Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from to
Commission File Number 333-103781
ProUroCare Medical Inc.
(Exact name of registrant
as specified in its charter)
Nevada
|
|
20-1212923
|
(State or other
jurisdiction
of incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
5500 Wayzata Blvd., Suite 310
Golden Valley, Minnesota 55416
(Address of principal
executive offices, and Zip Code)
(952) 476-9093
(Registrants telephone
number, including area code)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES
x
NO
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 in Rule 12b-2 of the Exchange Act).
YES
o
NO
x
The registrant has 1,786,984 shares of common stock
outstanding as of August 2, 2008.
Table of Contents
PART I. FINANCIAL
INFORMATION
Item 1. Financial Statements
ProUroCare Medical Inc.
A Development Stage Company
Consolidated Balance Sheets
|
|
June 30, 2008
(Unaudited)
|
|
December 31, 2007
(Audited)
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
|
|
$
|
14,580
|
|
$
|
400,613
|
|
Restricted cash
|
|
44,134
|
|
44,000
|
|
Other current
assets
|
|
65,842
|
|
21,733
|
|
Total current
assets
|
|
124,556
|
|
466,346
|
|
Equipment and
furniture, net
|
|
299
|
|
605
|
|
Deferred
offering expenses
|
|
221,095
|
|
132,638
|
|
Debt issuance
costs, net
|
|
395,027
|
|
439,321
|
|
|
|
$
|
740,977
|
|
$
|
1,038,910
|
|
Liabilities and Shareholders Deficit
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Notes payable,
bank
|
|
$
|
1,600,000
|
|
$
|
|
|
Notes payable,
net of original issue discount
|
|
932,490
|
|
263,143
|
|
Convertible
debentures, net of original issue discount
|
|
576,312
|
|
|
|
Convertible
notes, net of original issue discount
|
|
776,386
|
|
|
|
Accounts payable
|
|
696,683
|
|
484,375
|
|
Accrued expenses
|
|
710,616
|
|
801,925
|
|
Loans from
officers and directors
|
|
2,200
|
|
10,450
|
|
Total current
liabilities
|
|
5,294,687
|
|
1,559,893
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
Long-term bank
debt
|
|
|
|
1,600,000
|
|
Long-term note
payable
|
|
|
|
600,000
|
|
Long-term
convertible notes, net of original issue discount
|
|
327,085
|
|
970,600
|
|
Total
liabilities
|
|
5,621,772
|
|
4,730,493
|
|
Shareholders
deficit:
|
|
|
|
|
|
Common stock,
$0.00001 par. Authorized 50,000,000 shares; issued and outstanding 1,727,350
and 1,727,311 shares on June 30, 2008 and December 31, 2007,
respectively
|
|
17
|
|
17
|
|
Additional
paid-in capital
|
|
13,059,917
|
|
12,586,496
|
|
|
|
|
|
|
|
Deficit
accumulated during development stage
|
|
(17,940,729
|
)
|
(16,278,096
|
)
|
Total
shareholders deficit
|
|
(4,880,795
|
)
|
(3,691,583
|
)
|
|
|
$
|
740,977
|
|
$
|
1,038,910
|
|
See accompanying notes to financial statements.
1
Table of Contents
ProUroCare Medical Inc.
A Development Stage Company
Consolidated Statements
of Operations
(Unaudited)
|
|
|
|
|
|
Period from
August 17,1999
(inception) to June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
$
|
300,155
|
|
$
|
82,414
|
|
$
|
300,155
|
|
$
|
107,234
|
|
$
|
5,157,707
|
|
General and
administrative
|
|
216,372
|
|
430,992
|
|
462,534
|
|
875,433
|
|
8,267,030
|
|
Total operating
expenses
|
|
516,527
|
|
513,406
|
|
762,689
|
|
982,667
|
|
13,424,737
|
|
Operating loss
|
|
(516,527
|
)
|
(513,406
|
)
|
(762,689
|
)
|
(982,667
|
)
|
(13,424,737
|
)
|
Interest income
|
|
125
|
|
|
|
378
|
|
|
|
18,136
|
|
Interest expense
|
|
(465,182
|
)
|
(279,266
|
)
|
(854,491
|
)
|
(574,461
|
)
|
(4,106,921
|
)
|
Debt
extinguishment cost
|
|
(20,491
|
)
|
(74,502
|
)
|
(45,831
|
)
|
(158,202
|
)
|
(427,207
|
)
|
Net loss
|
|
$
|
(1,002,075
|
)
|
$
|
(867,174
|
)
|
$
|
(1,662,633
|
)
|
$
|
(1,715,330
|
)
|
$
|
(17,940,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(0.58
|
)
|
$
|
(0.55
|
)
|
$
|
(0.96
|
)
|
$
|
(1.12
|
)
|
$
|
(17.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
1,727,350
|
|
1,572,558
|
|
1,727,340
|
|
1,536,975
|
|
1,003,154
|
|
See accompanying notes to
financial statements.
2
Table of Contents
ProUroCare Medical Inc.
A Development Stage Company
Consolidated Statements
of Cash Flows
(Unaudited)
|
|
Six months ended
June 30,
|
|
Six months ended
June 30,
|
|
Period from August
17, 1999 (inception)
to
|
|
|
|
2008
|
|
2007
|
|
June 30, 2008
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,662,633
|
)
|
$
|
(1,715,330
|
)
|
$
|
(17,940,729
|
)
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
306
|
|
1,948
|
|
20,498
|
|
Gain on sale of
furniture and equipment
|
|
|
|
|
|
(2,200
|
)
|
Stock-based
compensation
|
|
29,719
|
|
458,101
|
|
1,734,821
|
|
Issuance of
common stock for services rendered
|
|
|
|
|
|
156,904
|
|
Issuance of
common stock for debt guarantees
|
|
|
|
|
|
88,889
|
|
Issuance of
notes payable for intangibles expensed as research and development
|
|
150,000
|
|
|
|
150,000
|
|
Warrants issued
for services
|
|
|
|
72,000
|
|
540,636
|
|
Warrants issued
for debt guarantees
|
|
|
|
|
|
320,974
|
|
Warrants issued
for debt extinguishment
|
|
45,831
|
|
158,202
|
|
356,488
|
|
Amortization of
note payable original issue discount
|
|
50,828
|
|
23,162
|
|
293,015
|
|
Amortization of
convertible debt original issue discount
|
|
414,006
|
|
121,216
|
|
868,848
|
|
Amortization of
debt issuance and deferred offering costs
|
|
185,819
|
|
261,501
|
|
1,469,988
|
|
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:
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
(189,554
|
)
|
Other current
assets
|
|
(249
|
)
|
7,911
|
|
89,040
|
|
Accounts payable
|
|
105,874
|
|
16,370
|
|
836,329
|
|
Accrued expenses
|
|
(68,659
|
)
|
132,344
|
|
941,329
|
|
Net cash used in
operating activities
|
|
(749,158
|
)
|
(462,575
|
)
|
(7,973,631
|
)
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
Purchases of
equipment and furniture
|
|
|
|
|
|
(20,797
|
)
|
Deposit into a
restricted cash account
|
|
(134
|
)
|
|
|
(44,134
|
)
|
Net cash used in
investing activities
|
|
(134
|
)
|
|
|
(64,931
|
)
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
Proceeds of note
payable, bank
|
|
|
|
|
|
500,000
|
|
Payments of note
payable, bank
|
|
|
|
|
|
(500,000
|
)
|
Proceeds of
notes payable
|
|
112,500
|
|
|
|
728,000
|
|
Payment of notes
payable
|
|
(219,793
|
)
|
(25,000
|
)
|
(1,257,089
|
)
|
Proceeds from
long-term notes payable and bank debt
|
|
593,750
|
|
|
|
4,343,750
|
|
Payments on
long-term bank debt
|
|
|
|
|
|
(600,000
|
)
|
Proceeds from
warrants
|
|
31,250
|
|
|
|
81,250
|
|
Payments for
debt issuance costs
|
|
(105,152
|
)
|
|
|
(630,378
|
)
|
Payment for
rescission of common stock
|
|
|
|
|
|
(100,000
|
)
|
Proceeds from
loans from officers and directors
|
|
|
|
117,000
|
|
172,600
|
|
Payments of
loans from officers and directors
|
|
(8,250
|
)
|
(79,100
|
)
|
(135,100
|
)
|
Payments for
deferred offering expenses
|
|
(41,046
|
)
|
|
|
(69,873
|
)
|
Cost of reverse
merger
|
|
|
|
|
|
(162,556
|
)
|
Net proceeds
from issuance of common stock
|
|
|
|
447,611
|
|
5,682,538
|
|
Net cash
provided by financing activities
|
|
363,259
|
|
460,511
|
|
8,053,142
|
|
Net increase in
cash
|
|
(386,033
|
)
|
(2,064
|
)
|
14,580
|
|
Cash, beginning
of the period
|
|
400,613
|
|
2,407
|
|
|
|
Cash, end of the
period
|
|
$
|
14,580
|
|
$
|
343
|
|
$
|
14,580
|
|
3
Table of Contents
|
|
Six months ended
June 30,
|
|
Six months ended
June 30,
|
|
Period from August
17, 1999 (inception)
to
|
|
|
|
2008
|
|
2007
|
|
June 30, 2008
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
61,611
|
|
$
|
135,190
|
|
$
|
654,947
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Conversion of
notes payable into long-term convertible debentures
|
|
|
|
|
|
175,000
|
|
Conversion of
loans from directors into long-term convertible debentures
|
|
|
|
|
|
25,000
|
|
Deferred
offering costs included in accounts payable
|
|
70,061
|
|
|
|
180,049
|
|
Deferred
offering costs included in accrued expenses
|
|
(22,650
|
)
|
|
|
|
|
Debt issuance
costs included in accounts payable
|
|
36,373
|
|
|
|
92,190
|
|
Warrants issued
pursuant to notes payable
|
|
68,048
|
|
22,500
|
|
392,235
|
|
Prepaid expenses
financed by note payable
|
|
43,860
|
|
42,585
|
|
154,882
|
|
Common stock
issued in lieu of cash for accrued expenses
|
|
|
|
49,911
|
|
229,636
|
|
Common stock
issued for debt issuance cost
|
|
|
|
|
|
158,167
|
|
Common stock
issued in lieu of cash for accounts payable
|
|
|
|
20,704
|
|
122,291
|
|
Common stock
issued in lieu of cash for loans from officers and directors
|
|
|
|
7,000
|
|
10,300
|
|
Proceeds from
sale of furniture and equipment
|
|
|
|
|
|
2,200
|
|
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
|
|
Issuance of note
payable for redemption of common stock
|
|
|
|
|
|
650,000
|
|
Warrants issued
for debt issuance costs
|
|
|
|
|
|
242,612
|
|
Conversion of
accounts payable to note payable
|
|
|
|
|
|
241,613
|
|
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
|
|
Deposits applied
to accrued expenses
|
|
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
4
Table of Contents
ProUroCare
Medical Inc.
A Development Stage Company
Notes to Consolidated Financial Statements
June 30, 2008 and
2007 and the period from
August 17, 1999
(inception) to June 30, 2008
(Unaudited)
(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 a development stage company that is focused on
developing advanced mechanical imaging technology for assessing diseases of the
prostate. The Companys 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.
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 Companys shareholders approved a one-for-ten reverse split of the
Companys common stock
without a corresponding reduction in the
number of authorized shares of the Company capital stock (the Reverse Split). The reverse stock split became effective on February 14,
2008. The exercise price and the number
of shares of common stock issuable under the Companys outstanding convertible
debentures, options and warrants were proportionately adjusted to reflect the
Reverse Split for all periods presented.
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
adjusted to give effect to the Reverse Split.
5
Table of Contents
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. All share data has been adjusted to give effect
to the Merger under which each PUC share was converted into three shares of
Global. The share data in this paragraph
has been restated to give effect to the Reverse Split, as noted above.
(b)
Interim
Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America (GAAP) and pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC) for interim financial
information. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted pursuant to such rules and
regulations. Operating results for the
three and six month periods ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008 or any other period. The
accompanying financial statements and related notes should be read in
conjunction with the audited financial statements of the Company, and notes
thereto, contained in our Annual Report on Form 10-KSB for the year ended December 31,
2007.
The
financial information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented.
(c)
Accounting
Estimates
The preparation of financial statements in conformity with GAAP
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 Companys 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
and the accounting for debt with beneficial conversion features. Actual results
could differ from those estimates.
Valuation of Stock-Based Compensation.
E
ffective as of August 17,
1999 (inception), the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 Accounting for Stock-Based Compensation
(SFAS 123)
and
on January 1, 2006 adopted SFAS No. 123 (revised 2004)
Share-Based Payment
,
(SFAS
123R), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors including
employee stock options based on fair values.
The Companys 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 Companys 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.
6
Table of Contents
Debt with Beneficial Conversion Features
. The beneficial conversion features of the
promissory notes are valued using the Black-Scholes pricing model which
approximates fair value. 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.
(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 Companys 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 three and six month periods
ended June 30, 2008 and 2007, and the period from August 17, 1999
(inception) to June 30, 2008 due to the Companys net losses. 1,368,371 and 760,824 shares of common stock
issuable under stock options, warrants, convertible debentures 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 periods ended
June 30, 2008 and 2007, respectively, as were the undetermined number of
shares issuable pursuant to the convertible notes and warrants issued in
connection with our private placements as described and defined in Note 5.
(e)
Stock-Based
Compensation
Effective as of August 17,
1999, the Company adopted the fair value recognition provisions of SFAS 123 to
record option and warrant issuances, including stock-based employee
compensation. The Companys policy is to
grant stock options at fair value at the date of grant and to record the
expense at fair value as required by SFAS 123, using the Black-Scholes pricing
model.
Effective January 1, 2006, the Company adopted SFAS
123R, that focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. This statement replaced SFAS 123 and
supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS
123R requires all companies to expense the fair value of employee stock options
and similar awards, which has been the Companys policy to date. Stock-based employee and non-employee
compensation cost related to stock options was $(437), $15,219 and $1,597,297
for the three and six month periods ended June 30, 2008 and the period
from August 17, 1999 (inception) to June 30, 2008, respectively. Stock-based employee and non-employee
compensation cost related to stock options was $273,877 and $362,101 for the
three and six month periods ended June 30, 2007. The Company estimates the amount of future
stock-based compensation expense related to currently outstanding options to be
approximately $38,300, $30,601, $24,083 and $24,084 for the years ending December 31,
2008, 2009, 2010 and 2011, respectively.
7
Table of
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The Black-Scholes
option-pricing 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 Companys 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 Companys employee stock options.
No stock options were issued
in the three and six month periods ended June 30, 2008. In determining the compensation cost of the
options and warrants granted during the three and six month periods ended June 30,
2007, as specified by SFAS 123R, 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:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk-free
Interest Rate
|
|
n/a
|
|
5.16
|
%
|
n/a
|
|
4.90
|
%
|
Expected Life of
Options Granted
|
|
n/a
|
|
4.0 years
|
|
n/a
|
|
4.0 years
|
|
Expected
Volatility
|
|
n/a
|
|
133.6
|
%
|
n/a
|
|
133.4
|
%
|
Expected
Dividend Yield
|
|
n/a
|
|
0
|
|
n/a
|
|
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. 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. Because of the limited trading history of the
Companys stock, until December 31, 2007 the expected volatility was based
on a simple average of daily price data since the date of the Merger on April 5,
2004. Beginning on January 1, 2008,
expected volatility is based on a simple average of weekly price data since the
date of the Merger. Based on the lack of
history to calculate a forfeiture rate, the Company has not adjusted the
calculated value of the options. 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.
(f)
Warrants
In accordance with Emerging Issues Task Force (EITF) Issue No. 96-18,
Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods and Services (EITF 96-18)
and EITF Issue No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (EITF
98-5), 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.
The weighted-average per share fair value of warrants granted during the three
and six month periods ended June 30, 2008 was $1.89 and $1.48,
respectively, and such warrants were immediately vested and exercisable on the
date of grant. See Note 6(c) for a
description of warrants issued during the three and six month period ended June 30,
2008.
8
Table of Contents
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:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk-free
Interest Rate
|
|
2.91
|
%
|
4.75
|
%
|
3.09
|
%
|
4.71
|
%
|
Expected Life of
Warrants Issued(1)
|
|
5.0 years
|
|
5.0 years
|
|
5.0 years
|
|
4.8 years
|
|
Expected
Volatility
|
|
130.0
|
%
|
133.7
|
%
|
129.1
|
%
|
133.7
|
%
|
Expected
Dividend Yield
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(1) The contractual
term of the warrants.
Because of the limited trading history of the Companys
stock, until December 31, 2007 the expected volatility was based on a
simple average of daily price data since the date of the Merger on April 5,
2004. Beginning on January 1, 2008,
expected volatility is based on a simple average of weekly price data since the
date of the Merger. Based on the lack of
history to calculate a forfeiture rate, the Company has not adjusted the
calculated value of the warrants. 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 grants.
(g)
Debt Issuance
Costs
Debt issuance costs at December 31,
2007 consisted of
legal and accounting fees, printing costs and
commissions paid to the placement
agents
related to the Companys Crown Bank promissory
notes, a promissory note issued to the Phillips W. Smith Family Trust, a five
percent shareholder (the Smith Trust) and the Companys December 27,
2007 private placements of convertible debentures and warrants (the 2007
Private Placement). During the three
and six month period ended June 30, 2008, the Company incurred additional
debt issuance costs related to a second closing on the 2007 Private Placement
and on closings on
an aggregate of $545,000 of units
consisting of unsecured, subordinated,
convertible promissory notes and common stock purchase warrants in additional
private placements (the 2008 Private
Placements).
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.
Debt issuance costs are
summarized as follows:
|
|
June 30, 2008
|
|
December 31,
2007
|
|
Debt issuance
costs, gross
|
|
$
|
593,638
|
|
$
|
452,113
|
|
Less
amortization
|
|
(198,611
|
)
|
(12,792
|
)
|
Debt issuance
costs, net
|
|
$
|
395,027
|
|
$
|
439,321
|
|
Amortization
expense related to debt issuance costs was $94,301, $185,819 and $1,469,988 for
the three and six months ended June 30, 2008 and the period from August 17,
1999 (inception) to June 30, 2008, respectively. Amortization expense related to debt issuance
costs was $131,473 and $261,501 for the three and six months ended June 30,
2007, respectively.
9
Table of
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(h)
Deferred
Offering Costs
The
legal fees related to an anticipated public offering the Company expects to
complete in the second half of 2008 were recorded as a deferred offering cost
asset as of June 30, 2008. The
deferred costs related to the public offering will be recorded as a cost of the
offering upon its closing, or expensed as a general and administrative expense
if no such closing occurs.
(i)
Restricted Cash
Pursuant to the renewal of
the Crown Bank promissory notes (see Note 2), the Company agreed to deposit
with Crown Bank four months worth of future interest payments due under the
notes. The Company has further agreed to
deposit with Crown Bank all of the interest due on the notes through maturity
upon the closing, and out of the net proceeds of, a future underwritten public offering of equity securities of the
Company. The funds on deposit are
not available to the Company for any purpose other than for debt service on the
Crown Bank promissory notes.
(j)
Going Concern
We have incurred operating losses, accumulated
deficit and negative cash flows from operations since inception. As of June 30, 2008, we had an
accumulated deficit of approximately $17,940,000. These factors, among others, raise
substantial doubt about our ability to continue as a going concern. The accompanying unaudited consolidated
financial statements 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.
Note 2. Notes
Payable Bank.
In
February 2006, the Company completed two closings of senior debt financing
totaling $2,200,000 pursuant to promissory notes issued to Crown Bank. The average interest rate of the notes was
6.49 percent and 6.87 percent for the three and six month periods ended June 30,
2008, respectively. On October 15,
2007, the Company retired $600,000 of the Crown Bank Promissory notes, and on October 31,
2007, the Company renewed the remaining $1,600,000 of notes to mature in February 2009. The renewed notes bear interest at a rate of
the prime rate plus one percent (6.00 percent and 8.25 percent at June 30,
2008 and December 31, 2007, respectively), with $1.2 million of the
renewed notes subject to a minimum interest rate of 6.5%. The promissory notes are secured by a pledge
of all Company assets, including its intellectual property, and are guaranteed
by Bruce Culver, James Davis and William Reiling, each five percent
shareholders of the Company.
In
connection with the renewal, and as a condition to the effectiveness of the
terms and conditions of the renewal of the notes, the Company agreed to deposit
into escrow with Crown Bank four months worth of future interest payments due
under the notes. On December 28,
2007, the Company deposited $44,000 with Crown Bank as the four months interest
requirement, thereby making effective the terms of the renewed notes. The Company has further agreed to deposit
into escrow with Crown Bank all of the interest due on the notes through maturity
upon the closing, and out of the net proceeds of, an underwritten public offering of equity securities of the Company.
10
Table of Contents
Note 3. Notes
Payable.
On June 1, 2006, the
Company borrowed $75,000 from Mr. Roman Pauly, and in connection therewith
issued to Mr. Pauly a promissory note to mature on August 30, 2006
(the Pauly Note). On March 20,
2007, the Pauly Note was amended to extend the due date of the note until the
Company closes on an aggregate of $750,000 of incremental debt or equity
financing. On January 22, 2007, January 3,
2008 and February 29, 2008, the Company repaid $25,000, $33,000 and $7,650
of the principal of the Pauly Note, respectively. At June 30, 2008, the outstanding
balance of the Pauly Note was $9,350.
The Pauly Note, as amended, bears interest at the prime rate (5.00
percent and 7.25 percent at June 30, 2008 and December 31, 2007,
respectively). In connection with the
amendments, following repayment of the Pauly Note, the Company will issue a
five-year warrant to Mr. Pauly to acquire 41.7 shares of the Companys
common stock at $5.00 per share for each day the promissory note is outstanding
after August 30, 2006. The guidance
provided by EITF Issue No. 96-19 Debtors Accounting for a Modification
or exchange of Debt Instruments (EITF 96-19) indicates that a substantial
modification of debt terms should be accounted for as an extinguishment of
debt. The present value of the cash
flows under the August 24, 2006 modification was greater than 10 percent
different from the present value of the cash flows under the original
agreement. Accordingly, the accrual of
warrants to be issued pursuant to the amended note was recorded as debt
extinguishment expense (see Note 6(c)).
On November 30, 2006,
the Company borrowed $100,000 from Adron Holdings, LLC (Adron). In connection therewith, the Company issued
to Adron an unsecured promissory note that bore an annual interest rate of 60
percent and was set to mature on January 2, 2007 (the Adron Note). On each of March 20, 2007 and August 8,
2007, the Company amended the Adron Note, resulting in a change of the annual
interest rate to 42 percent, the extension of its due dates and an agreement to
issue to Adron 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. In January 2008, the Company repaid all
of the outstanding principal amount of the Adron Note and issued five-year,
immediately exercisable warrants to acquire up to 52,357 shares of the Companys
common stock at $5.00 per share (see Note 6(c)). The guidance provided by EITF
96-19 indicates that a substantial modification of debt terms should be
accounted for as an extinguishment of debt.
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. Accordingly, the
accrual of warrants to be issued pursuant to the Adron Note were recorded as
debt extinguishment expense (see Note 6(c)).
On May 25, 2007, the Company borrowed $42,585 from a commercial
lender pursuant to an insurance policy financing agreement. The financing
agreement called for ten monthly installment payments of $4,453 beginning July 1,
2007, with an imputed annual interest rate of 9.85 percent. The proceeds were paid directly to an
insurance company as a prepayment on an insurance policy. The remaining principal balance of the
financing agreement was repaid during the six months ended June 30,
2008. On May 27, 2008, the Company
borrowed $43,860 from the same commercial lender pursuant to another insurance
policy financing agreement. The financing
agreement calls for ten monthly installment payments of $4,554 beginning July 1,
2008, with an imputed annual interest rate of 8.26 percent.
On July 31,
2007, the Company borrowed, for working capital purposes, $100,000 from the
Smith Trust pursuant to a promissory note.
The note bears interest at the prime rate (5.00 percent on June 30,
2008)
.
Following repayment of the
promissory note, the Company will issue a five-year warrant to the Smith Trust
to acquire 1 share of the Companys common stock per $1,000 principal balance
outstanding at $5.00 per share, for each day the promissory note is outstanding
(see Note
11
Table
of Contents
6(c)).
On January 3, 2008, the Company repaid
$66,000 of this note.
On March 11, 2008, the Company amended the promissory
note with the Smith Trust. Under the
terms of the amendment, unpaid principal and interest will be payable upon the
Companys closing of an aggregate of $500,000 or more of incremental debt or
equity financing following the date of the amendment.
Interest expense recorded during the three and six
month periods ended June 30, 2008 and the period from August 17, 1999
(inception) to June 30, 2008
was $451, $1,027 and $4,354, respectively. No interest expense was recognized in the
comparable 2007 periods.
At various
times the Company receives short-term, unsecured loans from certain officers
and directors solely for short-term working capital needs. These loans are made without any interest or
other consideration accruing to the officers and directors, and had no defined
terms. As of December 31, 2007, the
Company had borrowed a total of $10,450 from David Koenig, a director. During the six months ended June 30,
2008, the Company repaid $8,250 of the loan.
On October 31, 2007,
the Company issued a promissory note for $600,000 in favor of the Smith Trust,
effective as of October 15, 2007.
The proceeds were used to retire $600,000 of the Crown Bank promissory
notes. The promissory note issued to the
Smith Trust matures on February 28, 2009, bears interest at the prime rate
plus one percent (6.00 percent at June 30, 2008 and 8.25 percent at December 31,
2007, respectively) and has a subordinated security interest in all of the
Companys assets. Interest expense
recorded during the three and six months ended June 30, 2008 and the
period from August 17, 1999 (inception) to June 30, 2008 was $9,233,
$20,188 and $31,080, respectively. No
interest expense was recorded in the comparable 2007 periods. In consideration
for this loan, on November 7, 2007, the Company agreed to issue 33,333
shares of its common stock to the Smith Trust, the value of which was recorded
as debt issuance cost asset (see Note 1(h)).
We also agreed to issue to the Smith Trust: (i) an aggregate amount
of 6,667 shares of our common stock if the Crown Bank promissory notes remain
outstanding on October 31, 2008 and (ii) five-year warrants to
acquire a maximum aggregate of 16,667 shares of our common stock at an exercise
price of $2.00. The total aggregate
number of shares subject to the warrants will be determined by dividing 100,000
by the per share price in an underwritten public offering (not less than $2.00),
minus 33,333. The warrants will be
issued on the earlier of (i) the date of an underwritten public offering
or (ii) October 31, 2008, and will be exercisable beginning on the
one-year anniversary of that date.
On March 11, 2008, the Company
amended the promissory note with the Smith Trust. Under the terms of the amendment, interest
accrued pursuant to the promissory note will be payable on the maturity date,
rather than payable monthly.
On April 3, 2008, the Company purchased certain patents,
patent applications and know-how from Profile (the Profile Assets)(see Note
8). $150,000 of the purchase price was
financed under a secured promissory note issued in favor of Profile (the Profile
Note). Pursuant to the terms of the
Profile Note, the principal and interest accrued thereon becomes due and
payable five business days following the close of a public offering of the
Companys equity securities or August 29, 2008, whichever occurs first
(the Maturity Date). Interest will
accrue at an annual rate of 10 percent prior to the Maturity Date and 18
percent thereafter. In the event the
Profile Note is not fully paid at the Maturity Date or within 45 days
thereafter, Profile may enforce its right to have the Profile Assets returned,
and the Company will not be able to recoup any monies that were previously paid
to Profile. The Profile Note was made in
connection with, and subject to the terms and conditions of, a Security
Agreement dated April 3, 2008 between the Company and Profile under which
the Company granted to Profile a security interest in the Profile Assets.
On April 3, 2008, the Company borrowed
an aggregate of $112,500 pursuant to three promissory notes, each in the amount
of $37,500. The promissory notes were
issued in favor of James Davis,
12
Table of Contents
William Reiling and the Smith Trust. Payment in full of the promissory notes and
the interest accrued thereon at an annual rate of 10 percent is due on September 1,
2008. As consideration for providing the
loans, the Company issued immediately exercisable, five-year warrants to
purchase 25,000 shares of the Companys common stock at $1.50 per share to each
lender. The gross proceeds were
allocated between the note and the warrants based on the relative fair value at
the time of issuance. The warrants,
valued at $69,000 using the Black-Scholes pricing model, with a relative fair
value of $42,769, were recorded as original issue discount on the related
promissory notes, and are being expensed as interest expense over the term of
the promissory notes. Interest expense
related to the amortization of the original issue discount was $25,548 for the
three and six month periods ended June 30, 2008 and
the period from August 17, 1999 (inception) to June 30,
2008, respectively.
The proceeds from the promissory notes were
used toward the purchase of the Profile Assets (see Note 8).
Note 4. Convertible Debentures.
As
consideration to the original guarantors (Bruce Culver, James Davis, William
Reiling and the Smith Trust) to provide their guarantees for the Crown Bank
promissory notes, the Company issued $733,334 of unsecured convertible 10
percent debentures. Of the $733,334,
$400,000 matures on February 16, 2009 and $333,334 matures on February 28,
2009. The debentures are convertible
into Company common stock at a price of $3.00 per share. The $733,334 face value of the convertible
debentures (before the impact of the calculation of the beneficial conversion
feature see below) is recorded as a current liability, with the offset of the
cost of the debentures recorded as a debt issuance cost asset. The debt issuance cost asset is being
amortized as interest expense over the term of the underlying bank note
payable. The convertible debentures are being treated as debt issuance cost
because they represent the costs directly attributable to the bank promissory
note financing.
The
embedded conversion feature of the convertible debentures does not meet all the
characteristics of a derivative instrument as described in SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133), and therefore
was not separated from the host contract and accounted for as a
derivative. The embedded conversion
feature does not provide for net settlement, the shares to be issued pursuant
to the exercise of the conversion feature will be unregistered and, due to the
large number of shares involved and the thinly traded market for the Companys
shares, cannot be readily settled net by a means outside the contract. The value of the beneficial conversion
feature was computed as the difference between the fair market value of the
shares at the transaction dates and the lowest possible conversion price during
the debenture term ($3.00 per share), multiplied by the number of conversion
shares that would be issued at that conversion price (244,445 shares). The value so computed was in excess of the
face value of the convertible debentures issued, and was therefore limited to
the face value of the debentures issued ($733,334). The beneficial conversion feature was
recorded as an original issue discount as defined in EITF 98-5 against the
convertible debt liability and is also
being amortized as interest expense over the term of the convertible
debentures.
Interest expense related to the amortization of the original issue
discount was $60,943, $121,887 and $576,312 for the three and six month periods
ended June 30, 2008 and
the period from August 17,
1999 (inception) to June 30, 2008, respectively.
Interest
expense related to the amortization of the original issue discount was $60,943
and $121,216 for the three and six month periods ended June 30, 2007.
On March 21, 2007, the
Company and the four convertible debenture holders agreed to amend the
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
13
Table of Contents
$49,911 of accrued
interest. Each Investment Unit consists
of one share of the Companys common stock and a 3-year warrant (immediately
exercisable) to acquire 0.5 shares of the Companys common stock for $2.50
($5.00 per share). The guidance provided
by EITF 96-19 indicates that a substantial modification of debt terms should be
accounted for as an extinguishment of debt.
The present value of the cash flows under the March 20, 2007
modification was greater than 10 percent different from the present value of
the cash flows under the original agreement.
Accordingly, the warrants issued, valued at $26,829 using the
Black-Scholes method, were recorded as debt extinguishment expense. No other gain or loss was recorded.
On December 27, 2007, the
four convertible debenture holders
agreed to
amend the terms of their debentures to provide for automatic conversion of the
principal amount of the debentures and the unpaid interest accrued thereon into
shares of the Companys common stock at $3.00 per share upon the closing of an
underwritten public offering by the Company.
The $733,334 outstanding principal amount of the debentures will convert
into 244,445 shares of the Companys common stock. As of June 30, 2008, $105,120 of unpaid
accrued interest related to the debentures was outstanding. Interest will continue to accrue on the
debentures until they are converted or otherwise retired.
Interest expense
recorded during the three and six month periods ended June 30, 2008, and
the period from August 17, 1999 (inception) to June 30, 2008 was
$18,539, $37,077 and $175,199, respectively.
Interest expense recorded during the three and six month periods ended June 30,
2007 was $18,539 and $36,873, respectively.
Note 5. Convertible Notes.
(a)
Short-term Convertible Notes
On December 27, 2007, the Company closed on the
sale of $1,050,000 of units consisting of unsecured, subordinated, convertible
promissory notes (the 2007 Notes) and common stock purchase warrants (the 2007
Warrants) in a private placement (the 2007 Private Placement). Net cash proceeds to the Company were
$712,923, after deducting $337,077 of expenses of the offering (including
$105,000 of commissions paid to the placement agent) and excluding from the
cash proceeds the conversion into units of $25,000 of loans made to the Company
by James Davis and $25,000 of certain loans from the Companys directors.
At the closing, the Company issued $997,500 in
principal amount of 2007 Notes and 2007 Warrants to purchase 210,000 shares of
common stock. The 2007 Notes bear
interest at 10 percent per year, mature on June 27, 2009 and will convert
into the type of equity securities offered by the Company in any underwritten
public offering prior to maturity at 70 percent of the public offering
price. In the event a public offering is
not completed before the maturity date, the entire principal and unpaid accrued
interest will convert into the Companys common stock at $0.05 per share. The Company may, at its option, prepay the
2007 Notes anytime on or after December 27, 2008. The 2007 Warrants will become exercisable
upon the earlier of the closing of a public offering or the maturity date of
the 2007 Notes, and will remain exercisable until December 31, 2012. The exercise price will be 50 percent of the
public offering price, or in the event a public offering is not completed
before the maturity date, at 50 percent of the closing price of the Companys
common stock on the maturity date of the 2007 Notes.
On December 27, 2007, the Company also converted
$150,000 of existing loans from James Davis into a note (the Davis Note) and
warrants (the Davis Warrants). The
principal amount of the note issued to Mr. Davis was $142,500. Mr. Davis also received warrants to
purchase 30,000
14
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shares of the Companys common stock. The terms of the Davis Note and Davis
Warrants are the same as those issued in the 2007 Private Placement, except
that, the Davis note is convertible into the type of equity securities offered
by the Company in an underwritten public offering at 50 percent of the public
offering price. In addition, Mr. Davis
agreed that the equity securities issued upon conversion of the Davis Note and
the common stock issued upon exercise of the Davis Warrants will not be
transferable for a period of one year beginning on the effective date of the
public offering triggering conversion of the note.
On January 4, 2008, the Company closed on the sale of
$80,000 of additional units as part of the 2007 Private Placement with the same
terms as noted above. Net cash proceeds
to the Company were $69,600, after deducting $10,400 of commissions paid to the
placement agent. At closing, the Company
issued $76,000 in principal amount of 2007 Notes and 2007 Warrants to purchase
16,000 shares of common stock. In total,
in the two closings of the 2007 Private Placement, the Company issued a total
of $1,073,500 in principal amount of 2007 Notes and 2007 Warrants to purchase
226,000 shares of common stock.
(b) Long-term Convertible
Notes
On February 13, February 28
and May 2, 2008, the Company closed on an aggregate $545,000 of units
consisting of
unsecured, subordinated, convertible promissory notes and common stock purchase
warrants in the 2008 Private
Placements. Net cash proceeds to the
Company were approximately $413,875, after deducting approximately $131,125 of
expenses of the offerings (including $70,850 of commissions paid to the
placement agent). Each $10,000 unit
consists of a note in the principal amount of $9,500 (the 2008 Notes) and a warrant to purchase 2,000 shares
of our common stock (the 2008 Warrants). The terms of the 2008
Notes and 2008 Warrants are identical to the 2007 Notes and 2007 Warrants,
respectively, except that the Companys option to prepay $370,500 of the 2008
Notes begins anytime on or after February 13, 2009 with a maturity date of
August 13, 2009, and the Companys option to prepay $147,250 of the 2008
Notes begins anytime on or after May 2, 2009 with a maturity date of November 2,
2009.
The embedded conversion features of the 2007 Notes, Davis Notes and the
2008 Notes do not meet all the characteristics of a derivative instrument as
described in SFAS 133, and therefore were not separated from the host contracts
and accounted for as derivatives. The
embedded conversion features are indexed to the Companys common stock, and
would be classified in shareholders equity under the guidance of EITF Issue No. 00-19
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock (EITF 00-19), if they were freestanding
derivatives. The embedded conversion
feature contains an explicit limit on the number of shares to be delivered, the
Company has sufficient authorized and unissued shares available to settle the
maximum number of shares and the debenture agreement does not contain a net
cash settlement feature. The beneficial
conversion features of the promissory notes, valued at $872,184 using the
Black-Scholes pricing model, along with the $50,630 relative fair value of the
2007 Warrants, the Davis Warrants and the 2008 Warrants, were recorded as an
original issue discount as defined in EITF 98-5 against the convertible debt
liability, and is being amortized as interest expense over the term of the
convertible debentures. During the three
and six month periods ended June 30, 2008, $163,343 and $292,119 of the
original issue discount was amortized as interest expense, respectively.
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Note 6.
Shareholders Equity.
(a)
Common
Stock
No common stock was issued during
the six months ended June 30, 2008.
(b)
Stock Options
No stock options were issued during
the six months ended June 30, 2008.
(c)
Warrants
The warrants described below,
issued or to be issued, are exempt from registration under Section 4(2) of
the Securities Act as they were or will be issued in non-public offerings to a
limited number of subscribers. Each of
the following warrants was valued using the Black-Scholes pricing model:
·
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 Companys 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 Companys
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 in the first
quarter of 2008. No expense was recorded
during the three months ended June 30, 2008.
·
Pursuant to the terms of the Adron Note (see
Note 3), upon the repayment of the principal thereon on January 16, 2008,
the Company issued five-year, immediately exercisable warrants to acquire up to
52,357 shares of the Companys common stock at $5.00 per share. During the six months ended June 30,
2008, the accrual of 1,347 warrants (and subsequently issued as part of the January 16,
2008 issuance noted above) valued at $4,849 using the Black-Scholes pricing
model was expensed as debt extinguishment expense. During the three and six month periods ended June 30,
2007 the accrual of 17,948 and 25,338 warrants valued at $54,611 and $91,215
was recorded as debt extinguishment expense, respectively. During the six months ended June 30,
2007, the issuance of 5,167 warrants valued at $23,162 was expensed as interest
expense.
·
In connection with amendments to the Pauly
Note (see Note 3), following repayment of the Pauly Note, the Company will
issue a five-year warrant (immediately exercisable) to Mr. Pauly to
acquire 41.7 shares of the Companys common stock at $5.00 per share for each
day the Pauly Note is outstanding after August 30, 2006. As of June 30, 2008, the Company had
accrued for issuance warrants to acquire 27,981 shares of the Companys common
stock pursuant to this arrangement.
During the three and six months ended June 30, 2008, the accrual of
3,795 and 7,590 warrants valued using the Black-Scholes pricing model at
$20,491 and $40,983, respectively, were expensed as debt extinguishment
expense. During the three and six months ended June 30, 2007, the accrual
of 3,795 and 7,548 warrants valued using the Black-Scholes pricing model at
$20,491 and $40,758, respectively, were expensed as debt extinguishment
expense.
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·
On July 31, 2007, the Company borrowed
$100,000 for short-term working capital needs pursuant to a promissory note
issued to the Smith Trust (see Note 3).
Following repayment of the promissory note, the Company will issue a
five-year warrant (immediately exercisable) to the Smith Trust to acquire 1
share of the Companys common stock per $1,000 principal outstanding at $5.00
per share for each day the promissory note is outstanding after August 30,
2006. As of June 30, 2008, the
Company had accrued for issuance warrants to acquire 21,720 shares of the
Companys common stock pursuant to this arrangement. During the three and six months ended June 30,
2008, the accrual of 3,094 and 6,320 warrants valued using the Black-Scholes
pricing model at $12,376 and $25,280 , respectively, was expensed as interest
expense.
·
On April 3,
2008, as consideration to James Davis, William Reiling and the Smith Trust 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 Companys
common stock at $1.50 per share to each lender (see Note 3). The gross proceeds were allocated between the
note and the warrants based on the relative fair value at the time of issuance. The warrants, valued at $69,000 using the
Black-Scholes pricing model, were allocated $42,768 which was recorded as
original issue discount on the related promissory notes and is being expensed
as interest expense over the term of the promissory notes.
Note
7. Income Taxes.
In
July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in its tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company adopted FIN 48 as of January 1,
2007, and the adoption had no significant impact on the consolidated financial
statements.
The Company has adopted the policy of classifying
interest in interest expense and penalties in general and administrative
expense. The Company had recorded no
accrued interest or penalties as of the date of adoption.
The Company had no significant unrecognized tax
benefits as of June 30, 2008 and December 31, 2007 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.
The Company has generated net operating loss
carryforwards of approximately $4.5 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 the Merger and
private placement transactions that occurred in April 2004, and believes
that they do not constitute such an ownership change. However, additional shares and warrants
likely to be issued pursuant to the Companys financing efforts, together with
certain transactions occurring in the previous 36-month period, may constitute a
change in ownership that could subject the Companys use of its net operating
loss carryforwards to the above limitations.
Based on the Companys estimates, the limitation would apply to
substantially all of the $4.5 million net operating loss carryforwards.
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The net operating loss carryforwards are subject to
examination until they expire. The tax
years that remain subject to examination by major tax jurisdictions currently
are:
Federal 2004 - 2006
State of Minnesota 2004 - 2006
Note 8.
Asset
Purchase Agreement.
On April 3, 2008, the Company purchased the
Profile Assets from Profile pursuant to an asset purchase agreement. Prior to purchasing the Profile Assets, the
Company had licensed certain rights to the Profile Assets from Profile. Profile is a five percent shareholder of the
Company. The technology encompassed by
the Profile Assets provides the basis for the ProUroScan
TM
system,
the Companys initial product currently in the final stages of
development. The purchase price of the
Profile Assets was $300,000, of which $150,000 was paid in cash and $150,000
was financed under the Profile Note (see Note 3). As indicated by SFAS No.
2, Accounting for Research and Development Costs,
regarding costs of intangibles that are purchased from others for a particular
research and development project and that have no alternative future uses,
the entire $300,000 purchase price was expensed as research
and development expense in the three month period ended June 30, 2008.
Note 9.
Subsequent
Events.
On
July 11, 2008, the Company issued incentive stock options to acquire
70,000 shares of its common stock to its Chief Executive Officer, Richard
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
and 20,000 shares will vest on July 1 of each of 2009, 2010 and 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.
FAS 123R requires that options that are cancelled and reissued simultaneously
be accounted for 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 will be 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.
On
July 11, 2008, the Company issued incentive stock options to acquire
35,000 shares of its common stock to its Chief Financial Officer, Richard
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 will vest on July 1 of each of 2009, 2010 and
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. FAS 123R requires that options that are
cancelled and reissued simultaneously be accounted for 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 will be 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.
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On July 11, 2008, the
Companys directors received 21,667 of shares of the Companys common stock in
lieu of cash for $21,667 of unpaid directors fees earned and previously
expensed through June 30, 2008.
On July 11, 2008, the
Company issued a
total of 37,967 shares of the
Companys common stock to its directors in recognition of
extraordinary amount of
time and effort they have spent on the Companys restructuring and refocusing
efforts since January 2007. The
shares were valued at $1.00 per share on the date of issuance.
On July 15, 2008 and July 29, 2008, the Company closed on
an aggregate $175,000 of units
consisting of unsecured,
subordinated, convertible promissory notes and common stock purchase warrants
as part of the 2008 Private Placements
(see Note 5(b)). The terms of the
2008 Notes and 2008 Warrants issued are identical to the previous 2008 Notes
and 2008 Warrants, respectively, except that the Companys option to prepay the
$142,500 of 2008 Notes issued begins anytime on or after July 15, 2009
with a maturity date of January 15, 2010.
The beneficial conversion features of the promissory notes, valued at
$74,355 using the Black-Scholes pricing model, along with the $11,855 relative
fair value of the 2008 Warrants will be recorded as an original issue discount
as defined in EITF 98-5 against the convertible debt liability, and amortized
as interest expense over the term of the convertible debentures.
On July 16, 2008, PUC entered into an employment agreement with Mr. Carlson,
its Chief Executive Officer. The
agreement provides for a minimum annual salary of $150,000, a cash incentive
bonus potential of up to 40 percent of Mr. Carlsons base pay and
eligibility to participate in an annual grant of options to purchase shares of
common stock, as determined by the Companys Board of Directors. The agreement provides for severance payments
if the Company terminates Mr. Carlson without cause or if Mr. Carlson
terminates the agreement for good reason that includes six months of base
salary plus one month of base salary for each year of service (up to a maximum
of 12 months of base salary), payment of earned bonuses, continued payment of
existing health and life insurance benefits for a period of six months, and
immediate vesting of all unvested stock options then held by Mr. Carlson. In addition, within a one-year period
following a change in control of the Company, upon termination without cause,
unacceptable demotion or reduction in responsibilities or a relocation of more
than 100 miles, Mr. Carlson will receive as severance, six months of base
salary plus one month of base salary for each year of service (up to a maximum
of 12 months of base salary), and immediate vesting of all unvested stock
options then held by Mr. Carlson.
The agreement prohibits Mr. Carlson from directly or indirectly
participating in the ownership, management, operation or control of a
competitive business for a period of one year after his employment with the
Company terminates. The agreement will
expire on December 31, 2009.
On July 25, 2008, the Company entered
into two agreements with Artann Laboratories, Inc. (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. 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 Companys common stock valued at
$500,000. In addition, the Company shall
pay Artann a royalty equal to four percent of the first $30,000,000 of net
cumulative sales of licensed products, three percent of the next $70,000,000 of
net cumulative
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sales and two percent of net cumulative sales
over $100,000,000. Further, the Company
will pay Artann a technology royalty of 1% 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 Food and Drug Administration
(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, sub-licensable, 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 become effective on the tenth day after the close of
one or more public or private equity offerings by the
Company that raises at least $4,000,000 or November 30, 2008, whichever is
first to occur.
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.
Under the second Artann agreement, the Development
and Commercialization Agreement,
the parties
intend to collaborate together to develop, commercialize and market prostate
mechanical 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,
the Company will make cash
milestone
payments to Artann of $250,000 upon initiation of an FDA approved clinical
study, $250,000 upon completion of that FDA approved clinical study and
submission of an FDA regulatory approval application on the prostate imaging
system and $750,000 upon FDA clearance to allow the prostate imaging system to
be commercially sold in the United States.
In addition, the
Company will
issue to Artann shares of common stock of the Company having a value of
$1,000,000 upon completion of the FDA
approved clinical study and submission of an FDA regulatory approval
application on the prostate imaging system and, as a success bonus, the
Company
will issue to Artann shares of its common stock having a value of $1,000,000
upon
FDA clearance. The success bonus will be reduced by ten
percent for each month that FDA clearance is delayed following fifteen months
from the effective date of the Development and Commercialization Agreement. The Company will also pay a
monthly
retainer fee for technical advice and training by Artann personnel. The monthly fee retainer shall be $30,000 per
month for each of the first six months following the effective date of the
Development and Commercialization Agreement
and $15,000 per month for the next twelve months.
Additionally, Artann will supply to the
Company such quantities of the prostate imaging system as is reasonably
required for pre-commercial testing, evaluation, marketing and clinical study
and to facilitate the transfer of commercial production to a third party. Artann also agrees to use best reasonable
efforts to provide a limited number of commercial systems, if requested by the
Company. The pre-commercial and
commercial systems will be sold to the Company at prices yet to be
determined. Qualified Artann personnel
shall provide manufacture and scale-up services to the Company or a third party
manufacturer designated by the Company to facilitate the commercial manufacture
of the prostate imaging systems at a cost of $1,200 per day per individual for
such services.
The effective date of the Development and
Commercialization Agreement is the tenth day after the close of
one or more public or private equity offerings that
raises at least $4,000,000 by the Company or November 30, 2008, whichever
is first to occur.
The initial term of the Development
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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.
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Item 2. Managements Discussion and Analysis of
Financial Condition and Results of
Operation.
The accompanying
Managements Discussion and Analysis of Financial Condition and Results of
Operation should be read in conjunction with our unaudited consolidated
financial statements, and notes thereto, in Part I, Item 1 of this
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008
.
Disclosure Regarding Forward-Looking Statements
Certain
statements contained in this Quarterly Report on Form 10-Q may be deemed
to be forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995, and the Company intends that such forward-looking
statements be subject to the safe-harbor created thereby. Such forward-looking statements relate to,
among other things: 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 raise capital to fund our 2008 and 2009 working
capital needs and launch our products into the marketplace in subsequent years;
our ability to complete the development of our existing and proposed products
on a timely basis or at all; legislation or regulatory requirements, including
our securing of all U.S. Food and Drug Administration (FDA) and other
regulatory approvals on a timely basis, or 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 companies 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; 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. We caution that these statements are qualified by important factors
that could cause actual results to differ materially from those reflected by
the forward-looking statements contained herein.
Overview;
Product Offerings.
ProUroCare Medical Inc. (ProUroCare,
the Company, we, us or our, which terms include reference to our wholly
owned subsidiary, ProUroCare Inc. (PUC)) is a development stage company that
is focused on developing advanced mechanical imaging technology for assessing
the size, shape and volume of the prostate by creating a visual image of the
prostate gland for use in identifying and characterizing abnormal lesions or
tissue and monitoring the effects of prostate treatments.
The Companys primary
activities to date have focused on acquiring technology, intellectual property
rights and working with Artann Laboratories Inc. (Artann) to complete
development of the ProUroScan
TM
prostate imaging system. We have assembled an experienced management
team and identified the necessary clinical, regulatory and reimbursement
resources to assist us in moving the product to market. We have aggressively worked to obtain the
funding to complete development of the ProUroScan
TM
system and to bring it to market.
Our initial product is the ProUroScan
TM
system, a mechanical imaging system
that enables physicians to identify and characterize the existence of abnormal
prostate tissue and monitor changes in prostate tissue over time. During the next 12 months, assuming our
financing efforts are successful (see
Liquidity and Capital Resources, below
), we expect to prepare the ProUroScan
TM
system for clinical trials, obtain FDA clearance
on a basic mapping and data maintenance
labeling claim and prepare to launch our product into the market,
although there can be no assurance that we will be successful in meeting these
milestones. We
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are currently exploring potential marketing
relationships with medical device companies that are interested in marketing
products in the prostate cancer detection market. We expect such a
relationship would provide both financial support and access to down stream
marketing, engineering, manufacturing and sales capabilities.
Current
Developments
On April 3, 2008, we purchased certain patents, patent
applications and know-how (the Profile Assets) from Profile, LLC (Profile)
for $300,000. The technology encompassed
by the Profile Assets provides the basis for the ProUroScan
TM
system, our initial product
currently in the final stages of development.
Prior to purchasing the Profile Assets, we had licensed certain rights
to the Profile Assets from Profile. By
purchasing the Profile Assets, we secure ownership of our key intellectual
property and eliminate potentially very significant royalty payments to Profile
upon commercialization of the ProUroScan
TM
system. As discussed in Note 8 to the consolidated
financial statements, we financed the purchase of the Profile Assets by issuing
a $150,000 promissory note to Profile (secured by the Profile Assets) and by
issuing an aggregate $112,500
of unsecured promissory notes to three individual investors along with
75,000 warrants.
The
ProUroScan
TM
system
has been developed by us under development contracts with Artann, a scientific
technology company focused on early-stage technology development. In September 2006, Artann was awarded a
$3 million Small Business Innovation Research Phase II Competitive Renewal
grant from the National Cancer Institute (the 2006 NIH Grant) to help advance
the development and application for clearance of our ProUroScan
TM
system by the FDA. It is our intent to work with Artann under
this grant to finalize our current system for clinical trials, and to expand
our working relationship with Artann to include their participation in the
development and licensing of future generations of the ProUroScan
TM
system.
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. As consideration, we agreed to
pay, on the effective date of the License Agreement, an upfront cash license
fee of $600,000 and shares of our common stock valued at $500,000. In addition, we agreed to pay Artann a
royalty fee equal to four percent of the first $30,000,000 of net cumulative
sales of licensed products, three percent of the next $70,000,000 of net
cumulative sales and two percent of net cumulative sales over
$100,000,000. Further, we will pay
Artann a technology royalty fee of one percent 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
. 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 License
Agreement. We also agreed to grant
Artann a
non-exclusive fully paid up, sub-licensable, 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 become effective on the tenth day after the close of
one or
more public or private equity offerings in which we raise at least $4,000,000
or November 30, 2008, whichever is first to occur.
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 we fail to make a payment to Artann and such
failure is not cured within a 30-day
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cure period
or should one of the parties become insolvent, go into liquidation or
receivership or otherwise lose legal control of its business.
Under the
second Artann agreement, the Development and Commercialization Agreement,
the parties intend to collaborate
together to develop, commercialize and market prostate mechanical 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 will pay
to Artann cash
milestone
payments of $250,000 upon initiation of an FDA approved clinical study,
$250,000 upon completion of that FDA approved clinical study and submission of
an FDA regulatory approval application on the prostate imaging system and
$750,000 upon FDA clearance that allows the prostate imaging system to be
commercially sold in the United States.
In addition, we
will issue to Artann shares of our common stock having a
value of $1,000,000 upon completion of the FDA
approved clinical study and submission of an FDA regulatory approval
application on the prostate imaging system and, as a success bonus, we
will issue to Artann shares of
our common stock having a value of $1,000,000 upon
FDA clearance. The success bonus
will be reduced by ten percent for each month that FDA clearance is delayed
following fifteen months from the effective date of the Development and
Commercialization Agreement. We will
also pay a
monthly retainer fee for technical advice and training by Artann
personnel. The monthly fee retainer
shall be $30,000 per month for each of the first six months following the
effective date of the
Development
and Commercialization Agreement
and $15,000 per month for the next twelve months.
Additionally,
Artann will supply us with such quantities of the prostate imaging system as is
reasonably required for pre-commercial testing, evaluation, marketing and
clinical study and to facilitate the transfer of commercial production to a
third party manufacturer. Artann also
agrees to use best reasonable efforts to provide a limited number of commercial
systems, if requested by us. The
pre-commercial and commercial systems will be sold to us at prices yet to be
determined. Qualified Artann personnel
shall provide manufacture and scale-up services to us or a third party
manufacturer we designate to facilitate the commercial manufacture of the
prostate imaging systems at a cost of $1,200 per day per individual for such
services.
The effective
date of the Development and Commercialization Agreement is the tenth day after
the close of
one or more public or private equity
offerings that raises at least $4,000,000 by the Company or November 30,
2008, whichever is first to occur.
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 we fail 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.
Results
of Operations
The following discussion
of the financial condition and results of operations should be read in
conjunction with the financial statements included herewith. 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.
24
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Three
months ended June 30, 2008 compared to the three months ended June 30,
2007:
Operating
Expenses/Operating Loss
.
Our operating expenses (and our operating loss) for the three months
ended June 30, 2008 were $516,525, an increase of $3,119, or approximately
1 percent, compared to $513,406 last year.
The operating expenses for the three months ended June 30, 2008
included our acquisition of certain patents, patent applications and know-how
for $300,000, which was expensed as research and development costs. The operating expenses for the three months
ended June 30, 2007 included approximately $221,000 related to the
extension of the exercise period of certain stock options pursuant to
separation agreements with two former officers of the Company, and the issuance
of warrants valued at $72,000 to Artann pursuant to a cooperation agreement in April 2007.
Fees for legal services
increased approximately $48,000, or 195 percent, compared to last year, arising
from our contract negotiations with Artann and patent maintenance related legal
expenses.
Net
Interest Expense
.
Net
interest expense for the three months ended June 30, 2008 was $465,182, an
increase of 67 percent, compared to $279,266 last year. The increased interest can be attributed to
the issuance of convertible notes to investors in our 2007 and 2008 private
placements. Amortization of the original
issue discount attributable to the warrants and the beneficial conversion
feature of the convertible notes issued in the private placements resulted in
approximately $163,000 of recorded interest expense in the three months ended June 30,
2008, while the interest on the convertible notes totaled approximately
$42,000. These increases were partially
offset by interest expense reductions resulting from declining interest rates
(the prime rate is down approximately 30 percent from last year) and a
reduction in the amounts of other loans that were outstanding.
Debt Extinguishment Expense
. Our debt extinguishment expense for the three
months ended June 30, 2008 was $20,491, a decrease of 72 percent, compared
to $74,502 last year. Our debt
extinguishment expense arises primarily from the cost of warrants accrued for
issuance pursuant to the provisions of short-term loans from certain individual
lenders. The decrease was due to the
repayment of a significant portion of these outstanding short term loans in
late 2007 and in early 2008.
Six
months ended June 30, 2008 compared to the six months ended June 30,
2007:
Operating
Expenses/Operating Loss
.
Our operating expenses (and our operating loss) for the six months ended
June 30, 2008 were $762,689, a decrease of $219,978, or approximately 22
percent, compared to $982,667 last year.
Compensation and benefits
costs in the six months ended June 30, 2008 decreased approximately
$81,000, or 34 percent, compared to last year as a result of the departure of
three former employees in the first quarter of 2007. Stock-based compensation declined
approximately $428,000, or 94 percent, compared to last year, as the 2007
period included approximately $221,000 related to the extension of the exercise
period of certain stock options pursuant to separation agreements with two
former officers of the Company and a one-time, $96,000 expense related to an
extension of the exercise period of a warrant.
In addition, several employee stock options became fully vested during
2007 and were therefore fully expensed prior to 2008. Fees for legal services increased
approximately $67,000, or 84 percent, compared to last year, due to legal fees
associated with our negotiations with Artann, one-time costs of our reverse
stock split, the filing of our Registration Statement on Form S-8 and
other SEC filings and from patent maintenance related legal expenses.
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Research and development
costs in the six months ended June 30, 2008 increased approximately
$193,000, or 180 percent, compared to last year, due to the expensing of our
$300,000 acquisition of the Profile Assets.
Research and development costs recognized during the six months ended June 30,
2007 included the issuance of warrants valued at $72,000 to Artann pursuant to
a cooperation agreement signed in April 2007 and approximately $24,000 of
research costs related to a discontinued prostate visioning system project.
Net
Interest Expense
.
Net
interest expense for the six months ended June 30, 2008 was $854,491, an
increase of 49 percent, compared to $574,461 last year. The increased interest can be attributed to
the issuance of convertible notes to investors in our 2007 and 2008 private
placements. Amortization of the original
issue discount attributable to warrants issued in the private placements
resulted in approximately $292,000 of recorded interest expense in the six
months ended June 30, 2008, while the interest on the convertible notes
totaled approximately $77,000. These
increases were partially offset by interest expense reductions resulting from
declining interest rates (the prime rate is down approximately 30 percent from
last year) and a reduction in the amounts of other loans that were outstanding.
Debt Extinguishment Expense
. Our debt extinguishment expense for the six
months ended June 30, 2008 was $45,831, a decrease of 71 percent, compared
to $158,202 last year. Our debt
extinguishment expense arises primarily from the cost of warrants accrued for
issuance pursuant to the provisions of amendment to short-term loans from
certain individual lenders. The decrease
was due to the repayment of a significant portion of these outstanding short
term loans in late 2007 and in early 2008.
Assets; Property Acquisitions and Dispositions
Our primary assets are patents and patent
applications, which are the foundation for our proposed product offerings. These assets
secure a $1.6 million senior bank note and a
note issued to an investor in the amount of $600,000 and are also pledged as
collateral on a $150,000 loan and, as a result, are not available to secure
other senior debt financing. We anticipate purchasing approximately
$116,000 of computer equipment, development tools and molds, software and
production tooling during the next 12 months.
We do not anticipate selling any significant equipment or other assets
in the near term.
Current Operations Employees and Expenses
We currently employ only two employees. We conduct our research and development,
market research, regulatory and other business operations through the use of a
variety of consultants and medical device development contractors, primarily
Artann. We believe that using consultants
and contractors to perform these functions is more cost effective than hiring
full-time employees and affords us flexibility in directing our resources
during our development stage. As we
prepare for submission to the FDA and market launch of our ProUroScan
TM
system, over the next 12 months we expect to
hire approximately 6 employees in the areas of engineering, regulatory
compliance, marketing and quality assurance.
During the next 12 months, we expect to complete the development of
clinical ProUroScan
TM
systems, conduct clinical trials
and file a 510(k) submission with the FDA, begin the registration process
in the European Union and establish strategic marketing and contract
manufacturing relationships in anticipation of regulatory clearance to enter
the market.
We
incur ongoing expenses that are
directly related to being a publicly traded company, including professional
audit and legal fees, financial printing, press releases and transfer agent
fees. We currently occupy temporary offices
within the office of a former Company director, for which we accrue rent on a
month-to-month basis of approximately $2,200 per month. Upon successful completion of our current funding
efforts, we expect to relocate to permanent offices of approximately 2,000 square
feet. Other
26
Table of Contents
expenses incurred include executive officer
compensation, expensing of stock options, travel, insurance, telephone,
supplies and other miscellaneous expenses.
In the next 12 months, the Company anticipates that it will spend
approximately $1.3 million in marketing and administrative expenses. Of this amount, we expect that approximately
$400,000 will be for compensation, benefits and payroll taxes and approximately
$275,000 will be for consulting costs.
The
remaining work to prepare the ProUroScan
TM
system
for FDA clinical studies consists primarily of engineering and user interface
refinements, safety and bio-testing and completion of documentation and
validation studies. Over the next 12
months, we expect this work to be performed by Artann and other independent
contractors. Pursuant to the terms of
the Artann Development and Commercialization Agreement, over the next 12 months
we expect to make cash payments of approximately $750,000 and an equity payment
of the Companys common shares valued at approximately $1,000,000 for
development and clinical work. In
addition, pursuant to the terms of the Artann License Agreement, over the next
12 months we expect to make a cash payment of $600,000 and an equity payment of
the Companys common shares valued at approximately $500,000 to Artann for
licensing fees.
We
also anticipate developing a small internal engineering team with competencies
in electrical and mechanical engineering and software design and development to
fill specific project requirements not covered by Artann or other outside
contractors. Internal salaries, benefits
and miscellaneous departmental expenses for software and hardware development,
regulatory work and project management over the next 12 months are estimated to
be $245,000.
Liquidity and Capital Resources
On May 2, 2008 and July 29,
2008, the Company closed on
an aggregate of $330,000 of units consisting of unsecured, subordinated,
convertible promissory notes and common stock purchase warrants in a private placement on terms essentially the
same as the 2007 and 2008 private placements as described in the notes to the
consolidated financial statements. As of
July 29, 2008, the Company has closed on a total of $2,000,000 of units in
the 2007 and 2008 private placements, including the conversion of $175,000 of
existing debt into units.
Net cash used in operating activities
was $316,859 and $749,158 during the three
and six month periods ended June 30, 2008, compared to $172,829 and
$462,575 in the comparable periods in 2007.
The increase in cash used was primarily the result of cash used to
purchase the Profile Assets and the payments of accrued expenses, including
accrued compensation, in the first quarter of 2008.
Net cash provided by financing activities was $197,860 and $363,259
during the three and six month periods ended June 30, 2008, compared to
$154,500 and $460,511 in the comparable periods in 2007. Net proceeds of our private placements during
the six months ended June 30, 2008 of $519,848 and the issuance of
$112,500 of notes payable were offset by payments of notes payable and loans
from directors of $228,043. During the
six months ended June 30, 2007, net proceeds from the issuance of common
stock of $447,611 and a net increase in loans from officers and directors of
$37,900 was offset by payments of notes payable of $25,000.
We do not currently have sufficient funds to
complete the development of our products and gain approval of them from the
FDA. As of June 30, 2008, we had
approximately $15,000 of cash on hand and current liabilities (excluding
original issue discounts on debt) of approximately $5.3 million. We estimate that we will need approximately
$3.6 million of cash over the next 12 months to complete the development of a
first generation system, submit a premarket notification application to the FDA
and obtain FDA 510(k) clearance for basic mapping and data maintenance
labeling claims. In addition, we have
$2.2 million of
27
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secured debt and $733,334 of convertible
debt, both of which mature at the end of February 2009, $150,000 of
secured debt that matures at the end of August 2008 and other short term
liabilities exceeding $1,613,000.
During the next 12 months, we plan to raise
approximately $4.8 million through private or public offerings of our debt or
equity securities, alternative financing sources that may become available to
us or some combination of these. We
anticipate that the net proceeds from such financings will be sufficient to
fund our operations and retire approximately $1.2 million of short term
liabilities. We intend to address the $2.2 million secured debt that matures in
February 2009 by seeking an equity investment or licensing fee from a
strategic marketing partner, or by seeking an extension of the maturity
dates. We expect that the convertible
debt will be converted into common stock during the next 12 months. If we are unsuccessful in obtaining an equity
investment or licensing fee, or an extension of the maturity date of the secured
debt, or if the convertible debt is not converted into our common stock, we
will need to raise additional funds.
Sources of alternative
financing include possible strategic investments from medical device companies
that may be interested in marketing products in the prostate cancer detection
market. In addition to financial
support, a successful collaboration with such a company would allow us to gain
access to down stream marketing, engineering, manufacturing and sales support.
Approximately $2.6 million
of our outstanding convertible notes and debentures will automatically convert
into equity upon our closing of an underwritten public offering. In addition, to date we have issued a total
of 400,000 warrants in our 2007 and 2008 private placements, and additional
warrants may be issued pursuant to our financing efforts.
We
are attempting to raise enough cash to complete the development of a first
generation ProUroScan
TM
system
and to seek or obtain FDA 510(k) clearance for basic mapping and data maintenance
labeling claims. However, if our
financing efforts are unsuccessful or significantly delayed for any reason, or
if our product development efforts experience significant unforeseen delays, we
may not have sufficient funds to complete these objectives, and will require
additional financing. If additional
funds are raised by the issuance of convertible debt or equity securities, such
as the issuance of stock, or the issuance and exercise of warrants or the issuance
and conversion of convertible debentures, then existing shareholders will
experience dilution in their ownership interests. 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 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, we may be unable to fund expansion, or to develop or enhance
our products. Ultimately, if no
additional financing is obtained beyond what has been secured to date, we could
potentially be forced to cease operations.
See Part II, Item 1A of this Quarterly Report on Form 10-Q and
Item 1 of our Annual Report on Form 10-KSB for the year ended December 31,
2007 for more complete information concerning our risk factors.
Going Concern
We have incurred operating losses, accumulated
deficit and negative cash flows from operations since inception. As of June 30, 2008, we had an
accumulated deficit of approximately $18.0 million. These factors, among others, raise
substantial doubt about our ability to continue as a going concern. Our unaudited consolidated financial
statements included in Part II, Item 1 of this Quarterly Report on Form 10-Q
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.
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Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The application of
GAAP requires that we make estimates that affect our 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 revenue and expenses
during the reporting period. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances. We evaluate our estimates and assumptions on an ongoing basis.
Our actual results may differ significantly from these estimates.
A
description of the Companys critical accounting policies that represent the
more significant judgments and estimates used in the preparation of the Companys
financial statements was provided in Item 6. Managements Discussion and
Analysis or Plan of Operations of the Companys Annual Report on Form 10-KSB
for the year ended December 31, 2007.
Item 4T. Controls and
Procedures.
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 Securities Exchange Act of 1934, as amended (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 (the SEC).
As of June 30, 2008, the end of the period covered by this Quarterly
Report on Form 10-Q, we carried out an evaluation, under the supervision and
with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
During
the quarter ended June 30, 2008, there has been no change in the Companys
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 Companys internal control over financial reporting.
29
Table of Contents
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
The Company, like most other public companies, is involved
in legal proceedings in the conduct of the ordinary course of its business.
Item
1A. Risk Factors
Investing in our common stock involves a high
degree of risk. You should carefully consider the risks and uncertainties set
forth under Item 1 of our Annual Report on Form 10-KSB for the year ended December 31,
2007, as well as the material changes to those risk factors set forth below
before purchasing our common stock.
These risks and uncertainties are not the only ones facing our Company;
additional risks and uncertainties may also impair our business operations. If
any of the following risks actually occur, our business, financial condition,
results of operations or cash flows would likely suffer. In that case, the
trading price of our common stock could fall, and you may lose all or part of
your investment. We undertake no
obligation to update or revise any forward-looking statement except as required
by the SEC.
The following changes to risk factors disclosed in our
Annual Report on Form 10-KSB are as a result of our April 3, 2008
acquisition of the Profile Assets that we had previously licensed:
Risk Factors Deleted:
·
We license from third parties, and do not own
or control, key intellectual property critical to our products.
·
If we lose our right to license and use from
third parties certain critical intellectual property for any reason, our entire
business would be in jeopardy.
·
The protections for the intellectual property
we license from other parties may be successfully challenged by third parties.
·
We will begin to
lose patent protection on our licensed prostate-imaging systems and related
patent technologies beginning in 2012. As we lose patent protection on
our critical licensed technologies, it may have a material adverse effect on
our business
Risk Factors Added:
The intellectual property we own is subject to a
secured $150,000 loan which, if not settled upon maturity, could lead to the
loss of our patent rights and put
our entire business in jeopardy.
We have purchased
certain patents, patent applications and know-how from Profile, LLC
that is critical to our proposed products.
A portion of the purchase price
of the patents, patent applications and know-how was financed under a secured,
$150,000 promissory note issued in favor of Profile. Pursuant to the terms of the note, the
principal and interest accrued thereon becomes due and payable five business
days following the close of a public offering of our equity securities August 29,
2008, whichever occurs first. In the
event the note is not fully paid upon maturity or within 45 days thereafter,
Profile may enforce its right, which is secured by an agreement under which we
granted to Profile a security interest, to have the patents, patent
applications and know-how returned, and we will not be able to recoup any
monies that were previously paid to Profile.
If the
foregoing breach
30
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and
circumstances occurred, the viability of the Company would be in question. Our
only alternatives would be to find existing and non-infringing technology to
replace the lost technology, 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 and could have a material adverse effect
on our business.
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.
We will begin to
lose patent protection on our prostate-imaging systems and related patent
technologies beginning in 2012. 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. One of these patents will
expire in 2012, another in 2013, while the remainder will expire between 2016
and 2021. As we begin to lose certain
patent protections on our prostate-imaging systems and related critical
patented technologies in 2012, we may face strong competition as a result, which
could have a material adverse effect our business.
The following changes to risk factors disclosed in our
Annual Report on Form 10-KSB are as a result of the completion of our July 25,
2008 agreements with Artann:
Risk Factors Deleted:
·
We are relying upon Artann Laboratories, Inc.
(Artann) to complete development of the ProUroScan
TM
system
and will not be able to control the pace of that development. Failure
to establish a new development and licensing agreement on terms acceptable to
the Company would significantly delay the development and market introduction
of the ProUroScan
TM
system
and would have a material adverse effect on our business.
·
Failure to obtain a license for intellectual
properties owned by Artann would 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 have limited experience in assembling and testing our products and
may encounter problems or delays in the assembly of our products or fail to
meet certain regulatory requirements which could result in an adverse effect on
our business and financial results.
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Risk Factors Added:
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, over the contract periods of the License and the
Development and Commercialization Agreements with Artann, we expect to issue
equity securities to Artann valued up to $2.5 million. 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.
The following risk factor, previously disclosed in our
Annual Report on Form 10-KSB, is updated to provide more current
information:
We are currently in need of financing and will need additional
financing during 2008, and any such financing will likely be dilutive to our
existing shareholders.
We do not currently have sufficient funds to
complete the development of our products and gain approval of them from the
FDA. As of June 30, 2008, we had
approximately $15,000 of cash on hand and current liabilities (excluding
original issue discounts on debt) of approximately $5.3 million. We estimate that we will need approximately
$3.6 million of cash over the next 12 months to complete the development of a
first generation system, submit a premarket notification application to the FDA
and obtain FDA 510(k) clearance for basic mapping and data maintenance
labeling claims. In addition, we have
$2.2 million of secured debt and $733,334 of convertible debt, both of which
mature at the end of February 2009, $150,000 of secured debt that matures
at the end of August 2008 and other short term liabilities exceeding
$1,613,000.
During the next 12 months, we plan to raise approximately
$4.8 million through private or public offerings of our debt or equity
securities, alternative financing sources that may become available to us or
some combination of these. We anticipate
that the net proceeds from such financings will be sufficient to fund our
operations and retire approximately $1.2 million of short term liabilities. We
intend to address the $2.2 million secured debt that matures in February 2009
by seeking an equity investment or licensing fee from a strategic marketing partner,
or by seeking an extension of the maturity dates. We expect that the convertible debt will be
converted into common stock during the next 12 months. If we are unsuccessful in obtaining an equity
investment or licensing fee, or an extension of the maturity date of the
secured debt, or if the convertible debt is not converted into our common
stock, we will need to raise additional funds.
Sources of alternative financing
include possible strategic investments from medical device companies that may be
interested in marketing products in the prostate cancer detection market. In addition to financial support, a
successful collaboration with such a company would allow us to gain access to
down stream marketing, engineering, manufacturing and sales support.
Approximately $2.6 million of our
outstanding convertible notes and debentures will automatically convert into
equity upon our closing of an underwritten public offering. In addition, to date we have issued a total of
400,000 warrants in our 2007 and 2008 private placements, and additional
warrants may be issued pursuant to our financing efforts.
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We are attempting to raise enough cash to complete the
development of a first generation ProUroScan
TM
system and to seek or obtain FDA 510(k) clearance
for basic mapping and data maintenance labeling claims. However, if our financing efforts are
unsuccessful or significantly delayed for any reason, or if our product
development efforts experience significant unforeseen delays, we may not have
sufficient funds to complete these objectives, and will require additional
financing. If additional funds are
raised by the issuance of convertible debt or equity securities, such as the
issuance of stock, or the issuance and exercise of warrants or the issuance and
conversion of convertible debentures, then existing shareholders will
experience dilution in their ownership interests. 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 existing holders of common stock.
The following risk factor is added to provide current
information:
We have not made the required payments due under
certain agreements.
We
have not made the required $9,350 payment of principal under a short-term loan
agreement. We plan to amend the terms of this short-term loan agreement,
subject to agreement by the lender, so that the outstanding principal amount
will become due and payable upon the Company obtaining a sufficient amount of
funding. In addition, as of July 31,
2008, we have not paid $41,517 of interest payments due pursuant to certain
short-term loan agreements. We expect to
reach agreement with the lenders to defer payment of the accrued interest until
the closing of an underwritten public offering.
As consideration, we expect to issue to the lenders warrants to acquire
a limited number of shares of the Companys common stock. If we fail to negotiate amendments to these
short-term loan agreement, we will remain in past due status with such
agreements and will be forced to borrow additional funds to retire the
obligations.
The risks and uncertainties listed below are fully described
in our Annual Report on Form 10-KSB, to which no material changes have
been made:
·
|
|
As a development stage company,
we have no operating history and our business plan has not yet been fully
tested. We anticipate incurring future losses until our products are
completed, regulatory approval is secured and our products are introduced
into the United States and worldwide markets.
|
|
|
|
·
|
|
We
have a history of operating losses and have received a going-concern
qualification from our independent registered public accounting firm.
|
|
|
|
·
|
|
Even if we raise enough cash in our financing
efforts to complete development of a first generation
ProUroScan
TM
system and to obtain FDA clearance of a
510(k) on a basic mapping and data maintenance claim, we will still
require additional financing to launch our product into the market.
|
|
|
|
·
|
|
If we are unable to secure a
distribution partner for the commercial launch of our first generation ProUroScan
TM
system, we may require additional financing
to launch our product into the market.
|
|
|
|
·
|
|
If FDA clearance is delayed, including because we
are not able to raise enough funds to get us through the regulatory process,
we could potentially be forced to cease operations.
|
33
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·
|
|
Our
assets are pledged to secure a $1.2 million senior bank note and a $600,000 note
issued to an investor and, as a result, are not available to secure other
senior debt financing. Upon the occurrence of an event of default, our assets
will be assigned to guarantors of the senior bank note and the holder of such
$600,000 promissory note.
|
|
|
|
·
|
|
Our
products have not been, and may never be, fully commercially completed and
developed.
|
|
|
|
·
|
|
The
commercialization of our products may be significantly delayed by
governmental regulation and any and all such delays, if they occur, may have
a material adverse effect on our business.
|
|
|
|
·
|
|
Even
if successfully developed, our products may not be commercially viable.
|
|
|
|
·
|
|
Even
if successfully developed, our products may not be accepted by the
marketplace.
|
|
|
|
·
|
|
A failure to successfully
implement a patient pay sales model prior to establishing third party
reimbursement would have a material adverse effect on product sales and our
financial results.
|
|
|
|
·
|
|
Our
failure to receive third-party coverage and reimbursement for our products, when
in the marketplace, could result in diminished marketability of our products.
|
|
|
|
·
|
|
Once we commercialize the
ProUroScan
TM
system, we may 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.
|
|
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·
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Any failure in our efforts or our contractors
efforts to train physicians or other medical staff could result in lower than
expected product sales.
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·
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There is no guarantee that the FDA will grant
510(k) clearance or PMA approval of our future products and failure to
obtain necessary clearances or approvals for our future products would
adversely affect our ability to grow our business.
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·
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Clinical trials necessary to support our future
submissions will be expensive and may require the enrollment of large numbers
of patients, and suitable patients may be difficult to identify and recruit
. 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.
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·
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If the third parties on which we rely to conduct
our clinical trials and to assist us with pre-clinical development do not
perform as contractually required or expected, we may not be able to obtain
regulatory approval for or commercialize our products.
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·
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Even if
our products are cleared or approved by regulatory authorities, if we or our
contract 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.
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·
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Our products may in the future be subject to
product recalls that could harm our reputation, business and financial
results.
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34
Table
of Contents
·
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If our 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.
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·
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Federal regulatory reforms may adversely affect
our ability to sell our products profitably.
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·
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Rapid
technological change in our competitive marketplace may render our proposed
products obsolete or may diminish our ability to compete in the marketplace.
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·
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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.
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·
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Our
reliance on third-party manufacturers and other third parties in other
aspects of our business may reduce any profits we may earn from our products
and may negatively affect future product development.
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·
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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.
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·
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The
funding provided by the government from the $3,000,000 Small Business
Innovation Research Phase II Competitive Renewal grant awarded to Artann by
the National Institutes of Health (NIH) may be reduced or delayed. If such
reduction or delay occurs, this may have a material adverse effect on our
business.
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·
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We
are highly dependent on the services provided by certain key personnel.
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·
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We
may not be able to successfully compete against companies in our industry
with greater resources, or with any competition.
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·
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Our
common stock is illiquid and may be difficult to sell.
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·
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There
is currently limited trading volume in our common stock, which may make it
difficult to sell shares of our common stock.
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·
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Because
our stock is deemed a penny stock, you may have difficulty selling shares
of our common stock.
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·
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The shares and warrants that may be issued in
future financings may trigger an ownership change as defined by the
Internal Revenue Code of 1986, as amended (the Code) and o
ur ability to use operating loss
carryforwards to offset income in future years may be limited.
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35
Table
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·
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Our
business and products subject us to the risk of product liability claims.
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·
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We
have never paid dividends and do not expect to pay dividends in the
foreseeable future.
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For a more detailed discussion of the risk factors listed
above that have not been materially changed, see Item 1 of our Annual Report on
Form 10-KSB for the year ended December 31, 2007 under the heading Risk
Factors Associated with our Business, Operations and Securities. We undertake
no obligation to update or revise any forward looking statements, except as
required by the SEC.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds.
Convertible Promissory
Note Issuances
On May 2, 2008, the Company closed on the sale of $155,000 of
units consisting of unsecured, subordinated, convertible promissory notes (the Notes)
and common stock purchase warrants (the Warrants) in a private
placement. Net cash proceeds to the
Company were approximately $120,000, after deducting approximately $35,000 of
expenses of the offering (including $20,150 of commissions and fees paid to the
placement agent). The net proceeds will
be used to pay certain existing obligations and for general corporate purposes.
At the closing, the Company issued $147,250 in principal amount of
Notes and Warrants to purchase 31,000 shares of common stock. The Notes bear interest at ten percent per
year, mature on November 2, 2009, and will convert into the type of equity
securities offered by the Company in any underwritten public offering prior to
maturity at 70 percent of the public offering price. In the event a public offering is not
completed before the maturity date, the entire principal and unpaid accrued
interest will convert into the Companys common stock at $0.05 per share. The Company may, at its option, prepay the
Notes anytime on or after May 2, 2009.
The Warrants will become exercisable upon the earlier of the closing of
a public offering or the maturity date of the Notes and will remain exercisable
until December 31, 2012. The
exercise price will be 50 percent of the public offering price, or in the event
a public offering is not completed before the maturity date, at 50 percent of
the closing price of the Companys common stock on the maturity date.
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 as
conducted by the placement agent and the Company.
Warrants
Pursuant to the terms of an aggregate
$112,500 of promissory notes issued in favor of William Reiling, James Davis
and the Phillips W. Smith Family Trust (the Smith Trust) on April 3,
2008, the Company issued five-year warrants (immediately exercisable) to
acquire up to an aggregate of 75,000 shares of the Companys common stock at
$1.50 per share to each lender.
The above warrant issuances were made, and the prospective issuances
will be made, in reliance on exemption from registration provided under Section 4(2) of
the Securities Act, for issuance by an issuer not involving a public offering.
Item
5. Other Information.
None.
36
Table
of Contents
Item
6. Exhibits
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
*
|
|
Employment Agreement by and between ProUroCare Inc. and Richard
Carlson dated July 16, 2008.
|
|
|
|
|
10.2
|
*
|
|
License Agreement by and between ProUroCare Medical Inc. and Artann
Laboratories Inc. dated July 25, 2008.
|
|
|
|
|
10.3
|
*
|
|
Development and Commercialization Agreement by and between ProUroCare
Medical Inc. and Artann Laboratories Inc. dated July 25, 2008.
|
|
|
|
|
10.4
|
*
|
|
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.
|
|
|
|
|
31.1
|
*
|
|
Certification of Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.2
|
*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
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.
37
Table
of Contents
SIGNATURES
Pursuant to the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
|
ProUroCare Medical Inc.
|
|
|
|
|
Date: August 14, 2008
|
By:
|
/s/ Richard C. Carlson
|
|
Name: Richard C. Carlson
|
|
Title: Chief Executive
Officer
|
|
|
|
|
Date: August 14, 2008
|
By:
|
/s/ Richard Thon
|
|
Name: Richard Thon
|
|
Title: Chief Financial
Officer
|
38
Table of Contents
Exhibit Index
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
*
|
|
Employment Agreement by and between ProUroCare Inc. and Richard
Carlson dated July 16, 2008.
|
|
|
|
|
10.2
|
*
|
|
License Agreement by and between ProUroCare Medical Inc. and Artann
Laboratories Inc. dated July 25, 2008.
|
|
|
|
|
10.3
|
*
|
|
Development and Commercialization Agreement by and between ProUroCare
Medical Inc. and Artann Laboratories Inc. dated July 25, 2008.
|
|
|
|
|
10.4
|
*
|
|
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.
|
|
|
|
|
31.1
|
*
|
|
Certification of Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.2
|
*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
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.
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