued an aggregate of 27,366 shares to its
independent directors as payment of $20,250 directors’ fees accrued
through December 31, 2008, in lieu of
cash.
|
|
·
|
On
July 23, 2009, the Company issued a two-year warrant to purchase 30,000
shares of our common stock at an exercise price of $1.25 per share to its
public relations firm as consideration for services provided to the
Company. The warrant, valued at $26,400 using the Black-Scholes
pricing model, was recorded as general and administrative
expense.
|
|
·
|
On
September 29, 2009, the Company issued 4,834 shares to a director as
payment of $7,250 directors’ fees, in lieu of
cash.
|
|
·
|
On
December 3, 2009, the Company issued 10,000 shares of its common stock to
a web-site designer for services provided valued at
$7,425.
|
|
·
|
On
July 2, 2010 and October 12, 2010, the Company issued an aggregate 33,679
shares of its common stock to directors in lieu of cash for $53,666 of
directors’ fees earned during the first three quarters of
2010. On February 8, 2011, the Company issued 12,379 shares of
its common stock to directors in lieu of cash for $12,500 of directors’
fees earned in the fourth quarter of 2010 and accrued at December 31, 2010
(see Note 15).
|
(g)
|
Common
Stock and Warrants issued pursuant to loans and loan
guarantees
|
Each
warrant listed below was valued using the Black-Scholes pricing model; however,
the recorded value of warrants issued to lenders and guarantors of Company debt
is limited to the corresponding amount loaned or guaranteed.
|
·
|
During
the year ended December 31, 2003, the Company issued warrants to purchase
a total of 64,287 shares of common stock at $23.33 per share to nine
individuals, including 4,286 shares to a Company director in exchange for
their guaranteeing a bank line of credit. An aggregate of
$216,112 of debt issuance cost related to these warrants was recorded and
amortized over the life of the bank line of credit. Upon the
closing of the Company’s 2004 Private Placement and Merger on April 5,
2004, certain exercise price protections and anti-dilution provisions of
these warrants became effective. Under the terms of these
provisions, the holders of these warrants became eligible to purchase a
total of 101,788 shares at $16.67 per share. The additional
warrants and revaluation of the existing warrants were valued at $320,974
using the Black Scholes pricing model, and were recorded as interest
expense at the time of issuance. The warrants expired
unexercised.
|
|
·
|
In
September 2005, the Company engaged a consultant to assist with the
introduction of strategic investors to the Company. Under this
agreement, on September 1, 2005 and February 22, 2006, the Company issued
a total of 5,000 shares of common stock valued at $40,500 on the grant
dates to the consultant. Upon the closing of the Company’s
Crown Bank notes on February 16, 2006, the $43,000 aggregate value of the
shares and initial retainer were recorded as debt issuance cost and were
amortized over the term of the
notes.
|
|
·
|
On
September 14, 2005, in connection with a commercial guaranty of a $100,000
bank loan, the Company issued two five-year warrants (immediately
exercisable) to an individual investor to acquire a total of 5,000 shares
of the Company’s common stock at $5.00 per share. The warrants,
valued at $29,000 using the Black-Scholes pricing model, were recorded as
debt issuance costs and expensed over the term of the loan as interest
expense. The Company recorded $29,000 of expense related to the
value of the warrants during the period from August 17, 1999 (inception)
to December 31, 2009. The warrants expired
unexercised.
|
F-36
|
·
|
On
September 21, 2005, in connection with $100,000 loan from an individual
investor, the Company issued two five-year warrants (immediately
exercisable) to the lender to acquire a total of 5,000 shares of the
Company’s common stock at $5.00 per share. The gross proceeds
of $100,000 were allocated between the promissory note and the common
stock warrants based on the relative fair values of the securities at the
time of issuance. The warrants, valued at $26,500 using the Black-Scholes
pricing model, were recorded as original issue discount as defined in ASC
Topic 470 expensed on a straight-line basis over the term of the
promissory note as interest expense. The Company recorded
$26,500 of expense related to the value of the warrants during the period
from August 17, 1999 (inception) to December 31, 2009. The
warrants expired unexercised.
|
|
·
|
On
October 19, 2005, in connection with commercial guaranties of a $300,000
loan from a bank, the Company issued five-year warrants (immediately
exercisable) to two investors to acquire up to 7,500 shares (15,000 shares
in total) of the Company’s common stock at $5.00 per share. The
warrants, valued at $79,500 using the Black-Scholes pricing model, were
recorded as debt issuance costs and expensed over the term of the loan as
interest expense. The Company recorded $79,500 of expense
related to the value of the warrants during the period from August 17,
1999 (inception) to December 31,
2010.
|
|
·
|
On
January 25, 2006, in connection with a $23,000 loan, the Company issued a
five-year warrant (immediately exercisable) to a partnership to acquire
5,000 shares of Company common stock at $5.00 per
share. The gross proceeds of $23,000 were allocated
between the promissory note and the common stock warrant based on the
relative fair values of the securities at the time of
issuance. The fair value of the warrant estimated at grant date
using the Black-Scholes pricing model exceeded the amount of the
loan. Accordingly, the warrant was valued at $23,000 and
recorded as original issue discount as defined in ASC Topic 470 and
expensed as interest expense over the term of the
loan.
|
|
·
|
On
June 1, 2006, the Company borrowed $75,000 from an individual investor,
and in connection therewith issued to the investor a promissory note to
mature on August 30, 2006. Under the terms of the loan
agreement, the Company issued a five-year warrant (immediately
exercisable) to the investor
to acquire 3,750 shares of Company common stock at $5.00 per
share. The fair value of the warrant at the grant date was
estimated using the Black-Scholes pricing model to be $25,500 and was
recorded as original issue discount as defined in ASC Topic 470 and
subsequently expensed as interest expense over the 90-day term of the
loan.
|
On August
24, 2006 the promissory note was amended to mature on October 29, 2006 and the
Company agreed to issue a five-year warrant to the investor to acquire 41.7
shares of the Company’s common stock at $5.00 per share for each day the
promissory note was outstanding after August 30, 2006 upon repayment of the
promissory note. These warrants were valued at $5.40 per share using
the Black-Scholes pricing model. In connection with amendments to the
promissory note, the Company issued to the investor 31,817 warrants accrued
between August 30, 2006 and October 1, 2008 along with a warrant to acquire
3,000 shares of its common stock and agreed to continue to accrue 41.7 warrants
per day to be issued upon the Company’s repayment of the promissory
note. The warrants issued and accrued on and after October 1,
2008 were five-year warrants with an exercise price of $1.50 per share, and were
valued at $1.32 per share using the Black-Scholes pricing model.
The
present value of the cash flows under both amendments was greater than 10
percent different from the present value of the cash flows under the original
agreement, indicating that a substantial modification of debt terms had
occurred. Accordingly, the warrants issued and the accrual of
warrants to be issued pursuant to the amended note were recorded as debt
extinguishment expense. The total debt extinguishment expense
recorded for the 0, 459 and 36,112 warrants accrued for issuance during the
years ended December 31, 2010 and 2009, and the period from August 17, 1999
(inception) to December 31, 2010 was $0, $607 and $181,443,
respectively. On January 12, 2009, the Company repaid the promissory
note and issued 4,295 warrants related to this note.
F-37
|
·
|
On
July 21, 2006, in connection with a $7,500 loan from an individual
investor, the Company issued a five-year warrant (immediately
exercisable) to the investor
to acquire 375 shares of Company common stock at $5.00 per
share. The gross proceeds of $7,500 were allocated between the
promissory note and the common stock warrant based on the relative fair
values of the securities at the time of issuance. The warrant,
valued at $2,025 using the Black-Scholes pricing model, was recorded as
original issue discount as defined in ASC Topic 470 and was expensed as
interest expense during the year ended December 31,
2006.
|
|
·
|
On
August 30, 2006, in connection with a $10,000 loan from an individual
investor, the Company issued a five-year warrant (immediately exercisable)
to the investor to acquire 500 shares of Company common stock at $5.00 per
share. The gross proceeds of $10,000 were allocated between the promissory
note and the common stock warrant based on the relative fair values of the
securities at the time of issuance. The warrant, valued at
$2,300 using the Black-Scholes pricing model, was recorded as original
issue discount as defined in ASC Topic 470 and was expensed as interest
expense during the year ended December 31,
2006.
|
|
·
|
On
November 30, 2006, the Company borrowed $100,000 from a partnership, and
in connection therewith issued to the partners a promissory note to mature
on January 2, 2007. Pursuant to the terms of the promissory
note, the Company issued five-year warrants (immediately exercisable) to
the partners to acquire 5,000 shares of Company common stock at $5.00 per
share. In addition, pursuant to the terms of the promissory
note, the Company issued an additional five-year warrant (immediately
exercisable) to the partners to acquire 5,000 shares of Company common
stock at $5.00 per share, when the loan was not repaid on January 2,
2007. The first warrant, valued at $22,500 using the
Black-Scholes pricing model, was recorded as original issue discount as
defined in ASC Topic 470 and was expensed as interest expense over the
term of the promissory note. The second warrant, also valued at
$22,500, was expensed immediately as interest expense. The
Company recorded interest expense of $45,000 related to the warrants
issued pursuant to the original agreement during the period from August
17, 1999 (inception) to December 31,
2010.
|
On each
of March 20, 2007 and August 8, 2007, the Company amended the promissory note
with the partnership, resulting in an extension of its due dates, the issuance
of a third warrant to acquire 5,000 shares of Company common stock at $5.00 per
share on February 1, 2007 and an agreement to issue to the partners five-year
warrants to acquire 167 shares at $5.00 per share for each day the principal
remained unpaid on and after March 1, 2007. The present value of the
cash flows under the modifications was greater than 10 percent different from
the present value of the cash flows under the existing agreement, indicating
that a substantial modification of debt terms had
occurred. Accordingly, the accrual of warrants to be issued and the
warrants issued on February 1, 2007 pursuant to the promissory note were
recorded as debt extinguishment expense. The Company expensed as debt
extinguishment cost $206,485 related to the accrual of 52,357 warrants to be
issued of warrants pursuant to the amended terms of the promissory note during
the period from August 17, 1999 (inception) to December 31, 2010,
respectively. On January 16, 2008, the Company repaid the outstanding
principal amount of the note and issued the 52,357 accrued
warrants.
|
·
|
On
March 14, 2007, upon the termination of employment of an employee, and in
consideration for an agreement to defer payment of accrued salaries until
the Company is able to make such payments, the Company agreed to extend by
three years the expiration date of 30,000 warrants beneficially held by
the employee. The modification of the warrant resulted in the
recording of an immediate incremental compensation expense totaling
$96,000, computed as the increase in the fair value of the warrant as
determined using the Black-Scholes pricing model over the fair value so
determined immediately before the
modification.
|
|
·
|
On
July 31, 2007, the Company borrowed $100,000 for short-term working
capital needs pursuant to a promissory note issued to an individual
investor. During the years ended December 31, 2010 and 2009,
and the period from August 17, 1999 (inception) to December 31, 2009, the
Company accrued for issuance five-year warrants to acquire 0, 680 and
28,656 shares of the Company’s common stock, respectively, and recorded
interest expense of $0, $2,720 and $114,624, respectively, related
thereto. The exercise price of the warrants was $5.00 per
share. On January 20, 2009, the Company repaid the promissory
note and issued 28,656 warrants related to this
note.
|
F-38
|
·
|
On
August 29, October 31, and November 30, 2007, the Company borrowed for
working capital needs $50,000, $100,000 and $25,000, respectively, from
James Davis. On December 27, 2007 these notes were converted
into the units sold by the Company in its 2007 Private Placement (see Note
13(e)). Pursuant to the terms of the promissory notes the Company issued
to Mr. Davis 12,550 five-year warrants to acquire the Company’s common
stock at $5.00 per share that were valued at $28,340 using the
Black-Scholes pricing model. These warrants were expensed as interest
expense during the year ended December 31,
2007.
|
|
·
|
On
October 15, 2007, the Company borrowed $600,000 pursuant to a promissory
note issued to an individual investor. In consideration for
this loan, on November 7, 2007 the Company agreed to issue 33,333 shares
of its common stock to the investor. The $66,666 value of this
consideration was recorded as debt issuance cost and was amortized over
the term of the loan using the straight-line method, which approximates
the interest method. The Company recorded $0, $7,836 and
$66,667 of interest expense related to the amortization of this debt
issuance cost during the years ended December 31, 2010 and 2009, and the
period from August 17, 1999 (inception) to December 31, 2010,
respectively. On October 31, 2008, pursuant to the terms of the
loan when the loan remained unpaid on that date, the Company issued to the
investor 6,667 shares of its common stock and a five-year immediately
exercisable warrant to acquire 16,667 shares of its common stock at an
exercise price of $2.00. The $6,667 value of the shares issued
and the $12,834 value of the warrants was recorded as interest expense
during the year ended December 31,
2008.
|
On March
19, 2009, the note was renewed to mature on March 28, 2010. As
consideration to the lender for renewing the loan, the Company agreed to issue
11,111 shares of its common stock to the lender for each month or portion
thereof that the principal amount of the loan remained
outstanding. On the renewal date, the Company issued a total of
66,667 shares of its common stock to the lender, representing the first six
months compensation. It was determined that a substantial
modification of the terms of the note was made as the present value of the cash
flows under the new convertible promissory note was greater than 10 percent
different from the present value of the cash flows under the original
note. Accordingly, the value of the shares issued pursuant to this
arrangement was immediately recorded as debt extinguishment
expense. Additional accruals of stock to be issued subsequent to the
initial six month period were also expensed each month as debt extinguishment
expense. During the years ended December 31, 2010 and 2009, the
Company recorded debt extinguishment expense related to the stock consideration
of $55,555 and $44,444, respectively.
On March
26, 2010, the lender agreed to convert the $600,000 loan and $97,546 of accrued
interest thereon into 381,173 equity units, with each unit consisting of one
share of the Company’s common stock and one warrant to purchase one share of
Company’s common stock. The immediately exercisable warrants had a
three-year term, an exercise price of $1.83 per share and a cashless exercise
provision. The lender immediately elected to exercise the warrants,
and the Company issued 102,154 shares of stock to the lender pursuant to the
cashless exercise. The Company recognized debt extinguishment expense
of $870,981 during the year ended December 31, 2010, representing the excess
fair value of the securities issued over the carrying value of the debt and
interest. Upon loan conversion to equity, the Company issued to the
individual lender 66,666 shares of common stock as consideration pursuant to the
original terms of the loan.
On
January 7, 2009, upon the effective date of the 2009 Public Offering, the
Company issued 292,384 shares of common stock to holders of $733,334 of
convertible debentures pursuant to the automatic conversion of the debentures
and $143,815 interest accrued thereon.
|
·
|
On
December 28, 2007, pursuant to the terms of guarantees of its $1.6 million
of Crown Bank promissory notes, the Company issued to Mr. Davis, Mr.
Reiling and another guarantor an aggregate of 88,889 shares of the
Company’s common stock. The $88,889 value of the shares was
immediately expensed as interest. On October 31, 2008, pursuant
to the terms of the guarantees, when the Crown bank loan remained unpaid
the Company issued to the three guarantors an aggregate amount of 17,778
shares of our common stock and five-year immediately exercisable warrants
to acquire an aggregate of 44,445 shares of our common stock at an
exercise price of $2.00 per share. The $17,778 value of the
shares issued and the $34,223 value of the warrants was recorded as
interest expense during the year ended December 31,
2008.
|
On March
19, 2009, $1.2 million of the Crown Bank loan was renewed to mature on March 28,
2010, with Mr. Davis and Mr. Reiling as guarantors. As consideration
to the guarantors for guaranteeing the renewed note, the Company agreed to issue
a total of 22,222 shares of its common stock to the guarantors for each month or
portion thereof that the principal amount of the loan remained
outstanding. On the renewal date, the Company issued an aggregate of
133,334 shares of its common stock to the guarantors representing the first six
months compensation, and in issuances made on June 25, 2010 and July 12, 2010
issued the 155,556 shares of common stock accrued subsequent to the initial six
month period. It was determined that a substantial modification of
the terms of the note had not occurred, as the present value of the cash flows
under the new convertible promissory note was less than 10 percent different
from the present value of the cash flows under the original
note. Accordingly, the value of the shares issued pursuant to this
arrangement was recorded as interest expense over the term of the renewed
note. During the years ended December 31, 2010 and 2009, the Company
recorded interest expense related to the stock consideration of $33,334 and
$111,111, respectively.
F-39
On March
28, 2010 and again on April 28, 2010, the maturity dates of the Company’s $1.2
million Crown Bank loan were extended. As consideration to the
guarantors for guaranteeing the note extensions, the Company agreed to continue
to issue a total of 22,222 shares of its common stock to the guarantors each
month through June 28, 2010. On July 12, 2010, the 66,666 shares
accrued during the loan extension periods were issued to the
guarantors. It was determined that a substantial modification of the
terms of the note was made as the present value of the cash flows under the new
convertible promissory note was greater than 10 percent different from the
present value of the cash flows under the original note. Accordingly,
the value of the shares issued pursuant to this arrangement was recorded as debt
extinguishment expense. During the year ended December 31, 2010, the
Company recorded debt extinguishment expense related to the stock consideration
of $130,000.
On June
25, 2010, of the Crown Bank note was renewed once again with $100,000 to mature
on November 28, 2010 and $900,000 to mature on March 28, 2011. The
Company agreed to continue to total of 22,222 shares of its common stock to the
guarantors for each month the loan was outstanding through November 28, 2010 and
20,000 shares per month thereafter until the maturity date. Pursuant
to this consideration arrangement, the Company issued 65,555 shares of its
common stock to each of Mr. Davis and Mr. Reiling on July 12, 2010, representing
the first six months of such consideration. It was determined that a
substantial modification of the terms of the note was made as the present value
of the cash flows under the new convertible promissory note was greater than 10
percent different from the present value of the cash flows under the original
note. Accordingly, the value of the shares issued pursuant to this
arrangement was recorded as debt extinguishment expense. During the year ended
December 31, 2010, the Company recorded debt extinguishment expense related to
the stock consideration of $252,388.
|
·
|
On
April 3, 2008, as consideration to James Davis, William Reiling and
another investor for providing certain loans to the Company, the Company
issued five-year warrants (immediately exercisable) to purchase a total of
75,000 shares of the Company’s common stock at $1.50 per
share. The gross proceeds were allocated between the note and
the warrants based on the relative fair value at the time of
issuance. The relative fair value of warrants was recorded as
original issue discount on the related convertible promissory notes and
was expensed as interest expense over the term of the
notes. During the year ended December 31, 2008, original issue
discounts of $42,768 were expensed as interest expense. On
January 22, 2009, $29,500 of the convertible promissory notes was
converted into 42,143 shares of the Company’s common
stock.
|
|
·
|
On
September 25, 2008, the Company borrowed $150,000 pursuant to a
convertible promissory note issued in favor of James Davis. As
consideration for providing the loan, the Company issued an immediately
exercisable, five-year warrant to purchase 100,000 shares of the Company’s
common stock at $1.50 per share to Mr. Davis. The $46,604
relative fair value of the warrant was recorded as original issue discount
and expensed as interest expense over the term of the promissory
note. During the year ended December 31, 2008, original issue
discount of $8,280 was expensed as interest expense. On March
19, 2009, Mr. Davis agreed to refinance the $150,000 debt interest and a
$37,500 note along with accrued interest and additional amounts loaned to
the Company. Pursuant to the refinancing and the other arrangements, the
Company issued a $281,000 unsecured convertible promissory note to Mr.
Davis. On May 26, 2009, Mr. Davis exercised his conversion
rights under the promissory note, and the note was converted into 510,909
shares of the Company’s common
stock.
|
F-40
|
·
|
On
June 16, 2009, an individual guarantor provided a guarantee of a $100,000
bank loan to the Company (see Note 11). The bank loan was
retired on June 28, 2010. As consideration for the guarantee,
the Company agreed to issue 1,111 shares of its common stock as for each
month or portion thereof that the principal amount of the bank loan
remained outstanding. Pursuant to this consideration
arrangement, the Company issued 6,667, 4,444 and 2,222 shares to the
guarantor on June 16, 2009, May 28, 2010 and June 25, 2010,
respectively. During the years ended December 31, 2010 and
2009, the Company recorded interest expense related to the guarantor stock
consideration of $5,467 and $9,833,
respectively.
|
|
·
|
On
September 21, 2009, Mr. Davis provided a $243,000 loan to the Company (see
Note 10). On August 2, 2010, Mr. Davis applied the principal
amount of the loan to the exercise of warrants in the Company’s 2010
Warrant Replacement Offering. As consideration for the loan,
the Company agreed to issue 2,700 shares of its common stock to Mr. Davis
for each month or portion thereof that the principal amount of the loan
remained outstanding. In addition, in lieu of cash interest,
the Company agreed to issue 1,618 shares of its common stock to Mr. Davis
for each month or portion thereof that the principal amount of the loan
remained outstanding. Pursuant to these consideration and interest
arrangements, the Company issued 19,833 and 31,302 shares to Mr. Davis on
September 21, 2009 and July 12, 2010, respectively. During the
years ended December 31, 2010 and 2009, the Company recorded interest
expense related to the stock consideration and interest payments of
$25,619 and $47,248, respectively.
|
|
·
|
On
September 23, 2009, an individual guarantor provided a guarantee of a
$100,025 bank loan (see Note 11). As consideration for the guarantee, the
Company agreed to issue 1,111 shares of its common stock as for each month
or portion thereof that the principal amount of the bank loan remained
outstanding. Pursuant to this consideration arrangement, the
Company issued 6,667 shares to the guarantor on September 23, 2009,
representing the first six months of
consideration, and is accruing for later issuance the additional shares as
agreed. As of December 31, 2010, 11,111 shares were accrued for
issuance. All accrued shares will be issued upon repayment of
the loan. During the years ended December 31, 2010 and 2009,
the Company recorded interest expense related to the guarantor stock
consideration of $5,121 and $17,779,
respectively.
|
|
·
|
On
September 23, 2009, an individual provided a $300,000 loan to the Company
(see Note 11). As consideration for the loan, the Company agreed to issue
3,333 shares of its common stock as for each month or portion thereof that
the principal amount of the bank loan remained
outstanding. Pursuant to this consideration arrangement, the
Company issued 20,000 shares to the guarantor on September 23, 2009,
representing the first six months of
consideration, and is accrued for later issuance the additional shares as
agreed. In addition, in lieu of cash interest, the Company
agreed to issue 1,998 shares of its common stock to the lender for each
month or portion thereof that the principal amount of the loan remained
outstanding. As of December 31, 2010, 65,301 shares were
accrued for issuance pursuant to these arrangements. During the
years ended December 31, 2010 and 2009, the Company recorded interest
expense related to the guarantor stock consideration and interest payments
of $26,153 and $85,701, respectively. On February 8, 2011, the
Company refinanced the loan, issuing a $300,000 convertible promissory
note to the lender (see Note 15). The new convertible
promissory note does not provide for stock-based consideration or
interest. On the date of the refinancing, the Company issued
70,632 shares to the lender for accrued consideration and interest earned
through that date pursuant to the terms of the original promissory
note.
|
|
·
|
On
November 6, 2009, the Company issued 925 shares of its common stock valued
at $1,322 to Scott Smith, a director, as consideration for providing a
$26,000 loan.
|
|
·
|
On
June 11, 2010, the Company closed on the sale of $885,000 of June 2010
Notes (see Note 10). Each June 2010 Note bore interest payable
in warrants to purchase shares of the Company’s common stock during the
first 30 days of their terms. For every $13,000 original
principal amount of June 2010 Notes, 10,000 three-year warrants to acquire
shares of the Company’s common stock at $1.30 per share were issued as
interest expense. On July 12, 2010, 680,770 warrants were
issued. The warrants were valued using the Black-Scholes
pricing model at $1.51 per share (see Note 1(j)). Interest
expense related to these warrants of $1,027,962 was recorded during the
year ended December 31, 2010.
|
F-41
(h)
|
Warrant
exercises
|
|
On
September 25, 2009, the Company commenced tender offer to holders of
certain outstanding warrants to provide additional consideration for the
exercise of such warrants. Pursuant to the offer, the Company
temporarily modified the terms of certain outstanding warrants so that
each holder who tendered them for early exercise on or before November 6,
2009 received, in addition to the shares of common stock purchased upon
exercise, new three-year warrants to purchase the same number of shares of
the Company’s common stock at an exercise price of $1.30 per share (the
“2009 Replacement Warrants”). On November 6, 2009, warrants to
purchase 1,244,829 shares of common stock were tendered resulting in gross
proceeds to the Company of $1,618,278, including the cancellation of a
$26,000 loan from a director and $11,250 of directors’ fees owed to
another director in lieu of cash payments for the exercise of a portion
the warrants they exercised. Upon the closing of the tender
offer, the Company issued 1,244,829 shares of common stock and 1,244,829
2009 Replacement Warrants. The $1,356,864 fair value of the
2009 Replacement Warrants as determined using the Black-Scholes pricing
model was expensed with an offsetting entry to additional paid-in
capital. The $1,618,278 purchase price of the stock issued
pursuant to the warrant exercise, less the $171,865 expenses of the
offering was recorded as capital stock and additional paid-in
capital. The fair value of the warrants was estimated on the
November 6, 2009 closing date using the Black-Scholes pricing model,
calculated using the following assumptions: a risk-free rate of
1.40%, a three year expected life, expected volatility of 132.4% and no
expected dividends. The incentive for early warrant exercise
was recorded as other expense rather than as an operating expense, as the
Company does not consider this to be a normal part of its
operations.
|
On July
2, 2010, the Company commenced a second tender offer to holders of certain
outstanding warrants to provide additional consideration for the exercise of
such warrants. Pursuant to the offer, the Company temporarily
modified the terms of certain outstanding warrants so that each holder who
tendered them for early exercise on or before August 2, 2010 received, in
addition to the shares of common stock purchased upon exercise, new three-year
warrants to purchase the same number of shares of the Company’s common stock at
an exercise price of $1.30 per share (the “2010 Replacement
Warrants”). On August 2, 2010, warrants to purchase 1,007,529
warrants were tendered by warrant holders and accepted by the
Company. Holders of 809,217 warrants paid for their warrant exercise
by the cancellation of $1,051,982 of amounts due them pursuant to promissory
notes from the Company (see Note 10). Warrants to purchase 198,312
shares of common stock were exercised for cash, resulting in gross proceeds to
the Company of approximately $257,741. Upon the closing of the tender
offer, the Company issued 1,007,529 shares of common stock and 1,007,529 2010
Replacement Warrants. The $1,309,787 purchase price of the stock
issued pursuant to the warrant exercise, less the $92,377 expenses of the
offering was recorded as capital stock and additional paid-in
capital. The 1,007,529 2010 Replacement Warrants issued, valued at
$1,370,239, were recorded as incentive for early warrant exercise expense in
other expenses on the consolidated statement of operations during the year ended
December 31, 2010. The fair value of the warrants was estimated on
the August 2, 2010 closing date using the Black-Scholes pricing model,
calculated using the following assumptions: a risk-free rate of
0.85%, a three year expected life, expected volatility of 128.3% and no expected
dividends. The incentive for early warrant exercise was recorded as
other expense rather than as an operating expense, as the Company does not
consider this to be a normal part of its operations.
The
Company did not deduct the replacement warrants for tax purposes. We
believe upon an IRS inquiry, it is a more likely than not position that the
treatment is correct. If the IRS did have the Company expense the value of
the warrants, it would result in income to the warrant holders. The
additional expense for the Company would increase the NOL (which currently has a
full valuation allowance) and not have a material effect on the financial
statements besides an increase in the NOL available disclosure.
|
The
Company issued 279,870 and 101,975 shares of common stock to certain
warrant holders and realized proceeds of $344,631 and $132,568 upon their
exercise of warrants during the years ended December 31, 2010 and 2009,
respectively.
|
F-42
|
(i)
|
Warrants
summary
|
Warrant
activity was as follows for the years ended December 31:
Warrants
|
Weighted-Average
Exercise
Price
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Outstanding,
January 1
|
7,386,559 | 1,074,014 | $ | 1.47 | $ | 3.05 | ||||||||||
Granted
|
2,209,472 | 7,689,349 | 1.36 | 1.30 | ||||||||||||
Exercised
|
(1,668,572 | ) | (1,346,804 | ) | 1.41 | 1.30 | ||||||||||
Expired
|
(123,741 | ) | (30,000 | ) | 8.64 | 20.00 | ||||||||||
Outstanding,
December 31
|
7,803,718 | 7,386,559 | $ | 1.33 | $ | 1.47 |
The fair
value of stock warrants is the estimated present value at grant date using the
Black-Scholes pricing model (see Note 1(j)). Stock-based compensation
cost related to warrants issued to directors (in lieu of stock options) was $0,
$0 and $12,075 for the years ended December 31, 2010 and 2009, and the period
from August 17, 1999 (inception) to December 31, 2010,
respectively. The table above excludes 305,000 warrants that will be
issued as part of Units to be delivered upon exercise of 305,000 underwriter’s
warrants originally issued pursuant to the 2009 Pubic Offering (see Note
13(e)).
|
(j)
|
Stock
Options
|
Stock
Option Plans
In April
2002, the Company’s Board passed a resolution adopting the ProUroCare Medical
Inc. 2002 Stock Plan (the “2002 Plan”), reserving 150,000 shares of the
Company’s common stock for issuance.
In July
2004, the Board passed a resolution adopting the ProUroCare Medical Inc. 2004
Stock Option Plan (the “2004 Plan”), which was approved by the Company’s
shareholders in July 2005. The Company has reserved 150,000 shares of
common stock for issuance under the 2004 Plan.
In
February 2009, the Board passed a resolution adopting the ProUroCare Medical
Inc. 2009 Stock Option Plan (the “2009 Plan”), which was approved by the
Company’s shareholders in August 2009. The Company has reserved
1,200,000 shares of common stock for issuance under the 2009 Plan.
The plans
permit the Company to grant incentive and nonqualified options, stock
appreciation rights, stock awards, restricted stock awards, performance shares
and cash awards to Company employees and independent contractors. The
exercise price for all options granted under the plans shall be determined by
the Board. The term of each stock option and period of exercisability will also
be set by the Board, but will not exceed a period of ten years and one day from
grant date. The agreements also include provisions for anti-dilution of
options.
Stock
Option Grants
Each of
the options granted below were valued using the Black-Scholes pricing model (see
Note 1(i)) and are being expensed over the vesting period as general and
administrative expense.
|
·
|
In
March 2002, the Company granted an aggregate of 90,000 employee stock
options to officers and directors that were exercisable at $11.33 per
share. The officers’ options vested ratably over a 36-month
period through December 2004, while the directors’ options vested ratably
over a 24-month period through April 2004. An aggregate
$342,782 of stock-based compensation expense related to these options was
recognized in the period from August 17, 1999 (inception) to December 31,
2010.
|
·
|
In
October 2003, an officer resigned from the Company and 15,000 of his
unvested options were forfeited and in October 2004 his remaining 21,000
options expired. In February 2004, a director resigned from the
Board, and 375 of his unvested options were forfeited, and in October 2005
his remaining 2,625 options expired. Effective May 1, 2007,
Maurice Taylor, the Company’s former Chairman and Chief Executive Officer,
retired from the Company. Pursuant to a May 11, 2007 agreement
to defer payment of his unpaid salary, the Company extended the date
through which Mr. Taylor may exercise 45,000 options (including options
gifted to his children) following his separation to April 1,
2012. The Company recorded stock-based compensation expense of
$103,500 related to the extension of the exercise date during the period
from August 17, 1999 (inception) to December 31,
2010.
|
F-43
|
·
|
In
April 2002, the Company issued a nonqualified stock option to a consultant
to acquire 3,000 shares of common stock at $11.33 per share. This option
expired unexercised. At the same time, the Company also issued
a nonqualified stock option to another consultant to acquire 3,000 shares
of common stock at $11.33 per share. This option vested ratably over a
two-year period through April 2004. An aggregate of $27,600 of
stock-based compensation expense related to these options was recognized
in the period from August 17, 1999 (inception) to December 31,
2010.
|
|
·
|
In
February 2004, the Company issued 45,000 employee stock options to Michael
Grossman, our former President and Chief Operating
Officer. These options were valued at $6.70 per share, vested
ratably over a three-year period and are exercisable at $20.00 per
share. The Company expensed, $16,811 and $303,000 related to
these options during the year ended December 31, 2007 and the period from
August 17, 1999 (inception) to December 31, 2010,
respectively. Pursuant to a May 11, 2007 separation agreement,
the Company extended the date through which Mr. Grossman may exercise
45,000 options (including options gifted to his children) following his
separation until February 1, 2012. The Company recorded
stock-based compensation expense of $117,000 related to the extension of
the exercise during the period from August 17, 1999 (inception) to
December 31, 2010.
|
|
·
|
In
February 2004, the Company issued 3,000 nonqualified stock options to a
consultant in consideration of services rendered. The options
were valued at $6.70 per share, and vested as to 1,500 shares upon
issuance and as to the remaining 1,500 shares on January 1,
2005. These options are exercisable at $20.00 per share through
February 2014. The Company expensed $20,200 related to these
options during the period from August 17, 1999 (inception) to December 31,
2010.
|
|
·
|
In
July 2004, the Company issued 20,000 employee stock options to Mr. Thon in
connection with his employment agreement. These options were
valued at $15.00 per share, vested ratably over a three-year period, and
are exercisable at $25.00 per share through July 2014. The
Company expensed $300,000 related to these options during the period from
August 17, 1999 (inception) to December 31, 2010. On July 11,
2008, in connection with the issuance of new options to Mr. Thon (see
below), these options were
cancelled.
|
|
·
|
In
January 2005, the Company issued 15,000 stock options to Mr. Carlson, who
at the time was the Company’s Vice President of Marketing and
Sales. The options were valued at $16.20 per share, vest
ratably over a three-year period, and are exercisable at $23.50 per share
through January 2015. The Company expensed $243,000 related to
these options during the period from August 17, 1999 (inception) to
December 31, 2010. On July 11, 2008, in connection with the
issuance of new options to Mr. Carlson (see below), these options were
cancelled.
|
|
·
|
In
September 2005, the Company issued 15,000 stock options exercisable at
$6.00 per share to an employee. The options were valued at
$5.30 per share and expired unexercised. The Company expensed
$15,460 related to these options during the period from August 17, 1999
(inception) to December 31, 2010.
|
|
·
|
On
March 1, 2006, the Company issued to five of its employees five-year stock
options to acquire a total of up to 20,000 shares of common stock at $7.50
per share. The options, valued at $5.60 per share, vest upon
the Company securing FDA approval of its ProUroScanTM
system. 10,000 of these options were awarded to employees who
subsequently left the Company and have been forfeited. The
remaining options are being expensed over the vesting period (estimated by
the Company as forty-one months) as general and administrative
expense. The Company expensed $209, $2,823and $94,216 related
to these options during the years ended December 31, 2010 and 2009, and
the period from August 17, 1999 (inception) to December 31, 2010,
respectively.
|
|
·
|
On
May 30, 2006, the Company issued 3,000 nonqualified stock options to Mr.
Smith, a director, upon his appointment to the Board. The
options were valued at $5.90 per share, and vested over a two year
period. These options are exercisable at $7.00 per share
through May 2013. The Company expensed $17,700 related to these
options during the period from August 17, 1999 (inception) to December 31,
2010.
|
F-44
|
·
|
On
February 1, 2007, the Company granted to Mr. Carlson, a seven-year option
to acquire up to 20,000 shares of the Company’s common stock at a price of
$5.00 per share. The options were valued at $3.40 per share
using the Black-Scholes pricing model and will be expensed over the
vesting period as general and administrative expense. The vesting
schedule was as follows:
|
|
(a)
|
5,000
shares vested immediately.
|
|
(b)
|
5,000
shares would have vested upon the Company’s closing on new equity
financing arrangements aggregating to $3,000,000 or more after February 1,
2007 and prior to December 31, 2007. This objective was not
met, and these options did not vest and were
forfeited.
|
|
(c)
|
5,000
shares would have vested if the Company records gross product revenues of
$1,000,000 or more in the Company’s 2008 fiscal year. This
objective was not met, and these options did not vest and were
forfeited.
|
|
(d)
|
5,000
shares vested on December 31, 2008.
|
The
Company expensed $34,000 related to these during the period from August 17, 1999
(inception) to December 31, 2010.
|
·
|
On
June 14, 2007, the Company issued 3,000 nonqualified stock options to Mr.
Rudelius, upon his appointment to the Board. The options were
valued at $2.40 per share, and vested ratably over a 24-month period
through June 14, 2009. These options are exercisable at $2.90
per share through May 2014. The Company expensed $0, $1,800 and
$7,200 related to these options during the year ended December 31, 2010
and 2009, and the
period from August 17, 1999 (inception) to December 31, 2010,
respectively.
|
|
·
|
On
July 11, 2008, the Company issued incentive stock options to acquire
70,000 shares of its common stock to Mr. Carlson. The options
are exercisable for a period of seven years at an exercise price of $1.00
per share. Of the options, 10,000 shares vest immediately,
20,000 shares vested on each of July 1, 2009 and July 1, 2010 and 20,000
shares will vest on July 1, 2011. At the same time, Mr. Carlson
agreed to cancel existing, fully-vested stock options to acquire 15,000
shares of common stock at an exercise price of $23.50 per
share. The Company accounts for options that are cancelled and
reissued simultaneously as a modification of the terms of the original
option. Accordingly, the incremental compensation cost of the
fully vested portion of the newly issued options, valued at $0.79 per
share using the Black-Scholes pricing model, over the $0.31 per share
value of the cancelled options on the cancellation date were expensed
immediately as general and administrative expense. The value of the
unvested portion will be recorded as general and administrative expense
over the three-year vesting period. The Company expensed
$17,000, $17,000 and $45,750 related to these options during the year
ended December 31, 2010 and 2009, and the period from August 31, 1999
(inception) to December 31, 2010,
respectively.
|
|
·
|
On
July 11, 2008, the Company issued incentive stock options to acquire
35,000 shares of its common stock to Mr. Thon. The options are
exercisable for a period of seven years at an exercise price of $1.00 per
share. Of the options, 10,000 shares vest immediately and 8,333
shares vested on each of July 1, 2009 and July 1, 2010 and 8,334 shares
will vest on July 1, 2011. At the same time, Mr. Thon agreed to
cancel existing, fully-vested stock options to acquire 20,000 shares of
common stock at an exercise price of $25.00 per share. The
Company accounts for options that are cancelled and reissued
simultaneously as a modification of the terms of the original
option. Accordingly, the incremental compensation cost of the
fully vested portion of the newly issued options, valued at $0.79 per
share using the Black-Scholes pricing model, over the $0.27 per share
value of the cancelled options on the cancellation date were expensed
immediately as general and administrative expense. The value of
the unvested portion will be recorded as general and administrative
expense over the three-year vesting period. The Company
expensed $7,084 $7,083 and $20,209 related to these options during the
year ended December 31, 2010 and 2009, and the period from August 31, 1999
(inception) to December 31, 2010,
respectively.
|
F-45
|
·
|
On
August 11, 2008, the Company issued 1,000 non-qualified stock options
(immediately exercisable) to each of its three outside directors, Mr.
Koenig, Mr. Smith and Mr. Rudelius, pursuant to its standard annual option
award program, upon their re-election to the Company’s
Board. The options are exercisable for a period of seven years
at an exercise price of $0.90 per share, and were valued at $0.71 per
share. The Company expensed $2,130 related to these options
during the period from August 17, 1999 (inception) to December 31,
2010.
|
|
·
|
On
March 3, 2009, the Company granted non-qualified stock options to acquire
an aggregate of 70,000 shares of its common stock to its non-employee
directors, and incentive options to acquire 45,000 shares of its common
stock to Richard Thon, our Chief Financial Officer (the
“CFO”). The options are fully vested and are exercisable for a
period of seven years at an exercise price of $0.85 per
share. The 115,000 options were valued at $0.68 per share using
the Black-Scholes pricing model and $78,200 was immediately expensed as
general and administrative expense.
|
Also on
March 3, 2009, the Company granted an incentive stock option to acquire an
aggregate of 100,000 shares of its common stock to Richard Carlson, our Chief
Executive Officer (the “CEO”). Of the options, 90,000 shares vest
immediately and 10,000 shares will vest on January 2, 2010. At the
same time, Mr. Carlson agreed to cancel existing, unvested stock options to
acquire 5,000 shares of common stock at an exercise price of $7.50 per
share. The options that were cancelled and simultaneously reissued
were treated as a modification of the terms of the original
option. Accordingly, the incremental compensation cost of the fully
vested portion of the newly issued options valued at $0.68 per share using the
Black-Scholes pricing model over the $0.07 per share value of the cancelled
options on the cancellation date was expensed immediately as general and
administrative expense. A total of $68,200 was recorded as
compensation expense related to this option grant during the year ended December
31, 2009
|
·
|
On
July 23, 2009, the Company granted a non-qualified stock option to acquire
an aggregate of 6,500 shares of its common stock to a consultant pursuant
to a consulting arrangement. The options are fully vested and
are exercisable for a period of five years at an exercise price of $1.21
per share. The options were valued at $0.87 per share using the
Black-Scholes pricing model and $5,655 was immediately expensed as general
and administrative expense.
|
|
·
|
On
July 23, 2009, the Company granted a non-qualified stock option to acquire
an aggregate of 100,000 shares of its common stock to a consultant
pursuant to a consulting arrangement. The options expire seven
years from the date of issuance and have an exercise price of $1.21 per
share. Options to purchase 50,000 shares vested immediately,
and were valued at $0.97 per share using the Black-Scholes pricing model
on the issuance date. Options to purchase the remaining 50,000
shares vested on July 23, 2010, and were valued on that date using the
Black-Scholes pricing model at $1.01 per share. The value of
the options to purchase all 100,000 shares was recognized as general and
administrative expense over the 12 month consulting period. The
Company expensed $34,208, $64,792 and $99,000 during the years ended
December 31, 2010 and 2009 and the period from August 31, 1999 (inception)
to December 31, 2010, respectively.
|
|
·
|
On
August 11, 2009, the Company issued 1,000 non-qualified stock options
(immediately exercisable) to each of its non-employee directors pursuant
to its standard annual option award program, upon their re-election to the
Board. The options are fully vested and exercisable for a
period of seven years at an exercise price of $1.25 per
share. The options were valued at $1.00 per share using the
Black-Scholes pricing model and $3,000 was immediately expensed as general
and administrative expense.
|
|
·
|
On
September 29, 2009, the Company issued non-qualified stock options to each
of its non-employee directors, Mr. Koenig (50,000 options), Mr. Smith
(30,000 options) and Mr. Rudelius (30,000 options). On the same
date, the Company issued incentive stock options to its executive
officers, Mr. Carlson (150,000 options) and Mr. Thon (60,000
options). The options expire seven years from the date of
issuance, are exercisable at $1.50 per share and vest upon the latter of
the date that the Company is cleared by the FDA to sell its ProUroScan
System in the United States or the date that the Company closes on an
aggregate of $2 million or more of incremental financing after the date of
grant, including financing received upon the exercise of existing
warrants. The options were valued at $1.21 per share using the
Black-Scholes pricing model and are being expensed over the estimated
vesting period as general and administrative expense. The
Company expensed $122,613, $232,320 and $354,933 during the years ended
December 31, 2010 and 2009 and the period from August 31, 1999 (inception)
to December 31, 2010, respectively, related to these
options.
|
F-46
|
·
|
On
November 23, 2009, Mr. Koenig exercised 32,000 of his non-qualified
options in a cashless exercise that resulted in a net issuance of 22,229
shares of common stock.
|
|
·
|
On
March 1, 2010, the Company issued 10,374 nonqualified stock options to
each of Mr. Davis and Mr. Chambers, upon their appointment to the
Board. The options were valued at $1.97 per share, and vest
ratably over a 24-month period through March 1, 2012. These
options are exercisable at $2.41 per share through March 1,
2017. The Company expensed $15,354 related to these options
during the year ended December 31,
2010.
|
|
·
|
On
August 10, 2010, the Company issued 72,675 non-qualified stock options
(immediately exercisable) to each of its non-employee directors pursuant
to its standard annual option award program, upon their re-election to the
Board. The options are fully vested and exercisable for a
period of seven years at an exercise price of $1.72 per
share. The options were valued at $1.33 per share using the
Black-Scholes pricing model and $96,658 was immediately expensed as
general and administrative expense during the year ended December 31,
2010.
|
|
(k)
|
Stock
options summary
|
Stock
option activity was as follows for the years ended December 31:
Options
|
Weighted-Average
Exercise
Price
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Outstanding,
January 1
|
840,500 | 233,000 | $ | 3.01 | $ | 7.73 | ||||||||||
Granted
|
93,423 | 644,500 | 1.87 | 1.23 | ||||||||||||
Exercised
|
— | (32,000 | ) | — | 0.86 | |||||||||||
Forfeited/Expired
|
— | (5,000 | ) | — | 7.50 | |||||||||||
Outstanding,
December 31
|
933,923 | 840,500 | $ | 2.90 | $ | 3.01 | ||||||||||
Exercisable,
December 31
|
517,635 | 398,833 | $ | 3.97 | $ | 4.73 |
The
following table summarizes information about stock options outstanding as of
December 31, 2010:
Options
Vested or Expected to Vest
|
Options
Exercisable
|
|||||||||||||||||||||
Range
of Exercise Prices
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||
$0.85-$1.25
|
400,500 | $ | 0.99 | 5.39 | 322,166 | $ | 0.95 | |||||||||||||||
$1.50
- $1.72
|
392,675 | $ | 1.54 | 6.52 | 72,675 | $ | 1.50 | |||||||||||||||
$2.41-$2.90
|
23,748 | $ | 2.47 | 5.86 | 10,794 | $ | 2.90 | |||||||||||||||
$5.00-$7.50
|
18,000 | $ | 6.03 | 4.50 | 13,000 | $ | 5.46 | |||||||||||||||
$11.33
|
51,000 | $ | 11.33 | 1.84 | 51,000 | $ | 11.33 | |||||||||||||||
$20.00
|
48,000 | $ | 20.00 | 1.79 | 48,000 | $ | 20.00 | |||||||||||||||
933,923 | $ | 2.90 | 5.48 | 517,635 | $ | 3.97 |
The
aggregate intrinsic value of the options outstanding and exercisable at December
31, 2010 was $86,350 and $80,683, respectively. The average fair
value of each option granted during the years ended December 31, 2010 and 2009,
and the period from August 17, 1999 (inception) to December 31, 2010, as
determined using the Black-Scholes pricing model (see Note 1(i)) was $1.31,
$0.99 and $2.21, respectively. The options exercised in 2009 were
exercised pursuant to cashless exercise provisions of the options and no cash
was received by the Company.
F-47
(13)
|
Related
Parties
|
The
Company considers its directors, executives and beneficial shareholders of more
than five percent of its common stock to be related parties. During
the years ended December 31, 2010 and 2009, the following significant
transactions were made between the Company and those parties that were related
parties at the time of each transaction:
On
January 15, 2009, the Company repaid an outstanding $37,500 loan along with
accrued interest thereon to Mr. Reiling.
On March
19, 2009, pursuant to the guaranties received relating to the Company’s renewal
of its $1,200,000 Crown Bank promissory note, the Company issued 66,667 shares
of its common stock as consideration to each of Mr. Davis and Mr. Reiling for
the first six months of the loan term. Pursuant to March 28, April 28
and June 28, 2010 renewals of the promissory note, on July 12, 2010, the Company
issued 109,999 shares of its common stock to each of Mr. Davis and Mr. Reiling
for the loan term through December 28, 2010. The aggregate 219,998
shares issued were valued at $393,498 based on the fair market value on the
dates of the loan guarantees.
On March
19, 2009, a $37,500 convertible promissory note and a $150,000 convertible
promissory note due to Mr. Davis were refinanced and combined with other loans
and advances on behalf of the Company from Mr. Davis into a $281,000 convertible
promissory note. On May 26, 2009, Mr. Davis exercised his conversion
rights under the promissory note and the note was converted into 510,909 shares
of the Company’s common stock (see Note 13(g)).
On April
13, 2009, the Company issued an aggregate of 27,366 shares of its common stock
to its non-employee directors as payment of $20,250 directors’ fees accrued
during 2008, in lieu of cash.
On
September 1, 2009, the Company borrowed $26,000 from Mr. Smith for working
capital purposes. On November 6, 2009, the entire amount due to Mr.
Smith was applied toward his exercise of warrants tendered in the 2009 Warrant
Tender Offering. Although no promissory note was issued, on November
6, 2009, the Company issued 925 shares of its common stock valued at $1,322 to
Mr. Smith as consideration for making the loan and in lieu of cash
interest.
Between
May 1, 2009 and September 16, 2009, Mr. Davis made various payments for the
benefit of the Company and provided the Company with certain cash advances
totaling approximately $243,000. On September 21, 2009, Mr. Davis and
the Company executed the Davis Note. Upon execution, as consideration
for making the payments and advances represented by the Davis Note, the Company
issued 19,833 shares of its common stock to Mr. Davis and agreed to accrue for
future issuance to Mr. Davis 2,700 shares of common stock for each month (or
portion thereof) that the Davis Note remained outstanding after March 21,
2010. In addition, under the terms of the Davis Note, the Company
accrued for issuance to Mr. Davis, in lieu of cash interest, 1,618 shares of its
common stock for each month (or portion thereof) that the principal amount of
the Davis Note was outstanding. On July 12, 2010, the Company issued
31,302 shares of common stock as consideration and interest. The
shares were valued at $44,605 based on the fair market value on the date of the
loan. On August 2, 2010, Mr. Davis used the $243,000 Davis Note as payment for
the exercise an aggregate 186,923 warrants pursuant to the Company’s 2010
Warrant Tender Offer.
On March
1, 2010, the Company’s Board of Directors awarded $12,000 to director David
Koenig in recognition of his years of service as corporate
secretary. In addition, Mr. Koenig was engaged by the Board as a paid
consultant to the Company to assist management with corporate
financing. In this role, Mr. Koenig was paid $4,000 per month from
March to December 2010.
On June
11, 2010, the Company sold to Mr. Koenig, Mr. Davis, director Robert Rudelius
and William Reiling, a more than five percent shareholder, a total of $403,000
of June 2010 Notes. Pursuant to the terms of the June 2010 Notes, on
July 11, 2010 the Company issued as interest an aggregate 310,000 three-year
warrants to acquire its common stock at $1.30 per share to Mr. Koenig, Mr.
Davis, Mr. Rudelius and Mr. Reiling. On August 2, 2010, all of these
notes were used as payment for the exercise of an aggregate 310,000 warrants
pursuant to the Company’s 2010 Warrant Tender Offer.
F-48
On July
1, 2010, the Company issued an aggregate of 22,762 shares of stock to its
independent directors as payment for $36,416 of accrued directors’ fees, in lieu
of cash.
On
October 12, 2010, the Company issued an aggregate of 10,917 shares of its common
stock to its independent directors as payment of $17,250 of directors’ fees
accrued from July 1, 2010 through September 30, 2010, in lieu of
cash.
In total,
amounts expensed for related party interest and related party debt
extinguishment costs were $646,826 and $285,721, respectively, during the year
ended December 31, 2010, $311,230 and $347,820, respectively, during the year
ended December 31, 2009, and $2,306,049 and $708,583, respectively, during the
period from August 17, 1999 (inception) to December 31, 2010.
(15)
|
Subsequent
Events
|
On
January 14, 2011, the Company renewed its $100,025 promissory note with Central
Bank (see Note 11). The renewed note bears interest at the prime rate
plus one percent, with a minimum rate of 6.0 percent and matures on January 17,
2012. The renewed promissory note remains guaranteed by an individual
guarantor, whose guaranty was collateralized by Company assets. As
consideration for providing the 2011 guaranty, the Company issued to the
guarantor 6,667 shares of stock and will accrue for issuance 1,111 shares of its
common stock for each month or portion thereof that the principal amount of the
loan remains outstanding beginning July 17, 2011. All accrued shares
will be issued upon repayment of the loan. In addition, as
consideration for providing the guaranty during the original note term, the
Company issued to the guarantor 11,111 shares of stock that had accrued pursuant
to this arrangement during the original note term. In addition, the
Company’s existing security agreement with the guarantor, which provided him
with a subordinated security interest in the Company’s assets, will remain in
effect until the Central Bank promissory note is retired. It was
determined the loan modification was a substantial modification of the terms of
the note, as the present value of the cash flows under the new convertible
promissory note was greater than 10 percent different from the present value of
the cash flows under the original notes. The shares to be issued as
consideration, valued at $1.08 per share on the loan renewal date, will be
recorded as debt extinguishment expense over the term of the loan.
On
February 4, 2011, the Company repaid a $65,000 June 2010 Note (see Note
10).
On
February 8, 2011, the Company issued an aggregate of 12,379 shares of its common
stock to its independent directors for $12,500 of directors’ fees earned in the
fourth quarter of 2010 and accrued for at December 31, 2010, in lieu of
cash.
On
February 8, 2011, the Company refinanced its $300,000 note payable with an
individual lender (see Note 10). The replacement note bears interest
at 6.0 percent per year, matures on August 8, 2012, and is convertible into
shares of the Company’s common stock at $1.30 per share. The Company
may prepay the note at any time with 30-days’ notice, during which time the
lender may exercise his conversion rights under the terms of the convertible
note. Stock-based compensation and interest provisions of the
original note do not apply to the convertible note. The convertible
note provides the lender with a subordinated security interest in the Company’s
assets. It was determined that the note refinancing was a substantial
modification of the terms of the note, as it included a conversion feature that
was deemed to be substantive. On the date of the refinancing, the
Company issued 70,632 shares to the lender for accrued consideration and
interest earned through that date pursuant to the terms of the original
promissory note.
On
February 10, 2011, the Company issued a $65,698 unsecured convertible promissory
note to a service provider in settlement of a $65,698 payable. The
unsecured promissory note bears interest at 6.0 percent per year, matures on
August 10, 2012, and is convertible into shares of the Company’s common stock at
$1.30 per share. Interest is payable in cash at the end of each
calendar quarter. The Company may repay the note at any time with 30-days'
notice, during which time the holder may exercise its conversion rights under
the term of the convertible note.
On
February 11, 2011, the Company refinanced an $11,018 June 2010 Note with an
individual lender (see Note 10). The unsecured replacement note bears interest
at 6.0 percent per year, matures on August 11, 2012 and is convertible into
shares of the Company’s common stock at $1.30 per share. The Company
may prepay the note at any time with 30-days’ notice, during which time the
lender may exercise her conversion rights under the terms of the convertible
note. It was determined that the note refinancing was a substantial
modification of the terms of the note, as it included a conversion feature that
was deemed to be substantive.
F-49
ITEM
9:
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures designed 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 rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
As of
December 31, 2010, our Chief Executive Officer and Chief Financial Officer
carried out an evaluation of the effectiveness of our disclosure controls and
procedures as such term is defined in Rule 13a-15(e) under the Securities and
Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer recognized the additional risks to an effective internal
control environment with a limited accounting staff and the inability to fully
segregate all duties within our accounting and financial functions, including
the financial reporting and quarterly close process. Management has
concluded that, with certain oversight controls that are in place and the duties
we have been able to successfully segregate, the remaining risks associated with
the lack of segregation of duties are not sufficient to justify the costs of
potential benefits to be gained by adding additional employees given our
development stage, the limited scope of our operations, and the number of
business transactions we currently process, nor do these remaining risks rise to
the level of a material weakness. Management intends to periodically
reevaluate this situation and continue to assess ways in which duties can be
further segregated as our business evolves. Based on these
evaluations, our Chief Executive Officer and Chief Financial Officer concluded
our disclosure controls and procedures are effective as of December 31,
2010.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
financial statements, financial analyses and all other information included in
this Annual Report on Form 10-K were prepared by the Company’s management, which
is responsible for establishing and maintaining adequate internal control over
financial reporting.
The
Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company’s internal control over
financial reporting includes those policies and procedures that:
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition and use or disposition of the Company’s assets
that could have a material effect on the financial
statements.
|
There are
inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurances with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal controls may vary over
time.
Management
assessed the design and effectiveness of the Company’s internal control over
financial reporting as of December 31, 2010. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated
Framework. Based on management’s assessment using this framework, it
believes that, as of December 31, 2010, the Company’s internal control over
financial reporting is effective.
36
This
Annual Report on Form 10-K does not include an attestation report of the
Company’s independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject
to attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
During
the quarter ended December 31, 2010, there has been no change in the Company’s
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
PART III
ITEM
10: DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
persons listed in the table below are directors, executive officers and/or
affiliates of the Company, and the address for each person is c/o ProUroCare
Medical Inc., 6440 Flying Cloud Dr., Suite 101, Eden Prairie, MN 55344. There
are no family relationships among our executive officers or
directors.
Name
|
Age
|
Position
|
||
Richard
C. Carlson
|
59
|
Chief
Executive Officer and Acting Chairman of the Board
|
||
Michael
Chambers
|
56
|
Director
|
||
James
L. Davis s
|
66
|
Director
|
||
David
F. Koenig
|
70
|
Director
|
||
Robert
J. Rudelius
|
55
|
Director
|
||
Scott
E Smith
|
55
|
Director
|
||
Richard
B. Thon
|
55
|
Chief
Financial Officer
|
Richard C. Carlson, Chief
Executive Officer, Director since 2006 and Acting Chairman of the Board since
2007. Mr. Carlson was hired as our Vice President of Marketing and
Sales in January 2005, and was promoted to Chief Executive Officer in November
2006. Prior to joining the Company, Mr. Carlson held several
positions with SurModics, Inc., a company that provides surface modification
solutions for medical device and biomedical applications, from 1998 to 2004,
including Vice President of Marketing and Sales and Vice President of Strategic
Planning.
Mr.
Carlson’s extensive experience marketing urology products with American Medical
Systems and Boston Scientific is invaluable in developing market strategies for
the Company’s products.
Michael Chambers, JD, Ph.D.
Elected Director on March 1, 2010. Dr. Chambers currently serves as
President and CEO of Swift Biotechnology, a company he co-founded in January
2010. Swift is commercializing early diagnostics for gynecological cancers
through technology invented at the Mitchell Cancer Institute. From
1999 through 2005, Dr. Chambers served as President and CEO of InnoRx
Pharmaceuticals, a privately-held company specializing in drugs and drug
delivery systems for ophthalmic diseases that he helped establish. He is also
"of Counsel" to the law firm of Cabaniss Johnston, based in Birmingham,
Alabama. Dr. Chambers is a member of the Governance and Nominating
Committee.
Dr.
Chambers experience as an attorney, angel investor and medical products
entrepreneur helps the Board address key issues it faces in intellectual
property matters and global expansion opportunities.
37
James L. Davis. Elected
Director on March 1, 2010. Mr. Davis is the President of Davis &
Associates, Inc. which he founded more than 30 years ago. Davis & Associates
represents the leading edge lighting and controls manufacturers, providing
lighting and controls solutions for customers in the upper
Midwest. Mr. Davis is a member of the board of directors of Cachet
Financial Solutions, a leading provider of remote deposit capture (RDC)
solutions for financial institutions and their customers. Mr. Davis is a member
of the Compensation Committee.
Mr. Davis
brings to the Board extensive experience as a successful independent business
owner and an active investor in entrepreneurial companies. He has served as
Director on both private and public company Boards over the last 20
years.
David F. Koenig, Director
since 2004. Mr. Koenig served as a director of our predecessor
company, ProUroCare Inc. (“PUC”), from 1999 until April 2004, when he became a
director of the Company upon the merger of PUC with an acquisition subsidiary of
the Company (the “Merger”). From 1996 to 2005, Mr. Koenig was the
Executive Vice President and Chief Operating Officer of Solar Plastics, Inc., a
manufacturer of custom rotationally molded plastic parts. Mr. Koenig
is Chairman of the Compensation Committee.
Mr.
Koenig has valuable experience in raising funds with both private and
institutional investors, in commercial banking relationships and deal
structuring and in strategic business planning. All of these functions are of
particular importance to the Company at its current stage.
Robert J. Rudelius, Director
since 2007. Since 2003, Mr. Rudelius has been the Managing Director
and CEO of Noble Ventures, LLC, a company he founded, providing advising and
consulting services to early-stage companies in the information technology,
renewable energy and loyalty marketing fields. Mr. Rudelius is also
the Managing Director and CEO of Noble Logistics, LLC, a holding company he
founded in 2002 to create, acquire and grow a variety of businesses in the
freight management, logistics and information technology
industries. Mr. Rudelius is currently a member of the board of
directors of LecTec Corporation, an intellectual property (“IP”) licensing and
holding company. Mr. Rudelius is the Chairman of the Governance and
Nominating Committee and is a member of the Audit Committee.
Mr.
Rudelius' experience launching several new ventures combined with 25 years of
experience leading information technology companies and consulting
on IT/systems matters for global companies provides a valued
perspective to the Board.
Scott E Smith, Director since
2006. Mr. Smith currently serves as the Managing Director for Adams Harris, a
consulting & professional services firm specializing in the areas of
internal audit, accounting and finance, corporate tax, and technology process
and controls; providing consulting, co-sourcing, out-sourcing, and project
management solutions. He was previously employed by F-2 Intelligence Group
(“F2”), a company engaged in providing critical insights to multinational
corporations and private equity clients on a broad range of strategic issues.
From 2004 to 2008, Mr. Smith served as F2’s Regional Director of Sales for
Private Equity, where he advised private equity firms on market and competitive
intelligence issues. Prior to joining F2, Mr. Smith was employed by Arthur
Andersen for 23 years and served the last 10 years as an audit
partner. Mr. Smith also serves on the board of directors and chairs
the audit committee of Table Trac, Inc. Mr. Smith is a Certified
Public Accountant and a Certified Management Accountant. Mr. Smith is Chairman
of the Audit Committee and a member of the Compensation Committee.
Mr.
Smith’s expertise gained through 23 years of experience in public accounting
(including 10 years as an audit partner at Arthur Andersen) is invaluable to the
Company. Mr. Smith provides leadership and guidance on the Company’s
accounting and financial reporting issues.
Richard B. Thon, Chief
Financial Officer. Mr. Thon has been our Chief Financial Officer
since 2004.
There are
no family relationships among our executive officers or directors.
The
number of seats on the Board of Directors has been fixed by the Board of
Directors at seven. The Company’s Board of Directors is engaged in
the process of identifying, evaluating and recruiting a highly qualified
individual to fill the vacant director seat.
38
Audit
Committee
Our Board
of Directors has established a two-member Audit Committee that currently
consists of Messrs. Smith, the Chairman, and Rudelius. Mr. Koenig was
a member of the Audit committee through March 1, 2010. The Board of Directors
has adopted a written charter for the Audit Committee, which is available on our
website www.prourocare.com.
The board
of directors has determined that Mr. Smith is an “audit committee financial
expert” as that term is defined in Item 407(d)(5) of Regulation S-K promulgated
under the Exchange Act. Mr. Smith was an Audit Partner for Arthur
Andersen and is a Certified Public Accountant and a Certified Management
Accountant. Both members of the Audit Committee qualify as
“independent directors,” as such term is defined in Section 5000(a)(19) of the
NASDAQ listing standards. Moreover, the board of directors has
determined that each of the Audit Committee members is able to read and
understand fundamental financial statements.
Code
of Ethics Disclosure Compliance
On
November 2, 2010, our Board of Directors adopted a Code of Ethics, which
includes our Company’s principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, as required by Sections 406 and 407 of the Sarbanes-Oxley Act of
2002. Our Code of Ethics is available on our website
www.prourocare.com, and we will provide a copy, without charge, to any
shareholder upon written request to Dick Thon, ProUroCare Medical Inc., 6440
Flying Cloud Drive, Suite 101, Eden Prairie, MN 55344. We intend to
post on our website any amendments to our Code of Ethics and any waivers from
our Code of Ethics for principal officers.
Section
16(a) Beneficial Ownership Reporting Compliance
The rules
of the Securities and Exchange Commission require our directors, executive
officers and holders of more than 10 percent of our common stock to file reports
of stock ownership and changes in ownership with the Securities and Exchange
Commission. Based on the Section 16 reports filed by our directors,
executive officers and greater than 10 percent beneficial owners and written
representations of our directors and executive officers, we believe there were
no late or inaccurate filings for transactions occurring during 2010,
except as follows:
Name
|
Number of Late Reports
|
Number of Transactions Reported
Late
|
|||
Michael
Chambers
|
1
|
1
|
|||
James
Davis
|
1
|
1
|
|||
David
Koenig
|
1
|
1
|
|||
Robert
Rudelius
|
1
|
1
|
|||
Scott
Smith
|
1
|
1
|
|||
39
Summary
Compensation Table
The
following table sets forth the compensation earned for services rendered in all
capacities by our Chief Executive Officer and Chief Financial Officer. There
were no other executive officers or other individuals who earned more than
$100,000 during 2010. The individuals named in the table will be hereinafter
referred to as the “Named Executive Officers.”
Summary
Compensation Table
Name
and Position
|
Year
|
Salary
|
Bonus(2)
|
Option
Awards
(3)
|
All
Other
Compensation
(4)
|
Total
|
||||||||||||||||
Richard
Carlson(1)
|
2010
|
$ | 174,600 | $ | 14,086 | $ | 0 | $ | 2,463 | $ | 191,149 | |||||||||||
Chief
Executive Officer
|
2009
|
$ | 150,000 | $ | 20,000 | $ | 249,700 | $ | 2,107 | $ | 421,807 | |||||||||||
and
Acting Chairman of the Board
|
||||||||||||||||||||||
Richard
Thon
|
2010
|
$ | 133,015 | $ | 23,367 | $ | 0 | $ | 8,185 | $ | 164,567 | |||||||||||
Chief
Financial Officer
|
2009
|
$ | 133,015 | $ | 20,000 | $ | 103,200 | $ | 8,185 | $ | 264,400 |
(1)
|
All
compensation Mr. Carlson earned is related to his duties as an
officer.
|
(2)
|
Bonus
amounts in 2010 represent amounts paid to our officers for additional
income taxes they incurred when significant amounts of their salary earned
in 2006 and 2007 were deferred to 2008 and
2009.
|
(3)
|
The
amount in the Option Awards column represents the aggregate grant date
fair value computed in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 for
stock options granted during the years ended December 31, 2010 and 2009,
as determined using the Black-Scholes pricing model. See Notes 1(i) and
15(j) to the Consolidated Financial Statements for the year ended December
31, 2009 included in Part II, Item 8 of our Annual Report on Form 10-K for
the year ended December 31, 2009 and Notes 1(i) and 13(j) to the
Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report on Form 10-K for the year ended December 31, 2010 for the
material terms of stock option
grants.
|
(4)
|
Other
compensation represents insurance premiums paid by us with respect to term
life insurance and long-term care polices for the benefit of the
executive. There is no cash surrender value associated with the
policies.
|
40
Outstanding
Equity Awards at December 31, 2010
No stock
options or stock-appreciation rights were exercised by our Named Executive
Officers during 2010, and no stock appreciation rights were outstanding at the
end of 2010. The table below sets forth outstanding but unexercised options of
our Named Executive Officers as of December 31, 2010.
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable(1)
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable(1)
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
|
Option
Expiration
Date
|
|||||||||||||
Richard
Carlson
|
10,000 | — | — | $ | 5.00 |
February
1, 2017
|
||||||||||||
50,000 | 20,000 | (2) | — | $ | 1.00 |
July
11, 2015
|
||||||||||||
100,000 | — | — | $ | 0.85 |
March
3, 2016
|
|||||||||||||
— | — | 150,000 | (3) | $ | 1.50 |
September
29, 2016
|
||||||||||||
Richard
Thon
|
— | — | 5,000 | (3) | $ | 7.50 |
March 1,
2011
|
|||||||||||
3,000 | — | — | $ | 11.33 |
April 18,
2012
|
|||||||||||||
26,666 | 8,334 | (2) | — | $ | 1.00 |
July
11, 2015
|
||||||||||||
45,000 | — | — | $ | 0.85 |
March
3, 2016
|
|||||||||||||
— | — | 60,000 | (3) | $ | 1.50 |
September
29, 2016
|
(1)
|
See
Notes 1(i) and 14(j) to the Consolidated Financial Statements for the
year ended December 31, 2010 included in Part II, Item 8 in this
Annual Report on Form 10-K for the material terms of stock option
grants.
|
(2)
|
Shares
will vest on July 1, 2011.
|
(3)
|
Equity
Incentive Plan awards will vest upon the Company securing FDA market
clearance of its ProUroScan System.
|
Director
Compensation
Each of
our non-employee directors earns $10,000 per year for services to the
Company. The chairpersons of our Compensation and Governance and
Nominating Committees receive $750 per committee meeting up to a maximum of
$3,000 per year. Non-chair committee members of those committees
receive $500 per meeting, up to an annual maximum of $2,000. The
chairperson of the Audit Committee receives $750 per committee meeting, up to a
maximum of $6,000 per year, while other members of the Audit Committee receive
$500 per meeting up to a maximum of $4,000 per year.
In
addition, non-employee directors receive non-qualified stock options upon
election or appointment to the Board of Directors, and annually thereafter upon
re-election to the Board of Directors by the Company’s shareholders, to purchase
a number of shares equal to $25,000 divided by the then current stock
price. On March 1, 2010, the Company granted 10,374 non-qualified
stock options to each of Mr. Chambers and Mr. Davis upon their appointment to
the Board of Directors. The options vest ratably over two years of
service and are exercisable for a period of seven years at an exercise price of
$2.41 per share. On August 10, 2010, the Company issued 14,535
non-qualified stock options to each of Mr. Chambers, Mr. Davis, Mr. Koenig, Mr.
Smith and Mr. Rudelius upon their re-election to Board of Directors by the
Company’s shareholders. The options were fully vested upon issuance,
expire seven years from the date of issuance and are exercisable at $1.72 per
share.
Directors
are reimbursed for travel and other out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors and its
committees.
41
The table
below sets forth director compensation earned during 2010:
Name
|
Fees
Earned
or
Paid in
Cash
|
Stock
Awards(4)
|
Option
Awards(5)
|
Total
|
||||||||||||
Michael
Chambers
|
$ | 0 | $ | 9,833 | $ | 39,768 | $ | 49,601 | ||||||||
James
Davis
|
$ | 0 | $ | 7,833 | $ | 39,768 | $ | 47,601 | ||||||||
David
Koenig(1)
|
$ | 0 | $ | 14,500 | $ | 19,332 | $ | 33,832 | ||||||||
Scott
Smith(2)
|
$ | 0 | $ | 18,000 | $ | 19,332 | $ | 37,332 | ||||||||
Robert
Rudelius(3)
|
$ | 0 | $ | 15,500 | $ | 19,332 | $ | 34,832 |
(1)
|
Chairman
of the Compensation
Committee.
|
(2)
|
Chairman
of the Audit Committee.
|
(3)
|
Chairman
of the Governance and Nominating
Committee.
|
(4)
|
The
Board of Directors elected to receive shares of our common stock in lieu
of cash for directors’ fees for 2010. Shares issued in lieu of
cash for directors’ fees for 2010 were as follows: Michael
Chambers – 7,582; James Davis – 4,920; David Koenig – 11,237; Scott Smith
– 12,747: and Robert Rudelius – 10,813. The reported
stock awards include shares earned during the year ended December 31, 2010
and issued on February 8,
2011.
|
(5)
|
The
amount in the Option Awards column represents the aggregate grant date
fair value computed in accordance with FASB ASC Topic 718 for stock
options granted during the years ended December 31, 2010 as
determined using the Black-Scholes pricing model. See Notes 1(i) and
13(j) to the Consolidated Financial Statements for the year
ended December 31, 2010 included in Part II, Item 8 of this Annual
Report on Form 10-K for the material terms of stock option
grants. As of December 31, 2010, Mr. Chambers and Mr.
Davis each held 24,909 stock options, Mr. Koenig held 67,535 stock options
and Mr. Smith and Mr. Rudelius each held 69,535
options.
|
42
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth certain information regarding beneficial ownership of
our common stock as of February 11, 2011, by (i) each person known by us to be
the beneficial owner of more than five percent of the outstanding common stock,
(ii) each director of the Company, (iii) each executive officer of the Company
and (iv) all executive officers and directors as a group.
The
number of shares beneficially owned is determined under rules promulgated by the
SEC and the information is not necessarily indicative of beneficial ownership
for any other purpose. The definition of beneficial ownership
includes shares over which a person has sole or shared voting power or
dispositive power, whether or not a person has any economic interest in the
shares. The definition also includes shares that a person has a right to acquire
currently or within 60 days of February 11, 2011. Including those
shares in the tables does not, however, constitute an admission that the named
stockholder is a direct or indirect beneficial owner of those
shares. Unless otherwise indicated, each person or entity named in
the table has sole voting power and investment power (or shares that power with
that person’s spouse) with respect to all shares of common stock listed as owned
by that person or entity. Unless otherwise indicated, the address of
each of the following persons is 6440 Flying Cloud Drive, Suite 101, Eden
Prairie, MN 55344.
Name
|
Shares
Beneficially
Owned
|
Percent
of Class
|
||||||
Richard
C. Carlson(1)
|
160,850 | 1.0 | ||||||
Michael
Chambers(2)
|
224,522 | 1.4 | ||||||
James
L. Davis (3)
|
3,608,029 | 21.1 | ||||||
David
F. Koenig(4)
|
231,894 | 1.5 | ||||||
Robert
J. Rudelius(5)
|
254,466 | 1.6 | ||||||
Scott
E Smith(6)
|
248,619 | 1.6 | ||||||
Richard
B. Thon(7)
|
74,666 | * | ||||||
All
directors and officers as a group (7 total)(8)
|
4,803,046 | 27.1 | ||||||
Seaside
88, LP(9)(10)
|
1,400,000 | 8.8 | ||||||
Armen
Sarvazyan(11)(12)
|
1,095,485 | 6.9 | ||||||
Jack
Petersen(13)(14)
|
1,088,236 | 6.7 | ||||||
William
Reiling(15)(16)
|
956,987 | 5.9 |
*
|
Less
than one percent.
|
(1)
|
Includes
direct holdings of 850 shares of common stock and currently exercisable
options to purchase 160,000 shares of common
stock.
|
(2)
|
Includes
direct holdings of 120,582 shares of common stock options to purchase
20,164 shares of common stock that are currently exercisable or
exercisable within 60 days and currently exercisable warrants to purchase
83,776 shares of common stock.
|
(3)
|
Includes
the following directly held shares and currently exercisable warrants:
2,239,020 shares of common stock, options to purchase 20,164 shares of
common stock that are currently exercisable or exercisable within 60 days
and warrants to purchase 1,022,203 shares of common
stock. Shares beneficially owned also include the following
shares and currently exercisable warrants held by Davis &
Associates Inc., 401K PSP, of which Mr. Davis has sole
voting power: 94,964 shares of common stock and warrants to purchase
111,014 shares of common stock. Shares beneficially owned also
include the following shares and currently exercisable warrants held by
Davis & Associates Inc., of which Mr. Davis has sole voting
power: 57,482 shares of common stock and warrants to purchase 63,182
shares of common stock.
|
(4)
|
Includes
direct holdings of 135,912 shares of common stock, currently exercisable
warrants to purchase 50,000 shares of common stock and currently
exercisable options to purchase 17,535 shares of common stock. Also
includes 1,875 shares held by Clinical Network Management Corp. and 26,572
shares held by Clinical Network, Inc. with respect to each of which Mr.
Koenig is an officer and minority
owner.
|
(5)
|
Includes
direct holdings of 79,661 shares of common stock, warrants to purchase
43,996 shares of common stock and currently exercisable options to
purchase 39,785 shares of common stock. Also includes 64,268
shares of common stock and currently exercisable warrants to purchase
26,756 share of common stock held by Nobel Ventures, of which Mr. Rudelius
is an officer and the managing
director.
|
43
(6)
|
Includes
direct holdings of 139,359 shares of common stock, warrants to purchase
69,475 shares of common stock and currently exercisable options to
purchase 39,785 shares of common
stock.
|
(7)
|
Includes
currently exercisable directly held options to purchase 74,666 shares of
common stock.
|
(8)
|
Includes
Messrs. Carlson, Chambers, Davis, Koenig, Rudelius, Smith and
Thon.
|
(9)
|
The
address of Seaside 88, LP is 750 Ocean Royale Way, Suite 805, Juno Beach,
FL 33408.
|
(10)
|
Includes
direct holdings of 1,400,000 shares of common
stock.
|
(11)
|
The
address of Dr. Sarvazyan is 1753 Linvale Harbourton Rd., Lambertville, NJ
08530.
|
(12)
|
Includes
direct holdings of 937,099 shares of common stock. Also
includes 140,386 shares of common stock and currently exercisable warrants
to purchase 18,000 shares of common stock held by Artann Laboratories
Inc., of which Dr. Sarvazyan is an officer and minority
owner.
|
(13)
|
The
address of Mr. Petersen is 415 Knollwood Rd., Ridgewood, NJ
07450.
|
(14)
|
Shares
beneficially owned include 618,686 directly held shares, immediately
exercisable warrants to purchase 238,810 shares, and a promissory note
that is immediately convertible into 230,770
shares.
|
(15)
|
The
address of Mr. Reiling is 4351 Gulf Shore Blvd. North, Unit 6 North,
Naples, FL 34103.
|
(16)
|
Shares
beneficially owned include 699,356 directly held shares and immediately
exercisable warrants to purchase 257,631
shares.
|
Securities
Authorized for Issuance under Equity Compensation Plans as of Last Year
(December 31, 2010)
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (excluding securities reflected in column
(a))
|
||||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by stockholders(1)
|
933,923 | $ | 2.90 | 566,077 | ||||||||
Equity
compensation plans not approved by stockholders(2)
|
3,787,824 | $ | 1.41 | -- | ||||||||
Total
|
4,721,747 | $ | 1.71 | 566,077 |
(1)
|
Includes
shares of our common stock issuable pursuant to options granted under our
2002, 2004 and 2009 Plans (as defined below).
|
(2)
|
Consists
of warrants issued to vendors, consultants, lenders and loan
guarantors.
|
The Board
of Directors adopted the ProUroCare Inc. 2002 Stock Plan (the “2002 Plan”), the
ProUroCare Inc. 2004 Stock Option Plan (and the “2004 Plan”) and the ProUroCare
Inc. 2009 Stock Plan (the “2009 Plan”) to provide a means by which our
employees, directors, officers and consultants may be given an opportunity to
purchase our stock, to assist in retaining the services of such persons, to
secure and retain the services of persons capable of filling such positions and
to provide incentives for such persons to exert maximum efforts for our
success. Under the three Plans, we are able to grant incentive and
non-qualified options, stock appreciation rights, stock awards, restricted stock
awards and performance shares. Incentive stock options granted under
the Plans are intended to qualify as “incentive stock options” within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”). Non-qualified stock options granted under the Plans will not
qualify as incentive stock options under the Code. The Compensation
Committee of the board of directors determines the vesting provisions of
stock-based awards under the Plans on a case-by-case basis. We
utilize the fair-value method of accounting for these options. An
aggregate of $293,126, $480,873 and $2,415,771 of stock-based compensation
related to these options was recognized in the years ended December 31, 2010,
2009 and the period from August 17, 1999 to December 31, 2010,
respectively.
44
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Upon the
January 7, 2009 effective date of the Company’s 2009 Public Offering,
convertible debentures and accrued interest in the amount of $239,222 were
automatically converted into 79,741 shares of our common stock for each of
director James Davis and William Reiling, both beneficial shareholders of more
than five percent of our common stock at the time of the transaction (Mr. Davis
became a director of the Company on March 1, 2010).
Upon the
January 12, 2009 closing of the 2009 Public Offering, the following convertible
notes held by related parties were automatically converted into Units, each
consisting of one share of our common stock and one five-year warrant to
purchase common stock at $1.30 per share:
Related Party
|
Amount
of Convertible Debt and Accrued Interest
Converted
|
Units
Received upon Conversion
|
||||||
James
Davis
|
$ | 393,557 | 652,182 | |||||
William
Reiling
|
$ | 52,474 | 74,964 | |||||
Robert
Rudelius, director
|
$ | 31,318 | 44,742 | |||||
Scott
Smith, director
|
$ | 36,732 | 52,475 |
On
January 15, 2009, the Company repaid an outstanding $37,500 loan along with
accrued interest thereon to Mr. Reiling.
On
February 6, 2009, convertible debentures (and the accrued interest thereon) in
the amount of $98,114 held by Mr. Davis automatically converted into 140,163
shares of our common stock.
On March
19, 2009, pursuant to the guaranties received relating to the Company’s renewal
of its $1,200,000 Crown Bank promissory note, the Company issued an aggregate
66,667 shares of its common stock as consideration to each of Mr. Davis and Mr.
Reiling for the first six months of the loan term. On June 25, 2010
the Company issued 66,666 shares of common stock as consideration to each
of Mr. Davis and Mr. Reiling for the last six months of the loan
term. The aggregate 133,333 shares issued were valued at $66,666
based on the fair market value on the date of the guarantees
received.
On March
19, 2009, a $37,500 convertible promissory note and a $150,000 convertible
promissory note due to Mr. Davis were refinanced and combined with other loans
and advances on behalf of the Company from Mr. Davis in a $281,000 convertible
promissory note. On May 26, 2009, Mr. Davis exercised his conversion
rights under the promissory note and the note was converted into 510,909 shares
of the Company’s common stock.
On April
13, 2009, the Company issued an aggregate of 27,366 shares of its common stock
its independent directors as payment of $20,251 directors’ fees accrued from
January 1, 2008 through December 31, 2008, in lieu of cash.
On
September 1, 2009, the Company borrowed $26,000 from Mr. Smith for working
capital purposes. On November 6, 2009, the entire amount due to Mr.
Smith was applied toward his exercise of warrants tendered in the 2009 Warrant
Tender Offering. On November 6, 2009, the Company issued 925 shares
of its common stock valued at $1,322 to Mr. Smith as consideration for making
the loan and in lieu of cash interest.
Between
May 1, 2009 and September 16, 2009, Mr. Davis made various payments for the
benefit of the Company and provided the Company with certain cash advances
totaling approximately $243,000. On September 21, 2009, Mr. Davis and
the Company executed the Davis Note. Upon execution of the Davis
Note, the Company agreed, as consideration for making the payments and advances
represented by the Davis Note, to issue to Mr. Davis 19,833 shares of its common
stock and to accrue for future issuance to Mr. Davis 2,700 shares of common
stock for each month (or portion thereof) that the Davis Note is outstanding
after March 21, 2010. In addition, under the terms of the Davis Note,
the Company accrued for issuance, 1,618 shares of its common stock for each
month (or portion thereof) that the principal amount of the Davis Note remained
outstanding, in lieu of cash interest. On July 12, 2010 the Company
issued 31,302 shares of common stock as consideration and
interest. The shares were valued at $44,605 based on the fair market
value on the date of the loan. On August 2, 2010, Mr. Davis applied
the Davis Note amount toward the exercise of 186,923 warrants in the Company’s
2010 Warrant Tender Offering.
45
On March
1, 2010, the Company’s Board of Directors awarded $12,000 to director David
Koenig in recognition of his years of service as corporate
secretary. In addition, Mr. Koenig was engaged by the Board as a paid
consultant to the Company to assist management with corporate
financing. In this role, Mr. Koenig was paid $4,000 per month from
March to December 2010.
On June
11, 2010, the Company closed on a private placement of $885,000 of unsecured
promissory notes (the “2010 Private Placement”). Three directors
participated in the 2010 Private Placement: Mr. Davis purchased
$182,000 of the notes, Mr. Koenig purchased $65,000 of the notes and Mr.
Rudelius purchased $26,000 of the notes. During the first 30 days of
the note term, each note bore interest payable in warrants to purchase shares of
the Company’s common stock. For every $13,000 original principal
amount of notes, warrant interest accrued at a rate of 333.333 shares of common
stock per day, up to a maximum of 10,000 warrants per $13,000 of original
principal amount of Notes. The warrants have an exercise price of
$1.30 per share, a three-year term and are immediately
exercisable. The Company may elect to redeem the warrants at any time
after the last sales price of the Company’s common stock equals or exceeds $4.00
for 10 consecutive trading days. On August 2, 2010, the entire amount
of the notes were used as payment for the exercise of 140,000, 50,000 and 20,000
warrants by Mr. Davis, Mr. Koenig and Mr. Rudelius, respectively, pursuant to
the Company’s 2010 Warrant Tender Offer.
On July
1, 2010, the Company issued an aggregate of 22,762 shares of its common stock to
its independent directors as payment for $36,416 of directors’ fees accrued from
January 1, 2010 to June 30, 2010, in lieu of cash.
Pursuant
to the guaranties received relating to the Company’s June 28, 2010 renewal of
$900,000 of its Crown Bank promissory note, on July 12, 2010, the Company issued
109,999 shares of its common stock to each of Mr. Davis and Mr.
Reiling. The aggregate 219,998 shares issued were valued at $393,498
based on the fair market value on the dates of the loan guarantees.
On
October 12, 2010, the Company issued an aggregate of 10,917 shares of its common
stock to its independent directors as payment of $17,250 of directors’ fees
accrued from July 1, 2010 through September 30, 2010, in lieu of
cash.
Director
Independence
Each of
Messrs. Chambers, Koenig, Rudelius and Smith qualifies as an “independent
director,” as such term is defined in Section 5000(a)(19) of the NASDAQ listing
rules. As an executive officer of the Company, Mr. Carlson does not
qualify as an “independent director.” Our Board has determined that
due to his beneficial ownership of our securities, Mr. Davis does not qualify as
independent.
Principal Accountant Fees
and Services
The
following is a summary of the fees billed to the Company by Baker Tilly Virchow
Krause, LLP (“Baker Tilly Virchow Krause”) for professional services rendered
for the years ended December 31, 2010 and 2009, respectively:
Fee Category
|
2010 Fees
|
2009 Fees
|
||||||
Audit
Fees
|
$ | 77,190 | $ | 77,041 | ||||
Tax
Fees
|
2,145 | 2,060 | ||||||
All
Other Fees
|
10,060 | 20,955 | ||||||
Total
Fees
|
$ | 89,395 | $ | 100,056 |
Audit Fees. These consist of
fees billed by our auditors for professional services rendered for the audit of
our consolidated financial statements and review of the interim consolidated
financial statements included in quarterly reports.
Tax Fees. These consist of
fees billed by our auditors for professional services for tax compliance, tax
advice and tax planning.
46
All Other Fees. There consist
of fees billed by our auditors for professional services rendered for the review
of private placement memorandums and registration statement filings on Form S-1,
Form S-3 and Form S-8.
Preapproval
Policies
The
policy of our Audit Committee is to review and preapprove both audit and
non-audit services to be provided by the independent auditors (other than with
de minimus exceptions permitted by the Sarbanes-Oxley Act of
2002). This duty may be delegated to one or more designated members
of the Audit Committee with any such approval reported to the committee at its
next regularly scheduled meeting. Approval of non-audit services
shall be disclosed to investors in periodic reports required by Section 13(a) of
the Exchange Act. 100 percent of the fees paid to Baker Tilly Virchow
Krause were pre-approved as aforesaid.
No
services in connection with appraisal or valuation services, fairness opinions
or contribution-in-kind reports were rendered by Baker Tilly Virchow
Krause. Furthermore, no work of Baker Tilly Virchow Krause with
respect to its services rendered to the Company was performed by anyone other
than Baker Tilly Virchow Krause.
47
PART
IV
Exhibit
No.
|
Description
|
|
2.1
|
Agreement
of Merger and Reorganization by and among Global Internet
Communications, Inc., GIC Acquisition Co., and
ProUroCare Inc. dated April 5, 2004 (incorporated by reference
to Exhibit 2.1 to our Current Report on Form 8-K filed
April 20, 2004).
|
|
2.2
|
Articles
of Merger relating to the merger of GIC Acquisition Co., then a
wholly owned subsidiary of the registrant with and into
ProUroCare Inc., as filed with the Minnesota Secretary of State on
April 5, 2004 (incorporated by reference to Exhibit 2.2 to our
Current Report on Form 8-K filed April 20,
2004).
|
|
3.1
|
Amended
and Restated Articles of Incorporation of ProUroCare Medical Inc.
(incorporated by reference to Exhibit 3.1 to Current Report on
Form 8-K filed August 17, 2009).
|
|
3.2
|
Amended
and Restated Bylaws of ProUroCare Medical Inc. (incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-KSB filed
March 31, 2005).
|
|
4.1
|
Form
of Warrant to acquire shares of common stock of ProUroCare
Medical Inc. issued in favor of Roman Pauly and Maryjo Pauly (37,500
shares), Andrew Write (3,750 shares), Leslie Pearson (5,000 shares) and
Roman Pauly (31,817 shares), dated between June 1, 2006 and October
24, 2008 (incorporated by reference to Exhibit 10.7 to Current Report
on Form 8-K filed June 6, 2006).
|
|
4.2
|
Form of
Warrants to acquire an aggregate of 67,657 shares of common stock of
ProUroCare Medical Inc. issued to the partners of Adron Holdings, LLC
in connection with a $100,000 promissory note dated November 29,
2006, January 3, 2007, February 1, 2007, and January 16, 2008
(incorporated by reference to Exhibit 4.17 to Annual Report on
Form 10-KSB filed March 30, 2007).
|
|
4.3
|
Form of
Warrant issued pursuant to the Company’s 2007 Private Placement dated
December 27, 2007 (incorporated by reference to Exhibit 4.16 to
Annual Report on Form 10-KSB filed March 31,
2008).
|
|
4.4
|
Warrant
issued to James Davis dated December 27, 2007 (incorporated by
reference to Exhibit 4.17 to Annual Report on Form 10-KSB filed
March 31, 2008).
|
|
4.50
|
Form of
Warrant issued pursuant to the Company’s 2008 Private Placement dated
February 13, 2008 (incorporated by reference to Exhibit 4.18 to
Annual Report on Form 10-KSB filed March 31,
2008).
|
|
4.6
|
Form of
Warrants issued to William Reiling, James Davis, and the Phillips W.
Smith Family Trust dated April 3, 2008 (incorporated by reference to
Exhibit 4.1 to Quarterly Report on Form 10-Q filed May 8,
2008).
|
|
4.7
|
Form of
Origination Warrant issued pursuant to the Company’s Unit Put Agreement
dated September 16, 2008 (incorporated by reference to
Exhibit 4.22 to Registration Statement on Form S-1 filed
September 19, 2008).
|
|
4.8
|
Form of
Put Warrant issued pursuant to the Company’s exercise of its put right
pursuant to the Unit Put Agreement dated September 16, 2008
(incorporated by reference to Exhibit 4.23 to Registration Statement
on Form S-1 filed September 19, 2008).
|
|
4.9
|
Warrant
issued to James Davis dated September 25, 2008 (incorporated by
reference to Exhibit 4.1 to Quarterly Report on Form 10-Q filed
October 23, 2008).
|
|
4.10
|
Form of
Warrant issued to James Davis, Bruce Culver, William S. Reiling, and
the Smith Family Trust, dated October 31, 2008 (incorporated by
reference to Exhibit 4.25 to Amendment No. 1 to Registration
Statement on Form S-1 filed November 10,
2008).
|
|
4.11
|
Form of
Underwriters Warrant Agreement (incorporated by reference to
Exhibit 4.26 to Amendment No. 3 to Registration Statement on
Form S-1 filed December 18, 2008).
|
|
4.12
|
Form
of Warrants to acquire an aggregate of 20,000 shares of common stock of
ProUroCare Medical Inc. issued in favor of Artann Laboratories and
Vladimir Drits on April 16, 2007 (incorporated by reference to Exhibit
4.18 to Registration Statement Form S-4/A filed October 16,
2009).
|
|
4.13
|
Form
of Warrants to purchase an aggregate of 7,295 shares of ProUroCare Medical
Inc. common stock issued to Roman Pauly on October 24, 2008 and January
12, 2009(incorporated by reference to Exhibit 4.19 to Registration
Statement Form S-4/A filed October 16, 2009).
|
|
4.14
|
Warrant
to purchase 28,656 shares of ProUroCare Medical Inc. common stock issued
to the Phillips W. Smith Family Trust on January 20, 2009 (incorporated by
reference to Exhibit 4.20 to Registration Statement Form S-4/A filed
October 16, 2009).
|
|
4.15
|
Warrant
to purchase 30,000 shares of ProUroCare Medical Inc. common stock issued
to Kohnstamm Communications on August 6, 2009 (incorporated by reference
to Exhibit 4.21 to Registration Statement Form S-4/A filed October 16,
2009).
|
48
Exhibit
No.
|
Description
|
|
4.16
|
Form
of Warrant Agreement between ProUroCare Medical Inc. and Interwest
Transfer (incorporated by reference to Exhibit 4.27 to Amendment
No. 3 to Registration Statement on Form S-1 filed
December 18, 2008).
|
|
4.17
|
Specimen
Warrant (incorporated by reference to Exhibit 4.28 to Amendment
No. 3 to Registration Statement on Form S-1 filed
December 18, 2008).
|
|
4.18
|
Form of
Unit Certificate (incorporated by reference to Exhibit 4.29 to
Amendment No. 3 to Registration Statement on Form S-1 filed
December 18, 2008).
|
|
4.19
|
Form of
Unit Agreement between ProUroCare Medical Inc. and Interwest Transfer
(incorporated by reference to Exhibit 4.30 to Amendment No. 3 to
Registration Statement on Form S-1 filed December 18,
2008).
|
|
4.20
|
First
Amendment to Warrant Agreement between ProUroCare Medical Inc. and
Interwest Transfer Company, Inc. (incorporated by reference to Exhibit 4.3
to Registration Statement Form S-3 filed September 25,
2009).
|
|
4.21
|
Specimen
Replacement Warrant (incorporated by reference to Exhibit 4.4 to
Registration Statement Form S-3 filed September 25,
2009).
|
|
4.22
|
Warrant
to acquire 381,173 shares of ProUroCare Medical Inc. common stock issued
in favor of the Phillips W. Smith Family Trust on March 15, 2010
(incorporated by reference to Exhibit 4.27 to Annual Report on
Form 10-K filed March 31, 2010).
|
|
4.23
|
Form
of warrant issued as interest under form of unsecured promissory note
issued pursuant to June 11, 2010 $885,000 private placement (incorporated
by reference to Exhibit 4.1 to Amended Current Report on Form 8-K/A filed
June 25, 2010).
|
|
4.24
|
Second
Amendment to Warrant Agreement between ProUroCare Medical Inc. and
Interwest Transfer Company, Inc. (incorporated by reference to Exhibit
4.24 to Registration Statement on Form S-4 filed July 2,
2010).
|
|
4.25
|
Specimen
2010 Replacement Warrant (incorporated by reference to Exhibit 4.25 to
Registration Statement on Form S-4 filed July 2, 2010).
|
|
4.26
|
Form
of warrant issued to Lane Capital Markets, LLC dated September 30, 2010
(incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K
filed October 5, 2010).
|
|
10.1
*
|
ProUroCare
Medical Inc. Amended and Restated 2002 Stock Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-8
filed March 31, 2008).
|
|
10.2
*
|
ProUroCare
Medical Inc. Amended and Restated 2004 Stock Option Plan
(incorporated by reference to Exhibit 4.2 to Registration Statement
on Form S-8 filed March 31, 2008).
|
|
10.3
|
Guaranty
provided to Crown Bank on behalf of ProUroCare Medical Inc. by James
Davis dated October 10, 2007 (incorporated by reference to
Exhibit 10.41 to Annual Report on Form 10-KSB filed
March 31, 2008).
|
|
10.4
|
Guaranty
provided to Crown Bank on behalf of ProUroCare Medical Inc. by
William Reiling dated October 10, 2007 (incorporated by reference to
Exhibit 10.42 to Annual Report on Form 10-KSB filed
March 31, 2008).
|
|
10.5
|
Commercial
Loan and Security Agreement with Crown Bank, executed October 31,
2007 and effective as of December 28, 2007 (incorporated by reference
to Exhibit 10.39 to Annual Report on Form 10-KSB filed
March 31, 2008).
|
|
10.6
*
|
Form of
Stock Option Agreement and Notice of Stock Option Grant for incentive
stock options issued to Richard Carlson and Richard Thon on July 11,
2008 (incorporated by reference to Exhibit 10.4 to Quarterly Report
on Form 10-Q filed August 14, 2008).
|
|
10.7
|
License
Agreement by and between ProUroCare Medical Inc. and Artann
Laboratories Inc. dated July 25, 2008 (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q filed
August 14, 2008).
|
|
10.8
|
Development
and Commercialization Agreement by and between ProUroCare
Medical Inc. and Artann Laboratories Inc. dated July 25,
2008 (incorporated by reference to Exhibit 10.3 to Quarterly Report
on Form 10-Q filed August 14, 2008).
|
|
10.9
|
Form of
Unit Put Origination Warrant issued pursuant to Unit Put Agreement dated
September 16, 2008 (incorporated by reference from Exhibit 4.23
to Registration Statement on Form S-1 filed September 19,
2008).
|
|
10.10
|
Form of
Unit Put Warrant to be issued to Unit Put Agreement dated
September 16, 2008 (incorporated by reference from Exhibit 4.22
to Registration Statement on Form S-1 filed September 19,
2008).
|
|
10.11
|
Amendment
of License Agreement by and between ProUroCare Medical Inc. and Artann
Laboratories, Inc. dated December 19, 2008 (incorporated by
reference to Exhibit 10.46 to Amendment No. 4 to Registration
Statement on Form S-1 filed December 22,
2008).
|
|
10.12
|
Amendment
No.1 to Development and Commercialization Agreement by and between
ProUroCare Medical Inc. and Artann Laboratories, Inc. dated
December 19, 2008 (incorporated by reference to Exhibit 10.46 to
Amendment No. 4 to Registration Statement on Form S-1 filed
December 22, 2008).
|
49
Exhibit
No.
|
Description
|
|
10.13
|
Promissory
Note dated March 19, 2009 issued in favor of Crown Bank (incorporated
by reference to Exhibit 10.51 to Annual Report on Form 10-K
filed March 26, 2009).
|
|
10.14
|
Financing
Agreement by and between ProUroCare Medical Inc. and James Davis dated
March 19, 2009 (incorporated by reference to Exhibit 10.52 to Annual
Report on Form 10-K filed March 26, 2009).
|
|
10.15
|
Form of
Loan Guarantor Compensation Letter Agreement dated March 19, 2009
(incorporated by reference to Exhibit 10.53 to Annual Report on
Form 10-K filed March 26, 2009).
|
|
10.16
|
Letter
Agreement by and between ProUroCare Medical Inc. and the Phillips W. Smith
Family Trust dated March 19, 2009 (incorporated by reference to
Exhibit 10.54 to Annual Report on Form 10-K filed March 26,
2009).
|
|
10.17
|
Amendment
#2 to $600,000 Promissory Note dated October 15, 2007 between
ProUroCare Medical Inc. and the Phillips W. Smith Family Trust
dated March 19, 2009 (incorporated by reference to Exhibit 10.55
to Annual Report on Form 10-K filed March 26,
2009).
|
|
10.18
|
Convertible
Promissory Note dated March 19, 2009 issued in favor of James Davis
(incorporated by reference to Exhibit 10.56 to Annual Report on
Form 10-K filed March 26, 2009).
|
|
10.19
|
Promissory
note dated June 12, 2009 issued in favor of Crown Bank (incorporated
by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
filed August 14, 2009).
|
|
10.20
|
Security
Agreement with Crown Bank dated June 12, 2009 (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q filed
August 14, 2009).
|
|
10.21
|
ProUroCare
Medical Inc. 2009 Stock Plan (incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed August 17,
2009)
|
|
10.22
|
Promissory
note dated September 21, 2009 issued in favor of James L. Davis
(incorporated by reference to Exhibit 10.44 to Registration Statement on
Form S-4/A filed October 16, 2009).
|
|
10.23
|
Promissory
note dated September 23, 2009 issued in favor of Jack Petersen
(incorporated by reference to Exhibit 10.45 to Registration Statement on
Form S-4/A filed October 16, 2009).
|
|
10.24
|
Promissory
note dated September 23, 2009 issued in favor of Central Bank
(incorporated by reference to Exhibit 10.46 to Registration Statement on
Form S-4/A filed October 16, 2009).
|
|
10.25
|
Security
Agreement with Bruce Johnson dated September 23, 2009 (incorporated by
reference to Exhibit 10.47 to Registration Statement on Form S-4/A filed
October 16, 2009).
|
|
10.26
|
Amendment
No.2 to Development and Commercialization Agreement by and between
ProUroCare Medical Inc. and Artann Laboratories, Inc. dated November
17, 2009 (incorporated by reference to Exhibit 10.48 to Annual Report
on Form 10-K filed March 31, 2010).
|
|
10.27
|
Settlement
Agreement by and between ProUroCare Medical Inc. and Rensselaer
Polytechnic Institute dated December 7, 2009 (incorporated by reference to
Exhibit 10.49 to Annual Report on Form 10-K filed March 31,
2010).
|
|
10.28
|
Modification/Amendment
Agreement to Crown Bank Loans dated March 26, 2010 (incorporated by
reference to Exhibit 10.50 to Annual Report on Form 10-K filed
March 31, 2010).
|
|
10.29
|
Form
of Promissory Note issued pursuant to the Company’s private placement of
promissory notes on June 11, 2010 (incorporated by reference to Exhibit
10.1 to Current Report on Form 8-K/A filed June 25,
2010).
|
|
10.30
|
$900,000
Promissory Note dated June 28, 2010 issued in favor of Crown Bank
(incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K filed July 2, 2010).
|
|
10.31
|
$100,000
Promissory Note dated June 28, 2010 issued in favor of Crown Bank
(incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K filed July 2, 2010).
|
|
10.32
|
Form of
Loan Guarantor Compensation Letter Agreement dated June 28, 2010
(incorporated by reference to Exhibit 10.3 to Current Report on
Form 8-K filed July 2, 2010).
|
|
10.33
|
Securities
Purchase Agreement dated as of September 28, 2010 between ProUroCare
Medical Inc. and the purchasers identified therein (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K
filed September 29, 2010).
|
|
10.34
|
Promissory
note dated January 17, 2011 issued in favor of Central Bank (filed
herewith).
|
|
10.35
|
Convertible
secured promissory note dated February 8, 2011 issued in favor of Jack
Petersen (filed herewith).
|
|
10.36
|
Convertible
unsecured promissory note dated February 10, 2011issued in favor of
Maslon, Edelman, Borman & Brand LLP (filed
herewith).
|
|
21.1
|
List
of Subsidiaries of ProUroCare Medical Inc. (incorporated by reference
to Exhibit 21.1 to Registration Statement on Form SB-2 filed
August 3, 2004).
|
50
Exhibit
No.
|
Description
|
|
23.1
|
Consent
of Baker Tilly Virchow Krause, LLP (filed herewith).
|
|
24.1
|
Power
of Attorney (included on signature page hereof).
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
Note: In
order that share data agree with the underlying documents, no share data in this
list of Exhibits have been restated to reflect the effect of the Company’s
February 2008 one-for-ten reverse stock split.
51
Pursuant
to the requirements of Section 13 and 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ProUroCare
Medical, Inc.
|
|||
Date:
February 15, 2011
|
By:
|
/s/ Richard C. Carlson | |
Richard
C. Carlson
|
|||
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1934, this Annual Report has been
signed as of February 9, 2011, by the following persons in the capacities
indicated.
Name
|
Title
|
|
/s/ Richard C. Carlson
|
Chief
Executive Officer (Principal Executive Officer)
|
|
Richard
C. Carlson
|
||
/s/ Richard Thon
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
Richard
Thon
|
||
/s/ K. W. Michael Chambers
|
Director
|
|
K.
W. Michael Chambers
|
||
/s/ James L.
Davis
|
Director
|
|
James
L. Davis
|
||
/s/
David Koenig
|
Director
|
|
David
Koenig
|
||
/s/
Robert Rudelius
|
Director
|
|
Robert
Rudelius
|
||
/s/
Scott E. Smith
|
Director
|
|
Scott
E. Smith
|
52