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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
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ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number: 333-103781
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ProUroCare Medical Inc.
(Exact name of registrant as specified in its charter)
Nevada
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20-1212923
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(State or other jurisdiction
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(IRS Employer
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of incorporation)
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Identification No.)
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6440 Flying Cloud Drive,
Suite 101, Eden Prairie, MN
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55344
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number,
including area code
952-476-9093
5500 Wayzata Blvd.,
Suite 310, Golden Valley, MN 55416
(Former name or former address, if changed since last
report.)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common
Stock $0.00001 par value; Common Stock Warrants
Units,
consisting of one share of Common Stock and one Warrant
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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Yes
x
No
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act.
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Yes
x
No
Indicate by check mark whether
the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
x
Yes
o
No
Indicate by check mark if
disclosure of delinquent filers in response to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller
reporting company
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Indicate by check mark
whether the registrant is a shell company (as defined by Rule 12-b of the
Exchange Act).
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Yes
x
No
State the aggregate market
value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was sold, or the
average bid and asked price of such common equity, as of the last business day
of the registrants most recently completed second fiscal quarter.
$853,897 as of June 30, 2008
Indicate the number of
shares outstanding of each of the registrants classes of common equity, as of
the latest practicable date.
3,108,767
common shares and 6,041,281 Units at March 18, 2009
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INTRODUCTORY CAUTIONARY STATEMENT
This Annual Report on Form 10-K
includes forward-looking statements within the meaning of the Securities
Exchange Act of 1934, as amended (the Exchange Act). These statements are based on managements current
beliefs and assumptions and on information currently available to us.
Forward-looking statements include, among others, the information concerning
possible or assumed future results of operations of ProUroCare Medical, Inc.
and its subsidiary (the Company, we, us, or our) set forth under the
heading Managements Discussion and Analysis or Plan of Operation and
elsewhere in this Annual Report.
Forward-looking statements also include statements where the words may,
will, should, could, expect, anticipate, intend, plan, believe,
estimate, predict, potential, or similar expressions are used. Forward-looking statements are not guarantees
of future performance. Our future actual results and shareholder values may
likely differ materially from those expressed in these forward-looking
statements. We caution you not to put undue reliance on any forward-looking
statements included in this document.
See Risk Factors Associated with our Business, Operations, and
Securities.
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PART I
ITEM
1: BUSINESS
See Item 1A, RISK FACTORS
ASSOCIATED WITH OUR BUSINESS, OPERATIONS AND SECURITIES, page
19.
Overview
We are a development stage
company engaged in the business of developing for market innovative products
for the detection and characterization of male urological prostate disease. Our
primary focus is currently the ProUroScan prostate imaging system (the ProUroScan
System).
The ProUroScan System is an
imaging system designed for use as an aid to the physician in visualizing and
documenting tissue abnormalities in the prostate that have been previously
detected by a digital rectal exam (DRE). The ProUroScan System is comprised
of an array of sensors mounted on a probe, a central processing unit,
proprietary software and image construction algorithms, and a color monitor. As
an adjunct to DRE, the ProUroScan System will be used following an abnormal DRE
to generate a real time image and map of the prostate and to store this
information electronically.
The ProUroScan system is not
currently marketed or sold and is not cleared for marketing by the
U.S. Food and Drug Administration (FDA). Our initial goal is to obtain a
basic mapping and data maintenance claim from the FDA under a 510(k) application
for the first generation system. The remaining regulatory and clinical work on
the ProUroScan System will be performed under our development contract with
Artann Laboratories Inc. (Artann), a scientific technology company based
in Trenton, New Jersey, that is focused on early-stage technology development.
Artann has completed all pre-clinical activities and testing on the ProUroScan
System, is conducting clinical trials for the basic mapping and data
maintenance claim, and will prepare and submit the 510(k) application for
such claim.
The ProUroScan System will
initially be marketed as an adjunctive tool following an abnormal DRE to
create a map of the prostate and an electronic record of the image. More specifically, the proposed indication
for use that Artann intends to seek for the ProUroScan System 510(k) submission,
which we refer to as the basic mapping and data maintenance claim, is for use
as an aid to the physician in visualizing and documenting abnormalities of the
prostate detected by a DRE.
Once FDA 510(k) clearance
is obtained on our first generation ProUroScan System, we intend to have the
systems manufactured by one or more FDA-regulated contract manufacturers and
market the system in cooperation with a medical device company that has an
established presence in the urology market. We are currently exploring
potential marketing relationships with several urology product companies
interested in marketing the ProUroScan System in the prostate disease market.
We expect such a relationship would provide financial resources and access to
down stream marketing, engineering, manufacturing and sales support.
In the future, subject to
receipt of appropriate FDA approvals or clearances, we plan to develop and
introduce enhanced versions and additional indications for use of the
ProUroScan System that we expect will be able to monitor changes in prostate
tissue over time, guide prostate biopsies and assess changes in prostate size
following drug treatment for Benign Prostatic Hypertrophy (BPH).
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Corporate Information
ProUroCare Inc. (PUC) was incorporated in 1999 as a Minnesota
corporation. In January 2002, PUC
licensed the rights to certain advanced prostate mechanical imaging technology,
and became engaged in the business of developing this technology for assessing
characteristics of the prostate. In
2004, through a reverse merger transaction with Global Internet Communications
(Global), a Nevada corporation, PUC became the wholly owned and sole
operating subsidiary of Global, which was then renamed ProUroCare Medical Inc.
Market FocusProstate Disease
Prostate cancer is the most
common form of cancer and the second leading cause of cancer death in men.
According to the National Cancer Institute, more than 186,000 men were
expected to be diagnosed with prostate cancer and over 28,000 were expected to
die from the disease in 2008. Currently, there are approximately
42 million men in the U.S. over the age of 50. For men in this age
category, the standard of care to screen for the presence of prostate cancer is
to have a physical exam each year in which two tests are routinely performed:
the DRE and the Prostate Specific Antigen (PSA) blood test. Although used for
many years, the specificity of these tests has been widely questioned. Data
from community based studies suggest that the positive predictive value of a
DRE for prostate cancer is 15% to 30% and varies relatively little with
age. For elevated PSA levels between 4 and 10ng/mL, the positive
predictive value is approximately 20%. For studies in which biopsies were done
when the results of either test were abnormal, 18% to 26% of screened
patients had suspicious results, cancer was actually detected in approximately
4% of screened patients and the positive predictive value of the tests combined
was 15% to 21%. In another study involving 6,630 volunteers, the
combination of DRE and PSA detected 26% more cancers than PSA alone. Although
PSA and DRE provide some positive predictive value, neither of these tests
creates a physical or visual record of the abnormality or its position in the
prostate.
If a patient is suspected of
having an abnormal tissue formation in the prostate as a result of a positive
DRE or a high PSA value, he is generally referred to a urologist. A urologist
will usually perform their own DRE and may decide to perform a prostate biopsy
to obtain tissue samples for microscopic analysis. The prostate is biopsied by
a needle that is guided by ultrasound into the prostate through the rectal
wall. Since the existence and exact location of possible cancerous tissue is
not known, the urologist will usually take 10 to 14 samples in a scattered
pattern throughout the prostate in an attempt to find the suspect tissue. Of
the approximately 1 million prostate biopsy procedures done each year in
the United States, only approximately 25 percent actually detect the
presence of cancer. The low predictive ability of the DRE and PSA tests to
gauge the presence of cancer tends to over-inflate the number of referrals for
invasive biopsy that are necessary to confirm that a patient has cancer.
We believe there is a market
need to be able to visualize and create an electronic record (map) that can
show the relative size and position of abnormal tissue in the prostate gland.
We believe that the ProUroScan System offers a solution that meets these needs
and one that will (assuming we apply for and obtain FDA approval or clearance
for this indication) enable physicians to monitor and compare images of the
prostate over time. With additional development and further FDA approvals, we
believe the ProUroScan System may eventually be used to guide prostate biopsy
and assess the effect of medical treatments of BPH.
Prostate Cancer Screening and
Diagnosis
The two most common
screening tests for identifying prostate cancer are the DRE and the PSA. These
tests have been used for years, but have often been criticized for their lack
of specificity and selectivity.
In a DRE exam, a physician
wearing a latex glove inserts a lubricated finger into the rectum to palpate
the prostate gland to detect abnormalities. The clinician must rely on his or
her experience and sensitivity of touch to estimate the size of the prostate
and detect irregularities in shape or hardness. There is significant
subjectivity inherent in the DRE exam which can be negatively affected by poor
examiner training, lack of experience or poor ability to
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interpret the results, as well as other patient related limitations
including excessive obesity, patient discomfort and unusual anatomical
positioning of the prostate.
Data from community-based
studies indicate that the positive predictive value of a DRE in detecting
cancer is 15% to 30% and varies relatively little with age. In a
Scandinavian study, the positive predictive value of DRE was found to be only
22% to 29%. According to the Eighth Edition of Campbells Urology, a DRE
has only fair reproducibility even with experienced examiners and the test
misses a substantial proportion of cancers before they become advanced and less
amenable to treatment.
The other primary screening
test for detecting prostate cancer is the measurement of PSA in serum. The
advantages offered by PSA testing are its simplicity, objectivity,
reproducibility and low level of invasiveness. Although PSA is specific to
prostate tissue, it is not specific to prostate cancer. Older men that have
benign enlargement of the prostate and acute prostatitis often have elevated
PSA levels. Serum levels of PSA can also be elevated for a period of time
after transrectal needle biopsy, acute urinary retention and prostate surgery.
Because of the prevalence of these conditions in men over the age of 50,
the positive predictive value of PSA measurements decreases with age.
In clinical practice, a PSA
level greater than 4ng/mL is generally considered an abnormal result. Recent
community-based studies show that PSA levels greater than 4ng/mL are seen
in about 15% of men who are older than 50 years of age. The
probability, or positive predictive value, that a man who is older than 50
having prostate cancer if his PSA level is elevated is approximately
20% to 30%. However, the likelihood of cancer depends on the degree of
elevation in the PSA levels. For levels between 4 and 10ng/mL, the positive
predictive value is about 20 percent. This value increases to between
42 percent and 64 percent if the PSA level is greater than
10ng/nL. Despite these variances, PSA testing has increased the detection
rate of early-stage prostate cancers, which are more curable than late-stage
cancers.
Most clinicians have adopted
the strategy of performing both tests in combination, which has been shown to
increase the combined predictive value. In fact, in a large study of
volunteers, the combination of DRE and PSA detected 26% more cancers than PSA
alone. However, because of the significant risk of prostate cancer, prostate
biopsy is recommended for all men who have DRE abnormalities, regardless of
PSA level, because 25% of men with cancer have PSA levels less than
4mg/nL.
A patient with a positive
DRE or an elevated PSA is typically referred to a urologist for further
diagnosis. The urologist will usually perform a prostate biopsy to obtain
tissue samples for microscopic analysis. The prostate is biopsied by a needle
that is guided by ultrasound into the prostate through the rectal wall. Since
the existence and exact location of possible cancerous tissue is not known, the
urologist will usually take 10 to 14 samples in a scattered pattern throughout
the prostate in an attempt to find the suspect tissue. The tissue samples are
then sent to a laboratory for analysis and interpretation, and the results are
reported several days later. If the results are negative or indeterminate, the
urologist may suggest a second biopsy procedure, or that the patient increase
the frequency of future screening examinations. According to Oregon Health and
Science University, approximately 1 million patients are biopsied each
year in the United States, but only approximately 25% of biopsy procedures
performed detects the presence of cancer.
The treatment path for
patients who test positive for prostate cancer depends on many variables,
including age, location and pathology of the cancerous tissue and general
health of the patient. Generally, a younger, otherwise healthy patient will
elect to have the prostate removed to eliminate the possibility that it might
spread beyond the prostate. Older, less healthy patients may elect not to
undergo surgery, and instead monitor the disease closely by semi-annual PSA and
DRE exams, and annual biopsies. This monitoring regimen is commonly referred to
as active surveillance. Some patients may elect radiation or drug treatments,
in addition to necessary ongoing active surveillance. The National Cancer
Institute estimates that there are approximately 2 million men alive who
have a
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history of cancer of the prostate. On this basis, we estimate that the
number of men over the last decade that have elected against prostate removal
and thus are undergoing ongoing active surveillance exceeds one million.
The ProUroScan Prostate Imaging
System
The ProUroScan System is an
imaging system designed to provide a map of the prostate and to store a digital
image for review. As an adjunctive tool to DRE, it will be used after a
physician identifies abnormal tissue during a DRE examination. The first
generation system will provide a map or record of the pressures that are
generated from palpation of the posterior surface of the prostate using a
sensor probe. The systems operation is based on measurement of the stress
pattern on the rectal wall when the probe is pressed against the prostate.
Temporal and spatial changes in the stress pattern provide information on the
elastic structure of the gland and allow two-dimensional reconstruction of
prostate anatomy and visualization of prostate mechanical properties. The data
acquired allow the calculation of prostate features such as size and shape. The
prostate image is displayed on a screen that allows physicians to visualize
tissue abnormalities in the prostate gland. In addition to the real time visual
image, the results are stored electronically as a digital record.
The ProUroScan System
consists of arrays of pressure sensors mounted on a probe, a central processing
unit, proprietary software and image construction algorithms, and a color
monitor. The probe is specially designed for the rectal anatomy to minimize
patient discomfort. It is ergonomic for the clinician and similar to a
traditional DRE for the patient. The probe utilizes highly sensitive pressure
sensors located on the face of the probe head to palpate the prostate. The
probes positioning system ensures that the person administering the scan
examines the entire surface of the prostate, and assists prostate image
construction.
To perform a scan, the
clinician inserts the tip of the probe into the patients rectum and palpates the
prostate. As the prostate is palpated, a color image of the prostate is
produced and displayed on the computer monitor, along with indicators of the
amount of pressure being applied to help guide the clinician. Differences in
tissue stiffness and elasticity will be depicted in real time on a color
monitor. Total testing time for a healthy prostate is under one minute.
ProUroScan System Status
The first generation
ProUroScan System has been tested in laboratory experiments on prostate models
and in a pre-clinical study. In addition, the system was used for over two
years and on approximately 168 patients at the Robert Wood Johnson Medical
Center in New Brunswick, New Jersey. In March 2008,
an article authored by Artann scientists and published in the peer- reviewed
Urology
reported that in 84% of the cases in this
pre-clinical study, the ProUroScan System was able to construct a real-time
color image and map of the prostate.
Based on discussions between
Artann and representatives from the FDA, we believe that the ProUroScan System
with a basic mapping and data maintenance claim will be regulated by the FDA as
a class II device. Class II devices typically are cleared for
marketing by the FDA through a 510(k) application.
Under the terms of its
contract with us, Artann is responsible for submitting and obtaining the
initial 510(k) clearance for the ProUroScan System for the basic mapping
and data maintenance claim. In April 2008, representatives from Artann met
with the FDA to solicit feedback from the agency regarding the proposed
clinical testing that the FDA will require to support a 510(k). Artann
commenced the clinical study in the fourth quarter of 2008. In order to meet
the requirements established by the FDA for the 510(k) clinical study,
three centers were identified to participate in the study and to serve as
future training and referral sites for the eventual market rollout of the
ProUroScan System. The sites include the Mayo Clinic in Rochester, Minnesota,
the Robert Wood Johnson Medical Center in New Brunswick, New Jersey and the VA
Medical Center in Minneapolis, Minnesota. Institutional Review Board (IRB)
approvals have been obtained, and ProUroScan Systems have been installed, at
all three sites. Physician training has also been completed at all three sites
and formal clinical studies have commenced at the Robert Wood Johnson Medical
Center and the VA Medical Center. It is expected that clinical studies
will commence at the
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Mayo Clinic in late March or early April 2009. We expect to
complete this study in May 2009, and submit the 510(k) application to
the FDA shortly thereafter. Once
submitted, the FDA will have 90 days to review and grant clearance, ask
questions or turn the 510(k) down. However, the 510(k) application
process may be significantly longer if the FDA has questions upon its review or
makes a request for additional information from Artann. Once cleared and upon
ProUroCares first commercial sale of a ProUroScan System, Artann will transfer
the 510(k) to ProUroCare. No assurances can be given in regard to the
timing of any of these events.
Planned Development of the
ProUroScan System
We believe that the
ProUroScan Systems existing technology provides a platform on which to develop
multiple future generation systems. Once 510(k) clearance is obtained for
a basic mapping and data maintenance claim and is transferred to us from
Artann, we intend to work with Artann to develop more enhanced product
features. Future generation systems will require us to obtain regulatory
approval or clearance for use of the ProUroScan System for additional prostate
related indications and file additional submissions with the FDA to obtain
expanded labeling claims. Such regulatory clearances or approvals may require
us to perform additional clinical studies. Future generations of the ProUroScan
System may also require us to secure rights to additional intellectual
property.
Active Surveillance
We believe that one of the
more valuable future applications for the ProUroScan System, assuming we obtain
any necessary FDA clearance or approval, will be to allow physicians to monitor
changes in the prostate over time. The ProUroScan System is designed to produce
a digital image of the prostate showing the size and symmetry of the prostate
and the location of tissue abnormalities within the prostate. The ProUroScan
System creates a digital record of the exam that can be stored and used for
comparison to subsequent exams. We believe its ability to digitally store not
only the scan results but all of the individual pressure readings taken during
the course of the procedure should facilitate a quantitative analysis of the progression
of the disease over time. By comparing the data taken in a baseline examination
to subsequent examinations during the course of active surveillance, we believe
the urologist will gain valuable information about changes in the patients
condition that can influence their decision to pursue additional treatment or
continue surveillance. We believe that this expanded use of the ProUroScan
System will provide consistent mapping over time as compared to variations
resulting from differences in technique and experience of clinicians performing
DREs. We believe this will enable physicians to compare and contrast the
patients results from exam to exam, and to get second opinions on the patients
status in regards to the diagnosis without an additional office visit. We
believe that comparisons of multiple scans over time will also enable the
physician to make longitudinal assessments of the patients disease.
Three Dimensional Imaging
We believe that another
future enhancement of the current generation system may be the capability to
identify the specific three-dimensional location of lesions found in the
prostate. This enhanced system may also be able to create a three-dimensional
image of the position of the lesions and allow the physician to rotate the image
to assist in identifying the actual position of the lesion in the prostate
gland. We believe that having this capability may prove helpful in providing a
diagnosis of the patients condition in conjunction with other commercially
available diagnostic tools.
Guiding Biopsy
We believe that future
expansion to three dimensional imaging may facilitate guiding biopsy needles to
the point where suspicious lesions exist so that a tissue sample can be
obtained from the prostate gland. Having the three-dimensional coordinates of a
lesion will enable the physician to precisely guide the biopsy needle to the
point where he can be assured that tissue samples are being taken from that
area. Having this capability increases the likelihood of finding cancerous tissue
while also potentially minimizing the number of biopsies that are taken on an
individual
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patient. According to Oregon Health and Science University,
approximately 1 million patients are biopsied each year in the United
States, but only 25 percent of biopsy procedures performed detects the
presence of cancer.
Evaluating Drug Treatment for BPH Patients
For patients who have
symptoms of BPH, we believe that future generations of the ProUroScan System
may also be used to monitor changes in prostate size before and during the
course of drug treatments, allowing physicians to more quickly assess the
effectiveness of alternative therapeutic approaches. Assuming future FDA
approval or clearance is granted, use of the ProUroScan System in patients
diagnosed with BPH will allow physicians to monitor changes in the size and
volume of the prostate following treatment with drugs or other tissue reducing
technologies. Timely, accurate assessment of prostate volume changes and the
effectiveness of treatment should enable physicians to recommend alternative
treatments sooner than current assessment methods, and thus provide more
immediate relief to patients.
Marketing and Distribution
Our business plan is built
on the premise that the map and physical record created by the ProUroScan
System will become a valuable tool in assisting physicians and patients in
understanding the scope of the abnormalities that are identified with a DRE.
Physicians performing the scan will need to acquire a ProUroCare System, which
will be placed under a direct purchase, lease or user utilization agreement.
Current Procedural
Terminology (CPT) codes are used by physicians and other providers to submit
claims. We anticipate that the ProUroScan System may be covered by Medicare as
a diagnostic test for patients who have clinical signs or symptoms of disease.
At the outset, however, there will not be a unique CPT code for the ProUroScan
procedure. Consequently, obtaining coverage and reimbursement may be
challenging during the initial stages of the ProUroScan System rollout. During
this period of time, physicians will have the option of submitting claims under
a miscellaneous CPT code with proper documentation. We also expect to use a patient
pay model in which the patient would pay directly for the cost of the scan.
During the first few years of use, we will collect the clinical and economic
data necessary in order to apply for a unique CPT code from the American
Medical Association (AMA).
Our initial commercial
rollout will focus on urologists in the United States. By focusing on
urologists, we expect to establish the clinical and economic value of the scan
for patients, and to demonstrate to both private and government payors the
rationale and parameters for establishing a CPT code and that the scan
should be covered and adequately reimbursed.
We believe that the cost of
establishing our own direct sales force of sufficient size and capability to
effectively rollout the ProUroScan System in the U.S. would be cost prohibitive
and that our product can be more effectively launched by establishing a
distribution relationship with one or more large urology product companies that
have well-established relationships with physicians. We believe that
establishing such a relationship will not only allow us to quickly and
effectively penetrate the urology market, but may also afford us an opportunity
for additional financial support in the form of licensing fees, equity
investment and in kind support from other key functional departments of the
urology product company. We are currently exploring potential marketing
relationships with several urology product companies interested in marketing
products in the prostate disease market.
We anticipate that the
majority of our revenue will be generated from the sale and lease of the
ProUroScan System, as well as from the sale of proprietary disposable supplies
consumed in the scanning process. ProUroScan Systems likely will be placed in
clinics under a variety of programs, including outright sales, operating
leases, financing leases or arrangements where payments are based upon the
usage of the system.
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Manufacturing
The ProUroScan System has
two major proprietary hardware components: a central processor and a rectal
probe. There are also certain off-the-shelf components that presently are
widely available. Artann has provided five clinical prostate imaging systems
that are being used in performing FDA-controlled clinical trials and for
contract manufacturing assessment. Artann will transfer ownership of these units
to us upon the date of first commercial sale of the ProUroScan System.
We are currently seeking to
contract with one or more third-party manufacturers that are Quality Systems
Regulation (QSR) compliant to produce the ProUroScan System. The QSR requires
manufacturers, including certain third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance procedures
during all aspects of the manufacturing process. Because of the unique nature
of the two major proprietary components of the ProUroScan System, it is highly
likely that different third party manufacturers will be chosen to assemble the
final versions of each component. Our goal in both cases is to reduce the cost
of manufacturing over the first two years, taking advantage of manufacturing
scale and purchasing discounts, as well as engineering changes designed to
eliminate components and reduce component costs.
ProUroScan System Development
Partner
The ProUroScan System is
based on work originally performed in the late 1990s by Artann and its
affiliate, ArMed LLC. In 2002, we licensed the rights to this technology
developed by Artann from its owner, Profile L.L.C., a Delaware limited
liability company (Profile), a technology holding company, and since then
have worked with Artann and our other technology partners on its development.
In April 2008, we acquired the patents, patent applications and other know
how associated with this technology previously licensed from Profile. In July 2008,
we entered into two new agreements with Artann relating to this technology,
namely, a license agreement (the Artann License Agreement) and a development
and commercialization agreement (the Artann Development Agreement).
Under the Artann License
Agreement, Artann has granted us an exclusive, worldwide, sub-licensable
license to certain patent applications and other know how needed to make, use
and market certain mechanical imaging products for the diagnosis or treatment
of urologic disorders of the prostate, kidney or liver. Artann also agreed to
transfer to us possession of five clinical prostate imaging systems and grant
us full access to all relevant documentation thereto. As an upfront license fee
pursuant to the Artann License Agreement, on January 14, 2009 we paid
Artann $600,000 in cash and $500,000 in shares of our common stock. In addition, we have agreed to pay Artann:
·
a
royalty fee equal to 4% of the first $30,000,000 of net cumulative sales of
licensed products, 3% of the next $70,000,000 of net cumulative sales and 2% of
net cumulative sales over $100,000,000; and
·
a
technology royalty fee of 1% of net sales of the prostate imaging system
products through the earlier of December 31, 2016 or the date of last
commercial sale of such products.
The combined royalties are
subject to a minimum annual royalty equal to $50,000 per year for each of the
first two years after FDA clearance for commercial sale and $100,000 per year
for each year thereafter until termination or expiration of the Artann License
Agreement. We also agreed to grant Artann a non-exclusive, fully paid up,
sub-licensable, worldwide license to our patents, patent applications and know
how relating to the manufacture, use or sale of any mechanical imaging system
for the diagnosis or treatment of disorders of the female human breast.
Under the Artann Development
Agreement, we will collaborate with Artann to develop, commercialize and market
prostate imaging systems. Artann will conduct and complete all pre-clinical
activities and testing on the prostate imaging system, conduct clinical trials,
prepare and submit FDA regulatory submissions and provide hardware and software
development, refinement and debugging services to ready the prostate imaging
system for
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commercial sale. For these development services, we paid Artann
$250,000 in cash upon initiation of the clinical study to support the basic
mapping and data maintenance claim, and we have agreed to pay Artann:
·
$250,000
in cash and $1,000,000 in shares of our common stock upon completion of that
study and submission of the 510(k) application to support the basic
mapping and data maintenance claim;
·
$750,000
in cash and $1,000,000 in shares of our common stock upon FDA clearance that
allows the ProUroScan System to be commercially sold in the United States
(subject to reduction of the number of shares by 10% for each month that FDA clearance
is delayed beyond March 23, 2010); and
·
a
monthly retainer fee for technical advice and training by Artann personnel of
$30,000 per month for each of the first six months and $15,000 per month for
each of the following twelve months.
Under the Artann Development
Agreement, Artann will also supply us with such quantities of the ProUroScan
System as are 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 its best
reasonable efforts to provide us with a limited number of commercial systems.
The pre-commercial and commercial systems will be sold to us at prices yet to
be determined.
The Artann License Agreement
and the Artann Development Agreement each became effective on December 23,
2008. Under the Artann License Agreement, we have a 30-day cure period from the
date of receipt of written notice from Artann of a breach of our payment
obligations under either the Artann License Agreement or Artann Development
Agreement. If we have not cured such payment breach within five days of receipt
of the Artann notice, the exclusive licenses convert to non-exclusive licenses,
however, neither party may sub-license or grant additional licenses for a
period of 60 days after receipt of such notice. Under the Artann
Development Agreement, we have a 60-day cure period from the date of receipt of
written notice from Artann of a breach of our payment obligations under either
the Artann License Agreement or the Artann Development Agreement. If we do not
cure a breach of our payment obligations by the end of the 30-day cure period,
the licenses granted under the Artann License Agreement will terminate. Subject to earlier termination due to breach,
bankruptcy and certain other events, the Artann License Agreement will
terminate upon expiration of all royalty obligations, and the Artann
Development Agreement will terminate on its third anniversary, subject to
renewal for additional one year terms upon mutual agreement of us and Artann.
In the future, we expect to
engage third parties to assist us and Artann in transitioning the technology
from research and development to clinical study status, to perform verification
and validation testing including certification of safety related testing
standards, and to develop quality control processes for the transition to
manufacturing of the ProUroScan System.
During the years ended December 31,
2008 and 2007, we recorded research and development expense of $597,755 and
$143,628, respectively. The 2008
research and development expense amount included the $250,000 first project
milestone payment under the Artann Development Agreement upon the initiation of
clinical trials, additional research and development expenses totaling $50,000
related to work performed by Artann under the same agreement, and the expensing
of our $300,000 acquisition of certain intellectual property and know-how from
Profile. Fiscal 2007 expenses included a $35,000 payment and the issuance of
warrants valued at $72,000 to Artann pursuant to a cooperation agreement signed
in April 2007 and $24,407 of research costs related to a prostate
visioning system project.
Intellectual Property
Our objective as a medical
device company is to effectively and aggressively obtain, maintain and enforce
patent protection for our products, formulations, processes, methods and other
proprietary technologies, preserve our trade secrets and licenses, and operate
without infringing the proprietary rights of other parties both in the United
States and in all other countries where we may do business. We seek to obtain,
where appropriate and financially
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feasible, the broadest intellectual property protection possible for
our products, proprietary information and proprietary technology through a
combination of contractual arrangements, licenses, and patents, both in the
United States and throughout the rest of the world.
We also depend upon the
skills, knowledge and experience of scientific and technical personnel that we
hire or outside organizations with whom we contract, as well as our advisors and
consultants. To help protect our proprietary know-how that is not patentable,
and for inventions for which patents may be difficult to enforce, we rely on
trade-secret protection and confidentiality agreements. To this end, it is our
practice to require employees, consultants, advisors and other contractors, as
appropriate, to enter into confidentiality agreements that prohibit the
disclosure of confidential information and, where applicable, require
disclosure and assignment to us of the ideas, developments, discoveries and
inventions important to our business.
We own patents, patent
applications and know-how associated with mechanical prostate-imaging systems.
These patents and patent applications relate to real-time mechanical imaging of
the prostate (patent expires in 2021), a method and device for mechanical
imaging of the prostate (patent expires in 2012), an intracavity ultrasonic
device for elasticity imaging (patent expires in 2012), a method and device for
elasticity imaging (patent expires in 2013), an apparatus for measuring
mechanical parameters of the prostate and for imaging the prostate (patent
expires in 2012), a device for palpation and mechanical imaging of the prostate
(patent expires in 2012), and a method for using a transrectal probe to
mechanically image the prostate gland (patent expires in 2012). Together, our
mechanical imaging technology is protected by seven U.S. patents, seven
foreign patents (foreign patents expire in 2017), five foreign patent
applications and, along with the Artann patent applications discussed below, is
the basis for the imaging technology used in our ProUroScan System. We own
similar patents, patent applications and know-how associated with breast
imaging. However, we do not intend to pursue any such applications within our
near-term business plan. Under the Artann License Agreement, we agreed to grant
Artann a non-exclusive, fully paid up license to make, use or sell any imaging
system for the diagnosis or treatment of disorders of the human breast.
Artann has filed four
additional U.S. patent applications (filed in May and June of
2005 and June of 2008) that are licensed to us under the Artann License
Agreement. These patent applications relate to a method and device for
analyzing overlaps between sensed mechanical images to generate a composite
image (map) and sensors arranged to locate the prostate.
Third-Party Reimbursement
In the U.S., health care
providers that use the ProUroScan System will generally rely on third-party
payors, including private payors and governmental payors such as Medicare and
Medicaid, to cover and reimburse all or part of the cost of using the
ProUroScan System. Consequently, sales of the ProUroScan System depend in part
on the availability of coverage and reimbursement from third-party payors. The
manner in which reimbursement is sought and obtained varies based upon the type
of payor involved and the setting in which the procedure is furnished. In
general, third-party payors will provide coverage and reimbursement for medically
reasonable and necessary procedures and tests. Most payors, however, will not
pay separately for capital equipment, such as the ProUroScan System. Instead,
payment for the cost of using the capital equipment is considered to be covered
as part of payments received for performing the procedure. In determining
payment rates, third-party payors increasingly are scrutinizing the amount
charged for medical procedures.
Medicare and Medicaid
Procedures using the
ProUroScan System may be considered by Medicare as either a screening test or a
diagnostic test depending on whether it is conducted routinely on healthy
individuals or whether the patient presents with a sign or symptom of the
relevant disease. In order for Medicare to cover procedures using the ProUroScan
System as screening, the Secretary of Health and Human Services (the Secretary)
would need to add the scan to the list of appropriate procedures for prostate
cancer screening or the procedure would need to be appropriately
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recommended by the United States Preventative Services Task Force (USPSTF)
and added through the national coverage determination (NCD) process.
Recently, Congress expanded
the ability for Medicare to cover additional preventive services under certain
circumstances. In order to be covered by Medicare, Congress required the
following three conditions to be satisfied: (1) the service must be
reasonable and necessary for the prevention or early detection of an illness or
disability; (2) the service must be recommended with a grade of A or B
by the USPSTF; and (3) the service must be appropriate for Medicare
beneficiaries. Congress also required that the Centers for Medicare and
Medicaid (CMS) use the NCD process to add covered preventative services.
The USPSTF has evaluated the
benefits of prostate screening and concluded that the current evidence is
insufficient to make an A or B recommendation, regardless of age. Should
the USPSTF change its recommendation, CMS still would need to use the NCD
process to make prostate screening with the ProUroScan System a covered
service. The NCD process is at least nine months long and in most cases lasts
one year. There is no guarantee that this process will result in a positive
outcome. In fact, CMS could decide not to cover prostate screening procedures
using the ProUroScan System nationally. It is very difficult to overturn a
negative NCD without the further development of substantial clinical evidence.
Medicare coverage as a
screening test could be a significant hurdle to overcome. We anticipate,
however, that the ProUroScan System may be covered by Medicare as a diagnostic
test for patients who have clinical signs or symptoms of disease. We anticipate
that the first generation of the ProUroScan System will be used to map the
prostate and to maintain historical records for future tracking for men who
have an abnormal DRE or other signs or symptoms of disease. Thus, providers who
perform prostate mapping using the first generation ProUroScan System likely
will seek Medicare coverage as a diagnostic, rather than a screening test,
presuming that the patient presents with a sign or symptom of disease. Even as
a diagnostic test, however, CMS or its contractors could determine that
procedures using the ProUroScan System are not medically necessary and
therefore decide not to cover them.
Regardless of how they are
covered, we anticipate that procedures using the ProUroScan System will be
reimbursed either based upon the value of their unique billing and procedure
code or as part of an office visit. Until a unique billing and procedure code
is established, we expect that providers will be able to bill for the procedure
using a miscellaneous Current Procedural Terminology (CPT) code. Claims
submitted under a miscellaneous code are processed manually and the provider
must include additional information to be used by the payor in determining the
medical appropriateness of the procedure. The lack of a unique, permanent
CPT code could slow market uptake of the ProUroScan System.
In order to apply for a new,
unique code, an application must be submitted to the AMAs CPT Editorial
Panel. The process of obtaining a new CPT code typically takes
14 months to three years. Once a new CPT code is created, the AMAs
Relative Value Scale Update Committee (RUC) recommends relative value units (RVUs)
for it. CMS then takes these recommendations into account when establishing the
Medicare Physician Fee Schedule values. The amount of reimbursement the
provider receives generally depends on the RVUs assigned to the procedure
multiplied by a conversion factor. Most private payers also base their payment
rates based on the RVUs adopted by CMS. There is a significant risk that the
reimbursement rate that results from this process could be insufficient,
hampering our ability to market and sell the ProUroScan System. In the
alternative, CMS may decide that payment for the ProUroScan System procedure
should be bundled into the payment for a covered office visit furnished to the
patient on the same day. Such a determination would impede our ability to
commercialize the ProUroScan System as physicians and providers would probably
not want to absorb the additional expense of our product without additional
reimbursement.
Initially, we anticipate
using a patient pay model for physicians to receive payment for performing
the ProUroScan System procedure. Under a patient pay model, in the absence of
coverage from their health insurance, patients pay for the scan out of their
own funds. Medicare beneficiaries would sign an Advanced Beneficiary Notice
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(ABN) that would allow the provider to collect from the patient. Only
one in four biopsies performed based on an abnormal PSA reading reveal prostate
cancer, and only 50 percent of suspicious lesions found by DRE presented
cancer on prostate biopsy. Given these statistics, in cases where patients have
abnormal DRE or PSA test results or when a test result may not be clear, there
is a high incentive to seek additional information so that patients can make an
informed and reasonable decision for themselves and their family. We believe
that a sufficient number of patients will be willing to pay for the ProUroScan
System procedure out of their personal funds to support the launch of our
product in advance of receiving favorable coverage decisions from third-party
insurers. The concept of a patient pay model has been used successfully for a
few other procedures (e.g., computer-aided detection (CAD) for
mammography), and we expect this to be our approach for generating revenues
during at least the early phases of product rollout. As described above,
providers also will be able to bill under a miscellaneous CPT code until a
unique CPT code is created for the ProUroScan System procedure.
Commercial Insurers
Many private payors look to
Medicare as a guideline in setting their coverage policies and payment amounts.
Unlike the Medicare program, however, private payors have no statutory
impediment to covering screening tests. They do tend to seek guidance from
USPSTF recommendations, however. The current coverage policies of these private
payors may differ from the Medicare program, and the payment rates they make
may be higher, lower, or the same as the Medicare program. If CMS or other
agencies decrease or limit reimbursement payments for physicians, this may
affect coverage and reimbursement determinations by many private payors.
Additionally, some private payors do not follow the Medicare guidelines, and
those payors may reimburse only a portion of the costs associated with the use
of our products, or not at all.
Competition
Although we expect
competition to intensify in the prostate imaging and prostate disease
diagnostic market, we are not aware of any competitive product currently being
sold based on the same technology platform with comparable real-time color
images or other product features that the ProUroScan System provides. In
addition, we do not expect to market the ProUroScan System as a general
screening tool, and therefore will not be positioning the system to compete
directly with currently available screening tests, including the DRE and PSA
tests. The ProUroScan System will be positioned as an adjunctive tool
following an abnormal DRE to create a map of the prostate and an electronic record
of the image. More specifically, the proposed indication for use of the
ProUroScan System is for use as an aid to the physician in visualizing and
documenting abnormalities of the prostate detected by a DRE.
Another test that uses
inferred data to identify prostate cancer, yet to be approved in the United
States, is the PCA3 Marker (the PCA3). The PCA3 is a non-coding
ribonucleic acid (RNA) believed to be a more accurate marker of prostate
cancer than currently used diagnostics tests. The PCA3 marker was licensed in
2000 by DiagnoCure Inc. of Quebec, Canada. In 2003, DiagnoCure granted a
worldwide license to Gen-Probe, based in San Diego, CA, for the development and
licensing of a second generation PCA3-based test using their proprietary platform.
In 2006, Gen-Probe made the test available in analyte specific reagent format
to U.S. laboratories and launched a full CE-marked PCA3 test in Europe.
Although this test has not been approved in the United States, it potentially
represents a significant advance in the development of more sophisticated and
sensitive detection methods for identifying early stage prostate cancer. Gene
fusion is another discovery that may lead to a test that potentially will be
used to diagnose prostate cancer more accurately than current tests as well as
predict prognosis. Gen-Probe has licensed this technology as well.
In contrast to the DRE, PSA
and PCA3 tests, the ProUroScan System creates a visual and physical record of
the prostate gland. We will seek expanded labeling claims on future generations
of the ProUroScan System so that it can also be used to conduct ongoing
monitoring and surveillance of the status of the abnormal tissue that is found
by
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either a DRE or with the ProUroScan System. We believe that the current
generation of the ProUroScan System will have several features that are
complementary to a traditional DRE examination, such as:
·
it
is designed to produce a real-time color image of the prostate; and
·
it
is designed to enable physicians to electronically store the images in patient
files.
Aside from large-scale
imaging modalities such as magnetic resonance imaging, computed tomography and
nuclear medicine, which due to their cost and limited availability will not be
direct competitors of the ProUroScan System, the only imaging system in common
use for prostates is the transrectal ultrasound (TRUS). TRUS is employed by
urologists following the referral of a patient that has had a positive result
from a DRE or PSA test, primarily to guide the placement of prostate biopsy
needles. We believe that the ProUroScan System will be easier to operate and
require less training than TRUS. We also believe it will be less costly to
acquire and maintain in a traditional medical office setting.
Subject to FDA clearance or
approval, we believe that future uses of the ProUroScan System will include
providing a permanent record of the prostate that can be used to identify
changes over time. Nevertheless, technology is rapidly changing in the prostate
imaging and the prostate disease diagnostic market, and other technology could
come to market potentially displacing the ProUroScan System.
Government Regulation
The ProUroScan System is
subject to the Federal Food, Drug, and Cosmetic Act (FDCA) as implemented and
enforced by the FDA and by comparable agencies in various states and various
foreign countries. To ensure that medical products distributed domestically and
internationally are safe and effective for their intended use, FDA and
comparable authorities in other countries have imposed regulations that govern,
among other things, the following activities that we or our third-party
manufacturers and suppliers perform or will perform:
·
product
design and development;
·
product
testing;
·
product
manufacturing;
·
product
labeling;
·
product
storage;
·
premarket
clearance or approval;
·
advertising
and promotion;
·
product marketing, sales and distribution;
and
·
post-market surveillance reporting death or
serious injuries and medical device reporting.
FDA Premarket Clearance and Approval Requirements
Unless an exemption applies,
each medical device we wish to market in the U.S. will require either 510(k) clearance
or approval of a Premarket Approval Application (PMA) from the FDA. The FDA
classifies medical devices into one of three classes:
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·
Class I devices, which are subject to
only general controls (e.g., labeling, medical devices reporting, and
prohibitions against adulteration and misbranding) and, in some cases, to the
510(k) premarket clearance requirements;
·
Class II devices, generally requiring
510(k) premarket clearance before they may be commercially marketed in the
United States (based on discussions between Artann and the FDA, we believe the
use of the ProUroScan System will be classified as a class II device); and
·
Class III devices, consisting of devices
deemed by the FDA to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices deemed not substantially
equivalent to a predicate device, generally requiring submission of a PMA supported
by clinical trial data.
Devices deemed to pose lower
risks are placed in either class I or II, which typically requires the
manufacturer to submit to the FDA a 510(k) requesting permission to
commercially distribute the device. This process is generally known as 510(k) clearance.
Some low risk devices are exempted from this requirement. Devices deemed by the
FDA to pose the greatest risks, or for which there is no predicate, are placed
in class III, requiring approval of a PMA.
510(k) Clearance Pathway
When a 510(k) clearance
is required, we or Artann, as the case may be, will be required to submit a 510(k) demonstrating
that our proposed device is substantially equivalent to a previously cleared
510(k) device or a device that was in commercial distribution before May 28,
1976 for which the FDA has not yet called for the submission of PMAs. By
regulation, the FDA is required to clear or deny a 510(k) premarket
notification within 90 days of submission of the application. As a
practical matter, clearance may take longer. The FDA may require further
information, including clinical data, to make a determination regarding
substantial equivalence.
Once filed, the FDA has
90 days in which to review the 510(k) application and respond.
Typically, the FDAs response after reviewing a 510(k) is a request for
additional data or clarification. Depending on the complexity of the
application and the amount of data required, the process may be lengthened by
several months or more. If additional data, including clinical data, are needed
to support our claims, the 510(k) application process may be significantly
lengthened. Published FDA statistics from 2006 (the most recent available)
indicate that the average total time from receipt of a 510(k) application
to final action (not including the time a submission is on hold pending receipt
of additional information) is 95 days.
If the FDA issues an order
declaring the device to be Not Substantially Equivalent (NSE) and places it
into a class III or PMA category, we can then request a de novo
classification of the product. De novo generally applies where there is no
predicate device and the FDA believes the device is sufficiently safe so that
no PMA should be required. The request must be in writing and sent within 30 days
from the receipt of the NSE determination. The request should include a
description of the device, labeling for the device, reasons for the recommended
classification and information to support the recommendation. The de novo
process has a 60 day review period. If the FDA classifies the device into
class II, the Company will then receive an approval order to market the
device. This device type can then be used as a predicate device for future 510(k) submissions.
However, if the FDA subsequently determines that the device will remain in the
class III category, the device cannot be marketed until the Company has
obtained an approved PMA. If we are required to follow a de novo process, an
additional 60 to 90 days or more will be added on to the original
90 days required for the initial 510(k) review.
Any modification to a
510(k)-cleared device that would constitute a major change in its intended use,
or any change that could significantly affect the safety or effectiveness of
the device, requires a new 510(k) clearance and may even, in some
circumstances, require a PMA, if the change raises complex or novel scientific
issues or the product has a new intended use. The FDA requires every
manufacturer to make the determination regarding the need for a new 510(k) submission
in the first instance, but the FDA may review any manufacturers decision. If
the FDA
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were to disagree with any of our determinations that changes did not
require a new 510(k), it could require us to cease marketing and distribution
and/or recall the modified device until 510(k) clearance or PMA approval
is obtained. If the FDA requires us to seek 510(k) clearance or PMA
approval for any modifications, we may be required to cease marketing and/or
recall the modified device, if already in distribution, until 510(k) clearance
or PMA approval is obtained and we could be subject to significant regulatory
fines or penalties.
There is no guarantee that
the FDA will grant 510(k) clearance of the ProUroScan System for a basic
mapping and data maintenance claim, or 510(k) clearance or PMA approval,
of any of our future products. Failure to obtain such clearances or approvals
could adversely affect our ability to grow our business. Delays in receipt or
failure to receive clearances or approvals, the loss of previously received
clearances or approvals, or the failure to comply with existing or future
regulatory requirements could have a material adverse effect on our business.
Premarket Approval (PMA) Pathway
A PMA must be submitted to
the FDA if the device cannot be cleared through the 510(k) process. A PMA
must be supported by extensive data, including but not limited to, technical,
preclinical, clinical trials, manufacturing and labeling to demonstrate to the
FDAs satisfaction the safety and effectiveness of the device for its intended
use. During the review period, the FDA will typically request additional information
or clarification of the information already provided. Also, an advisory panel
of experts from outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA as to the approvability of
the device. The FDA may or may not accept the panels recommendation. In
addition, the FDA will generally conduct a pre-approval inspection of the
manufacturing facility or facilities to ensure compliance with the QSRs.
New PMAs or PMA supplements
are required for modifications that affect the safety or effectiveness of the
device, including, for example, certain types of modifications to the devices
indication for use, manufacturing process, labeling and design. PMA supplements
often require submission of the same type of information as a PMA, except that
the supplement is limited to information needed to support any changes from the
device covered by the original PMA and may not require as extensive clinical
data or the convening of an advisory panel. There is no guarantee that the FDA
will grant PMA approval of any new indications for use of the ProUroScan System
or for our future products. Failure to obtain such approvals would adversely
affect our ability to grow our business. Delays in receipt or failure to
receive approvals, the loss of previously received approvals, or the failure to
comply with existing or future regulatory requirements could reduce our sales,
profitability and future growth prospects.
Clinical Trials
Clinical trials are
generally required to support a PMA application and are sometimes required for
510(k) clearance. If the device presents a significant risk, as defined
by the FDA, to human health, the FDA requires the device sponsor to file an
investigational device exemption (an IDE) application with the FDA and obtain
IDE approval prior to commencing the human clinical trials. Such trials
generally require an IDE application approved in advance by the FDA for a
specified number of patients and study sites, unless the product is deemed a
non-significant risk device eligible for more abbreviated IDE requirements.
Clinical trials are subject to extensive monitoring, recordkeeping and
reporting requirements. Clinical trials must be conducted under the oversight
of an institutional review board (IRB) for the relevant clinical trial sites
and must comply with FDA regulations, including but not limited to those
relating to good clinical practices. To conduct a clinical trial, we also are
required to obtain the patients informed consent in form and substance that
complies with both FDA requirements and state and federal privacy and human
subject protection regulations. If the clinical trial is not performed in
accordance with the FDAs IDE regulations, the FDA could seek an enforcement
action against the sponsor and the investigators. In addition, the sponsor, the
FDA or the IRB could suspend a clinical trial at any time for various reasons,
including a belief that the risks to study subjects outweigh the anticipated
benefits. Even if a trial is completed, the results of clinical testing may not
adequately demonstrate the safety and efficacy of the device or may otherwise
not be sufficient to obtain FDA approval to market the product in the U.S.
Similarly, in Europe the clinical study must be
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approved by a local ethics committee and in some cases, including
studies with high-risk devices, by the ministry of health in the applicable
country.
Pervasive and Continuing Regulation
After
a device is placed on the market, numerous regulatory requirements apply. These
include:
·
product listing and establishment
registration, which helps facilitate FDA inspections and other regulatory
action;
·
QSR, which requires manufacturers, including
third-party manufacturers, to follow stringent design, testing, control,
documentation and other quality assurance procedures during all aspects of the
manufacturing process;
·
labeling regulations and FDA prohibitions
against the promotion of products for uncleared, unapproved or off-label use or
indication;
·
clearance of product modifications that could
significantly affect safety or efficacy or that would constitute a major change
in intended use of our cleared devices;
·
approval of product modifications that affect
the safety or effectiveness of our approved devices;
·
medical device reporting regulations, which
require that manufacturers comply with FDA requirements to report if their
device may have caused or contributed to a death or serious injury, or has
malfunctioned in a way that would likely cause or contribute to a death or
serious injury if the malfunction of the device or a similar device were to
recur;
·
post-approval restrictions or conditions,
including post-approval study commitments;
·
post-market surveillance regulations, which
apply when necessary to protect the public health or to provide additional
safety and effectiveness data for the device; and
·
the FDAs recall authority, whereby it can
ask, or under certain conditions order, device manufacturers to recall from the
market a product that is in violation of governing laws and regulations.
Advertising and promotion of
medical devices, in addition to being regulated by the FDA, are also regulated
by the Federal Trade Commission and by state regulatory and enforcement
authorities. Recently, promotional activities for FDA-regulated products of
other companies have been the subject of enforcement action brought under
healthcare reimbursement laws and consumer protection statutes. In addition,
under the federal Lanham Act and similar state laws, competitors and others can
initiate litigation relating to advertising claims. In addition, we are
required to meet regulatory requirements in countries outside the U.S., which
can change rapidly with relatively short notice. If the FDA determines that our
promotional materials or training constitutes promotion of an unapproved or
uncleared use, it could request that we modify our training or promotional
materials or subject us to regulatory or enforcement actions, including the
issuance of an untitled letter, a warning letter, injunction, seizure, civil
fine or criminal penalties. It is also possible that other federal, state or
foreign enforcement authorities might take action if they consider our
promotional or training materials to constitute promotion of an unapproved use,
which could result in significant fines or penalties under other statutory
authorities, such as laws prohibiting false claims for reimbursement. In that
event, our reputation could be damaged and adoption of the products would be
impaired.
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Furthermore, our products
could be subject to voluntary recall if we or the FDA determine, for any
reason, that our products pose a risk of injury or are otherwise defective.
Moreover, the FDA can order a mandatory recall if there is a reasonable
probability that our device would cause serious adverse health consequences or
death.
The FDA has broad
post-market and regulatory enforcement powers. Our facilities and the
manufacturing facilities of our subcontractors will be subject to unannounced
inspections by the FDA to determine our level of compliance with the QSR and
other regulations. Failure by us or by our third-party manufacturers and
suppliers to comply with applicable regulatory requirements can result in
enforcement action by the FDA or other regulatory authorities, which may result
in sanctions including, but not limited to:
·
warning letters or untitled letters;
·
fines and civil penalties;
·
unanticipated expenditures to address or
defend such actions;
·
delays in clearing or approving, or refusal
to clear or approve, our products;
·
withdrawal or suspension of approval of our
products or those of our third-party suppliers by the FDA or other regulatory
bodies;
·
product recall or seizure;
·
orders for physician notification or device
repair, replacement or refund;
·
interruption of production;
·
operating restrictions;
·
injunctions; and
·
criminal prosecution.
Regulation of the ProUroScan System
The ProUroScan System is
being developed under development contracts with Artann. We are implementing a
regulatory strategy to obtain 510(k) clearance of the ProUroScan System
for a basic mapping and data maintenance claim and for the ProUroScan System to
serve as an adjunct to a DRE. We believe that this basic mapping and data
maintenance claim reflects the current needs of the market and the capabilities
of the system. Based on discussions between Artann and representatives from the
FDA, we believe that the ProUroScan System with a basic mapping and data
maintenance claim will be regulated by the FDA as a class II device. Class II
devices typically are cleared for marketing by the FDA through a 510(k) application.
In an April 2008,
representatives from Artann met with the FDA to solicit feedback from the
agency regarding the proposed clinical testing that the FDA will require to
support a 510(k). At that meeting, the FDA indicated that Artann will need to
conduct a 40 patient clinical trial on the ProUroScan System. In this
study, which will be conducted by Artann, clinical investigators from at least
three different sites will be trained to use the ProUroScan System on prostate
models. Subsequently, each of the trained investigators will be asked to
perform a standard DRE examination followed by the ProUroScan System on study
patients with a DRE detected abnormality. The study subjects will also have
pathology characterization of the DRE detected prostate abnormality as the
patients included in the study will have been referred for a TRUS guided biopsy
or radical prostatectomy. Artann intends to conduct this study as a
non-significant risk study. As a result, FDA approval of an IDE is not
required. However, Artann will still
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be required to comply with FDAs abbreviated IDE regulations,
including, among other things, protecting the rights and welfare of all
participants and obtaining IRB approval from each study center.
In order to meet the
requirements established by the FDA for the 510(k) clinical study, three
centers were identified to participate in the study and to serve as future
training and referral sites for the eventual market rollout of the ProUroScan
System. The sites include the Mayo Clinic in Rochester, Minnesota, the Robert
Wood Johnson Medical Center in New Brunswick, New Jersey and the VA Medical
Center in Minneapolis, Minnesota. Institutional Review Board (IRB) approvals
have been obtained, and ProUroScan Systems have been installed, at all three
sites. Physician training has also been completed at all three sites and formal
clinical studies have commenced at the Robert Wood Johnson Medical Center and
the VA Medical Center. It is expected that clinical studies will commence
at the Mayo Clinic in late March or early April 2009. We expect to
complete this study in May 2009.
In accordance with the
Artann Development Agreement, Artann is responsible for submitting and
obtaining the initial 510(k) clearance for the ProUroScan System. We
believe that this 510(k) will be submitted to the FDA shortly after
completion of the clinical studies. Once submitted, the FDA will have
90 days to review and grant clearance. However, the 510(k) application
process may be significantly longer if the FDA has questions upon its review or
makes a request for additional information, including clinical data, from
Artann. Once cleared, in accordance with the Artann Development Agreement,
Artann will transfer the 510(k) for the ProUroScan System upon ProUroCares
first commercial sale of a ProUroScan System unit.
Depending on the exact nature
of future claims, the approval process may require more extensive clinical
studies and possibly the submission of a PMA. Such an application will likely
take significantly more time to prepare and review and be more comprehensive
than the 510(k) clearance process.
Once we obtain the 510(k) for
the ProUroScan System, or obtain FDA clearance or approval for future products,
the manufacturing, sale and performance of our products will be subject to the
ongoing FDA regulation and inspection processes as described above.
Fraud and Abuse Laws
Because of the significant
federal funding involved in Medicare and Medicaid, Congress and the states have
enacted, and actively enforce, a number of laws whose purpose is to eliminate
fraud and abuse in federal health care programs. Once we commercialize the
ProUroScan System, our business is subject to compliance with these laws.
Anti-Kickback Statutes and Federal False Claims Act
The federal healthcare
programs Anti-Kickback Statute prohibits persons from knowingly and willfully
soliciting, offering, receiving or providing remuneration, directly or
indirectly, in exchange for or to induce either the referral of an individual,
or the furnishing or arranging for a good or service, for which payment may be
made under a federal healthcare program such as Medicare or Medicaid. The
definition of remuneration has been broadly interpreted to include anything
of value, including for example gifts, discounts, the furnishing of free
supplies, equipment or services, credit arrangements, payments of cash and
waivers of payments. Several courts have interpreted the statutes intent
requirement to mean that if any one purpose of an arrangement involving
remuneration is to induce referrals of federal healthcare covered business, the
statute has been violated. Penalties for violations include criminal penalties
and civil sanctions such as fines, imprisonment and possible exclusion from
Medicare, Medicaid and other federal healthcare programs. In addition, some
kickback allegations have been claimed to violate the Federal False Claims Act,
discussed in more detail below.
The Anti-Kickback Statute is
broad and prohibits many arrangements and practices that are lawful in
businesses outside of the healthcare industry. Recognizing that the
Anti-Kickback Statute is broad and may technically prohibit many innocuous or
beneficial arrangements, Congress authorized the Office of Inspector General of
the
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U.S. Department of Health and Human Services, or OIG, to issue a
series of regulations, known as safe harbors. These safe harbors, issued by
the OIG beginning in July 1991, set forth provisions that, if all their
applicable requirements are met, will assure healthcare providers and other
parties that they will not be prosecuted under the Anti-Kickback Statute. The
failure of a transaction or arrangement to fit precisely within one or more
safe harbors does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that do not fully
satisfy each applicable safe harbor may result in increased scrutiny by
government enforcement authorities such as the OIG.
Many states have adopted
laws similar to the Anti-Kickback Statute. Some of these state prohibitions
apply to referral of patients for healthcare items or services reimbursed by
any source, not only the Medicare and Medicaid programs.
Government officials have
focused their enforcement efforts on marketing of healthcare services and
products, among other activities, and recently have brought cases against
companies, and certain sales, marketing and executive personnel, for allegedly
offering unlawful inducements to potential or existing customers in an attempt
to procure their business.
Another development
affecting the healthcare industry is the increased use of the federal Civil
False Claims Act and, in particular, actions brought pursuant to the False
Claims Acts whistleblower or
qui tam
provisions. The False Claims Act imposes liability on any person or entity who,
among other things, knowingly presents, or causes to be presented, a false or
fraudulent claim for payment by a federal healthcare program. The qui tam
provisions of the False Claims Act allow a private individual to bring actions
on behalf of the federal government alleging that the defendant has submitted a
false claim to the federal government and to share in any monetary recovery. In
recent years, the number of suits brought against healthcare providers by
private individuals has increased dramatically. In addition, various states
have enacted false claim laws analogous to the Civil False Claims Act, although
many of these state laws apply where a claim is submitted to any third-party
payor and not merely a federal healthcare program.
When an entity is determined
to have violated the False Claims Act, it may be required to pay up to three
times the actual damages sustained by the government, plus civil penalties of
between $5,500 to $11,000 for each separate false claim. There are many
potential bases for liability under the False Claims Act. Liability arises,
primarily, when an entity knowingly submits, or causes another to submit, a
false claim for reimbursement to the federal government. The False Claims Act
has been used to assert liability on the basis of inadequate care, kickbacks
and other improper referrals, and improper use of Medicare numbers when
detailing the provider of services, in addition to the more predictable
allegations as to misrepresentations with respect to the services rendered. In
addition, companies have been prosecuted under the False Claims Act in
connection with alleged off-label promotion of products. Our future activities
relating to the reporting of wholesale or estimated retail prices for our
products, the reporting of discount and rebate information and other
information affecting federal, state and third-party reimbursement of our
products, and the sale and marketing of our products, may be subject to
scrutiny under these laws. We are unable to predict whether we would be subject
to actions under the False Claims Act or a similar state law, or the impact of
such actions. However, the costs of defending such claims, as well as any
sanctions imposed, could significantly affect our financial performance.
HIPAA and Other Fraud and Privacy Regulations
Among other things, the
Health Insurance Portability and Accountability Act of 1996, or HIPAA, created
two new federal crimes: healthcare fraud and false statements relating to
healthcare matters. The HIPAA health care fraud statute prohibits, among other
things, knowingly and willfully executing, or attempting to execute, a scheme
to defraud any healthcare benefit program, including private payors. A
violation of this statute is a felony and may result in fines, imprisonment
and/or exclusion from government-sponsored programs. The HIPAA false statements
statute prohibits, among other things, knowingly and willfully falsifying,
concealing or covering up a material fact or making
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any materially false, fictitious or fraudulent statement or
representation in connection with the delivery of or payment for healthcare
benefits, items or services. A violation of this statute is a felony and may
result in fines and/or imprisonment.
In addition to creating the
two new federal healthcare crimes, regulations implementing HIPAA also
establish uniform standards governing the conduct of certain electronic
healthcare transactions and protecting the security and privacy of individually
identifiable health information maintained or transmitted by healthcare
providers, health plans and healthcare clearinghouses, which are referred to as
covered entities. Three standards have been promulgated under HIPAAs
regulations: the Standards for Privacy of Individually Identifiable Health
Information, which restrict the use and disclosure of certain individually
identifiable health information, the Standards for Electronic Transactions,
which establish standards for common healthcare transactions, such as claims
information, plan eligibility, payment information and the use of electronic
signatures, and the Security Standards, which require covered entities to
implement and maintain certain security measures to safeguard certain
electronic health information. Although we are not a covered entity and
therefore not directly subject to these standards, we expect that our customers
generally will be covered entities and may ask us to contractually comply with
certain aspects of these standards, particularly because we expect that the
ProUroScan System will store patient information and scan results. The
government intended this legislation to reduce administrative expenses and
burdens for the healthcare industry; however, our compliance with certain
provisions of these standards entails significant costs for us.
In addition to federal
regulations issued under HIPAA, some states have enacted privacy and security
statutes or regulations that, in some cases, are more stringent than those
issued under HIPAA. In those cases, it may be necessary to modify our planned
operations and procedures to comply with the more stringent state laws. If we
fail to comply with applicable state laws and regulations, we could be subject
to additional sanctions.
Employees
We currently have only two
full-time employees, and expect to conduct much of our research and
development, market research, clinical and regulatory function, and other
business operations through the use of a variety of consultants and
medical-device development contractors. We believe that using consultants and
contractors, including the significant scientific and engineering resources of
Artann, to perform these functions is more cost effective than hiring full-time
employees, and affords us flexibility in directing our resources toward specific
and changing goals during our development stage. We anticipate hiring
approximately eight additional employees during the remainder of 2009 in the
areas of manufacturing management, marketing, sales training, administration
and quality assurance. Some or all of these functions may be performed by
contracted individuals or consultants as management deems most effective. To
date, we have conducted our research and development activities related to our
acquired technologies and proposed products on a contract basis with Artann,
Devicix, LLC and Minnetronix, Inc.
ITEM 1A. RISK
FACTORS
Important
Notices to Investors; Safe Harbor Statement
Statements in this Annual Report on Form 10-K which are not purely
historical are forward-looking statements.
These statements with respect to the goals, plan objectives, intentions,
expectations, financial condition, results of operations, future performance
and business of our Company, including, without limitation: (i) our
ability to successfully complete all clinical trials and commercial development
of our products and secure all necessary federal and other regulatory approvals
to introduce and market our products in the United States and around the world;
(ii) our ability to fund our working capital needs over the next 12 to 24
months; (iii) our ability to successfully introduce our products into the
medical device markets; and (iv) all statements preceded by, followed by
or that include the words may, would, could, should, expects, projects,
anticipates, believes, estimates, plans, intends, targets or
similar expressions.
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Forward-looking statements involve inherent risks and uncertainties,
and important factors (many of which are beyond our control) that could cause
actual results to differ materially from those set forth in the forward-looking
statements, including the following, in addition to those contained in our
Companys reports on file with the Securities and Exchange Commission: general
economic or industry conditions, nationally and in the physician, urology and
medical device communities in which we intend to do business; our ability to
fund our working capital needs over the next 12 to 24 months; our ability to
complete the development of our existing and proposed products on a timely
basis if at all; legislation or regulatory requirements, including our securing
all FDA and other regulatory approvals on a timely basis, if at all, prior to
being able to market and sell our products in the United States; competition
from larger and more well established medical device and other competitors; the
development of products that may be superior to the products offered by us;
securing and protecting our intellectual property and assets and enforcing
breaches of the same; clinical results not anticipated by management of the
Company; the quality or composition of our products and the strength and
reliability of our contract vendors and partners; ability to raise capital to
fund our 2009 and 2010 working capital needs and launch our products into the
marketplace in subsequent years; changes in accounting principles, policies or
guidelines; financial or political instability; acts of war or terrorism; and
other economic, competitive, governmental, regulatory and technical factors
affecting our operations, proposed products and prices.
Accordingly, results actually achieved may differ materially from
expected results in these statements.
Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically
disclaim, any obligation to update any forward-looking statements to reflect
events or circumstances occurring after the date of such statements.
Risk Factors Associated with our Business,
Operations and Securities
We are a development stage company. We have no
operating history and our business plan has not yet been fully tested. We
anticipate incurring future losses and may continue incurring losses after our
products are completed, regulatory clearance or approval is secured and our
products are introduced and accepted in the United States and worldwide
markets.
We are a development-stage
company. We have yet to commence active operations to manufacture or sell any
products associated with the proprietary urology-based imaging technologies
that we intend to market. We have no prior operating history from which to
evaluate our likelihood of success in operating our business, generating any
revenues or achieving profitability. As of December 31, 2008, we have
generated no revenue and have recorded losses since inception of approximately
$21 million. There can be no assurance that our plans for developing and
marketing our urology-based products will be successful, or that we will ever
attain significant sales or profitability. We anticipate that we will incur
losses in the near future.
We have a history of operating losses and have
received a going-concern qualification from our independent registered public
accounting firm.
We have incurred operating
losses and negative cash flows from operations since inception. As of December 31,
2008, we had an accumulated shareholders deficit of approximately
$7.3 million. We have not yet generated any revenues. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements included in this Annual Report
on Form 10-K do not include any adjustments related to recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should we be unable to continue as a going
concern.
Our independent registered
public accounting firm included an explanatory paragraph in their report on our
financial statements indicating that such deficit accumulated during the
development stage raises substantial doubt as to our ability to continue as a
going concern. The likelihood of our success must be considered in light of the
expenses, difficulties and delays frequently encountered in connection with
development stage businesses and the
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competitive environment in which we will operate. Our ability to
achieve profitability is dependent in large part on obtaining FDA clearance or
approval for the ProUroScan System, implementing a patient pay sales model,
achieving third party coverage and reimbursement, establishing distribution
channels, forming relationships with third-party manufacturers and gaining
market acceptance of the ProUroScan System. There can be no assurance that the
Company will successfully market the ProUroScan System or operate profitably.
We will need additional financing, and any such
financing will likely be dilutive to our existing shareholders.
As of February 28,
2009, we had approximately $774,000 of cash on hand and current liabilities of
$3.5 million, including $2.2 million of secured debt that was due on that
date. In March 2009, we renewed
$1.8 million of the secured debt to mature on March 28, 2010, and
temporarily paid down $400,000 of the secured debt pending the Company
obtaining a satisfactory guaranty of that amount. It is our intent to renew the $400,000
secured debt before the end of May 2009; however, there can be no
assurance that a satisfactory guaranty can be obtained. We expect that our existing cash will be
sufficient to allow us to complete the ProUroScan system clinical trials,
submit a 510(k) application to the FDA and obtain clearance for a basic
mapping and data maintenance claim. However, if our clinical trials experience
unforeseen delays, or FDA regulatory clearance delays, or are unable to
establish a satisfactory guaranty of the secured debt, we may not have
sufficient funds to complete these objectives, and will require additional
financing. In addition, we will need funding to pay, for example, up to
$1,000,000 of future payments to Artann related to FDA 510(k) clearance
milestones.
If product development is
completed on schedule, we expect to pursue one or more additional rounds of
funding in 2009 and 2010 to provide the working capital needed to repay our
existing debt and to fund a commercial launch into the urology market. In
addition, if we fail to secure a distribution partner on terms acceptable to
us, or at all, we could be required to undertake distribution activity at our
expense, which could significantly increase our capital requirements and may
delay the commercialization of our products.
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, the issuance and conversion of convertible debentures, then existing
shareholders will experience dilution in their ownership interest. If
additional funds are raised by the issuance of debt or certain equity
instruments, we may become subject to certain operational limitations, and such
securities may have rights senior to those of existing holders of common stock.
There can be no assurance that we will be successful in obtaining such
additional financing, if needed. Additional financing may not be available to
us, may not be available on favorable terms and will likely be dilutive to
existing shareholders.
Our assets are pledged to secure $1.6 million of
senior bank notes and a $600,000 note issued to an investor which become due in
March 2010 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 $1.6 million senior
debt financing through Crown Bank, Minneapolis, Minnesota, has required us to
pledge all of our assets and certain licenses, as well as to provide personal
guarantees of certain shareholders. In addition, we have issued a subordinated
promissory note in the amount of $600,000 to an investor. Such note has a
subordinated interest in all of our assets and certain licenses. Both the
$1.6 million senior bank notes and the $600,000 note issued to an investor
become due on March 28, 2010. Due to such security interests, the Company
will not be in a position in the future to pledge its assets to secure any debt
or lending facility, in the event we desire or need to borrow such funds on a
secured lending basis. It is doubtful that the Company would be able to obtain significant
additional debt financing on an unsecured basis.
Moreover, under the terms
and conditions of the Crown Bank facility, and our agreement with such
guarantors, in the event of any default by us with our senior lender that
causes the personal guarantees to be called and honored, we and our lender have
agreed that all of the Companys assets shall be assigned to such guarantors,
pro rata,
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in consideration of such breach and obligation to pay under the
respective guarantees. In addition, the holder of the $600,000 promissory note
has a subordinated interest in all of the Companys assets in the event of a
default under the note. Thus, our common shareholders, and any existing and
future investors in our common stock, would, if the foregoing breach and
circumstances occurred, not have access or recourse to the Companys assets and
collateral, and thus, would likely face a complete loss of their investment in
the Company.
If adequate funds are not available on a timely basis,
we could potentially be forced to cease operations.
If adequate funds are not
available on a timely basis, or are not available on acceptable terms, we may be
unable to repay our existing debt, to fund expansion, or to develop or enhance
our products. If we are forced to slow our development programs, or put them on
hold, it would delay our efforts to obtain regulatory clearances or approvals
needed, and thus delay market entry for our products. Ultimately, if adequate
financing is not obtained, we could potentially be forced to cease operations.
The current unprecedented volatility in the worldwide
credit and equity markets may have an impact on our ability to obtain future
financing.
We do not know what impact
the current unprecedented volatility in worldwide credit and equity markets may
have on our ability to obtain future financing. Since September 2008, we
have seen unprecedented turmoil in equity and credit markets that has resulted
in record-setting losses in the stock markets, dramatic decreases of liquidity
in the credit markets, bank failures, hedge fund closures and massive market
intervention by the United States and foreign governments. Because of the
unprecedented nature of these market events, and because the markets remain
highly-volatile today, we cannot predict what effect these events will have on
our ability to obtain financing in the future. If we are unable to raise
sufficient capital, including funds necessary to repay our loans due on March 28,
2010
,
it will have a material adverse
effect on our financial condition and our ability to remain in business.
The ProUroScan System has not been, and may never be,
fully commercially completed and developed.
Only a limited number of
complete ProUroScan Systems have been built for testing, clinical validations
and demonstration purposes to assess the feasibility of the device and to
provide a means to test and develop future systems and we have not built any
systems for commercial sale. The completion of development of the ProUroScan
System, or future generations of the ProUroScan System, remains subject to all
the risks associated with the development and manufacture of new products based
on innovative technologies, including unanticipated technical or other
problems, failures to meet FDA requirements or performance objectives and the
possible insufficiency of the funds allocated for the completion of such
development, which could result in a change in the design, delay in the
development or abandonment of such applications and products. Consequently,
there can be no assurance that the ProUroScan System will be successfully
developed or manufactured. Our failure to complete the development of the ProUroScan
System, or to work with Artann or other third parties to develop new products,
will have a materially adverse effect on our business.
We are relying upon Artann to submit and obtain 510(k) clearance
of the ProUroScan System. There is no guarantee that the FDA will grant timely
510(k) clearance of the ProUroScan System, if at all, and failure to
obtain such timely clearance would adversely affect our ability to market that
product and expand utilization of the technology in other prostate applications
or in other soft tissue organs in the body, which may affect our ability to
grow our business.
The ProUroScan System is
subject to regulation by the FDA and by comparable agencies in various foreign
countries. The process of complying with the requirements of the FDA and
comparable agencies is costly, time consuming and burdensome. We believe the
ProUroScan System with a basic mapping and data maintenance claim will be
regulated by the FDA as a class II device and will require the clearance
of a 510(k) application. By regulation,
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the FDA is required to clear or deny a 510(k) application within
90 days of submission of the application, but as a practical matter,
clearance may take much longer.
Under our current
development and commercialization agreement, dated July 25, 2008, with
Artann (the Artann Development Agreement), Artann is responsible for filing
the initial 510(k) for the ProUroScan System with the FDA. Artann has not
yet submitted that 510(k) to obtain FDA clearance and no assurances can be
given that such filing will be submitted, and, once submitted, will be
acceptable to the FDA. Prior to submitting such a 510(k) to the FDA,
Artann will need to conduct additional preclinical and clinical testing of the
device to support clearance of the current device. In addition, although Artann
is contractually obligated to perform certain tasks for us under the Artann
Development Agreement, there can be no assurance that Artanns existing
grant-based resources or other funding will be adequate to enable Artann to
complete these tasks on a timely basis or at all.
There is no guarantee that
the FDA will grant 510(k) clearance in a timely manner, if at all, for the
ProUroScan System with basic mapping and data maintenance claims. Failure to
obtain clearance for the ProUroScan System would require Artann to re-apply for
510(k) clearance with additional supporting data or information or for a
different labeling claim, submit a Premarket Approval Application (a PMA) for
FDA approval, or abandon the product. Even if FDA 510(k) clearance is
received, Artann may encounter significant delays in receiving such clearance.
If unexpected clearance delays occur, or if Artann needs to re-apply for FDA
clearance or submit a PMA, it could have a material adverse effect on our
business as Artann is to transfer such clearance or approval to us once we make
the first commercial sale of the ProUroScan System. If such delays occur, we
would need to obtain additional financing to continue operations.
Even if successfully developed, our products may not
be commercially viable or may not be accepted by the marketplace.
Even if Artann is able to
successfully develop the ProUroScan System and we are able to successfully
develop future products, we may not be able to contract for the manufacture of
such products in commercial quantities at prices that will be commercially
viable. Further, there is risk that the ProUroScan System and our future
products may not prove to be as effective as currently available medical or
diagnostic products or those developed in the future. The inability to
successfully complete development of a product or application or a
determination by us, for financial, technical or other reasons not to complete
development of any product or application, particularly in instances in which
we have made sufficient capital expenditures, could have a material adverse
effect on our business. With respect to the ProUroScan System, under our
current Artann Development Agreement, Artann is to transfer the 510(k) to
us once we make the first commercial sale of the ProUroScan System. If we are
not able to procure a commercial sale of at least one ProUroScan System, Artann
would not be obligated to transfer the 510(k) to us and might not do so,
thus inhibiting our ability to develop future generations of the product.
Even if successfully
developed, the ProUroScan System and our future products will be competing
against other imaging and diagnostic products in the medical device
marketplace, including those developed in the future that may render the
ProUroScan System obsolete. The DRE, in combination with a PSA test, is part of
todays standard of care to evaluate patients over the age of 50 for prostate
cancer or other ailments relating to the prostate. In addition, other
modalities that can be used for diagnostic imaging include transrectal
ultrasound (TRUS), magnetic resonance imaging, computed tomography and
nuclear medicine. Therefore, there can be no assurance that physicians,
providers, patients, third party payors or the medical device market, in
general, will accept our products.
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There is no guarantee that the FDA will grant 510(k) clearance
or PMA approval of our future products and claims and failure to obtain
necessary clearances or approvals for our future products and claims would
adversely affect our ability to expand utilization of the technology in other
prostate applications or in other soft tissue organs in the body, which may
affect our ability to grow our business.
In the future, we may seek
to obtain additional indications for use of the ProUroScan System beyond the
basic mapping and data maintenance claim, as well as clearance and approval of
new products. Some of these expanded claims and future products may require FDA
clearance of a 510(k). Other claims and future products will require FDA
approval of a PMA. Moreover, some of our future products and the additional
claims on the ProUroScan System we may seek may require clinical trials to
support regulatory approval, and we may not successfully complete these
clinical trials. The FDA may not approve or clear these future products, or
future generations of the ProUroScan System for the indications that are
necessary or desirable for successful commercialization. Indeed, the FDA may
refuse our requests for 510(k) clearance or PMA approval of new products.
Failure to receive clearance or approval for additional claims for the
ProUroScan System, or for our future products, would have an adverse effect on
our ability to expand our business.
We are relying upon Artann to conduct a
non-significant risk clinical trial necessary to obtain the initial 510(k) clearance
of the ProUroScan System. The results of that clinical trial may not support a
basic mapping and data maintenance claim or may result in the discovery of
adverse side effects.
Under the Artann Development
Agreement, Artann is responsible for conducting all clinical trials necessary
to support an initial 510(k) for the ProUroScan System with a basic
mapping and data maintenance claim. We
cannot be certain that the results will support a basic mapping claim. Success
in early clinical trials does not ensure that later clinical trials will be
successful, and we cannot be sure that Artanns 40 patient trial will replicate
the results of the earlier study at the Robert Wood Johnson Medical Center. The
clinical trial process may fail to meet its desired endpoints, which could
cause us to abandon, or delay the development of the ProUroScan System, or
necessitate modifications thereto. Any delay or termination of Artanns
clinical trial will delay their filing of the 510(k) and ultimately, our
ability to commercialize the product and generate revenues. It is also possible
that patients enrolled in that clinical trial will experience adverse side
effects that are not currently part of the ProUroScan Systems profile. In
addition, the clinical trials for the ProUroScan System involve a relatively
small patient population. Because of the small sample size, these results may
not be indicative of future results.
If Artann
does not perform, or if any third parties on which we will rely to conduct our
clinical trials in the future do not perform, as contractually required or
expected, we may not be able to obtain regulatory clearance or approval for, or
commercialize, our products.
We are highly dependent on
the services provided by Artann. In addition, we intend to rely on third
parties, such as contract research organizations, medical institutions,
clinical investigators and contract laboratories, to conduct clinical trials.
If Artann or these third parties do not successfully carry out their
contractual duties or regulatory obligations or meet expected deadlines, if
Artann or any of these third parties need to be replaced, or if the quality or
accuracy of the data they obtain is compromised due to the failure to adhere to
our clinical protocols or regulatory requirements or for other reasons, our
pre-clinical development activities or clinical trials may be extended,
delayed, suspended or terminated, and we may not be able to obtain regulatory
approval for, or successfully commercialize, our products on a timely basis, if
at all, and our business, operating results and prospects may be adversely
affected. If our clinical trials are not conducted in accordance with the FDAs
IDE regulations, the FDA may seek an enforcement action, such as the issuance of
a warning letter, against us or the third parties conducting our trials.
Furthermore, our third-party clinical trial investigators may be delayed in
conducting our clinical trials for reasons outside of their control.
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Clinical trials necessary to support our future
products and claims will be expensive and may require the enrollment of large
numbers of patients, and suitable patients may be difficult to identify and
recruit. These trials may require the submission of an IDE, for which there is
not guarantee that the FDA will approve. Delays or failures in our clinical
trials will prevent us from commercializing any modified or new products and
will adversely affect our business, operating results and prospects.
Initiating and completing
clinical trials necessary to support 510(k)s or PMAs for future generations of
the ProUroScan System will be time consuming and expensive and the outcome
uncertain. Moreover, the results of early clinical trials are not necessarily
predictive of future results, and any product we advance into clinical trials
may not have favorable results in later clinical trials.
Conducting successful
clinical studies may require the enrollment of large numbers of patients, and
suitable patients may be difficult to identify and recruit. Patient enrollment
in clinical trials and completion of patient participation and follow-up
depends on many factors, including: the size of the patient population; the
number of patients to be enrolled; the nature of the trial protocol; the
attractiveness of, or the discomforts and risks associated with, the treatments
received by enrolled subjects; the availability of appropriate clinical trial
investigators, support staff, and proximity of patients to clinical sites; and
the patients ability to meet the eligibility and exclusion criteria for
participation in the clinical trial and patient compliance. For example,
patients may be discouraged from enrolling in our clinical trials if the trial
protocol requires them to undergo extensive post-treatment procedures or
follow-up to assess the safety and effectiveness of our products or if they
determine that the treatments received under the trial protocols are not
attractive or involve unacceptable risks or discomforts. In addition, patients
participating in clinical trials may die before completion of the trial or
suffer adverse medical events unrelated to investigational products.
Development of sufficient
and appropriate clinical protocols to demonstrate safety and efficacy are
required, and we may not adequately develop such protocols to support clearance
and approval. Significant risk trials will require the submission and approval of
an IDE from the FDA. There is no guarantee that the FDA will approve our future
IDE submissions. Further, the FDA may require us to submit data on a greater
number of patients than we originally anticipated and/or for a longer follow-up
period or change the data collection requirements or data analysis applicable
to our clinical trials. Delays in patient enrollment or failure of patients to
continue to participate in a clinical trial may cause an increase in costs and
delays in the approval and attempted commercialization of our products or
result in the failure of the clinical trial. In addition, despite considerable
time and expense invested in our clinical trials, the FDA may not consider our
data adequate to demonstrate safety and efficacy. Such increased costs and
delays or failures could adversely affect our business, operating results and
prospects.
We have no manufacturing experience, and will rely on
third parties to manufacture the ProUroScan System in an efficient manner. If
design specification changes are needed to develop an efficient manufacturing
process, those changes may require FDA clearance of a new 510(k) or
approval of a PMA, which we may not be able to obtain in a timely manner, if at
all.
To be successful, the
ProUroScan System will need to be manufactured in sufficient quantities, in
compliance with regulatory requirements and at an acceptable cost. We have no
manufacturing experience. We are in the process of identifying a third-party
manufacturer to produce commercial units of the ProUroScan System for
distribution after 510(k) clearance or PMA approval is obtained. Prior to
commercialization, this third-party manufacturer will identify the most
efficient manufacturing process to produce commercial ProUroScan Systems. If
device design changes are required to implement an efficient manufacturing
process, these design changes will need to be evaluated and implemented in
accordance with applicable Quality Systems Regulation (QSR) requirements. If
we implement design changes after the FDA has cleared the ProUroScan System
510(k), we will need to assess whether those design changes could significantly
affect the safety or effectiveness of the device, and require the submission
and clearance of a new 510(k), or even require the submission of a PMA. If we
determine that these modifications require a new 510(k) clearance or PMA
approval, we may not be able to obtain this additional clearance in a timely
manner, or at all. In general, obtaining additional clearances can be a time
consuming process, and delays in obtaining required
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future clearances would adversely affect our ability to market the
ProUroScan System in a timely manner, which in turn would harm our future
growth.
If we or our third-party manufacturers or suppliers
fail to comply with ongoing FDA or other foreign regulatory authority
requirements, or if we experience unanticipated problems with our products,
these products could be subject to restrictions or withdrawal from the market.
Any product for which we
obtain FDA clearance or approval, and the manufacturing processes, reporting
requirements, post-approval clinical data and promotional activities for such
product, will be subject to continued regulatory review, oversight and periodic
inspections by the FDA and other domestic and foreign regulatory bodies. In
particular, we and our third-party manufacturers and certain of our suppliers
will be required to comply with the FDAs QSR, regulations for the manufacture
of our products and other regulations which cover the methods and documentation
of the design, testing, production, control, quality assurance, labeling,
packaging, storage and shipping of any product for which we obtain clearance or
approval. Regulatory bodies, such as the FDA, enforce the QSR and other
regulations through periodic inspections. The failure by us or one of our
third-party manufacturers or suppliers to comply with applicable statutes and
regulations administered by the FDA and other regulatory bodies, or the failure
to timely and adequately respond to any adverse inspectional observations or
product safety issues, could result in, among other things, any of the
following enforcement actions:
·
warning letters or untitled letters;
·
fines and civil penalties;
·
unanticipated expenditures to address or
defend such actions;
·
delays in clearing or approving, or refusal
to clear or approve, our products;
·
withdrawal or suspension of approval of our
products or those of our third-party suppliers by the FDA or other regulatory
bodies;
·
product recall or seizure;
·
orders for physician notification or device
repair, replacement or refund;
·
interruption of production;
·
operating restrictions;
·
injunctions; and
·
criminal prosecution.
If any of these actions were
to occur it would harm our reputation and cause our product sales and
profitability to suffer and may prevent us from generating revenue.
Furthermore, our third-party manufacturers and suppliers may not be in
compliance with all applicable regulatory requirements which could result in
failure to supply our products in required quantities, if at all.
Even if regulatory clearance
or approval of a product is granted, such clearance or approval may be subject
to limitations on the intended uses for which the product may be marketed and
reduce our potential to successfully commercialize the product and generate
revenue from the product. If the FDA determines that our promotional materials,
labeling, training or other marketing or educational activities constitute
promotion of an unapproved use, it could request that we cease or modify our
training or promotional materials or subject us to serious regulatory
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enforcement actions, including some of those listed above. It is also
possible that other federal, state or foreign enforcement authorities might
take action if they consider our training or other promotional materials to
constitute promotion of an unapproved use, which could result in significant
fines or penalties under other statutory authorities, such as laws prohibiting
false claims for reimbursement.
In addition, we may be
required to conduct costly post-market testing and surveillance to monitor the
safety or effectiveness of our products, and we must comply with medical device
reporting requirements, including the reporting of adverse events and
malfunctions related to our products. Later discovery of previously unknown
problems with our products, including unanticipated adverse events or adverse
events of unanticipated severity or frequency, manufacturing problems, or
failure to comply with regulatory requirements such as QSR, may result in
changes to labeling, restrictions on such products or manufacturing processes,
withdrawal of the products from the market, or regulatory enforcement actions.
Our products may in the future be subject to product
recalls that could harm our reputation, business and financial results.
The FDA and similar foreign
governmental authorities have the authority to require the recall of
commercialized products in the event of material deficiencies or defects in
design or manufacture. In the case of the FDA, the authority to require a
mandatory recall must be based on an FDA finding that there is a reasonable
probability that the device would cause serious adverse health consequences or
death. In addition, foreign governmental bodies have the authority to require
the recall of our products in the event of material deficiencies or defects in
design or manufacture. Manufacturers may, under their own initiative, initiate
a field correction or removal, known as a recall, for a product if any material
deficiency in a device is found. A government-mandated or voluntary recall by
us or one of our third-party manufacturers or suppliers could occur as a result
of component failures, manufacturing errors, design or labeling defects or
other deficiencies and issues. Recalls of any of our products would divert
managerial and financial resources and have an adverse effect on our financial
condition and results of operations. The FDA requires that certain
classifications of recalls be reported to the FDA within 10 working days after
the recall is initiated. Companies are required to maintain certain records of
recalls, even if they are not reportable to the FDA. We may initiate voluntary
recalls involving our products in the future that we determine do not require
notification of the FDA. If the FDA disagrees with our determinations, they
could require us to report those actions as recalls. A future recall
announcement could harm our reputation with customers and negatively affect our
sales. In addition, the FDA could take enforcement action for failing to report
the recalls when they were conducted.
If our marketed products cause or contribute to a
death or a serious injury, or malfunction in certain ways, we will be subject to
medical device reporting regulations, which can result in voluntary corrective
actions or agency enforcement actions.
Under the FDA medical device
reporting regulation, medical device manufacturers are required to report to
the FDA information that a device has or may have caused or contributed to a
death or serious injury or has malfunctioned in a way that would likely cause
or contribute to death or serious injury if the malfunction of the device or
one of our similar devices were to recur. If we fail to report these events to
the FDA within the required timeframes, or at all, the FDA could take
enforcement action against us. Any such adverse event involving our products
also could result in future voluntary corrective actions, such as recalls or
customer notifications, or agency action, such as inspection or enforcement
action. Any corrective action, whether voluntary or involuntary, as well as
defending ourselves in a lawsuit, will require the dedication of our time and
capital, distract management from operating our business, and may harm our
reputation and financial results.
We will depend upon others for the manufacturing of
our products, which will subject our business to the risk that we will be
unable to fully control the supply of our products to the market.
Our ability to develop,
manufacture and successfully commercialize our future products depends upon our
ability to enter into and maintain contractual and collaborative arrangements
with others. We do not intend to establish any of our own manufacturing
facilities for the ProUroScan System or any of our future products. Instead,
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we intend to retain QSR compliant and FDA registered contract
manufacturers. We may also have to rely on a sole supplier for certain
components of our ProUroScan System. There can be no assurance that such
manufacturers will be able to supply our products in the required quantities,
at appropriate quality levels or at acceptable costs. We may be adversely
affected by any difficulties encountered by such third-party manufacturers that
result in product defects, production delays or the inability to fulfill orders
on a timely basis. If a manufacturer cannot meet our quality standards and
delivery requirements in a cost-efficient manner, we could suffer interruptions
of delivery while we arrange for alternative manufacturing sources. Any
extended disruption in the delivery of our products could result in our
inability to satisfy customer demand for our products. Consequently, our
inability to obtain alternative sources on a timely basis may have a material
adverse effect on our business.
We may incur significant liability if it is determined
that we are promoting off-label use of our products in violation of federal and
state regulations in the United States or elsewhere.
Artann initially intends to
seek clearance of the ProUroScan System from the FDA solely for a basic mapping
and data maintenance claim. We believe that seeking 510(k) clearance for
this limited indication is the least burdensome path to initial regulatory
clearance. Our business and future growth, however, will depend primarily on
the use or enhancement of the ProUroScan System to identify the specific
3-dimensional location of lesions in the prostate, to create a 3-dimensional
image of the position of the lesions, and allow the physician to rotate the
image to assist in identifying the actual position of the lesion in the
prostate gland in order to provide a diagnosis of the patients condition. Once
510(k) clearance is obtained and the ProUroScan System 510(k) is
transferred to us from Artann, we intend to subsequently seek regulatory
clearance or PMA approval for use of the ProUroScan System for a variety of
other prostate related indications. Unless and until we receive regulatory
clearance or approval for use of the ProUroScan System in these procedures,
uses in procedures other than basic mapping and data maintenance will be
considered off-label uses of the ProUroScan System. Under the Federal Food,
Drug, and Cosmetic Act (the FDCA) and other similar laws, we are prohibited
from labeling or promoting our products, or training physicians, for such
off-label uses. This prohibition means that the FDA could deem it unlawful for
us to make claims about the safety or effectiveness of the ProUroScan System in
the diagnosis of lesions or proactively discuss or provide information or
training on the use of the ProUroScan System for the diagnosis of prostate
lesions, with very limited exceptions. However, although manufacturers are not
permitted to promote for off-label uses, in their practice of medicine,
physicians may lawfully choose to use medical devices for off-label uses. Even
if the FDA grants 510(k) clearance for the ProUroScan System for use in a
basic mapping and data maintenance claim, a physician could use the ProUroScan
System for uses not covered by the cleared labeling. This would constitute an
off-label use. We expect that hospitals and physicians will use the ProUroScan
System for a variety of uses beyond mapping prostate anatomy.
The FDA and other regulatory
agencies actively enforce regulations prohibiting promotion of off-label uses
and the promotion of products for which marketing clearance has not been
obtained. A company that is found to have improperly promoted off-label uses
may be subject to significant liability, including civil and administrative
remedies as well as criminal sanctions. Due to these legal constraints, our
sales and marketing efforts will focus only on the general technical attributes
and benefits of the ProUroScan System and the FDA cleared or approved
indications for use.
Federal regulatory reforms may adversely affect our
ability to sell our products profitably.
From time to time,
legislation is drafted and introduced in Congress that could significantly
change the statutory provisions governing the clearance or approval,
manufacture and marketing of a medical device. In addition, FDA regulations and
guidance are often revised or reinterpreted by the agency in ways that may
significantly affect our business and our products. It is impossible to predict
whether legislative changes will be enacted or FDA regulations, guidance or interpretations
changed, and what the impact of such changes, if any, may be.
Without limiting the
generality of the foregoing, last year, the Food and Drug Administration
Amendments Act of 2007 (the Amendments) were enacted. The Amendments require,
among other things, that the FDA propose,
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and ultimately implement, regulations that will require manufacturers to
label medical devices with unique identifiers unless a waiver is received from
the FDA. Once implemented, compliance with those regulations may require us to
take additional steps in the manufacture of our products and labeling These
steps may require additional resources and could be costly. In addition, the
Amendments will require us to, among other things, comply with clinical trial
registration requirements once our clinical trials are initiated.
A failure to successfully implement a patient pay sales
model prior to establishing third party reimbursement would have a material
adverse effect on our product sales and financial results.
Until third-party
reimbursement coverage for the ProUroScan System procedure is established, if
at all, we anticipate using a patient pay model for physicians to receive
payment. Under a patient pay model, in the absence of coverage from their
health insurance, patients pay for the scan out of their own funds. Any failure
to successfully establish a patient pay model would have a material adverse
effect on our product sales and financial results.
The financial success of the ProUroScan System and
other future medical device products will materially depend on our ability to
obtain coverage and reimbursement for them.
The financial success of the
ProUroScan System and other medical device products will materially depend on
the scope of coverage for each device and the ability of medical service
providers to obtain third-party reimbursement from private and public insurance
sources, such as Medicare, Medicaid and private payors. It is difficult to
predict the timing and outcome of coverage and reimbursement decisions. There
can be no assurance that coverage and reimbursement will be obtained or will be
obtained at a level that will provide a suitable return to providers of
services using our technology.
Because the incidence of
prostate cancer increases with age, we expect that a significant percentage of
our patients will be Medicare beneficiaries. Obtaining Medicare coverage and
reimbursement will be critical to our success. Ensuring adequate Medicare
coverage and reimbursement, however, can be a lengthy and expensive endeavor
and we cannot provide assurances that we will be successful.
Significantly, the U.S.
Congress may pass laws that impact coverage and reimbursement for healthcare
services, including Medicare reimbursement to physicians and hospitals.
Furthermore, many private payors look to Medicares coverage and reimbursement
policies in setting their coverage policies and reimbursement amounts. If the
Centers for Medicare and Medicaid Services (CMS), the federal agency that
administers the Medicare program, or Medicare contractors limit coverage or
payments to physicians for the ProUroScan System, private payors may similarly
limit coverage or payments. In addition, state legislatures may enact laws
limiting or otherwise affecting the level of Medicaid reimbursement for
procedures using the ProUroScan System. As a result, physicians may not
purchase our ProUroScan System, and, consequently, our business and financial
results would be adversely affected.
We do not currently receive
coverage and reimbursement from any party for the use of our products because
we have no products fully developed and currently available for sale in the
marketplace. As a result, we have not taken any steps to obtain approval for
coverage and reimbursement for the use of the ProUroScan System.
Our failure to receive the third-party coverage for
our products could result in diminished marketability of our products.
Generally, Medicare does not
cover and pay for items and services that are not reasonable or necessary for
the diagnosis or treatment of illness or injury or to improve the functioning
of a malformed body member. This means that Medicare does not usually cover and
pay for preventative services, including routine screening tests for patients
who do not present with any signs or symptoms of disease, unless the law
specifically provides for such preventative coverage. Such statutory coverage
currently exists for prostate cancer screening tests. Specifically, the law
states that Medicare will cover a prostate screening test that consists of a
DRE and/or a PSA test provided for the purpose of early detection of prostate
cancer to a man over 50 years of age who has not had such test during the
preceding year. In addition, the law provides the Secretary of Health and Human
Services (the Secretary) the authority to cover
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other prostate screening tests based upon changes in technology and
standards of medical practice, availability, effectiveness, costs and other
factors deemed appropriate by the Secretary. Thus, for the ProUroScan System to
receive Medicare coverage as a prostate screening test, the Secretary would
need to add the scan to the list of appropriate procedures for prostate cancer
screening. This could be a significant hurdle for the ProUroScan System to
receive Medicare coverage as a prostate screening test. Additionally, Congress
recently created an alternative pathway for Medicare to cover preventative
services. Preventative services that receive a grade A or B by the United
States Preventive Services Task Force (USPSTF) are eligible for Medicare
coverage. The USPSTF does not currently recommend prostate cancer screening
with either grade.
We anticipate, however, that
the ProUroScan System may be covered by Medicare as a diagnostic test for
patients who have clinical signs or symptoms of disease. Obtaining Medicare
coverage as a diagnostic test is more straightforward as long as the test is
reasonable and necessary. For example, the PSA test is covered as a diagnostic
test when used to differentiate benign from malignant disease in men with lower
urinary tract signs and symptoms (e.g., hematuria, slow urine stream,
hesitancy, urgency, frequency, nocturia and incontinence) as well as with
patients with palpably abnormal prostate glands on physician exam, and in
patients with other laboratory or imaging studies that suggest the possibility
of a malignant prostate disorder. We anticipate that the first generation of
the ProUroScan System will be used to map the prostate and to maintain
historical records for future tracking for men who have an abnormal DRE or
other signs or symptoms of disease. Thus, providers who perform prostate
mapping using the first generation ProUroScan System likely will seek Medicare
coverage and payment as a diagnostic, rather than a screening test. Even as a
diagnostic test, however, CMS or its contractors could determine that
procedures using the ProUroScan System are not medically necessary and
therefore decide not to cover them.
Even if covered, our failure to receive appropriate
reimbursement from third-party payors could slow market uptake of our products.
Regardless of whether the
ProUroScan System is covered as a screening tool or a diagnostic test, there is
a risk that Medicare and other payors will bundle payment for it into the
payment for a covered office visit furnished to the patient on the same day.
For example, Medicare currently bundles billing and payment for a DRE into
payment for a covered evaluation and management office visit when the two
services are furnished to a Medicare beneficiary on the same day. If the DRE is
the only service or is provided as part of an otherwise non-covered service, it
may be separately paid if other coverage requirements are met. On the other
hand, the PSA typically is separately paid as a clinical diagnostic laboratory
service. Specifically, CMS could determine that due to the ease and short
amount of time needed to perform the ProUroScan System procedure, separate
reimbursement is not warranted if the physician already is billing an office
visit.
In order for physicians and
providers who perform procedures using the ProUroScan System to receive
separate reimbursement, they must bill a Current Procedure Terminology (CPT)
code that appropriately describes the service performed. Although initially
physicians and providers will be able to bill a miscellaneous code to submit
claims for ProUroScan System procedures, eventually we will want to apply for a
unique CPT code. The CPT application process is lengthy, and there is no
guarantee that we will receive a unique CPT code or that we will receive a
unique CPT code in a timely manner. Should we receive a unique CPT code, the
code is then valued for purposes of receiving reimbursement by the American
Medical Associations Relative Value Scale Update Committee. The valuation
process depends on the amount of time the procedure takes and difficulty of
work involved, the practice expense and the malpractice expense associated with
using the ProUroScan System. CMS then takes the recommendation of this
committee into account when establishing the reimbursement amount. The amount
of reimbursement the physician will receive generally depends on the values
assigned to the various components of the procedure multiplied by a conversion
factor. This value is updated annually as part of the Medicare Physician Fee
Schedule. There is no guarantee that this process will result in an appropriate
level of reimbursement or an amount that supports the price and revenues we
have projected.
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Even if a unique CPT code is obtained for the test,
the level of reimbursement established may not provide adequate economic
incentive to physicians, which could deter them from using our products and
limit our sales growth.
At this time, we do not know
the extent to which physicians or providers would consider third-party
reimbursement levels adequate to cover the cost of our products. Failure by
physicians or providers to receive an amount that they consider to be adequate
reimbursement could deter them from using our products and limit our sales
growth. In addition, Medicare physician fee schedule payments may decline over
time, which could deter physicians from using the ProUroScan System. If
physicians or providers are unable to justify the costs of the ProUroScan
System or they are not adequately compensated for using our product, they may
experience an economic disincentive to purchase or use them, which would
significantly harm our business.
Notwithstanding current or
future FDA clearances, if granted, third-party payors may deny reimbursement if
the payor determines that the ProUroScan System is unnecessary, inappropriate,
not cost-effective or experimental, or is used for a non-approved indication.
Further, all third-party payors, whether governmental or private, whether
inside the U.S. or outside, are developing increasingly sophisticated methods
of controlling healthcare costs. These cost control methods include prospective
payment systems, capitated rates, benefit redesigns, or pre-authorization
requirements. Increased scrutiny particularly is being placed on medical
imaging. Additionally, payors are emphasizing and covering wellness and
healthier lifestyle interventions and other cost-effective methods of
delivering healthcare in exchange for covering more procedures. These cost
control methods also potentially limit the amount that healthcare providers may
be willing to pay for medical technology which could, as a result, adversely
affect our business and financial results. In addition, in the U.S., no uniform
policy of coverage and reimbursement for medical technology exists among all
third party payors. Therefore, coverage and reimbursement for medical
technology can differ significantly from payor to payor. There also can be no
assurance that current levels of reimbursement will not be decreased or
eliminated in the future, or that future legislation, regulation, or
reimbursement policies of third-party payors will not otherwise adversely
affect the demand for the ProUroScan System or our ability to sell the
ProUroScan System on a profitable basis.
If we commercialize the ProUroScan System, we will be
subject, directly or indirectly, to federal and state healthcare fraud and
abuse laws and regulations and could face substantial penalties if we are
unable to fully comply with such laws.
Although we do not control
referrals of healthcare services or directly bill Medicare, Medicaid or other
third-party payors directly, many healthcare laws and regulations will apply to
our business. For example, we could be subject to healthcare fraud and abuse
and patient privacy regulation and enforcement by both the federal government
and the states in which we conduct our business. The healthcare laws and
regulations that may affect our ability to operate include:
·
the federal healthcare programs
Anti-Kickback Law, which prohibits, among other things, persons or entities
from soliciting, receiving, offering or providing remuneration, directly or
indirectly, in return for or to induce either the referral of an individual
for, or the purchase order or recommendation of, any item or service for which
payment may be made under a federal healthcare program such as the Medicare and
Medicaid programs;
·
federal false claims laws which prohibit,
among other things, individuals or entities from knowingly presenting, or
causing to be presented, claims for payment from Medicare, Medicaid, or other
third-party payors that are false or fraudulent, or are for items or services
not provided as claimed, and which may apply to entities like us to the extent
that our interactions with customers may affect their billing or coding
practices;
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·
the federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, which established new federal crimes for
knowingly and willfully executing a scheme to defraud any healthcare benefit
program or making false statements in connection with the delivery of or
payment for healthcare benefits, items or services, as well as leading to
regulations imposing certain requirements relating to the privacy, security and
transmission of individually identifiable health information; and
·
state law equivalents of each of the above
federal laws, such as anti-kickback and false claims laws which may apply to
items or services reimbursed by any third-party payor, including commercial
insurers, and state laws governing the privacy of health information in certain
circumstances, many of which differ from each other in significant ways and
often are not preempted by HIPAA, thus complicating compliance efforts.
The healthcare sector is,
and in recent years has been, under heightened scrutiny as the subject of government
investigations and enforcement actions involving manufacturers who allegedly
offered unlawful inducements to potential or existing customers in an attempt
to procure their business, including specifically arrangements with physician
consultants. We may have arrangements with physicians and other entities which
may be subject to scrutiny. For example, we may lease the ProUroScan System to
physicians or others through consulting agreements. Payment for these
consulting services sometimes may be in the form of cash, stock options or
royalties. If our operations are found to be in violation of any of the laws
described above or any other governmental regulations that apply to us, we may
be subject to penalties, including civil and criminal penalties, damages,
fines, exclusion from the Medicare and Medicaid programs, and the curtailment
or restructuring of our operations. Any penalties, damages, fines, exclusions,
curtailment or restructuring of our operations could adversely affect our
ability to operate our business and our financial results. The risk of our
being found in violation of these laws is increased by the fact that many of
these laws are broad and their provisions are open to a variety of
interpretations. Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur significant legal
expenses and divert our managements attention from the operation of our
business. If the physicians or other providers or entities with whom we do
business are found to be non-compliant with applicable laws, they may be
subject to sanctions, which could also have a negative impact on our business.
Any failure in our efforts or our contractors efforts
to train physicians or other medical staff could result in lower than expected
product sales.
A critical component of our
sales and marketing efforts is the training of a sufficient number of
physicians and other medical staff to properly use the ProUroScan System. We
rely on physicians and other medical staff to devote adequate time to learn to
use our products. Convincing physicians and other medical staff to dedicate the
time and energy for adequate training in the use of our system may be
challenging, and we cannot guarantee that this will occur. If physicians and
other medical staff are not properly trained, they may misuse or ineffectively
use our products. Insufficient training may result in unsatisfactory patient
outcomes, patient injury and related liability or negative publicity, which
could have an adverse effect on our product sales or create substantial
potential liabilities.
Rapid technological change in our competitive
marketplace may render the ProUroScan System obsolete or may diminish our
ability to compete in the marketplace.
The prostate cancer
detection, imaging and medical device markets are extremely competitive,
dominated by large and well financed competition and are subject to rapid
technological advances and changes. The discovery of new technologies and
advances in the application of such technologies to the medical marketplace in
general, and the market for urology-based imaging products in particular, may
render our products obsolete or non-competitive. Any such changes and advances
could force us to abandon our currently proposed products, which would have a
material adverse effect on our business.
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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.
We cannot be sure that we
will be able to enter into manufacturing or other collaborative arrangements
with third parties on terms acceptable to us, if at all. If we fail to
establish such arrangements when, and as necessary, we could be required to
undertake these activities at our own expense, which would significantly
increase our capital requirements and may delay the development, manufacturing
and commercialization of our products. If we are unable to address these
capital requirements, it may have a material adverse effect on our business.
We expect to rely materially on Artann and other
consultants and contractors, some of whom may be partially or wholly paid
through issuances of common stock dilutive to our shareholders.
We materially rely on
consultants and contractors to perform a significant amount of research and
development, pre-manufacturing, clinical, regulatory and marketing activities.
Specifically, over the contract periods of the Artann License Agreement and the
Artann Development Agreement, we expect to issue equity securities to Artann
valued up to $2.5 million ($500,000 of which was issued in January, 2009).
We expect that certain other consultants and contractors will also accept
payment of a portion of their compensation in the form of our equity
securities. Any such issuances would be dilutive to shareholders.
We are highly dependent on the services provided by
certain key personnel.
We are highly dependent upon
the services of our sole executive officers, Richard Carlson and Richard Thon.
We have not obtained key-man life insurance policies insuring the lives of
either of these persons. If the services of either of these persons become
unavailable to us, for any reason, our business could be adversely affected.
If we lose our right to license and use from Artann
certain critical intellectual property for any reason, our entire business
would be in jeopardy.
If we breach or fail to
perform the material conditions including payment obligations of, or fail to
extend the term of, the agreement with Artann that licenses critical
intellectual property, we may lose all or some of our rights to such critical
intellectual property and our license may terminate. If we should lose our
right to license and use technology covered by such license that is critical to
our business, such loss would have a materially adverse effect on our business.
In such a case, the viability of the Company would be in question. Our only
alternatives would be to find existing and non-infringing technology to replace
that lost, if any exists, or develop new technology ourselves. The pursuit of
any such alternative would likely cause significant delay in the development
and introduction of our proposed products.
The protections for our key intellectual property may
be successfully challenged by third parties.
We own various key
intellectual properties. No assurance can be given that any intellectual
property claims will not be successfully challenged by third parties. Any
challenge to our intellectual property, regardless of merit, would likely
involve costly litigation which could have a material adverse effect on our business.
If a successful challenge were made to intellectual property that is critical
to our proposed products, the pursuit of any such alternative would likely
cause significant delay in the development and introduction of such products.
Moreover, a successful challenge could call into question the validity of our
business.
As we lose patent protection on our critical
technologies, it may have a material adverse effect on our business.
We rely on certain patents
to provide us with exclusive rights for our technology. The first of our
primary patents on our core technology will expire in December 2012. As we
begin to lose certain patent protections on our prostate-imaging systems and
related critical patented technologies, we may face strong competition as a
result, which could have a material adverse effect our business.
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The government has rights to certain of our patents.
Certain of our patents
emanated from work performed by Artann under grants from the National
Institutes of Health (NIH). As a result, certain standard NIH grant
obligations apply, which are designed to ensure that the U.S. investment is
used in the interest of U.S. industry and labor and that inventions are
reported to NIH. Additionally, the U.S. government retains a non-exclusive
license to these patents. As a non-exclusive licensee of certain of these
patents, the U.S. government, in addition to utilizing the inventions itself,
could in certain limited circumstances, request additional licenses to the
patents be granted to other parties and, if such license request is refused,
grant the licenses itself. Any actions by the U.S. government to require the
grant of additional licenses could materially and adversely affect our
business.
We may not be able to successfully compete against
companies in our industry with greater resources, or with any competition.
If our development plan is
successful, we expect to experience significant competition in the medical
device market. Although we believe that we may currently have a niche in the
prostate-imaging marketplace, many factors beyond our control will likely
encourage new competitors. In particular, there are several large companies
that have indicated an interest in the prostate-imaging business. Therefore, no
assurance can be given that we will be able to successfully compete with these,
or any other companies in the marketplace, if at all.
The Shares and Warrants issued in the 2009 Public
Offering constitute an ownership change as defined by the Internal Revenue
Code of 1986, as amended (the Code) and our ability to use operating loss
carryforwards to offset income in future years will be limited.
As of December 31,
2008, the Company had generated net operating loss carryforwards of
approximately $5.0 million which, if not used, will begin to expire in
2021. Federal and state tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a change in
ownership of the Company that constitutes an ownership change, as defined by Section 382
of the Code. The Company has analyzed the public offering of approximately $3.1
million of our equity securities with net proceeds to the Company of
approximately $1.9 million (the 2009 Public Offering) along with previous
changes and believes that such an ownership change has not occurred, and that
the Companys use of its net operating loss carryforwards is not subject to
such restrictions.
Our business and products subject us to the risk of
product liability claims.
The manufacture and sale of
medical products and the conduct of clinical trials using new technology involve
customary risks of product liability claims. There can be no assurance that our
insurance coverage limits will be adequate to protect us from any liabilities
which we might incur in connection with the clinical trials or the
commercialization of any of our products. Product liability insurance is
expensive and in the future may not be available on acceptable terms, if at
all. A successful product liability claim or series of claims brought against
us in excess of our insurance coverage would have a material adverse effect on
our business. In addition, any claims, even if not ultimately successful, could
have a material adverse effect on the marketplaces acceptance of our products.
We have never paid dividends and do not expect to pay
dividends in the foreseeable future.
We have never paid dividends
on our capital stock and do not anticipate paying any dividends for the
foreseeable future. Future debt covenants may prohibit payment of dividends.
ITEM 1B: UNRESOLVED STAFF
COMMENTS
Not applicable.
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ITEM 2:
PROPERTIES
Our executive offices are located at 6440 Flying
Cloud Drive, where we rent approximately 500 square feet of office space on a
month-to-month basis. Our rental cost
for this office space is approximately $550 per month, which we believe is at
market for similar office space in Minneapolis, Minnesota. We do not own any real property.
ITEM 3:
LEGAL PROCEEDINGS
Although
we are subject to litigation or other legal proceedings from time to time in
the ordinary course of our business, we are not a party to any pending legal
proceedings and are not aware of any threatened legal proceeding.
ITEM 4:
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART II
ITEM 5
: MARKET FOR REGISTRANTS
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
General
Our common stock has been
quoted on the Over-The-Counter Bulletin Board (the OTCBB) since December 2003.
Our common stock is currently quoted under the symbol PUMD. The following
table lists the high and low bid information for our common stock as quoted on
the OTCBB by quarter from January 1, 2007 through December 31, 2008
Quarter
|
|
Price Range
|
|
Ended
|
|
High
|
|
Low
|
|
March 31,
2007
|
|
$
|
4.50
|
|
$
|
2.60
|
|
June 30,
2007
|
|
$
|
5.10
|
|
$
|
2.00
|
|
September 30,
2007
|
|
$
|
3.00
|
|
$
|
0.50
|
|
December 31,
2007
|
|
$
|
2.50
|
|
$
|
0.51
|
|
March 31,
2008
|
|
$
|
0.95
|
|
$
|
0.30
|
|
June 30,
2008
|
|
$
|
2.01
|
|
$
|
0.30
|
|
September 30,
2008
|
|
$
|
3.05
|
|
$
|
0.30
|
|
December 31,
2008
|
|
$
|
1.85
|
|
$
|
0.41
|
|
The above quotations from
the OTCBB reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. The number of holders of
record of our common stock as of March 23, 2009 was
approximately 165.
Dividend Policy
We have never declared or
paid any cash dividends on our capital stock and do not expect to pay any
dividends for the foreseeable future. We intend to use future earnings, if any,
in the operation and expansion of our
36
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business. Any future determination relating to our dividend policy will
be made at the discretion of our board of directors, based on our financial
condition, results of operations, contractual restrictions, capital
requirements, business properties, restrictions imposed by applicable law and
other factors our board of directors may deem relevant. Future debt covenants
may prohibit payment of dividends.
Recent Sales of
Unregistered Securities
The issuances of our
securities listed below were made in reliance on exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended (the Securities
Act), as we reasonably believed that the investors were sophisticated, that no
general solicitations were involved and the transactions did not otherwise
involve a public offering.
Common Stock and Warrant Issuances
On October 24, 2008,
pursuant to a June 1, 2006 promissory note and amendments thereto, we
issued to Roman Pauly a 5-year warrant (immediately exercisable) to
purchase 31,817 shares of our common stock at an exercise price of $5.00 per
share and a 5-year warrant (immediately exercisable) to purchase 3,000 shares
of our common stock at an exercise price of $1.50 per share.
On October 31, 2008, we
issued a total of 17,778 shares of our common stock and five-year,
immediately exercisable warrants to purchase in the aggregate
44,445 shares of our common stock at a price of $2.00 per share to James
Davis, Bruce Culver and William Reiling pursuant to the terms of the October 31,
2007 extensions of their guarantees of our Crown Bank loans.
On October 31, 2008, we
issued 6,667 shares of our common stock and a five-year, immediately
exercisable warrant to purchase 16,667 shares of our common stock at a
price of $2.00 per share to the Smith Family Trust pursuant to the terms of a
$600,000 promissory note dated October 31, 2007.
Unit Put Agreements
On September 16, 2008,
we received $325,000 of funding commitments to purchase $325,000 of units in
accordance with the terms of a unit put agreement (the Unit Put Agreement).
Upon our exercise of the put, each investor that has signed a Unit Put
Agreement agreed to purchase the units being put by us on a pro rata basis
within 5 days after receiving the put notice from us.
Each unit consists of a note
in the principal amount of $9,500 and a warrant to purchase 2,000 shares
of our common stock. The purchase price of the warrant portion of each unit is
$500. The notes bore interest at ten percent per year, mature on the
18-month anniversary of the date of the Unit Put Agreement, and converted into
common stock at $0.70 per share (based on 70% of the 2009 Public Offering
price). The warrants will be exercisable immediately upon issuance and will
remain exercisable until December 31, 2012 at an exercise price of
$1.00 per share.
In consideration of each
purchasers future funding commitment, each purchaser received an origination
warrant (Origination Warrants) to purchase 1,000 shares of our common
stock for each $10,000 unit that an investor committed to purchase. Each
Origination Warrant is exercisable until December 31, 2012 at an exercise
price of $1.00 per share. We have issued Origination Warrants to purchase
an aggregate 32,500 shares of our common stock, although 1,000 of such
warrants were forfeited due to a failure to fulfill a $10,000 obligation under
the Unit Put Agreement.
On September 16, 2008,
we exercised $162,500 of our put options under the Unit Purchase Agreement, and
upon the September 24, 2008 closing thereof, issued Unit Put Notes in the
principal amount of $154,375 and 32,500
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Unit Put Warrants. On October 17,
2008, we exercised the remaining $162,500 of our put options and on October 28,
2008 and December 11, 2008, closed on put options of $127,500 and $25,000,
respectively. Pursuant to the October 28, 2008 and December 11, 2008
closings, we issued Unit Put Notes in the principal amount of $121,125 and
$23,750, respectively, along with 25,500 and 5,000 Unit Put Warrants,
respectively.
ITEM 6:
|
|
SELECTED FINANCIAL DATA
|
Not applicable.
ITEM
7:
|
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
The following discussion of
our financial condition and results of operations should be read in conjunction
with our consolidated financial statements, and notes thereto, included in this
Annual Report on Form 10-K. This discussion should not be construed to
imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future.
Results of Operations
Current Operations
We currently employ only two
employees. We conduct our research and development, market research, regulatory
and other business operations through the use 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. During the first half of 2009, we expect to
complete the clinical and regulatory process leading to FDA 510(k) market
clearance 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 rent approximately 500 square feet of office
space on a month-to-month basis at a cost of approximately $550 per month.
Other expenses incurred include executive officer compensation, travel,
insurance, telephone, supplies and other miscellaneous expenses.
Pursuant to the terms of the
Artann Development Agreement, we are required to make cash and equity payments
upon the achievement of several project milestones along with a monthly
retainer fee. Upon the submission of our
510(k) application to the FDA, we are to make a cash payment to Artann of
$250,000 and an equity payment of our common shares valued at $1,000,000. Upon
receipt of FDA 510(k) clearance, we are to make a further cash
payment of $750,000 and a second $1,000,000 equity payment. In addition, we expect to make cash payments
to Artann totaling approximately $150,000 for development services they are to
provide during the last nine months of 2009.
See ProUroScan System Development Partner for more information.
During the remainder of
2009, assuming that we are successful in obtaining FDA clearance on our
ProUroScan system, we expect to engage contract manufacturing, engineering and
clinical resources to produce our products as we begin to commercialize our
product. As we build inventory, and
ultimately accounts receivable as a result of our commercialization activity,
we will require an estimated $800,000 by year end to fund this build-up of
working capital. In addition, we expect
to hire approximately eight employees in the areas of manufacturing management,
marketing, sales training, administration and quality assurance. Consequently,
our operating expenses will increase sharply during the second half of the
year. We estimate that we will require
between $600,000 and $650,000 to fund staff compensation costs over the last
three quarters of 2009. During this same
period, we expect to
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supplement our internal resources by the use of consultant and
contracted personnel. We estimate the
cost of such contracted resources to be approximately $400,000.
Year ended
December 31, 2008 compared to the year ended December 31, 2007:
Operating
Expenses/Operating Loss.
Our operating loss equals our operating
expenses because we have no revenue. For the year ended December 31, 2008,
our operating expenses (and our operating loss) were $4,657,717, an increased loss
of $1,544,420 or 50 percent, compared to $3,113,297 last year.
Total employee compensation
and benefits costs decreased to $390,797 from $972,731 last year, or
60 percent. In the year ended December 31, 2007, we incurred
stock-based compensation of $316,500 related to the extension of the exercise
period of certain stock options and warrants issued pursuant to separation
agreements with three former employees. The remaining compensation expense
reduction came primarily as a result of the termination of the three employees
in early 2007 and reduced stock option expense, as certain options granted in
prior years became fully expensed in 2007.
General and administrative expenses in 2008 also included $1,100,000
related to technology licensing from Artann under the Artann Licensing
Agreement, with $600,000 to be paid in cash and $500,000 to be paid in common
stock. Fees for legal services in the
year ended December 31, 2008 increased $93,016, or 78 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 patent
related legal expenses. Fees accrued or paid to outside directors increased to
$70,717 for the year ended December 31, 2008 compared to $25,417 last
year, due primarily to a one-time stock grant to the directors in recognition
of their efforts in our repositioning and financing since the beginning of
2007.
Research and development
costs in the year ended December 31, 2008 were $597,755. This represents an increase of $454,127, or
316 percent, compared to the $143,628 recognized as research and
development expense during the year ended December 31, 2007. The 2008 research and development expense
amount included $250,000 of expense related to Artanns achievement of the
first project milestone under the Artann Development agreement, additional
research and development expenses totaling $50,000 related to work performed by
Artann under our development agreement, and the expensing of our $300,000
acquisition of certain intellectual property and know-how from Profile. Fiscal
2007 expenses included a $35,000 payment and the issuance of warrants valued at
$72,000 to Artann pursuant to a cooperation agreement signed in April 2007
and $24,407 of research costs related to a prostate visioning system project.
Interest
Expense.
Total interest expense for the year ended December 31,
2008 was $1,910,037, an increase of $597,817 or 46 percent, compared to $1,312,220
last year. The increased interest expense can be attributed to the issuance of
$1,900,000 of convertible notes in our 2007 and 2008 private placements,
$299,250 of convertible notes in our September 2008 unit put offering, and
$262,500 of convertible notes related to our April 2008 acquisition of
intellectual property from Profile.
Amortization of the original issue discount attributable to shares of
common stock issued, warrants issued and beneficial conversion features related
to these notes resulted in $1,055,453 of recorded interest expense in the year
ended December 31, 2008 compared to $446,359 in the year ended December 31,
2007. Amortization of debt issuance
costs related to the notes issued and outstanding during the years ended December 31,
2008 and 2007 was $421,564 and $506,639, respectively. Interest expense based on stated interest
rates was $433,020 and $359,222 during the years ended December 31, 2008
and 2007, respectively.
Debt
Extinguishment Cost.
Our total debt extinguishment cost for the
year ended December 31, 2008 was $123,785, a decrease of 64 percent,
compared to $343,454 last year. Our debt extinguishment cost resulted primarily
from the cost of warrants issued in connection with the amendment of certain
short term loans to defer their maturity dates. The year-to-year decrease was a
result of the repayment of a significant portion of these outstanding short
term loans in late 2007 and early 2008.
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Year ended December 31, 2007 compared to the
year ended December 31, 2006:
Operating
Expenses/Operating Loss.
Our operating expenses equal our operating
loss because we have no revenue. A 21 percent decrease in our operating
expenses for the year ended December 31, 2007 compared to the prior year,
from $1,842,169 to $1,448,902, was directly related to our efforts to
restructure the Company, with an emphasis on minimizing costs and conserving
cash while repositioning the Company and raising capital to fund development.
In late 2006, our former CEO retired. In the first quarter of 2007, two
additional executive level positions were eliminated. These moves resulted in a
reduction of salaries, payroll taxes and benefits from $935,705 during the year
ended December 31, 2006 to $423,347 in 2007, a savings of $512,358 or
55 percent. Offsetting this was a 41 percent increase in stock-based
compensation, from $389,034 to $549,384 in those same periods related to the
extension of exercise periods of certain options and warrants of the departing
executives pursuant to termination agreements. In December we moved our
headquarters into a smaller facility, resulting in a reduction of rent expense
from $47,519 in 2006 to $21,286 in 2007, saving $26,233 or 55 percent.
Research and development
costs for the year ended December 31, 2007 were $143,628, a decrease of
$102,491, or 42 percent, compared to 2006. The 2007 research and
development costs included the issuance of warrants valued at $72,000 and cash
payments of $45,000 to Artann pursuant to a cooperation agreement signed in April 2007
and $24,407 of research costs related to a prostate visioning system project.
Research and development costs in 2006 consisted of contracted development work
on our ProUroScan System and a subsequently abandoned prostate visioning system
project.
Interest
Expense.
Interest expense for the year ended December 31,
2007 was $1,312,220 compared to $1,089,762 in 2006, an increase of $222,458 or
20 percent. The majority of our recorded interest expense represents the
cost of warrants issued in conjunction with debt issuances and the cost of
certain convertible features of debt issuances. $952,998of the 2007 interest expense
and $802,475 of the 2006 interest expense related to the cost of warrants and
convertible debt features. The increased interest expense is the result of an
increase in the average amount of debt outstanding over the course of 2007
compared to 2006 used to fund operations.
Debt Extinguishment Cost.
Debt
extinguishment costs for the year ended December 31, 2007 was $353,454,
compared to $27,922 in 2006. These expenses represent primarily the cost of
warrants issued in connection with the amendment of certain short term loans
made to defer their maturity dates in late 2006 and early 2007, and the
issuance of stock and warrants pursuant to the refinancing of $600,000 of debt
with the Smith Trust in October 2007.
Liquidity and Capital Resources
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 $1,600,000 of senior bank notes and
a note issued to an investor in the amount of $600,000 and, as a result, are
not available to secure other senior debt financing.
We anticipate purchasing
approximately $400,000 of tooling molds and other capital for production,
computer equipment, software and general office furniture and equipment during
the remainder of 2009. We do not anticipate selling any significant assets in
the near term.
Purchase of Patents
On April 3, 2008, we
purchased certain previously-licensed patents, patent applications, and
know-how (the Profile Assets) associated with imaging technology from Profile
L.L.C., a Delaware limited liability company
40
Table of Contents
(Profile), pursuant to an asset purchase agreement. The purchase
price of the Profile Assets was $300,000, of which $150,000 was paid in cash
and $150,000 was financed under a secured promissory note (the Profile Note).
Recent Financings
Between December 2007
and July 2008, we raised a total of $2,000,000 (including conversion of
$175,000 of existing debt) from the sale of convertible promissory notes and
warrants in four private placements.
In connection with the
purchase of the Profile Assets, on April 3, 2008 we borrowed an aggregate
of $112,500 pursuant to three convertible promissory notes each in the amount
of $37,500. Payment in full of the promissory notes and the interest accrued
thereon at an annual rate of 10% became due on December 31, 2008. In January 2009, following the closing
of the 2009 Public Offering, we repaid $45,500 of the notes, and $29,500 of the
notes were converted into common stock at $0.70 per share (based on 70 percent
of the 2009 Public Offering price). On March 19,
2009, the remaining $37,500 promissory note and accrued interest thereon, due
to Mr. James Davis, was refinanced along with another $150,000 promissory
note due to Mr. Davis (see below).
On September 16, 2008,
we received funding commitments to purchase $325,000 of units in accordance with
the terms of a unit put agreement (the Unit Put Agreement) (such funding
commitments, the Unit Put Arrangements).
Between September 2008 and December 2008, we raised $315,000
from the sale of convertible promissory notes and warrants pursuant to the Unit
Put Arrangements.
On September 25, 2008,
we borrowed $150,000 pursuant to a promissory note issued in favor of Mr. Davis.
As consideration for providing the loan, we issued an immediately exercisable,
five-year warrant to purchase 100,000 shares of our common stock at $1.50 per
share to Mr. Davis. The proceeds of the loan were used to retire the
$150,000 principal amount of the Profile Note.
Payment in full of the promissory notes and
the interest accrued thereon at an annual rate of 10 percent was due seven
days after the closing date of the 2009 Public Offering. On March 19, 2009, Mr. Davis agreed
to refinance the $150,000 debt (and $7,291 of interest accrued thereon) along
with a $37,500 note (and $3,646 of accrued interest thereon), another $2,632
payable to Mr. Davis, and $15,293 of expenses paid by Mr. Davis on
our behalf. Mr. Davis also agreed
to loan to us an additional $64,638 to pay for our exhibition of the ProUroScan
system at the annual American Urology Association meeting, the retention of an
investor relations firm and the initiation of a clinical advisory board. He also agreed to have certain website
maintenance services performed for us.
Pursuant to the refinancing and the other arrangements, we issued a
$281,000 unsecured convertible promissory note to Mr. Davis. The promissory note matures on March 19,
2010, bears no interest, and is convertible into our common stock at $0.55 per
share at the option of Mr. Davis.
On January 12, 2009, we
closed on the 2009 Public Offering. We
expect that the $1,880,000 net proceeds of that offering will be sufficient to
fund our cash obligations under the Artann Development Agreement and the Artann
License Agreement and to finance our operating expenses up to receipt of FDA
510(k) clearance, as described in Current Operations above, and to
retire certain short-term liabilities. However, if our product development
efforts experience significant unforeseen delays, we may not have sufficient
funds to complete these objectives, and will require additional financing. We
do not expect the funds from the 2009 Public Offering to be sufficient for us
to initiate any significant market launch or scale-up manufacturing
capabilities. In addition, we need funding beyond the net proceeds of the 2009
Public Offering to pay, for example, up to $1,000,000 of future payments to
Artann related to their achievement of FDA 510(k) clearance
milestones.
The closing of the 2009
Public Offering triggered the automatic conversion of certain debt instruments
into equity, as follows:
·
$733,334 convertible debentures together with
$143,815 of interest accrued thereon converted into 292,384 shares of our
common stock.
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·
$1,900,000 of convertible notes issued in the
2007 and 2008 private placements together with $177,882 of interest accrued
thereon converted into 3,058,381 Units.
·
$299,250 of convertible notes issued pursuant
to the Unit Put Arrangement together with $9,563 of interest accrued thereon
converted into 441,165 shares of our common stock.
Current Financing Plans
As a result of the closing on the 2009 Public Offering and the
subsequent conversion of convertible notes into Units, we have 6,108,381
redeemable warrants outstanding. These
warrants have an exercise price of $1.30 per share, which we may redeem once
the last sale price of our common stock equals or exceeds $1.82 per share for a
period of ten consecutive trading days.
If this event were to occur, we intend to exercise our right to redeem
the warrants, which will allow all holders of warrants a period of 30 days to
exercise their warrants. If all such
warrant holders exercise their warrants, we could realize up to approximately
$7.9 million, depending on the number of shares actually exercised pursuant to
such a redemption. There can be no
assurance that we will be able to redeem the warrants, or of how much would be
realized if such a redemption were made.
During the first half of 2009, we plan to identify a distribution
partner to market our products (see Item 1,
Marketing and Distribution
). We expect such a distribution partner to
provide significant financial support in the form of licensing fees, loans,
equity investment or a combination of these.
In addition to financial support, a successful collaboration with such a
partner would allow us to gain access to down stream marketing, manufacturing,
and sales support. There can be no
assurance that a distribution partner can be successfully identified and
engaged during the first half of 2009, or at all.
In March 2009, we
renewed $1.2 million of the secured debt to mature on March 28, 2010, and
temporarily paid down $400,000 of the secured debt. We intend to re-borrow the $400,000 secured
debt before the end of May, 2009 upon the establishment of a satisfactory
guaranty of the debt with the lender.
We also have other short
term liabilities, consisting of the Davis convertible promissory note describe
above, accounts payable and accrued expenses, exceeding $1,575,000 We expect to pay for these obligations from
the proceeds of the exercise of the Unit warrants and license fees from a
potential distribution partner. If we are unable to exercise the warrants or
receive financial support from a distribution partner, we will pursue one or
more additional rounds of funding in 2009 and 2010 to provide the working
capital needed to fund a significant commercial launch into the urology market.
If additional funds are raised by the issuance of convertible debt or equity
securities, or by the exercise of outstanding warrants, then existing
shareholders will experience dilution in their ownership interest. If
additional funds are raised by the issuance of debt or certain equity instruments,
we may become subject to certain operational limitations, and such securities
may have rights senior to those of our existing holders of common stock.
If adequate funds are not
available through these initiatives on a timely basis, or are not available on
acceptable terms, we may be unable to fund expansion, or to develop or enhance
our products. If we are forced to slow our development programs, or put them on
hold, it would delay regulatory clearances or approvals needed, and thus delay
market entry for our products. Ultimately, if no additional financing is
obtained beyond what has been secured to date, we likely would be forced to
cease operations. There can be no assurance we will be successful in raising
such funds.
42
Table
of Contents
Off-Balance Sheet Arrangements
Not applicable.
Going Concern
We have incurred operating
losses, accumulated deficit and negative cash flows from operations since
inception. As of December 31, 2008, we had an accumulated shareholders
deficit of approximately $7.3 million. These factors, among others, raise
substantial doubt about our ability to continue as a going concern. Our consolidated
financial statements included in this Annual Report on Form 10-K do not
include any adjustments related to recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should we be unable to continue as a going concern.
Critical Accounting Policies
Our critical accounting
policies are policies which have a high impact on the reporting of our
financial condition and results, and require significant judgments and
estimates. Our critical accounting policies relate to (a) the valuation of
stock-based compensation awarded to employees, directors, loan guarantors and
consultants and (b) the accounting for debt with beneficial conversion
features.
Valuation of Stock-Based Compensation
E
ffective as of August 17, 1999
(inception), we 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. Our determination of fair value of
share-based payment awards is based on the date of grant using an
option-pricing model which incorporates a number of highly complex and
subjective variables. These variables include, but are not limited to, the
expected volatility of our stock price and estimates regarding projected
employee stock option exercise behaviors and forfeitures. We recognize the
expense related to the fair value of the award straight-line over the vesting
period.
Debt with Beneficial Conversion Features
The beneficial conversion
features of the promissory notes were valued using the Black-Scholes pricing
model. The resulting original issue discount is amortized over the life of the
promissory notes using the straight-line method, which approximates the interest
method.
ITEM 7A
:
QUANTITATIVE AND
QUALITATTIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
43
Table
of Contents
ITEM
8: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The following financial statements are
included:
F-1
Table
of Contents
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders,
Audit Committee and Board of Directors
ProUroCare Medical Inc.
Eden Prairie, MN
We have audited the
accompanying consolidated balance sheets of ProUroCare Medical Inc. (a
development stage company) as of December 31, 2008 and 2007, and the
related consolidated statements of operations, shareholders equity (deficit)
and cash flows for the years then ended and the period from August 17,
1999 (inception) to December 31, 2008.
These consolidated financial statements are the responsibility of the
Companys management. Our responsibility
is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our
audits included consideration of its internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ProUroCare Medical Inc. as of December 31,
2008 and 2007 and the results of their operations and their cash flows for the
years then ended and the period from August 17, 1999 (inception) to December 31,
2008, in conformity with U.S. generally accepted accounting principles.
The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has
recurring operating losses, negative cash flows from operations and requires
additional working capital to support future operations, which raises substantial
doubt about its ability to continue as a going concern. Managements plans in regards to these
matters are also described in Note 2.
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Virchow,
Krause & Company, LLP
Minneapolis, Minnesota
March 24, 2009
F-2
Table
of Contents
ProUroCare Medical Inc.
(A
Development Stage Company)
Consolidated Balance Sheets
|
|
December 31, 2008
|
|
December 31, 2007
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
|
|
$
|
3,900
|
|
$
|
400,613
|
|
Restricted cash
|
|
44,214
|
|
44,000
|
|
Other current
assets
|
|
31,634
|
|
21,733
|
|
Total current
assets
|
|
79,748
|
|
466,346
|
|
|
|
|
|
|
|
Equipment and
furniture, net
|
|
|
|
605
|
|
Deferred
offering expenses
|
|
729,924
|
|
132,638
|
|
Debt issuance
costs, net
|
|
266,882
|
|
439,321
|
|
|
|
$
|
1,076,554
|
|
$
|
1,038,910
|
|
|
|
|
|
|
|
Liabilities and Shareholders Deficit
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Notes payable,
bank
|
|
$
|
1,600,000
|
|
$
|
|
|
Notes payable
|
|
34,425
|
|
163,143
|
|
Notes payable -
related parties
|
|
634,000
|
|
110,450
|
|
Convertible
debt, net of original issue discount
|
|
1,033,484
|
|
|
|
Convertible debt
- related parties, net of original issue discount
|
|
1,179,913
|
|
|
|
Accounts payable
|
|
1,203,549
|
|
484,375
|
|
Accrued license
and development fees
|
|
1,327,835
|
|
|
|
Accrued expenses
|
|
937,253
|
|
801,925
|
|
Total current
liabilities
|
|
7,950,459
|
|
1,559,893
|
|
|
|
|
|
|
|
Commitments and
contingencies (note 7)
|
|
|
|
|
|
Long-term bank
debt
|
|
|
|
1,600,000
|
|
Long-term note
payable - related parties
|
|
|
|
600,000
|
|
Long-term
convertible debt, net of original issue discount
|
|
221,199
|
|
353,934
|
|
Long-term
convertible debt - related parties net of original issue discount
|
|
162,759
|
|
616,666
|
|
Total
liabilities
|
|
8,334,417
|
|
4,730,493
|
|
Shareholders
deficit:
|
|
|
|
|
|
Common stock,
$0.00001 par. Authorized 50,000,000 shares; issued and outstanding 1,811,429
and 1,727,311 shares, respectively
|
|
18
|
|
17
|
|
Additional
paid-in capital
|
|
13,677,932
|
|
12,586,496
|
|
Deficit
accumulated during development stage
|
|
(20,935,813
|
)
|
(16,278,096
|
)
|
Total
shareholders deficit
|
|
(7,257,863
|
)
|
(3,691,583
|
)
|
|
|
$
|
1,076,554
|
|
$
|
1,038,910
|
|
See accompanying notes to financial statements.
F-3
Table
of Contents
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated Statements of Operations
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
August 17,
|
|
|
|
|
|
|
|
1999
|
|
|
|
Year ended
|
|
Year ended
|
|
(inception) to
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Research and
development
|
|
$
|
597,755
|
|
$
|
143,628
|
|
$
|
5,455,307
|
|
General and
administrative
|
|
2,026,677
|
|
1,305,274
|
|
9,831,173
|
|
Total operating
expenses
|
|
2,624,432
|
|
1,448,902
|
|
15,286,480
|
|
Operating loss
|
|
(2,624,432
|
)
|
(1,448,902
|
)
|
(15,286,480
|
)
|
Interest income
|
|
537
|
|
1,278
|
|
18,295
|
|
Interest expense
|
|
(1,001,551
|
)
|
(872,713
|
)
|
(3,814,474
|
)
|
Interest expense
- related parties
|
|
(908,486
|
)
|
(439,507
|
)
|
(1,347,993
|
)
|
Debt
extinguishment expense
|
|
(75,571
|
)
|
(326,626
|
)
|
(430,119
|
)
|
Debt
extinguishment expense - related parties
|
|
(48,214
|
)
|
(26,828
|
)
|
(75,042
|
)
|
Net loss
|
|
$
|
(4,657,717
|
)
|
$
|
(3,113,298
|
)
|
$
|
(20,935,813
|
)
|
|
|
|
|
|
|
|
|
Net loss per
common share:
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(2.65
|
)
|
$
|
(1.98
|
)
|
$
|
(19.95
|
)
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding:
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
1,759,607
|
|
1,572,555
|
|
1,049,158
|
|
See accompanying notes to consolidated financial
statements.
F-4
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of
Shareholders Equity (Deficit)
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
during the
|
|
Total
|
|
|
|
Common stock
|
|
paid-in
|
|
development
|
|
shareholders
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
stage
|
|
equity (deficit)
|
|
Balance
at inception, August 17, 1999
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the
period from inception to December 31, 1999
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Balance,
December 31, 1999
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the
year ended December 31, 2000
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2000
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock to founders at $33.33 per share on March 1, 2001
|
|
1.0
|
|
|
|
20
|
|
|
|
20
|
|
Cancellation of
founders shares, March 6, 2001
|
|
(1.0
|
)
|
|
|
(20
|
)
|
|
|
(20
|
)
|
Recapitalization
and transfer of common stock to Clinical Network, Inc. July 6, 2001
|
|
300,000
|
|
3
|
|
(3
|
)
|
|
|
|
|
Issuance of
common stock to CS Medical Technologies, LLC as consideration for technology
license agreement on July 6, 2001, valued at $1.58 per share
|
|
300,000
|
|
3
|
|
474,997
|
|
|
|
475,000
|
|
Net loss for the
year ended December 31, 2001
|
|
|
|
|
|
|
|
(612,533
|
)
|
(612,533
|
)
|
Balance,
December 31, 2001
|
|
600,000
|
|
6
|
|
474,994
|
|
(612,533
|
)
|
(137,533
|
)
|
Issuance of
common stock valued at $4.29 per share to Profile LLC for technology license,
January 14, 2002
|
|
400,000
|
|
4
|
|
1,713,596
|
|
|
|
1,713,600
|
|
Issuance of
common stock at $23.33 per share for services rendered, November 14,
2002
|
|
4,421
|
|
|
|
103,166
|
|
|
|
103,166
|
|
Issuance of
common stock for cash at $23.33 per share on November 22, 2002, net of
costs of $193,386
|
|
45,335
|
|
1
|
|
864,418
|
|
|
|
864,419
|
|
Options to
purchase 90,000 shares issued to officers and directors, valued at $4.60 per
share, granted March 19, 2002; portion vested in 2002
|
|
|
|
|
|
124,583
|
|
|
|
124,583
|
|
Options to
purchase 6,000 shares issued to consultants for services rendered, valued at
$4.60 per share, granted March 19, 2002; portion vested in 2002
|
|
|
|
|
|
18,400
|
|
|
|
18,400
|
|
Warrant for
3,000 shares valued at $4.60 per share, issued to a director on
April 19, 2002; portion vested in 2002
|
|
|
|
|
|
4,025
|
|
|
|
4,025
|
|
Warrant for 150
shares valued at $3.33 per share issued for services rendered,
November 11, 2002
|
|
|
|
|
|
490
|
|
|
|
490
|
|
Net loss for the
year ended December 31, 2002
|
|
|
|
|
|
|
|
(3,613,003
|
)
|
(3,613,003
|
)
|
Balance,
December 31, 2002
|
|
1,049,756
|
|
11
|
|
3,303,672
|
|
(4,225,536
|
)
|
(921,853
|
)
|
Stock issued in
lieu of cash for accounts payable, valued at $23.33 per share,
February 25, 2003
|
|
545
|
|
|
|
12,705
|
|
|
|
12,705
|
|
Warrants for
19,286 shares valued at $3.00 per share, issued to bank line of credit
guarantors, March 1, 2003
|
|
|
|
|
|
57,858
|
|
|
|
57,858
|
|
Warrant for
2,143 shares valued at $3.00 per share, issued to director as a bank line of
credit guarantor, March 1, 2003
|
|
|
|
|
|
6,429
|
|
|
|
6,429
|
|
Warrant for
9,215 shares issued for services rendered, valued at $20.30 per share,
June 30, 2003
|
|
|
|
|
|
187,060
|
|
|
|
187,060
|
|
Warrants for
22,501 shares valued at $3.60 per share, issued to bank line of credit
guarantors, August 5, 2003
|
|
|
|
|
|
81,003
|
|
|
|
81,003
|
|
Warrant for
2,143 shares valued at $3.60 per share, issued to director as a bank line of
credit guarantor, August 5, 2003
|
|
|
|
|
|
7,714
|
|
|
|
7,714
|
|
Warrants for
6,429 shares valued at $3.40 per share, issued to bank line of credit
guarantors, September 11, 2003
|
|
|
|
|
|
21,858
|
|
|
|
21,858
|
|
Warrant for
11,789 shares valued at $3.50 per share, issued to bank line of credit
guarantor, December 22, 2003
|
|
|
|
|
|
41,250
|
|
|
|
41,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders Equity
(Deficit) (Continued)
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
during the
|
|
Total
|
|
|
|
Common stock
|
|
paid-in
|
|
development
|
|
shareholders
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
stage
|
|
equity (deficit)
|
|
Options to
purchase 90,000 shares issued to officers
and directors, valued at $4.60 per
share, granted March 19,
2002; portion vested in 2003
|
|
|
|
|
|
133,400
|
|
|
|
133,400
|
|
Options to
purchase 6,000 shares issued to
consultants for services rendered, valued at $4.60 per share, granted March 19, 2002;
portion vested in 2003
|
|
|
|
|
|
6,900
|
|
|
|
6,900
|
|
Warrant for
3,000 shares valued at $4.60 per share,
issued to a director on April 19, 2002; portion vested in 2003
|
|
|
|
|
|
6,900
|
|
|
|
6,900
|
|
Net loss for the
year ended December 31, 2003
|
|
|
|
|
|
|
|
(1,632,457
|
)
|
(1,632,457
|
)
|
Balance,
December 31, 2003
|
|
1,050,301
|
|
11
|
|
3,866,749
|
|
(5,857,993
|
)
|
(1,991,233
|
)
|
Options to
purchase 3,000 shares issued to a consultant
valued at $6.70 per share, granted
February 1, 2004, portion
vested in 2004
|
|
|
|
|
|
10,100
|
|
|
|
10,100
|
|
Options to
purchase 45,000 shares issued to officer
valued at $6.70 per share, granted February 1, 2004; portion vested in 2004
|
|
|
|
|
|
84,173
|
|
|
|
84,173
|
|
Repurchase of
90,000 shares pursuant to the exercise of
dissenters rights at time of
merger, April 5, 2004 in
connection with $750,000 note payable
|
|
(90,000
|
)
|
(1
|
)
|
(749,999
|
)
|
|
|
(750,000
|
)
|
Issuance of
shares to shareholders of Global Internet
Communications, Inc. pursuant
to merger April 5, 2004
|
|
209,700
|
|
2
|
|
(2
|
)
|
|
|
|
|
Issuance of
common stock for cash at $20.00 per share
during 2004, net of costs of
$139,493
|
|
220,500
|
|
2
|
|
4,270,505
|
|
|
|
4,270,507
|
|
Cost associated
with Global Internet Communications, Inc. reverse merger effective
April 5, 2004
|
|
|
|
|
|
(162,556
|
)
|
|
|
(162,556
|
)
|
Effect of
anti-dilution and price-protection provisions of warrants
issued to loan guarantors in 2003,
triggered by April 5, 2004 closing
of private placement; shares subject to warrants increased by 37,501; exercise price reduced from $23.33 to $16.67
per share (see note 10)
|
|
|
|
|
|
320,974
|
|
|
|
320,974
|
|
Issuance of
common stock valued at $20.00 per share for accrued
expenses in lieu of cash,
May 21, 2004
|
|
3,861
|
|
|
|
77,225
|
|
|
|
77,225
|
|
Warrants for
10,000 shares issued for services rendered
valued at $11.50 per share on
July 19, 2004
|
|
|
|
|
|
114,914
|
|
|
|
114,914
|
|
Options to
purchase 20,000 shares issued to officer
valued at $15.00 per share, granted July 21, 2004; portion vested in 2004
|
|
|
|
|
|
41,670
|
|
|
|
41,670
|
|
Issuance of
common stock valued at $20.00 per share for
accrued interest in lieu of cash,
October 12, 2004
|
|
4,444
|
|
|
|
88,882
|
|
|
|
88,882
|
|
Warrants for
20,000 shares issued for services rendered
valued at $8.30 per share on
December 2, 2004
|
|
|
|
|
|
166,172
|
|
|
|
166,172
|
|
Options to
purchase 90,000 shares issued to officers
and directors, valued at $4.60 per
share, granted March 19,
2002; portion vested in 2004
|
|
|
|
|
|
82,452
|
|
|
|
82,452
|
|
Warrant for
3,000 shares valued at $4.60 per share,
issued to a director on April 19, 2002; portion vested in 2004
|
|
|
|
|
|
1,150
|
|
|
|
1,150
|
|
Net loss for the
year ended December 31, 2004
|
|
|
|
|
|
|
|
(2,318,896
|
)
|
(2,318,896
|
)
|
Balance,
December 31, 2004
|
|
1,398,806
|
|
14
|
|
8,212,409
|
|
(8,176,889
|
)
|
35,534
|
|
F-6
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders Equity (Deficit)
(Continued)
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
during the
|
|
Total
|
|
|
|
Common stock
|
|
paid-in
|
|
development
|
|
shareholders
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
stage
|
|
equity (deficit)
|
|
Options to
purchase 90,000 shares issued to officers
and directors, valued at $4.60 per
share, granted March 19,
2002; portion vested in 2005
|
|
|
|
|
|
5,734
|
|
|
|
5,734
|
|
Options to
purchase 45,000 shares issued to officer valued at $6.70 per share, granted
February 1, 2004; portion vested in 2005
|
|
|
|
|
|
111,108
|
|
|
|
111,108
|
|
Options to
purchase 20,000 shares issued to officer valued at $15.00 per share, granted
July 21, 2004; portion vested in 2005
|
|
|
|
|
|
100,008
|
|
|
|
100,008
|
|
Options to
purchase 15,000 shares issued to officer valued at $16.20 per share, granted
January 3, 2005; portion vested in 2005
|
|
|
|
|
|
74,256
|
|
|
|
74,256
|
|
Options to
purchase 15,000 shares issued to officer valued at $6.70 per share, granted
September 6, 2005; portion vested in 2005
|
|
|
|
|
|
6,625
|
|
|
|
6,625
|
|
Issuance of
common stock for services rendered at $10.20 per share on May 13, 2005
|
|
5,000
|
|
|
|
51,000
|
|
|
|
51,000
|
|
Issuance of
common stock for cash at $7.60 per share on June 15, 2005
|
|
6,579
|
|
|
|
50,001
|
|
|
|
50,001
|
|
Issuance of
common stock for deferred offering costs at $7.10 per share on
September 1, 2005
|
|
2,500
|
|
|
|
17,750
|
|
|
|
17,750
|
|
Issuance of
common stock in lieu of cash for accrued expenses at $8.90 per share on
December 31, 2005
|
|
4,541
|
|
|
|
40,418
|
|
|
|
40,418
|
|
Warrants for
2,500 shares valued at $6.30 per share, issued to bank loan guarantor,
September 14, 2005
|
|
|
|
|
|
15,750
|
|
|
|
15,750
|
|
Warrants for
2,500 shares valued at $5.30 per share, issued in connection with notes
payable on September 21, 2005
|
|
|
|
|
|
13,250
|
|
|
|
13,250
|
|
Warrants for
20,000 shares valued at $4.80 per share, issued to bank loan guarantors,
October 19, 2005
|
|
|
|
|
|
106,000
|
|
|
|
106,000
|
|
Net loss for the
year ended December 31, 2005
|
|
|
|
|
|
|
|
(2,028,056
|
)
|
(2,028,056
|
)
|
Balance,
December 31, 2005
|
|
1,417,426
|
|
14
|
|
8,804,309
|
|
(10,204,945
|
)
|
(1,400,622
|
)
|
Options to
purchase 45,000 shares issued to officer valued at $6.70 per share, granted
February 1, 2004; portion vested in 2006
|
|
|
|
|
|
101,008
|
|
|
|
101,008
|
|
Options to
purchase 20,000 shares issued to officer valued at $15.00 per share, granted
July 21, 2004; portion vested in 2006
|
|
|
|
|
|
100,008
|
|
|
|
100,008
|
|
Options to
purchase 15,000 shares issued to officer valued at $16.20 per share, granted
January 3, 2005; portion vested in 2006
|
|
|
|
|
|
81,006
|
|
|
|
81,006
|
|
Options to
purchase 15,000 shares issued to officer valued at $6.70 per share, granted
September 6, 2005; portion vested in 2006
|
|
|
|
|
|
8,834
|
|
|
|
8,834
|
|
Options to
purchase 17,500 shares issued to officers and an employee valued at $5.60 per
share, granted March 1, 2006; portion vested in 2006
|
|
|
|
|
|
48,215
|
|
|
|
48,215
|
|
F-7
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders Equity (Deficit)
(Continued)
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
during the
|
|
Total
|
|
|
|
Common stock
|
|
paid-in
|
|
development
|
|
shareholders
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
stage
|
|
equity (deficit)
|
|
Options to
purchase 3,000 shares issued to a director valued at $5.90 per share, granted
May 30, 2006; portion vested in 2006
|
|
|
|
|
|
5,163
|
|
|
|
5,163
|
|
Original issue
discount on convertible debt issued on February 16, 2006
|
|
|
|
|
|
400,000
|
|
|
|
400,000
|
|
Warrants for
5,000 shares valued at $4.60 per share, issued in connection with notes
payable on January 25, 2006
|
|
|
|
|
|
23,000
|
|
|
|
23,000
|
|
Issuance of
common stock for deferred offering costs at $9.10 per share on
February 22, 2006
|
|
2,500
|
|
|
|
22,750
|
|
|
|
22,750
|
|
Original issue
discount on convertible debt issued on February 29, 2006
|
|
|
|
|
|
333,334
|
|
|
|
333,334
|
|
Issuance of
common stock for services rendered at $6.40 per share on April 21, 2006
|
|
7,000
|
|
|
|
44,800
|
|
|
|
44,800
|
|
Warrants for
3,750 shares valued at $6.80 per share, issued in connection with notes
payable on June 1, 2006
|
|
|
|
|
|
25,500
|
|
|
|
25,500
|
|
Warrants for 375
shares valued at $5.40 per share, issued in connection with notes payable on July 21,
2006
|
|
|
|
|
|
2,025
|
|
|
|
2,025
|
|
Warrants for 500
shares valued at $4.60 per share, issued in connection with notes payable on August 30,
2006
|
|
|
|
|
|
2,300
|
|
|
|
2,300
|
|
Issuance of
common stock for cash at $4.30 per share on September 7, 2006
|
|
11,628
|
|
|
|
50,000
|
|
|
|
50,000
|
|
Issuance of
common stock for services rendered at $6.30 per share on September 8,
2006
|
|
1,415
|
|
|
|
8,938
|
|
|
|
8,938
|
|
Warrants for
5,000 shares valued at $4.50 per share, issued in connection with notes
payable on November 30, 2006
|
|
|
|
|
|
22,500
|
|
|
|
22,500
|
|
Warrants for
5,171 shares valued at $5.40 per share, accrued for issuance in connection
with a note payable as of December 31, 2006
|
|
|
|
|
|
27,922
|
|
|
|
27,922
|
|
Net loss for the
year ended December 31, 2006
|
|
|
|
|
|
|
|
(2,959,853
|
)
|
(2,959,853
|
)
|
Balance,
December 31, 2006
|
|
1,439,969
|
|
14
|
|
10,111,612
|
|
(13,164,798
|
)
|
(3,053,172
|
)
|
Options to
purchase 45,000 shares issued to officer valued at $6.70 per share, granted
February 1, 2004; portion vested in 2007
|
|
|
|
|
|
16,811
|
|
|
|
16,811
|
|
Options to
purchase 20,000 shares issued to officer valued at $15.00 per share, granted
July 21, 2004; portion vested in 2007
|
|
|
|
|
|
58,314
|
|
|
|
58,314
|
|
Warrants for
5,000 shares valued at $4.50 per share, issued in connection with debt
extinguishment on January 3, 2007
|
|
|
|
|
|
22,500
|
|
|
|
22,500
|
|
Options to
purchase 15,000 shares issued to officer valued at $16.20 per share, granted
January 3, 2005; portion vested in 2007
|
|
|
|
|
|
81,007
|
|
|
|
81,007
|
|
Options to
purchase 17,500 shares issued to officers and an employee valued at $5.60 per
share, granted March 1, 2006; portion vested in 2007
|
|
|
|
|
|
33,245
|
|
|
|
33,245
|
|
Issuance of
investment units consisting of common stock and warrants for 62,500 shares
issued for cash at $4.00 per share on January 18, January 23,
February 28 and May 1, 2007, net of costs of $52,388
|
|
125,000
|
|
2
|
|
447,610
|
|
|
|
447,612
|
|
F-8
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders Equity (Deficit)
(Continued)
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
during the
|
|
Total
|
|
|
|
Common stock
|
|
paid-in
|
|
development
|
|
shareholders
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
stage
|
|
equity (deficit)
|
|
Options to purchase 20,000 shares issued to officer valued
at $3.40 per share, granted February 1, 2007; portion vested in 2007
|
|
|
|
|
|
32,857
|
|
|
|
32,857
|
|
Warrants for 5,000 shares valued at $3.60 per share,
issued in connection with debt extinguishment on February 1, 2007
|
|
|
|
|
|
18,000
|
|
|
|
18,000
|
|
Issuance of common stock in lieu of cash for a loan
from a director at $4.10 per share on February 9, 2007
|
|
1,707
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Modification of warrant term of warrant to purchase
30,000 shares pursuant to separation agreement of employee dated March 15,
2007, valued at $3.20 per share
|
|
|
|
|
|
96,000
|
|
|
|
96,000
|
|
Issuance of common stock in lieu of cash for accrued
expenses at $4.00 per share on March 21, 2007
|
|
12,478
|
|
|
|
49,911
|
|
|
|
49,911
|
|
Warrants for 6,240 shares issued pursuant to
amendment of convertible debt valued at $4.30 per share on March 21,
2007
|
|
|
|
|
|
26,829
|
|
|
|
26,829
|
|
Issuance of common stock for accounts payable $5.00
per share on April 2, 2007
|
|
4,141
|
|
|
|
20,704
|
|
|
|
20,704
|
|
Warrants for 20,000 shares issued for services
rendered
valued
at $3.60 per share on April 16, 2007
|
|
|
|
|
|
72,000
|
|
|
|
72,000
|
|
Modification of option term to purchase 45,000 shares
pursuant to separation agreement of officer dated May 11, 2007, valued
at $2.30 per share
|
|
|
|
|
|
103,500
|
|
|
|
103,500
|
|
Modification of option term to purchase 45,000 shares
pursuant to separation agreement of officer dated May 11, 2007, valued
at $2.60 per share
|
|
|
|
|
|
117,000
|
|
|
|
117,000
|
|
Options to purchase 3,000 shares issued to a
director valued at $5.90 per share, granted May 30, 2006; portion vested
in 2007
|
|
|
|
|
|
8,850
|
|
|
|
8,850
|
|
Options to purchase 3,000 shares issued to a
director valued at $2.40 per share, granted June 14, 2007; portion
vested in 2007
|
|
|
|
|
|
1,800
|
|
|
|
1,800
|
|
Issuance of common stock in lieu of cash for
directors fees at $3.00 per share on September 10, 2007
|
|
20,694
|
|
|
|
62,082
|
|
|
|
62,082
|
|
Issuance of common stock in lieu of cash for loans
from directors at $3.00 per share on September 10, 2007
|
|
1,100
|
|
|
|
3,300
|
|
|
|
3,300
|
|
Issuance of common stock as debt issuance cost at
$2.00 per share on November 7, 2007
|
|
33,333
|
|
|
|
66,666
|
|
|
|
66,666
|
|
Warrants for 6,050 shares valued at $2.80 per share,
issued in connection with notes payable on December 27, 2007
|
|
|
|
|
|
16,940
|
|
|
|
16,940
|
|
Warrants for 5,800 shares valued at $1.70 per share,
issued in connection with notes payable on December 27, 2007
|
|
|
|
|
|
9,860
|
|
|
|
9,860
|
|
Warrants for 700 shares valued at $2.20 per share,
issued in connection with notes payable on December 27, 2007
|
|
|
|
|
|
1,540
|
|
|
|
1,540
|
|
Original issue discount on convertible debt issued on
December 27, 2007
|
|
|
|
|
|
595,666
|
|
|
|
595,666
|
|
Original issue discount attributable to warrants for
240,000 shares issued on December 27, 2007
|
|
|
|
|
|
88,576
|
|
|
|
88,576
|
|
Issuance of common stock as compensation for loan guarantees
at $1.00 per share on December 28, 2007
|
|
88,889
|
|
1
|
|
88,888
|
|
|
|
88,889
|
|
Warrants for 15,400 shares valued at $4.00 per
share, accrued for issuance in addition to interest on a note payable as of
December 31, 2007
|
|
|
|
|
|
61,600
|
|
|
|
61,600
|
|
F-9
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders Equity (Deficit)
(Continued)
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
during the
|
|
Total
|
|
|
|
Common stock
|
|
paid-in
|
|
development
|
|
shareholders
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
stage
|
|
equity (deficit)
|
|
Warrants for 51,010 shares valued at $3.60 per
share, accrued for issuance in connection with debt extinguishment as of
December 31, 2007
|
|
|
|
|
|
183,637
|
|
|
|
183,637
|
|
Warrants for
15,221 shares valued at $5.40 per share, accrued for issuance in connection
with debt extinguishment as of December 31, 2007
|
|
|
|
|
|
82,191
|
|
|
|
82,191
|
|
Net loss for the
year ended December 31, 2007
|
|
|
|
|
|
|
|
(3,113,298
|
)
|
(3,113,298
|
)
|
Balance,
December 31, 2007
|
|
1,727,311
|
|
17
|
|
12,586,496
|
|
(16,278,096
|
)
|
(3,691,583
|
)
|
Original issue
discount on convertible debt issued between Jan 4, 2008 and July 30,
2008
|
|
|
|
|
|
350,873
|
|
|
|
350,873
|
|
Warrants for
160,000 shares valued at $0.47 to $1.10 per share issued in connection with
convertible debt between Jan 4, 2008 and July 30, 2008
|
|
|
|
|
|
65,160
|
|
|
|
65,160
|
|
Warrants for
14,500 shares valued at $1.00 per share issued to former employee pursuant to
a termination agreement on January 4, 2008
|
|
|
|
|
|
14,500
|
|
|
|
14,500
|
|
Warrants for
52,357 shares valued at $3.60 per share, connection with debt extinguishment
on January 16, 2008; portion expensed in 2008
|
|
|
|
|
|
4,848
|
|
|
|
4,848
|
|
Rounding of
common stock due to reverse stock split on February 14, 2008
|
|
39
|
|
|
|
|
|
|
|
|
|
Warrants for
75,000 shares valued at $0.92 per share, issued in connection with notes
payable on April 3, 2008
|
|
|
|
|
|
42,768
|
|
|
|
42,768
|
|
Options to
purchase 20,000 shares issued to officers valued at $0.79 per share, granted
July 11, 2008
|
|
|
|
|
|
15,800
|
|
|
|
15,800
|
|
Cancellation of
an officers options to purchase 20,000 shares valued at $0.27 per share on
July 11, 2008
|
|
|
|
|
|
(5,400
|
)
|
|
|
(5,400
|
)
|
Cancellation of
an officers options to purchase 15,000 shares valued at $0.31 per share on
July 11, 2008
|
|
|
|
|
|
(4,650
|
)
|
|
|
(4,650
|
)
|
Options to
purchase 3,000 shares issued to directors valued at $0.71 per share, granted
July 11, 2008
|
|
|
|
|
|
2,130
|
|
|
|
2,130
|
|
Issuance of
common stock valued at $1.00 per share in lieu of cash for directors fees on
July 11, 2008
|
|
59,634
|
|
1
|
|
59,633
|
|
|
|
59,634
|
|
Extension of
note payable modified with a conversion feature added and recorded as debt
extinguishment on September 12, 2008
|
|
|
|
|
|
48,214
|
|
|
|
48,214
|
|
Original issue
discount on convertible debt issued between September 16, 2008 and
December 11, 2008
|
|
|
|
|
|
145,743
|
|
|
|
145,743
|
|
Warrants for
95,500 shares valued at $0.89 to $1.31 per share issued in connection with
convertible debt between September 16, 2008 and December 11, 2008
|
|
|
|
|
|
75,819
|
|
|
|
75,819
|
|
Original issue
discount attributable to warrants for 100,000 shares valued at $0.47 per
share, issued on September 25, 2008
|
|
|
|
|
|
46,604
|
|
|
|
46,604
|
|
Warrants for
31,817 shares valued at $5.40 per share, issued on September 30, 2008 in
connection with debt extinguishment expensed and accrued from previous years;
portion expensed in 2008
|
|
|
|
|
|
61,700
|
|
|
|
61,700
|
|
Warrants for
3,000 shares valued at $1.32 per share, issued in connection with debt
extinguishment on October 24, 2008
|
|
|
|
|
|
3,960
|
|
|
|
3,960
|
|
Issuance of
common stock as compensation for loan guarantees at $1.00 per share on
October 31, 2008
|
|
17,778
|
|
|
|
17,778
|
|
|
|
17,778
|
|
Warrants for
44,445 shares valued at $0.77 per share issued as compensation for loan
guarantees on October 31, 2008
|
|
|
|
|
|
34,223
|
|
|
|
34,223
|
|
F-10
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders Equity (Deficit)
(Continued)
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
during the
|
|
Total
|
|
|
|
Common stock
|
|
paid-in
|
|
development
|
|
shareholders
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
stage
|
|
equity (deficit)
|
|
Issuance of
common stock valued at $1.00 per share for debt issuance cost on
October 31, 2008
|
|
6,667
|
|
|
|
6,667
|
|
|
|
6,667
|
|
Warrants for
16,667 shares valued at $0.77 per share issued as debt issuance costs on
October 31, 2008
|
|
|
|
|
|
12,834
|
|
|
|
12,834
|
|
Warrants for
3,836 shares valued at $1.32 per share, accrued for issuance in connection
with debt extinguishment as of December 31, 2006
|
|
|
|
|
|
5,063
|
|
|
|
5,063
|
|
Options to
purchase 17,500 shares issued to officers and an employee valued at $5.60 per
share, granted March 1, 2006; portion vested in 2008
|
|
|
|
|
|
9,663
|
|
|
|
9,663
|
|
Options to
purchase 3,000 shares issued to a director valued at $5.90 per share, granted
May 30, 2006; portion vested in 2008
|
|
|
|
|
|
3,687
|
|
|
|
3,687
|
|
Options to
purchase 3,000 shares issued to a director valued at $2.40 per share, granted
June 14, 2007; portion vested in 2008
|
|
|
|
|
|
3,600
|
|
|
|
3,600
|
|
Options to
purchase 5,000 shares issued to officer valued at $3.40 per share, granted
February 1, 2007; portion vested in 2008
|
|
|
|
|
|
8,869
|
|
|
|
8,869
|
|
Options to
purchase 15,000 shares issued to officer valued at $16.20 per share, granted
January 3, 2005; portion vested in 2008
|
|
|
|
|
|
6,731
|
|
|
|
6,731
|
|
Options to
purchase 85,000 shares issued to officers valued at $0.85 per share, granted
July 11, 2008; portion expensed in 2008
|
|
|
|
|
|
12,042
|
|
|
|
12,042
|
|
Reversal of
expense associated with performance-based option of an officer that did not
vest
|
|
|
|
|
|
(7,727
|
)
|
|
|
(7,727
|
)
|
Warrants for
12,576 shares valued at $4.00 per share, accrued for issuance in addition to
interest on a note payable; portion expensed in 2008
|
|
|
|
|
|
50,304
|
|
|
|
50,304
|
|
Net loss for the
year ended December 31, 2008
|
|
|
|
|
|
|
|
(4,657,717
|
)
|
(4,657,717
|
)
|
Balance,
December 31, 2008
|
|
1,811,429
|
|
$
|
18
|
|
$
|
13,677,932
|
|
$
|
(20,935,813
|
)
|
$
|
(7,257,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements.
F-11
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
|
|
Year Ended
December 31,
|
|
Year Ended
December 31,
|
|
Period from August
17, 1999 (inception) to
|
|
|
|
2008
|
|
2007
|
|
December 31, 2008
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,657,717
|
)
|
$
|
(3,113,298
|
)
|
$
|
(20,935,813
|
)
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
605
|
|
3,134
|
|
20,797
|
|
Gain on sale of
furniture and equipment
|
|
|
|
|
|
(2,200
|
)
|
Stock-based
compensation
|
|
59,245
|
|
549,384
|
|
1,764,347
|
|
Common stock
issued for services rendered
|
|
50,467
|
|
|
|
207,371
|
|
Common stock
issued for debt guarantees
|
|
17,778
|
|
88,889
|
|
106,667
|
|
Common stock
issued for debt issuance cost
|
|
6,667
|
|
|
|
6,667
|
|
Notes payable
issued for intangibles expensed as research and development
|
|
150,000
|
|
|
|
150,000
|
|
Warrants issued
for services
|
|
|
|
72,000
|
|
540,636
|
|
Warrants issued
for debt guarantees
|
|
34,223
|
|
|
|
355,197
|
|
Warrants issued
for debt extinguishment
|
|
75,571
|
|
283,829
|
|
359,400
|
|
Warrants issued
for debt extinguishment-related parties
|
|
|
|
26,828
|
|
26,828
|
|
Warrants issued
for debt issuance cost
|
|
12,834
|
|
|
|
12,834
|
|
Amortization of
note payable-original issue discount
|
|
|
|
23,162
|
|
152,247
|
|
Amortization of
note payable-related parties original issue discount
|
|
50,304
|
|
89,940
|
|
140,244
|
|
Amortization of
convertible debt-original issue discount
|
|
428,430
|
|
272
|
|
638,685
|
|
Amortization of
convertible debt-related parties original issue discount
|
|
505,217
|
|
244,587
|
|
749,804
|
|
Amortization of
debt issuance costs
|
|
421,564
|
|
506,639
|
|
1,705,733
|
|
Bargain
conversion option added to note payable- related parties for debt
extinguishment
|
|
48,214
|
|
|
|
48,214
|
|
Write-off debt
issuance cost for debt extinguishment
|
|
|
|
42,797
|
|
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
|
|
44,603
|
|
36,311
|
|
133,892
|
|
Accounts payable
|
|
199,379
|
|
(46,520
|
)
|
929,834
|
|
Accrued
development expense
|
|
1,327,835
|
|
|
|
1,327,835
|
|
Other accrued
expenses
|
|
129,808
|
|
229,042
|
|
1,139,796
|
|
Net cash used in
operating activities
|
|
(1,094,973
|
)
|
(963,004
|
)
|
(8,319,446
|
)
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
Purchases of
equipment and furniture
|
|
|
|
|
|
(20,797
|
)
|
Deposit into a
restricted cash account
|
|
(214
|
)
|
(44,000
|
)
|
(44,214
|
)
|
Net cash used in
investing activities
|
|
(214
|
)
|
(44,000
|
)
|
(65,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
F-12
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
|
|
Year Ended
December 31,
|
|
Year Ended
December 31,
|
|
Period from August
17, 1999 (inception) to
|
|
|
|
2008
|
|
2007
|
|
December 31, 2008
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
Proceeds of note
payable, bank
|
|
|
|
|
|
500,000
|
|
Payments of note
payable, bank
|
|
|
|
|
|
(500,000
|
)
|
Proceeds of
notes payable
|
|
|
|
|
|
340,500
|
|
Payment of notes
payable
|
|
(333,222
|
)
|
(54,442
|
)
|
(1,370,518
|
)
|
Proceeds of
notes payable - related parties
|
|
112,500
|
|
432,150
|
|
560,100
|
|
Payments of
notes payable - related parties
|
|
(76,450
|
)
|
(126,850
|
)
|
(203,300
|
)
|
Proceeds from
long-term notes payable and bank debt
|
|
923,337
|
|
684,000
|
|
3,807,337
|
|
Proceeds from
long-term notes payable, related parties
|
|
254,500
|
|
866,000
|
|
1,120,500
|
|
Payments on
long-term bank debt
|
|
|
|
(600,000
|
)
|
(600,000
|
)
|
Proceeds from
warrants
|
|
54,500
|
|
50,000
|
|
104,500
|
|
Payments for
debt issuance costs
|
|
(148,211
|
)
|
(293,260
|
)
|
(673,437
|
)
|
Payment for
rescission of common stock
|
|
|
|
|
|
(100,000
|
)
|
Payments for
deferred offering expenses
|
|
(88,480
|
)
|
|
|
(117,307
|
)
|
Cost of reverse
merger
|
|
|
|
|
|
(162,556
|
)
|
Net proceeds
from issuance of common stock
|
|
|
|
447,612
|
|
5,682,538
|
|
Net cash
provided by financing activities
|
|
698,474
|
|
1,405,210
|
|
8,388,357
|
|
Net increase (decrease)
in cash
|
|
(396,713
|
)
|
398,206
|
|
3,900
|
|
Cash, beginning
of the period
|
|
400,613
|
|
2,407
|
|
|
|
Cash, end of the
period
|
|
$
|
3,900
|
|
$
|
400,613
|
|
$
|
3,900
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
123,073
|
|
$
|
235,355
|
|
$
|
716,409
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Deferred
offering costs included in accounts payable
|
|
461,456
|
|
109,988
|
|
571,444
|
|
Deferred
offering costs included in accrued expenses
|
|
47,350
|
|
22,650
|
|
70,000
|
|
Debt issuance
costs included in accounts payable
|
|
58,339
|
|
55,817
|
|
114,156
|
|
Warrants issued
pursuant to notes payable
|
|
139,677
|
|
112,440
|
|
463,864
|
|
Warrants issued
for debt issuance costs
|
|
55,409
|
|
|
|
298,021
|
|
Prepaid expenses
financed by note payable
|
|
54,504
|
|
42,585
|
|
165,526
|
|
Convertible debt
issued in lieu of cash for accrued expenses
|
|
31,413
|
|
|
|
31,413
|
|
Common stock
issued in lieu of cash for accrued expenses
|
|
9,167
|
|
111,993
|
|
238,803
|
|
Common stock
issued for debt issuance cost
|
|
6,667
|
|
66,666
|
|
164,834
|
|
Warrants issued
in lieu of cash for accrued expenses
|
|
1,250
|
|
|
|
1,250
|
|
Conversion of
notes payable, related parties into convertible debentures
|
|
|
|
200,000
|
|
200,000
|
|
Common stock
issued in lieu of cash for accounts payable
|
|
|
|
20,704
|
|
122,291
|
|
Common stock
issued in lieu of cash for notes payable-related parties
|
|
|
|
10,300
|
|
10,300
|
|
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
|
|
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
|
|
Proceeds from
sale of furniture and equipment
|
|
|
|
|
|
2,200
|
|
Deposits applied
to accrued expenses
|
|
|
|
|
|
1,076
|
|
See accompanying notes to financial statements.
F-13
Table
of Contents
ProUroCare Medical Inc.
A Development
Stage Company
Notes to Consolidated
Financial Statements
December 31, 2008
and 2007 and the period from
August 17, 1999
(inception) to December 31, 2008
(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 engaged in the business of
developing for market innovative products for the detection and
characterization of male urological prostate disease. The primary focus of the Company is currently
the ProUroScan
TM
prostate imaging system, designed for use as
an aid to the physician in visualizing and documenting tissue abnormalities in
the prostate that have been previously detected by a digital rectal exam. The 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 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.
On
January 12, 2009, the Company closed a public offering of 3,050,000 units
at $1.00 per unit (the 2009 Public Offering)(see Note 14). Each unit sold (the 2009 Units) consisted
of one share of common stock and one redeemable warrant to purchase one share
of common stock at an exercise price of $1.30 per share.
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.
F-14
Table
of Contents
(b)
Restatement of Share Data
All share data has been restated to give effect to
the Reverse Split.
At the effective time of the Merger, all 350,100
shares of common stock of PUC that were outstanding immediately prior to the
Merger and held by PUC shareholders were cancelled, with one share of
ProUroCare common stock issued to Global.
Simultaneously, the non-dissenting shareholders of PUC received an aggregate
of 960,300 shares of common stock of Global in exchange for their aggregate of
320,100 shares of PUC. The share data in
this paragraph has been restated to give effect to the Reverse Split, as noted
above.
All share data has been restated to give effect to
the Merger under which each PUC share was converted into three shares of
Global.
(c)
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of expenses
during the reporting periods. The 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.
Effective 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.
Debt with Beneficial Conversion Features
. The
beneficial conversion features of the promissory notes were valued using the
Black-Scholes pricing model, which is considered the Companys equivalent to
the fair value of the conversion. The resulting original issue discount is
amortized over the life of the promissory notes (generally no more that 24
months) using the straight-line method, which approximates the interest method.
(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
F-15
Table
of Contents
common
share in subsequent years. All options
and warrants outstanding were antidilutive for the years ended December 31,
2008 and 2007 and the period from August 17, 1999 (inception) to December 31,
2008 due to the Companys net losses.
1,603,994 and 1,167,686 shares of common stock issuable under our stock
options, warrants, convertible debt and contingent shares and warrants issuable
under agreements with loan guarantors were excluded from the computation of
diluted net loss per common share for the years ended December 31, 2008
and 2007, respectively. Also excluded were
the undetermined number of shares issuable pursuant to the convertible notes
and warrants issued in connection with our private placements, unit put
arrangements and certain convertible notes, whose terms of conversion were
based on the price of the equity securities offered in the Companys
anticipated public offering, as described and defined in Note 14. The number of such shares was determined on
the January 7, 2009 effective date of the 2009 Public Offering to be
6,937,177 and 3,432,622 shares as of December 31, 2008 and 2007,
respectively.
(e)
Comparative Figures
Certain comparative figures
have been reclassified to conform to the financial statement presentation
adopted in the current year, including the reclassification of transactions
with related parties.
(f)
Cash
The Company maintains its
cash in high quality financial institutions.
The balances, at times, may exceed federally insured limits.
(g)
Equipment and Furniture
Equipment and furniture are
stated at cost and depreciated using the straight-line method over the
estimated useful lives ranging from three to seven years. Maintenance, repairs,
and minor renewals are expensed as incurred.
(h)
License Agreements
The costs associated with acquisition of licenses
for technology are recognized at the fair value of stock and cash used as
consideration.
Costs of acquiring technology which has no
alternative future uses are expensed immediately as research and development
expense.
(i)
Impairment of Long-lived Assets and
Long-lived Assets to be Disposed Of
The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
During the years ended December 31, 2008 and
2007, and the period from August 17, 1999 (inception) to December 31,
2008, the Company did not record any impairment charges.
F-16
Table
of Contents
(j)
Stock-Based Compensation
Effective August 17, 1999, the Company adopted
the fair value recognition provisions of Financial Accounting Standards Board (FASB)
SFAS No. 123, Accounting for Stock-Based Compensation (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 and warrants was
$59,245, $621,384, and $2,304,983 for the years ended December 31, 2008
and 2007, and the period from August 17, 1999 (inception) to December 31,
2008, respectively, or $0.03, $0.40, and $2.19 on a per share basis. The Company estimates the amount of future
stock-based compensation expense related to currently outstanding options to be
approximately $30,600, $24,000 and $12,000 for the years ending December 31,
2009, 2010, and 2011, respectively. The
Company recognizes the expense related to the fair value of the award
straight-line over the vesting period.
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.
In
determining the compensation cost of the options granted during the years ended
December 31, 2008 and 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:
|
|
For the years ended
December 31,
|
|
|
|
2008
|
|
2007
|
|
Risk-free
Interest Rate
|
|
3.13
|
%
|
4.90
|
%
|
Expected Life of
Options Granted
|
|
4.3years
|
(1)
|
4.0 years
|
(1)
|
Expected
Volatility
|
|
131.2
|
%
|
133.4
|
%
|
Expected
Dividend Yield
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
(1)
Calculated as the average of the vesting periods and the contractual
term of the options.
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, the expected volatility is based on a
simple average of weekly price data since the date of the Merger on April 5,
2004. Management expects and estimates
that substantially all employee stock options will vest, and therefore the
forfeiture rate used was zero. The
F-17
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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 grants.
(k)
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 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 (see Notes 9, 10 and 11).
The weighted-average fair value of the warrants granted during the years
ended December 31, 2008 and 2007 was $1.37 and $3.80, respectively, and
such warrants are immediately vested and exercisable on the date of grant.
The
fair value of stock warrants is the estimated present value at grant date using
the Black-Scholes pricing model with the following weighted average
assumptions:
|
|
For the years ended
December 31,
|
|
|
|
2008
|
|
2007
|
|
Risk-free
Interest Rate
|
|
3.23
|
%
|
4.68
|
%
|
Expected Life of
Warrants Issued(1)
|
|
5.0 years
|
|
4.9 years
|
|
Expected
Volatility
|
|
129.5
|
%
|
135.0
|
%
|
Expected
Dividend Yield
|
|
0
|
|
0
|
|
(1)
The contractual term of the warrants.
The expected volatility is
based on weekly price data since the date of the Merger on April 5,
2004. 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.
(l)
Financial Instruments
The carrying amount for all financial instruments approximates fair value. The carrying amounts for cash, notes payable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying amounts for long-term debt, and other obligations approximates fair value as the interest rates and terms are substantially similar to rates and terms which could be obtained currently for similar instruments.
(m)
Research and Development
Expenditures for research
and product development costs, including certain upfront license fees for
technologies under development, are expensed as incurred.
(n)
Debt Issuance Costs
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.
The costs related to the
Companys $2.2 million Crown Bank promissory notes issued in February 2006
were recorded as debt issuance cost, and were amortized over the approximately
two-year term of the notes using the straight-line method until October 14,
2007. At that time, $600,000 of the
notes were
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retired, and approximately
$42,800 of debt issuance cost related to that portion of the notes was expensed
as debt extinguishment expense. The debt
issuance cost associated with the remaining Crown Bank notes were amortized as
interest expense until December 28, 2007, when the notes were modified to
extend the maturity date of the notes to February 28, 2009. The Company evaluated this modification in
accordance with EITF Issue No. 96-19 Debtors Accounting for a
Modification or Exchange of Debt Instruments EITF (6-19). The change
in the agreement did not qualify as an extinguishment of debt; therefore, debt
issuance cost from the old debt is carried forward.
The remaining
$39,370 of unamortized debt issuance cost, together with $12,000 of bank fees
associated with the extension, is being amortized over the new term of the
notes as interest expense.
On October 15, 2007,
the Company borrowed $600,000 pursuant to a promissory note issued to the
Phillips W. Smith Family Trust (the Smith Trust) that matured on February 28,
2009. In consideration for this loan, on
November 7, 2007 the Company agreed to issue 33,333 shares of its common
stock to the Smith Trust. The $66,666
value of this consideration was recorded as debt issuance cost and is being
amortized over the term of the loan.
On December 27, 2007,
the Company held its first closing on a private placement of investment units
consisting of convertible debentures and warrants (the 2007 Private Placement)
(see Note 11(b)). Direct costs of the
offering totaling $337,077, including underwriting fees, legal and accounting
expenses, and printing costs were recorded as a debt issuance cost asset.
During the year ended December 31,
2008, the Company incurred additional debt issuance costs related to a second
closing on the 2007 Private Placement, the closings on
an aggregate of $720,000 of units
consisting of unsecured,
subordinated, convertible promissory notes and common stock purchase warrants
in additional private placements
(the
2008 Private Placements)
(see Note 11(b))
and the closing on a $315,000 unit put financing facility
(see Note 11(c))
. Included in this debt issuance
cost was the issuance of warrants to acquire 32,500 shares of our common stock
valued at $42,575 related to the origination of the unit put financing facility
(see Note 12(f)).
Debt issuance costs are
summarized as follows:
|
|
2008
|
|
2007
|
|
Debt issuance
costs, gross
|
|
$
|
701,238
|
|
$
|
452,113
|
|
Less
amortization
|
|
(434,356
|
)
|
(12,792
|
)
|
|
|
|
|
|
|
Debt issuance
costs, net
|
|
$
|
266,882
|
|
$
|
439,321
|
|
Amortization
expense related to debt issuance costs was $421,564, $506,639, and $1,705,733
for the years ended December 31, 2008 and 2007 and the period from August 17,
1999 (inception) to December 31, 2008, respectively. The unamortized debt issuance cost as of December 31,
2008 will either be amortized in 2009 or expensed as interest expense upon the
automatic conversion of the related debt into the Companys equity securities
upon the effective date of the 2009 Public Offering (see Note 14).
(o)
Deferred Offering Costs
The legal, accounting,
printing and certain other expenses directly related to the 2009 Public
Offering that became effective on January 7, 2009 were recorded as a
deferred offering cost asset as of December 31, 2008 and 2007. The deferred offering costs were recorded as
a cost of the offering and a reduction of additional paid-in capital upon its
closing on January 12, 2009.
F-19
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(p)
Restricted Cash
Pursuant to the renewal of the Crown Bank promissory
notes (see Note 10), the Company agreed to deposit with Crown Bank four months
worth of future interest payments due under the notes. The funds on deposit are not available to
the Company for any purpose other than for debt service on the Crown Bank
promissory notes. On March 19,
2009, pursuant to the renewal of a Crown Bank promissory note, this restriction
was removed (see Note 14).
(q)
Income Taxes
The Company utilizes the
liability method of accounting for income taxes. Under this method, deferred
tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the financial
statement and income tax reporting bases of assets and liabilities. Deferred
tax assets are reduced by a valuation allowance to the extent that realization
is not assured.
(r)
Recently Issued Accounting Pronouncements
During May, 2008, FASB
issued SFAS 162, The Hierarchy of Generally accepted Accounting Principles (SFAS
162). SFAS 162 identifies the sources
of accounting principles and the framework for selecting principles that are in
conformity with generally accepted accounting principles in the United States
of America. SFAS 162 became effective during
November 2008. The adoption of SFAS
162 did not have a material effect on the Companys results of operations,
financial position or cash flows.
(2)
Going Concern; Managements Plan to Fund
Working Capital Needs
The
Company incurred net losses of $4,657,717, $3,113,298 and $20,935,813 and
negative cash flows from operating activities of $1,094,973, $963,004, and
$8,319,446 for the years ended December 31, 2008 and 2007 and for the
cumulative period from August 17, 1999 (inception) to December 31,
2008, respectively. From July 2001 through January 2002, the Company
entered into several license arrangements to develop the licensed technologies
into diagnostic equipment and treatments for enlarged prostates and other male
urological conditions. Since January 2002, the Companys efforts to develop
the licensed technologies have been significantly delayed at times due to a
lack of sufficient capital resources. The Company anticipates materially
increasing its expenditures for technology development activities and building
the Companys infrastructure over the near term. Implementation of the Companys
business plan is dependent upon the successful transition of its product
development program into a viable product with market penetration and
profitability and obtaining sufficient capital to fund these developmental
activities.
Management
believes that the Company has sufficient funds to complete clinicals of its
ProUroScan System, submit a premarket notification application to FDA and
obtain FDA clearance of a 510(k) for a basic mapping and data maintenance
labeling claim. However, the Company
does not currently have sufficient funds to make a significant commercial
launch into the urology market. As of February 28, 2009, the Company had
approximately $774,000 cash on hand and current liabilities of approximately
$3.5 million, including $2.2 million of secured debt that was due on that
date. In March 2009, the Company
renewed $1.8 million of the secured debt to mature on March 28, 2010, and
temporarily paid down $400,000 of the secured debt. The Company intends to re-borrow the $400,000
secured debt before the end of May, 2009 upon the establishment of a
satisfactory guaranty of the debt with the lender. Management believes that
over the next 12 months the Company will need approximately $8 million of
working capital to fund operations through FDA clearance and subsequent
commercial launch.
As a result of the closing on the 2009 Public Offering and the
subsequent conversion of convertible notes into the Companys equity Units,
there are 6,108,381 redeemable warrants outstanding. These warrants have an exercise price of
$1.30 per share, which the Company may redeem once the last sale price of our
common stock equals or exceeds $1.82 per share for a period of ten consecutive
trading days. If this event were to
occur, the Company
F-20
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intends to exercise its right to redeem the warrants, which will allow
all holders of warrants a period of 30 days to exercise their warrants. If all
such warrant holders exercise their warrants, the Company could realize up to
approximately $7.9 million, depending on the number of shares actually
exercised pursuant to such a redemption.
There can be no assurance that the Company will be able to redeem the
warrants, or of how much would be realized if such a redemption were made.
During the first half of 2009, the Company plans to identify a
distribution partner to market its products.
The Company expects such a distribution partner to provide significant
financial support in the form of licensing fees, loans, equity investment or a
combination of these. In addition to
financial support, a successful collaboration with such a partner would allow
access to down stream marketing, manufacturing, and sales support. There can be no assurance that a distribution
partner can be successfully identified and engaged during the first half of
2009, or at all.
If
the Company is unable to obtain sufficient funding through the exercise of the
warrants or from financial support from a distribution partner, it will pursue
one or more additional rounds of funding in 2009 and 2010 to provide the
working capital needed to fund a significant commercial launch into the urology
market. If additional funds are raised
by the issuance of convertible debt or equity securities, or by the exercise of
outstanding warrants, then existing shareholders will experience dilution in
their ownership interest. If additional funds are raised by the issuance of
debt or certain equity instruments, the Company may become subject to certain
operational limitations, and such securities may have rights senior to those of
its existing holders of common stock.
If
adequate funds are not available through these initiatives on a timely basis,
or are not available on acceptable terms, the Company may be unable to fund
expansion, or to develop or enhance our products. If the Company is forced to
slow our development programs, or put them on hold, it would delay regulatory
clearances or approvals needed, and thus delay market entry for its products.
Ultimately, if no additional financing is obtained beyond what has been secured
to date, the Company likely would be forced to cease operations. There can be
no assurance the Company will be successful in raising such funds.
(3)
Equipment and Furniture
Equipment and furniture
consisted of the following at December 31:
|
|
2008
|
|
2007
|
|
Computer
equipment
|
|
$
|
11,563
|
|
$
|
11,563
|
|
Furniture
|
|
4,279
|
|
4,279
|
|
|
|
15,842
|
|
15,842
|
|
Less accumulated
depreciation
|
|
(15,842
|
)
|
(15,237
|
)
|
|
|
$
|
0
|
|
$
|
605
|
|
Depreciation expense was $605, $3,134, and $20,797
for the years ended December 31, 2008 and 2007 and the period from August 17,
1999 (inception) to December 31, 2008, respectively.
F-21
Table
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(4)
Accrued Expenses
Accrued expenses consisted
of the following at December 31:
|
|
2008
|
|
2007
|
|
Accrued interest
|
|
$
|
169,985
|
|
$
|
69,134
|
|
Accrued
compensation, benefits, and related taxes
|
|
350,836
|
|
535,537
|
|
Accrued
interest-related party
|
|
263,522
|
|
87,088
|
|
Public offering
costs
|
|
70,000
|
|
22,650
|
|
Audit fees
|
|
47,000
|
|
21,250
|
|
Directors fees
|
|
20,249
|
|
9,166
|
|
Consulting fees
|
|
15,000
|
|
15,000
|
|
Other
|
|
662
|
|
|
|
Contracted
development
|
|
|
|
35,000
|
|
Legal fees
|
|
|
|
7,100
|
|
|
|
$
|
937,253
|
|
$
|
801,925
|
|
(5)
Agreements with Artann Laboratories Inc.
The
Company has developed its ProUroScan System under contracts with Artann
Laboratories, Inc. (Artann), a scientific technology company based in
Trenton, New Jersey, that is focused on early-stage technology development.
Artann 2004 Development Agreement
In July 2004, the Company entered into a
development agreement with Artann and Dr. Armen Sarvazyan under which
Artann and Dr. Sarvazyan developed two working, pre-clinical ProUroScan
TM
systems.
These systems were delivered to the Company in late November 2004. The Company paid Artann $180,000 for this
development work, which was expensed as research and development cost during
the year ended December 31, 2004.
Artann 2004 Research and
Development Agreement
In July 2004, the Company entered into a
research and development agreement with Artann (the Research and Development
Agreement) for the further development of the ProUroScan
TM
system.
Under this agreement, Artann was a research and development partner to
the Company, supporting the further development of the ProUroScan
TM
system.
For its role, Artann received a payment of $50,000 and warrants for the
purchase of 10,000 shares of the Companys common stock upon the execution of
the agreement, and $110,000 and warrants for the purchase of 20,000 shares of
the Companys common stock following the shipment of the ProUroScan
TM
pre-clinical systems in accordance with the
development agreement in December 2004. The warrants were fully vested,
five-year warrants at a per share exercise price of $20.00 per share
value. The total value of these warrants
computed using the Black-Scholes pricing model was $281,086. All payments and the value of the warrants
were recorded as research and development expense in the year ended December 31,
2004.
Artann 2007 Cooperation Agreement
On April 16, 2007,
the Company entered into a cooperation
agreement with Artann (the Cooperation Agreement) in which the parties agreed
to terminate the existing Research and Development agreement and to use their
best efforts to finalize a new development agreement within a reasonable period
of time. The
F-22
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Cooperation
Agreement released each party from all undischarged obligations and liabilities
under that agreement.
Under
the terms of the Cooperation Agreement, the Company paid $60,000 in fees
originally due to Artann under the Research and Development Agreement, related
to submission of two patents and associated patent attorney fees. Further, the Company issued to Artann
five-year warrants (immediately exercisable) to acquire 20,000 shares of its
common stock at $4.10 per share, thus fulfilling another obligation under the
Research and Development Agreement. The
warrants were valued at $72,000 by the Black-Scholes pricing model and were
recorded as research and development expense.
The Company also agreed to pay Artann $35,000 as a first payment for
work already completed under the proposed development agreement. This payment was made on January 16,
2008.
Artann 2008 License Agreement
On July 25, 2008, the Company entered into two
agreements with Artann. Under the first
agreement, the License Agreement, Artann granted to the Company an exclusive,
worldwide, sublicensable license to certain patent applications, trade secrets
and technology to make, use and market certain mechanical imaging products in
the diagnosis or treatment of urologic disorders of the prostate, kidney or
liver field of use. Artann also agreed
to transfer possession of five fully functional prostate imaging systems to the
Company and grant the Company full access to all relevant documentation
thereto. The License Agreement became
effective on December 23, 2008. As
consideration, the Company agreed to pay, on the effective date of the
agreement, an upfront cash license fee of $600,000 and shares of the Companys
common stock valued at $500,000. The
total $1,100,000 license fee was recorded as a general and administrative
expense in the year ended December 31, 2008. In addition, the Company agreed to pay Artann
a royalty equal to four percent of the first $30 million of net cumulative
sales of licensed products, three percent of the next $70 million of net
cumulative sales and two percent of net cumulative sales over $100
million. Further, the Company will pay
Artann a technology royalty of one percent of net sales on prostate imaging
system products
through
December 31, 2016. The combined royalties are subject to a
minimum annual royalty equal to $50,000 per year for each of the first two
years after clearance from the 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, sublicensable, royalty-free and worldwide license for Artann to make, use or sell any
mechanical imaging system for the diagnosis or treatment of disorders of the
female human breast. The License
Agreement will terminate upon the expiration of all royalty obligations, by
failure of either party to cure a breach of the agreement within a 60-day cure
period, if the Company fails to make a payment to Artann and such failure is
not cured within a 30-day cure period or should one of the parties become
insolvent, go into liquidation or receivership or otherwise lose legal control
of its business.
Artann 2008 Development Agreement
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. As of the December 23, 2008 effective
date of the Development and Commercialization Agreement, the FDA approved
clinical study milestone had been initiated, and the Company has expensed
$250,000 on the consolidated statement of operations. In addition, the Company will issue to
Artann shares of common
F-23
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stock
of the Company having a value of $1 million 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 million upon
FDA clearance. The success bonus will be
reduced by ten percent for each month that FDA clearance is delayed following
15 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 nine months following the effective date of the Development and Commercialization Agreement
and $15,000 per month for the next 12 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 initial term of the Development and
Commercialization Agreement
is for three years and may thereafter be renewed for additional one
year terms upon mutual agreement of the parties. The Development
and Commercialization Agreement may also terminate if the Company fails to make a payment to
Artann and such failure is not cured within a 60-day cure period or should one
of the parties become insolvent, go into liquidation or receivership or
otherwise lose legal control of its business.
Accrued License and Development Fees
As of December 31,
2008, accrued license and development fees consisted of the following amounts
due to Artann under the License and Development and Commercialization
Agreements:
|
|
Amount
accrued
|
|
Upfront license
fee payable in cash
|
|
$
|
600,000
|
|
Upfront license
fee payable in equity
|
|
500,000
|
|
First milestone
cash payment due under the Development and Commercialization Agreement
|
|
250,000
|
|
Less: Advances
|
|
(22,165
|
)
|
Accrued license
and development fees at December 31, 2008
|
|
$
|
1,327,835
|
|
(6)
License Agreements
(a)
Profile LLC
In
January 2002, Profile granted the Company an exclusive license for
prostate imaging systems in exchange for 323,077 shares of the Companys common
stock and the assumption of $25,000 of Profile net liabilities. On March 22,
2002, in exchange for eliminating certain covenants of the license agreement,
the Company issued to Profile an additional 76,923 shares of its common
stock. The 400,000 shares of common
stock were valued at $1,713,600. The
aggregated stock and cash consideration for the Profile license was $1,738,600,
which was expensed as research and development.
On
April 3, 2008, the Company purchased certain patents, patent applications
and know-how from Profile (the Profile Assets) pursuant to an asset purchase
agreement. The purchase of the Profile
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Assets
effectively terminated the license agreement.
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 9). 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 for the year ended December 31,
2008.
(b)
CS Medical
In
July 2001, the Company licensed certain microwave technology from CS
Medical. The worldwide, exclusive
license is limited to the field of use of the treatment of enlarged prostates,
prostatitis, prostate cancer and other urological disorders, and terminates
with the expiration of the last patent to expire that is the subject of the
license and requires defined royalty payments.
As consideration for the license, the Company exchanged 300,000 shares
of its common stock valued at $475,000. This consideration was expensed as
research and development. Under the
terms of the license agreement, royalty payments are to be made quarterly in an
amount equal to 0.5 percent of the amount that net sales of the Companys
products that incorporate the licensed technology exceed $500,000 in that
quarter. The Company has no current
plans to develop the licensed technology due to resource limitations. In the absence of revenues, the Company is
not obligated to make any royalty payments to CS Medical.
(c)
RPI Agreement
In July 2001,
the Company entered into a license agreement with Rensselaer Polytechnic
Institute (RPI) to allow the Company to use Electrical Impedance Tomography (EIT)
technology developed and patented by RPI, on a worldwide, exclusive basis for
the diagnosis and treatment of urological conditions. Consideration for the
license was $50,000, paid in two $25,000 installments, which were expensed as
research and development in fiscal 2001. On July 27, 2005, the Company and
RPI entered into Amendment No. 1 to the RPI license. Subsequently, the
license become non-exclusive. The
Company intends to abandon the EIT technology due to resource limitations.
(7)
Commitments and Contingencies
(a)
Lease
Effective
March 1, 2009, the Company began renting approximately 500 square feet of
office space on a month-to-month basis at a cost of approximately $550 per
month.
From March 1, 2007 to February 28, 2009, the
Company rented executive offices within the offices of a former Company
director, Mr. Nazarenko. Our rental
cost for these offices was approximately $2,129 per month, which is the market
price for similar office space in Minneapolis, Minnesota.
Rent expense for the years ended December 31,
2008 and 2007, and the period from August 17, 1999 (inception) to December 31,
2008 was $23,062, $21,286 and $256,206, respectively.
(b)
Employment Agreements
On July 16, 2008, PUC
entered into an employment agreement with Richard 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 nine months of
F-25
Table
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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 nine 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, nine 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 21, 2007, PUC
entered into an employment agreement with its Chief Financial Officer, Richard
Thon. The agreement extends through June 30,
2009. The agreement provides for a minimum annual salary of $140,000, a cash
incentive bonus potential of up to 30 percent of Mr. Thons 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. Thon without cause or if Mr. Thon
terminates the agreement for good reason, including four months of base salary
plus one month of base salary for each year of service (up to a maximum of nine
months of base salary), payment of earned bonuses, continued payment of
existing health and life insurance benefits for a period of four months and
immediate vesting of all unvested stock options then held by Mr. Thon. 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. Thon 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. Thon. The
agreement prohibits Mr. Thon 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.
At December 31,
2008, approximately $269,000 of our current senior managements salaries and
bonuses had not been paid, and were recorded as an accrued expense.
(c)
Legal proceedings
The Company is involved in routine legal proceedings
in the conduct of the ordinary course of its business.
(8)
Income Taxes
The
Company has generated net operating loss carryforwards of approximately $5.0
million which, if not used, will begin to expire in 2021. Federal and state tax laws impose significant
restrictions on the utilization of net operating loss carryforwards in the
event of a change in ownership of the Company that constitutes an ownership
change, as defined by Section 382 of the Code. The Company has analyzed the 2009 Public
Offering along with previous changes and believes that such an ownership change
has not occurred, and that the Companys use of its net operating loss
carryforwards is not subject to such restrictions.
F-26
Table
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The Company has recorded a
full valuation allowance against its deferred tax assets and deferred tax
liability due to the uncertainty of realizing the related benefits and costs as
follows:
|
|
2008
|
|
2007
|
|
Deferred tax
assets
|
|
|
|
|
|
Net operating
loss carryforwards
|
|
$
|
1,916,000
|
|
$
|
1,566,000
|
|
Capitalized
start up costs
|
|
2,921,000
|
|
2,450,000
|
|
Expenses paid
with options and warrants
|
|
724,000
|
|
836,000
|
|
Capitalized
licenses
|
|
893,000
|
|
416,000
|
|
Other
|
|
164,000
|
|
149,000
|
|
Deferred tax
liability
|
|
|
|
|
|
Beneficial
conversion feature of convertible debentures
|
|
(212,000
|
)
|
(347,000
|
)
|
Less: valuation
allowance
|
|
(6,406,000
|
)
|
(5,070,000
|
)
|
Net deferred tax
assets
|
|
$
|
0
|
|
$
|
0
|
|
The
change in the valuation allowance was $1,336,000, $795,000 and $6,406,000 for
the years ended December 31, 2008 and 2007 and the period from August 17,
1999 (inception) to December 31, 2008, respectively. In September 2005, the FASB approved
EITF Issue No. 05-8, Income Tax Consequences of Issuing Convertible Debt
with a Beneficial Conversion Feature (EITF 05-8). EITF 05-8 provides: (i) that the
recognition of a beneficial conversion feature creates a difference between
book basis and tax basis of a convertible debt instrument, (ii) that basis
difference is a temporary difference for which a deferred tax liability should
be recorded and (iii) the effect of recognizing the deferred tax liability
should be charged to equity in accordance with SFAS No. 109 Accounting
for Income Taxes. EITF 05-8 was
effective for financial statements for periods beginning after December 15,
2005. The Company applied EITF 05-8 to
the 2008 and 2007 issuances of convertible debt and the remaining deferred tax
liability at December 31, 2008 and 2007 was $212,000 and $347,000,
respectively. Pursuant to EITF 05-8
Issue Summary No. 1 dated August 29, 2005, paragraph 15, the Company
offset the deferred tax liability against the deferred tax valuation allowance
at December 31, 2008 and 2007.
Reconciliation between the
federal statutory rate and the effective tax rates for the years ended December 31,
2008 and 2007 and the period from August 17, 1999 (inception) to December 31,
2008 is as follows:
|
|
2008
|
|
2007
|
|
Period from
August 17,
1999
(inception) to
December 31,
2008
|
|
Federal
statutory tax rate
|
|
(34.0
|
)%
|
(34.0
|
)%
|
(34.0
|
)%
|
State taxes, net
of federal benefit
|
|
(4.5
|
)
|
(4.5
|
)
|
(4.5
|
)
|
Employee
incentive stock options
|
|
0.3
|
|
2.5
|
|
1.9
|
|
Expired warrants
and options
|
|
4.6
|
|
2.6
|
|
1.5
|
|
Capitalized
license fees
|
|
|
|
|
|
0.9
|
|
Change in
valuation allowance
|
|
33.6
|
|
33.4
|
|
34.2
|
|
Effective tax
rate
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
The Company has adopted the policy of classifying interest in interest
expense and penalties in general and administrative expense.
The Company had no significant unrecognized tax benefits as of December 31,
2008 or December 31, 2007 and, likewise, no significant unrecognized tax
benefits that, if recognized, would affect the effective tax rate.
F-27
Table of Contents
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 tax years that remain
subject to examination by major tax jurisdictions currently are:
Federal 2005 - 2007
State of Minnesota 2005 - 2007
(9)
Notes Payable
·
On June 1, 2006, PUC 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 promissory note and amendments thereto
bore an interest at the Prime Rate.
On August 24,
2006, the promissory note was amended to mature on October 29, 2006.
On January 22, 2007, the Company repaid $25,000
of the promissory note. On March 20,
2007, the promissory note was amended for a second time to extend the due date
of the remaining balance until the Company closed on an aggregate of $750,000
or more of additional financing following the date of the amendment.
On January 3, 2008 and February 29,
2008, the Company repaid $33,000 and $7,650 of the principal of the promissory
note, respectively. On October 24,
2008, the promissory note was further amended to extend the maturity date to
the earlier of the Companys closing of its anticipated public offering or November 30,
2008.
In connection with the promissory note and the
amendments thereto, the Company issued several warrants to Mr. Pauly
(see Note
12(f)). The note balance outstanding at December 31,
2008 and 2007 was $9,350 and $50,000.
On January 9, 2009, the Company repaid
the remaining $9,350 principal amount of the Pauly loan and issued a warrant to
acquire 4,295 shares of the Companys common stock as described above (see Note
14).
·
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 date to September 15,
2007 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 (see Note 12(f)). The Company repaid the principal in January,
2008. The note balance outstanding at December 31,
2008 and 2007 was $0 and $100,000.
·
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 note was paid in full during 2008.
·
On July 31, 2007, the
Company borrowed for working capital purposes $100,000 from the Smith Trust
pursuant to a promissory note. 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
financing following the date of the amendment.
The note bore interest at the Prime Rate (3.25
percent and 7.25 percent at December 31, 2008 and 2007, respectively)
.
In addition,
the Company agreed to
issue a
five-year warrant to the Smith Trust to acquire one share of the Companys
common stock at $5.00 per share for each $1,000 of principal amount outstanding
for each day the promissory note remained unpaid (see Note 12(f)).
On January 20, 2009, the Company repaid
the Smith
F-28
Table
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Trust
promissory note and issued 28,656 warrants according to the above terms (see
Note 14). The note balance outstanding
at December 31, 2008 and 2007 was $34,000 and $100,000.
·
On August 29,
October 31 and November 30, 2007,
the Company borrowed for working capital needs
$50,000, $100,000 and $25,000, respectively, from James Davis
pursuant to
promissory notes. Each note bore
interest at the Prime Rate (3.25
percent and 7.25 percent at December 31, 2008 and 2007, respectively). Upon the December 27, 2007 conversion of
these notes into the convertible debentures of the Company (see Note 11(b)),
pursuant to the terms of the promissory note, the Company issued to Mr. Davis
a warrant to acquire 12,550 shares of its common stock that was valued at
$28,340 using the Black-Scholes pricing model and expensed as interest
expense. The conversion resulted in
there not being an outstanding balance at December 31, 2007.
·
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 1.0 percent over the Prime Rate, but never less than
6.50 percent (6.50 percent and 8.25 percent at December 31, 2008 and 2007,
respectively), and has a subordinated security interest in all of the Companys
assets. As consideration to the Smith
Trust for making this loan, the Company issued shares of its common stock and
warrants to acquire shares of its common stock (see Note 12(f)).
On March 11, 2008, the
Company amended the promissory note with the Smith Trust. Under the terms of the first amendment,
interest accrued pursuant to the promissory note is payable on the maturity
date, rather than
payable monthly.
The note balance outstanding
at both December 31, 2008 and 2007 was $600,000. On March 19, 2009, the Company again
amended the promissory note with the Smith Trust to extend the maturity date to
March 28, 2010 (see Note 14).
·
On
May 27, 2008, the Company borrowed $43,860 from a commercial lender
pursuant to an 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. The proceeds were paid directly to an
insurance company as a prepayment on an insurance policy. On September 16, 2008, the Company
borrowed an additional $10,644 from the same commercial lender pursuant to an
increase in its insurance coverage, resulting in an increase in the remaining
monthly payments of $1,823 beginning November 1, 2008. The note balance outstanding at December 31,
2008 was $25,075.
·
On April 3,
2008, the Company purchased the Profile Assets from Profile (see Note
6(a)). $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 was to become due and
payable five business days following the close of a public offering of the
Companys equity securities or August 29, 2008, whichever occurred first
(the Maturity Date). Interest accrued
at an annual rate of 10 percent prior to the Maturity Date and 18 percent
thereafter. On September 10, 2008,
the Company amended the Profile Note such that it became due on September 25,
2008. On September 25, 2008, the
Company repaid the principal amount the Profile Note and the accrued interest
thereon.
·
At
various times during the years ended December 31, 2008 and 2007, the
Company received short-term, unsecured loans from certain officers and
directors solely for short-term working capital needs. These loans were made without any interest or
other consideration accruing to the officers and directors, and had no defined
terms. As of December 31, 2008 and
2007, the Company had total outstanding borrowings of $0 and $10,450 from one
director, respectively.
See Note 13 for information regarding related party
transactions and loans.
F-29
Table
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(10)
Notes Payable - Bank
In
February 2006, the Company completed two closings of senior debt
financing. Pursuant to the two closings,
on February 16, 2006, the Company issued a promissory note to Crown Bank
in the amount of $1,200,000 at an interest rate of the Prime Rate plus one
percent
,
but never less than 6.50 percent (6.50 and 8.25 percent at December 31,
2008 and 2007, respectively). On February 28,
2006, the Company issued a second promissory note to Crown Bank in the amount
of $1,000,000, at an interest rate of the Prime Rate plus one percent (4.25
percent and 8.25 percent at December 31, 2008 and 2007,
respectively). The average interest rate
of the notes was 6.60 and 9.05 percent for the years ended December 31,
2008 and 2007, respectively. The
promissory notes were secured by a pledge of all Company assets, including two
technology licenses that were assigned to Crown Bank, and were guaranteed by
Bruce Culver, James Davis, William Reiling and the Smith Trust. In consideration for their guarantees, the
Company issued 10 percent unsecured convertible subordinated debentures
totaling $733,334 to the four guarantors (see Note 11(a)).
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
notes to mature on February 28, 2009. 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 an escrow with Crown Bank four
months worth of future interest payments due under the notes. On December 28, 2007, the Company
deposited $44,000 into Crown Bank as the four months interest requirement,
thereby making effective the terms of the renewed notes. 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 modification of the Crown Bank notes was less
than 10 percent different from the cash flows of the original agreement. Accordingly, the extension of the maturity
date of the notes was not deemed to be a substantial modification.
As
a condition to the renewal of the notes, Crown Bank required that the
guarantors extend their guarantees to cover the longer note terms and increase
the amount each guaranteed. As
consideration to Mssrs. Culver, Davis and Reiling for extending their
guarantees through February 28, 2009, the Company issued to each shares of
its common stock and warrants to acquire its common stock (see Note 12(f)).
On
March 19, 2009, the Company renewed the $1,200,000 Crown Bank note, and
temporarily paid down the $400,000 note (see Note 14).
(11)
Convertible Debt
(a)
Convertible Debentures
As consideration to the guarantors to provide their guarantees for the
Crown Bank promissory notes (see Note 10), the Company issued $733,334 of
unsecured convertible 10 percent debentures.
All of the debentures mature three years from the date of issue
(coincident with the closing dates of the promissory notes as noted above) and
are convertible into Company common stock at a price of $3.00 per share. The face value of the convertible debentures
was recorded as long-term convertible debentures liability for $733,334 (before
the impact of the calculation of the beneficial conversion feature see below)
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
F-30
Table
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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. See Note 8 for the deferred
income tax effects of the beneficial conversion feature.
On March 21, 2007, the
Company and the four guarantors 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
$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, as 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 holders of the unsecured convertible 10 percent debentures issued by
the Company agreed to further 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 December 31,
2008, $142,604 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.
The balance outstanding at both December 31, 2008 and
2007 was $733,334.
On January 12,
2009, the Company closed on its 2009 Public Offering, which triggered the
automatic conversion of the convertible debentures along with the interest
accrued thereon into shares of the Companys common stock (see Note 14).
(b)
Convertible Notes 2007 and 2008
Private Placements
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 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 bore interest at 10 percent per year and would have
matured on June 27, 2009. As a
result of the 2009 Public Offering, the 2007 Notes converted into the Companys
2009 Units at $0.70 per unit. The 2007
Warrants became exercisable
F-31
Table
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upon the
closing of the 2009 Public Offering and will remain exercisable until December 31,
2012 (see Note 12(f)). The exercise
price is $0.50 per share.
On December 27,
2007, the Company also converted $150,000 of existing loans from James Davis
into a note (the Davis Note) and warrants similar to those described
above. The principal amount of the note
issued to Mr. Davis was $142,500. Mr. Davis
also received warrants to purchase 30,000 shares of the Companys common
stock. The terms of the note and
warrants issued to Mr. Davis are the same as those issued in the 2007 Private
Placement, except that his note is converted into the Companys 2009 Units at
$0.50 per unit. In addition, Mr. Davis
agreed that the 2009 Units issued upon conversion of his note and the common
stock issued upon exercise of his warrant will not be transferable for a period
of one year from January 7, 2009.
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.
On
February 13, February 28, May 2, July 15 and July 30,
2008, the Company closed on the 2008 Private Placements, selling an aggregate
of $720,000 of investment units. Net cash proceeds to the Company were
$539,716, after deducting $180,284 of expenses of the offerings (including
$93,600 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).
In aggregate, the
Company issued $684,000 in principal amount of 2008 Notes and 2008 Warrants to
purchase 144,000 shares of common stock.
The terms of the 2008 Notes and 2008 Warrants are
identical to the 2007 Notes and 2007 Warrants, respectively, except with regard
to the eligible periods of prepayment.
The embedded conversion
features of the 2007 Notes, the Davis Note 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 2007 Notes, the Davis Note and the 2008
Notes, valued at $946,539 using the Black-Scholes pricing model, along with the
$153,735 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 are being amortized
as interest expense over the term of the convertible debentures. $612,689, $417 and $613,106 of the original
issue discount was amortized as interest expense during the years ended December 31,
2008 and 2007 and the period from August 17, 1999 (inception) to December 31,
2008, respectively. See Note 8 for the
deferred income tax effects of the beneficial conversion feature.
The aggregate balance outstanding of the 2007 Notes, the
Davis Note and the 2008 Notes at December 31, 2008 and 2007 was $1,900,000
and $1,140,000, respectively.
On the January 7, 2009 effective date of the Companys
2009 Public Offering, the 2007 Notes, the Davis Note and the 2008 Notes along
with the interest accrued thereon automatically converted into units identical
to those sold in the 2009 Public Offering (see Note 14).
F-32
Table
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(c)
Convertible Notes Unit Put
Arrangement
On September 16, 2008, the Company
secured $325,000 of future funding through commitments to purchase units in
accordance with the terms of a unit put agreement (the Unit Put Agreement,
such future funding commitments, the Unit Put Arrangements). In consideration of each purchasers future
funding commitment, each purchaser received an origination warrant to purchase
1,000 shares of the Companys common stock for each $10,000 unit an investor
committed to purchase (each, an Origination Warrant) (see Note 12(f)).
Each unit consists of a note
in the principal amount of $9,500 (the Unit
Put Notes) and a warrant to
purchase 2,000 shares of the Companys common stock (the Unit Put Warrants)(see
Note 12(f)). The purchase price of the warrant portion of
each unit was $500. The Unit Put Notes
bore interest at 10 percent per year, were to mature on March 16, 2010
and, as a result of the January 12, 2009 closing of 2009 Public Offering,
converted into common stock at $0.70 per share.
On
September 16, 2008, the Company exercised $162,500 of its put options
under the Unit Purchase Agreement, and upon the September 24, 2008 closing
thereof, issued Unit Put Notes in the principal amount of $154,375 and 32,500
Unit Put Warrants. On October 17,
2008, the Company exercised the remaining $162,500 of its put option under the
Unit Put Agreement and on October 28, 2008 and December 11, 2008,
closed on $127,500 and $25,000 of this exercise, respectively. $10,000 of the put option was not
closed. Pursuant to these closings, the
Company issued Unit Put Notes in the principal amount of $144,875 and 30,500
Unit Put Warrants. Cash proceeds from
all closings were $282,339, while $32,661 of the Unit Put Notes and Warrants
were paid for by the reduction of accrued interest due to one of the investors. Legal, accounting and other direct costs
related to the offering totaling $13,002 were recorded as debt issuance cost
and are being amortized as interest expense over the term of the Unit Put
Agreement.
The
embedded conversion feature of the Unit Put Notes does not meet all the
characteristics of a derivative instrument as described in SFAS 133, and
therefore was not separated from the host contracts and accounted for as
derivatives. The embedded conversion feature
is indexed to the Companys common stock and would be classified in
shareholders equity under the guidance of EITF 00-19 if it was a freestanding
derivative. 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 Unit Put Notes, valued at $145,743 using the
Black-Scholes pricing model, along with the $17,493 relative fair value of the
Unit Put Warrants, were recorded as an original issue discount as defined in
EITF 98-5 against the convertible debt liability, and are being amortized as
interest expense over the term of the convertible debentures. $24,797 of the original issue discount was
amortized as interest expense during the year ended December 31,
2008. See Note 8 for the deferred income
tax effect of the beneficial conversion feature.
The
$299,250 of Unit Put Notes outstanding at December 31, 2008 and the
interest accrued thereon automatically converted into shares of the Companys
common stock on February 6, 2009 (see Note 14).
(d)
Other Convertible Notes
·
On April 3, 2008, the
Company borrowed an aggregate of $112,500 pursuant to three promissory notes,
each in the amount of $37,500, issued in favor of James Davis, William Reiling
and the Smith Trust. The proceeds from
the promissory notes were used toward the purchase of the Profile Assets (see
Note 6(a)). Payment in full of the
promissory notes and the interest accrued thereon at an annual rate of 10
percent was due on September 1, 2008.
As consideration for providing the
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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 $42,769 relative fair value of the warrants was recorded as original
issue discount on the related promissory notes and expensed as interest expense
over the term of the promissory notes.
On September 12,
2008, the Company amended the three promissory notes. Under the terms of the amendments, the
maturity date of each $37,500 note was changed from September 1, 2008 to
the earlier of the seven days after the date the Company closed on an
underwritten public offering of equity securities or December 31,
2008. In addition, each note holder was
given the option of converting the principal and interest into shares of the
Companys common stock at price equal to 70 percent of the price of the
securities sold in that underwritten public offering, in lieu of cash. EITF Issue No. 06-6 Debtors Accounting
for a Modification (or Exchange) of Convertible Debt Instruments requires that
a modification or exchange of debt instruments be accounted for as debt
extinguishment if a substantive conversion option is added to the new or
modified debt instrument. Under the
guidance of EITF Issue No. 05-1 Accounting for the Conversion of an
Instrument That Became Convertible upon the Issuers Exercise of a Call Option,
the added conversion option was deemed to be substantive. Accordingly, the amendments were treated as a
debt extinguishment. No gain or loss was
recognized. The $48,214 fair value of
the beneficial conversion feature was recorded as original issue discount, and
was amortized as debt extinguishment expense over the term of the notes. The principal balance outstanding at December 31,
2008 was $112,500.
In January 2009, following the closing of the
2009 Public Offering, the Company repaid $45,500 of the notes, and $29,500 of
the notes were converted into common stock at $0.70 per share (see Note
14).
On March 19,
2009, the remaining $37,500 promissory note, due to Mr. Davis, was
refinanced along with another $150,000 promissory note due to Mr. Davis
(see Note 14).
·
On September 25, 2008, the Company borrowed $150,000 pursuant to a
convertible promissory note issued in favor of James Davis. The proceeds of the loan were used to retire
the $150,000 principal balance of the Profile Note. Payment in full of the promissory notes and
the interest accrued thereon at an annual rate of 10 percent was due on the
earlier of seven days after the date the Company closed an underwritten public
offering of equity securities or March 25, 2010. Under the terms of the promissory note,
following the closing of the 2009 Public Offering, Mr. Davis has the
option to convert the principal and accrued interest into shares of the Companys
common stock at $0.70 per share. As
consideration for providing the loan, the Company issued an immediately
exercisable, five-year warrant to purchase 100,000 shares of the Companys
common stock at $1.50 per share to Mr. Davis. The gross proceeds were allocated between the
note, the warrants and the bargain conversion feature of the note based on the relative
fair value at the time of issuance. The
$46,604 relative fair value of the warrants was recorded as original issue
discount and is being expensed as interest expense over the term of the
promissory note. As the holders ability
to exercise the conversion feature of the note is contingent upon an event
outside the control of the holder, the bargain conversion feature valued at
$103,396 was not recorded until January 2009 when the contingency was
removed (see Note 14).
The principal balance outstanding
at December 31, 2008 was $150,000.
Any
unamortized original discount will be expensed upon a conversion of the
promissory note.
On March 19. 2009, the $150,000 debt
(and $6,542 of interest accrued thereon) was refinanced by Mr. Davis (see
Note 14)
See Note 13 for related party
information concerning convertible notes.
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(e)
Future maturities of long-term debt
Future maturities of
long-term convertible notes for the years succeeding December 31, 2008 are
as follows:
Year
|
|
Paid in Cash
|
|
Original
Issue
Discount
|
|
Total
|
|
2009
|
|
$
|
|
|
$
|
(197,166
|
)
|
$
|
(197,166
|
)
|
2010
|
|
615,500
|
|
(34,376
|
)
|
581,124
|
|
Total
|
|
$
|
615,500
|
|
$
|
(231,542
|
)
|
$
|
383,958
|
|
(12)
Shareholders
Equity (Deficit)
(a)
Common
stock issued related to formation and licensing activities
The Company issued 300,000
shares to Clinical Network Inc. in July 2001. In connection with the
Companys license agreements with CS Medical and Profile, the Company issued
300,000 and 400,000 shares of common stock in 2001 and 2002, respectively.
(b)
Common
Stock and Warrants issued related to 2002 Private Placement
In connection with a private
placement to accredited investors, the Company issued 45,335 shares of common
stock in 2002. In addition, the Company
issued warrants to purchase 4,535 shares of common stock to three individuals
related to services rendered in connection with the private placement. These warrants expired unexercised.
(c)
Common Stock and Warrants issued related
to Merger and 2004 Private Placement
Merger Agreement
Prior to the April 5, 2004 Merger (see Note 1(a)), Profile had
notified the Company of a possible breach of its license agreement with the
Company, and had also dissented from the Merger proposal as the registered
holder of securities beneficially owned by certain shareholders holding, in the
aggregate, 30,847 (pre-merger) shares of PUCs common stock.
Effective on April 4, 2004, the parties reached
an agreement pursuant to which Profile waived any existing defaults under the
Profile license agreement, and t
he Company agreed to
purchase 30,000 of the 30,847 (pre-conversion) shares with respect to which
dissenters rights were exercised for an aggregate purchase of $750,000. Of that amount, $100,000 was paid upon the
initial closing of the private placement (described below) and the balance of
$650,000 was paid pursuant to the delivery of a promissory note, which was paid
in full in October 2004. The
remaining 847 (pre-conversion) shares with respect to which dissenters rights
were originally exercised withdrew their dissents and participated in the
Merger.
At the effective time of the Merger all 350,100 (pre-conversion) shares
of common stock of PUC that were outstanding immediately prior to the Merger
and held by PUC shareholders were cancelled, with one share of PUC common stock
issued to Global. Simultaneously, the
former shareholders of PUC common stock received an aggregate of 960,300 shares
of common stock of Global, representing approximately 82.1 percent of Globals
common stock outstanding immediately after the Merger.
Global was a non-operating public shell company at the time of the
Merger. Accordingly, the Merger transaction
was recorded as a recapitalization rather than a business combination. The assets and liabilities resulting from the
reverse acquisition were the former PUC assets and liabilities (at historical
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cost) plus a $13,500 accrued Global liability (assumed at historical
cost). There were no other assets or
liabilities on Globals books at the time of the Merger. The Company recorded costs associated with
the Merger totaling $162,556 during 2004.
2004 Private Placement of
Common Stock.
In connection with the Merger, the Company completed a private
placement offering of 220,500 shares of common stock pursuant to Rule 506
promulgated under the Securities Act. The initial closing occurred on April 5,
2004, at which time the Company issued 198,000 shares at $20.00 per share,
aggregating to gross proceeds of $3.96 million.
Subsequent to April 5, 2004, the Company issued an additional
22,500 shares at $20.00 per share, aggregating to gross proceeds of
$450,000. Costs associated with the
private placement (including the subsequent registration costs) were $139,493.
As part of the private placement, the Company engaged a consultant to
provide financial-advisory services.
Under terms of the arrangement, the consultant was paid $27,000 and was
issued a warrant for 30,000 shares of common stock upon the first closing of
the private placement. The warrant had a
three-year term and was exercisable at $20.00 per share.
(d)
Private sales of Common Stock
·
On June 15, 2005, the Company sold 6,579 shares
of its common stock to an accredited investor in a non-public offering. The per share selling price of $7.60 was
based on the last selling price prior to this sale as reported on the
Over-the-Counter Bulletin Board. Net
proceeds received from this placement were $50,000.
·
On September 7, 2006, the Company sold
5,814 shares of its common stock to Scott Smith, a director of the Company, and
5,814 shares of our common stock to an investor. The per share selling price of $4.30 was
based on the last selling price prior to this sale as reported on the
Over-the-Counter Bulletin Board. Net
proceeds received from these investments were $50,000.
·
During the year ended December 31, 2007,
the Company sold 125,000 of the Companys Investment Units at a price of $4.00
per unit, with total gross proceeds of $500,000. The Investment Units were sold in tranches of
31,250 Units each to four investors on January 18, January 23, February 28
and May 1, 2007. Each Investment
Unit consists of one share of the 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). Costs of
this sale totaled $52,388.
·
On February 12, 2007, the Company sold
1,707 shares of its common stock to Scott Smith, a director of the
Company. The per share selling price of
$4.10 was based on the last selling price prior to this sale as reported on the
Over-the-Counter Bulletin Board. The
subscription price was paid by the conversion of a $7,000 loan to the Company
from Mr. Smith.
·
On March 21,
2007, the Company and the four guarantors of the Companys Crown Bank
promissory notes (see Note 10) agreed to amend the related debenture agreements
.
Pursuant to the revised debenture agreements, among other things, the
Company issued a total of 12,478 shares of its
Investment Units
to the four guarantors in lieu of
$49,911 of accrued interest.
The
6,240 warrants were valued at $26,829 using the Black-Scholes method and were
recorded as debt extinguishment expense.
·
On September 10, 2007, the Company sold a total of
1,100 shares of its common stock to
Mr. Carlson and Mr. Smith. The per share selling price of $3.00 was
based on the last selling price prior to this sale as reported on the
Over-the-Counter Bulletin Board. The
subscription price was paid by the conversion of a $3,300 of loans to the
Company from Mr. Carlson and Mr. Smith.
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(e)
Common Stock and Warrants issued for services
and liabilities
·
In March 2002, the
Company granted a warrant to purchase 3,000 shares of common stock to a former
director that was exercisable at $11.33 per share. This warrant expired
unexercised. An aggregate of $12,075 of
stock-based compensation expense related to this warrant was recognized in the
period from August 17, 1999 (inception) to December 31, 2008.
·
In November 2002, the
Company granted a warrant to purchase 150 shares of common stock at an exercise
price of $23.33 per share to a consultant, for services rendered. This warrant expired unexercised. An aggregate of $490 of stock-based
compensation expense related to this warrant was recognized in the period from August 17,
1999 (inception) to December 31, 2008.
·
In February 2003, the
Company issued 545 common shares to a consultant, in lieu of $12,705 cash for
accounts payable.
·
In June 2003, under the
terms of an agreement with a supplier, the Company issued a warrant to purchase
9,215 shares of common stock at an exercise price of $3.33 per share. This warrant expired unexercised. The value of $187,060 related to this warrant
was recognized as research and development expense in the year ended December 31,
2003.
·
In May 2004, a vendor
was issued 3,861 shares of the Companys common stock as payment for product
development work valued at $77,225.
·
In July 2004, the
Company entered into a research and development agreement with Artann for the
further development of the ProUroScan
TM
system (see
Note 5). Under this agreement, warrants
for the purchase of 10,000 shares of the Companys common stock upon the
execution of the agreement and warrants for the purchase of 20,000 shares of
the Companys common stock in December 2004. The warrants were fully
vested, five-year warrants at a per share exercise price of $20.00 per share
value. The total value of these warrants
computed using the Black-Scholes pricing model was $281,086. The value of the warrants was recorded as
research and development expense in the year ended December 31, 2004.
·
In October 2004,
another vendor was issued 4,444 shares of the Companys common stock in lieu of
$88,882 cash for accounts payable.
·
On April 11, 2005, the Company entered into a
placement agency agreement with Stonegate Securities Inc. to raise working
capital for the Company. Pursuant to the
agreement, on May 13, 2005 the Company issued 5,000 shares of the Companys
common stock to the placement agent. The
5,000 shares were valued at $51,000 using the stock price on the date of grant
and were recorded as general and administrative expense during the year ended December 31,
2005
.
·
On December 30, 2005, the Company issued 4,541 shares
of common stock to our current and former directors in satisfaction of accrued
directors fees in the amount of $40,418.
·
On April 21, 2006, the Company issued 7,000 shares of
its common stock to Alan Haggerty, our former Vice-President of Engineering,
upon his resignation, pursuant to his employment agreement. The shares were valued at $44,800 based on
the average closing share price during the five days before and after the
issuance date, and were recorded as compensation expense during the year ended December 31,
2006.
·
On September 8, 2006, the Company
issued 1,415 shares of its common stock to a vendor, as payment for product
development work valued at $8,938.
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·
On April 2,
2007, the Company issued 4,141 shares
of its common stock to a vendor, as payment for
product development work valued at $20,704.
·
On April 16, 2007, the Company
issued to Artann five-year warrants
(immediately exercisable)
to acquire 20,000 shares of its common
stock at $4.10 per share pursuant to an agreement with
Artann (see
Note 5).
The warrants were valued at $72,000 by the
Black-Scholes pricing model and recorded as research and development expense
during the year ended December 31, 2007.
·
On September 10,
2007, the Company issued a total of 20,694 shares of its common stock to its
directors Mr. Smith, Mr. Rudelius, Mr. Koenig and former
directors as payment for $62,082 of accrued directors fees.
·
On January 4,
2008, pursuant to a final separation agreement with a former employee of the
Company, the Company issued to the former employee five-year warrants
(immediately exercisable) to acquire up to 14,500 shares of the 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 during the year ended December 31,
2008.
·
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 accrued through June 30,
2008. The shares were valued at $1.00
per share and expensed during the period of service.
·
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 and expensed on the date of
issuance.
(f)
Common Stock and Warrants issued pursuant to
loans and loan guarantees
Each
warrant listed below was valued using the Black-Scholes pricing model; however,
the recorded value of warrants issued to lenders and guarantors of Company debt
is limited to the corresponding amount loaned or guaranteed (see Note 1(k)).
·
During the year ended December 31, 2003,
the Company
issued warrants to purchase
a total of 64,287 shares of common stock at $23.33 per share to nine
individuals,
including 4,286 shares to David Koenig, a Company director, in exchange for
their guaranteeing a bank line of credit
. An aggregate
of $216,112 of debt issuance cost related to these warrants was recorded and
amortized over the life of the bank line of credit. Upon the closing of the Companys 2004
private placement and Merger on April 5, 2004, certain exercise price
protections and anti-dilution provisions of these warrants became
effective. Under the terms of these
provisions, the holders of these warrants became eligible to purchase a total
of 101,788 shares at $16.67 per share.
The additional warrants and revaluation of the existing warrants were
valued at $320,974 using the Black Scholes pricing model, and were recorded as
interest expense at the time of issuance.
The warrants expired unexercised.
·
In September 2005,
the Company engaged Venture Law Resources, PLLC (VLR) to assist with the
introduction of strategic investors to the Company. Under this agreement, on September 1,
2005 and February 22, 2006, the Company issued a total of 5,000 shares of
common stock valued at $40,500 on the grant dates to VLR. Upon the closing of the Companys Crown Bank
notes on February 16, 2006, the $43,000 aggregate value of the shares and
initial retainer were recorded as debt issuance cost and are being amortized
over the term of the notes (see Note 10).
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·
On September 14, 2005, in connection
with a commercial guaranty of a $100,000 bank loan, the Company issued two
five-year warrants (immediately exercisable) to James Murphy to acquire a total
of 5,000 shares of the Companys common stock at $5.00 per share. The warrants, valued at $29,000 using the
Black-Scholes pricing model, were recorded as debt issuance costs and expensed
over the term of the loan as interest expense.
The Company recorded $29,000 of expense related to the value of the
warrants during the period from August 17, 1999 (inception) to December 31,
2008.
·
On September 21, 2005, in connection with $100,000
loan from Roman Pauly, the Company issued two five-year warrants (immediately
exercisable) to the lender to acquire a total of 5,000 shares of the Companys
common stock at $5.00 per share. The
gross proceeds of $100,000 were allocated between the promissory note and the
common stock warrants based on the relative fair values of the securities at
the time of issuance. The warrants, valued at $26,500 using the Black-Scholes
pricing model, were recorded as original issue discount as defined in EITF 98-5
and expensed on a straight-line basis over the term of the promissory note as
interest expense. The Company recorded
$0, $12,187 and $26,500 of expense related to the value of the warrants during
the years ended December 31, 2008 and 2007, and the period from August 17,
1999 (inception) to December 31, 2008, respectively.
·
On October 19, 2005, in connection with commercial
guaranties of a $300,000 loan from Venture Bank, the Company issued five-year
warrants (immediately exercisable) to Ron Musich and Adrian Johnson to acquire
up to 7,500 shares (15,000 shares in total) of the Companys common stock at
$5.00 per share. The warrants, valued at
$79,500 using the Black-Scholes pricing model, were recorded as debt issuance
costs and expensed over the term of the loan as interest expense. The Company recorded $79,500 of expense
related to the value of the warrants during the period from August 17,
1999 (inception) to December 31, 2008.
·
On January 25, 2006, in connection with a $23,000
loan, the Company issued a five-year warrant (immediately exercisable) to Adron
to acquire 5,000 shares of Company common stock at $5.00 per share. The gross proceeds of $23,000 were
allocated between the promissory note and the common stock warrant based on the
relative fair values of the securities at the time of issuance. The fair value of the warrant estimated at
grant date using the Black-Scholes pricing model exceeded the amount of the
loan. Accordingly, the warrant was
valued at $23,000 and recorded as original issue discount as defined in EITF
98-5. The Company recorded $23,000 of
expense related to the value of the warrants during the period from August 17,
1999 (inception) to December 31, 2008.
·
On June 1, 2006, the Company
borrowed $75,000 from Roman Pauly, and in connection therewith issued to Mr. Pauly
a promissory note to mature on August 30, 2006
(see Note
9). Under the terms of the loan
agreement, the Company issued a five-year warrant (immediately exercisable)
to Mr. Pauly
to acquire 3,750 shares of Company common stock at $5.00 per share. The fair value of the warrant at the grant
date was estimated using the Black-Scholes pricing model to be $25,500 and was
recorded as original issue discount as defined in EITF 98-5 and subsequently
expensed as interest expense over the 90-day term of the loan.
On August 24, 2006 the promissory
note was amended to mature on October 29, 2006 and the Company agreed to
issue a five-year warrant to Mr. Pauly to acquire 41.7 shares of the
Companys common stock at $5.00 per share for each day the promissory note was
outstanding after August 30, 2006 upon repayment of the promissory
note. These warrants were valued at
$5.40 per share using the Black-Scholes pricing model. In connection with amendments to the
promissory note, the Company issued to Mr. Pauly 31,817 warrants accrued
between August 30, 2006 and October 1,
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2008 along with a warrant to acquire
3,000 shares of its common stock and agreed to continue to accrue 41.7 warrants
per day to be issued upon the Companys repayment of the promissory note. The warrants issued and accruing on and after
October 1, 2008 are five-year warrants with an exercise price of $1.50 per
share, and were valued at $1.32 per share using the Black-Scholes pricing
model.
The guidance provided by EITF Issue 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 both amendments was greater than 10
percent different from the present value of the cash flows under the original
agreement. Accordingly, the warrants
issued and the accrual of warrants to be issued pursuant to the amended note
were recorded as debt extinguishment expense.
The total debt extinguishment expense recorded for the 15,262, 5171 and
35,653 warrants accrued for issuance during the years ended December 31,
2008 and 2007, and the period from August 17, 1999 (inception) to December 31,
2008 was $70,723, $82,191 and $180,836, respectively.
·
On July 21, 2006, in connection with a $7,500 loan
from Michael Wright, the Company issued a five-year warrant (immediately
exercisable)
to Mr. Wright to acquire 375
shares of Company common stock at $5.00 per share. The gross proceeds of $7,500 were allocated
between the promissory note and the common stock warrant based on the relative
fair values of the securities at the time of issuance. The warrant, valued at $2,025 using the
Black-Scholes pricing model, was recorded as original issue discount as defined
in EITF 98-5 and was expensed as interest expense during the year ended December 31,
2006.
·
On August 30,
2006, in connection with a $10,000 loan from Leslie Pearson, the Company issued
a five-year warrant (immediately exercisable) to Ms. Pearson to acquire
500 shares of Company common stock at $5.00 per share. The gross proceeds of
$10,000 were allocated between the promissory note and the common stock warrant
based on the relative fair values of the securities at the time of
issuance. The warrant, valued at $2,300
using the Black-Scholes pricing model, was recorded as original issue discount
as defined in EITF 98-5 and was expensed as interest expense during the year
ended December 31, 2006.
·
On November 30, 2006, the Company borrowed
$100,000 from Adron,
and in connection therewith issued to Adron a
promissory note to mature on January 2, 2007 (see Note 9)
.
Pursuant to the terms of the promissory note, the Company issued
five-year warrants
(immediately exercisable)
to Adrons partners to acquire 5,000
shares of Company common stock at $5.00 per share. In addition, pursuant to the terms of the
promissory note, the Company issued an additional five-year warrant
(immediately exercisable) to Adrons partners to acquire 5,000 shares of
Company common stock at $5.00 per share, when the loan was not repaid on January 2,
2007. The first warrant, valued at
$22,500 using the Black-Scholes pricing model, was recorded as original issue
discount
as defined in EITF 98-5
and was expensed as interest expense over the term of
the promissory note.
The second
warrant, also valued at $22,500, was expensed immediately as interest expense
in January 2007. The Company
recorded interest expense of $23,162 and $45,000 related to the warrants issued
pursuant to the original agreement during the year ended December 31,
2007, and the period from August 17, 1999 (inception) to December 31,
2008, respectively.
On each of March 20,
2007 and August 8, 2007, the Company amended the Adron Note, resulting in
an extension of its due dates, the issuance of a third warrant to acquire 5,000
shares of Company
common stock at $5.00 per share
on February 1, 2007
and an agreement to issue to 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. 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
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Table of Contents
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 and the warrants issued on February 1, 2007 pursuant to the Adron
Note were recorded as debt extinguishment expense. The Company expensed as debt extinguishment
cost $4,848, $201,637 and $206,485 related to the accrual of 1,347, 51,010 and
52,357 warrants to be issued of warrants pursuant to the amended terms of the
promissory note during the years ended December 31, 2008 and 2007, and the
period from August 17, 1999 (inception) to December 31, 2008,
respectively. On January 16, 2008,
the Company repaid the outstanding principal amount of the Adron Note and
issued the 52,357 accrued warrants.
·
On March 14, 2007, upon the termination of employment of an
employee, and in consideration for an agreement to defer payment of accrued
salaries until the Company is able to make such payments, the Company agreed to
extend by three years the expiration date of 30,000 warrants beneficially held
by the employee. The modification of the
warrant resulted in the recording of an immediate incremental compensation
expense totaling $96,000, computed as the increase in the fair value of the
warrant as determined under the provisions of SFAS 123R over the fair value so
determined immediately before the modification.
·
On July 31, 2007, the Company borrowed $100,000
for short-term working capital needs pursuant to a promissory note issued to
the Smith Trust (see Note 9)
.
During the years ended December 31, 2008 and 2007, and the period
from August 17, 1999 (inception) to December 31, 2008, the Company
accrued for the issuance of warrants to acquire 12,576, 15,400 and 27,976
shares of the Companys common stock, respectively, and recorded interest
expense of $50,304, $61,600 and $111,904, respectively, related thereto. On January 20, 2009, the Company repaid
the promissory note and issued 28,656 warrants related to this note (see Note
14).
·
On August 29, October 31, and November 30,
2007, the Company borrowed for working capital needs $50,000, $100,000 and
$25,000, respectively, from James Davis (see Note 9). Upon the December 27, 2007 conversion of
these notes into the convertible debentures of the Company (see Note 11(b)),
pursuant to the terms of the promissory note the Company issued to Mr. Davis
12,550 warrants that were valued at $28,340 using the Black-Scholes pricing
model, which were expensed as interest expense during the year ended December 31,
2007.
·
On October 15, 2007, the Company borrowed
$600,000 pursuant to a promissory note issued to the Smith Trust (see Note
9). 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 $66,666 value of this
consideration was recorded as debt issuance cost and is being amortized over
the term of the loan using the straight-line method, which approximates the
interest method. The Company recorded
$48,473, $10,358 and $58,831 of interest expense related to the amortization of
this debt issuance cost
during the years ended December 31, 2008 and
2007, and the period from August 17, 1999 (inception) to December 31,
2008, respectively
. On October 31, 2008, pursuant to the
terms of the loan when the loan remained unpaid on that date, the Company
issued to the Smith Trust 6,667 shares of its common stock and a five-year
immediately exercisable warrant to acquire 16,667 shares of its common stock at
an exercise price of $2.00. The $6,667 value
of the shares issued and the $12,834 value of the warrants was recorded as
interest expense during the year ended December 31, 2008.
·
On December 27, 2007, the Company closed on the sale of $1,050,000
of units under its 2007 Private Placement (see Note 11(b)). At the closing, the Company issued 2007
Warrants to purchase 210,000 shares of common stock. On the same day, the Company also converted
$150,000 of existing loans from James Davis into similar units, and issued
warrants to purchase 30,000 shares of the Companys common stock.
On January 4,
2008, the Company closed on the sale of $80,000
F-41
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of additional
units as part of the 2007 Private Placement with the same terms as noted
above. At closing, the Company issued
2007 Warrants to purchase 16,000 shares of common stock.
On February 13, February 28,
May 2, July 15 and July 30, 2008, the Company closed on an
aggregate $720,000 of units under its 2008 Private Placements (see Note
11(b)). Pursuant to these closings, the
Company issued 2008 Warrants to purchase 144,000 shares of common stock.
The $153,735 relative fair
value of the aggregate 400,000 2007 Warrants, Davis Warrants and 2008 Warrants
issued were recorded as an original issue discount as defined in EITF 98-5
against the convertible debt liability, and are being amortized as interest
expense over the term of the convertible debentures.
The exercise
price of the 2007 Warrants, the Davis Warrants, and the 2008 Warrants was set
upon the January 7, 2009 effective date of the Companys 2009 Public
Offering at $0.50 per share (based on 50 percent of the offering price) (see
Note 14). All of these warrants became
exercisable upon the January 12, 2009 closing of the 2009 Public Offering
and will remain exercisable until December 31, 2012. Mr. Davis agreed that the equity
securities issued upon exercise of the Davis Warrant will not be transferable
until January 7, 2010. The unamortized original issue discount relating to
the warrants was expensed as interest expense upon the January 12, 2009
closing of the 2009 Public Offering.
·
On December 28, 2007, the terms and conditions of the renewed
Crown Bank notes became effective (see Note 10). Pursuant to the terms of the guarantees the
Company issued to the three guarantors of the Crown Bank notes an aggregate of
88,889 shares of the Companys common stock.
The $88,889 value of the shares was recorded as interest expense during
the year ended December 31, 2007.
On October 31,
2008, pursuant to the terms of the loan when the loan remained unpaid on that
date, the Company issued to the three guarantors an aggregate amount of 17,778
shares of our common stock and five-year immediately exercisable warrants to
acquire an aggregate of 44,445 shares of our common stock at an exercise price
of $2.00 per share. The $17,778 value of
the shares issued and the $34,223 value of the warrants was recorded as
interest expense during the year ended December 31, 2008.
·
On 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 (see Note 11(d)). The gross proceeds were allocated between the
note and the warrants based on the relative fair value at the time of
issuance. The relative fair value of
warrants was recorded as original issue discount on the related promissory
notes and was expensed as interest expense over the term of the promissory
notes. During the year ended December 31,
2008, original issue discounts of $42,768 were expensed as interest expense.
·
On September 16, 2008, pursuant to the
Companys Unit Put Agreement (see Note 11(c)), the Company issued Origination
Warrants to purchase an aggregate 32,500 shares of our common stock. Of
these, 31,500 Origination Warrants became exercisable when the Company
exercised its put options and closed on $315,000 of the Unit Put Arrangement,
while 1,000 Origination Warrants were forfeited when an investor failed to meet
a $10,000 unit put obligation. The
Origination Warrants are exercisable until December 31, 2012 at an
exercise price of $1.00 per share. The Origination Warrants, valued at $42,575
using the Black-Scholes pricing model, were recorded as a debt issuance cost
asset and are being amortized as interest expense over the term of the Unit Put
Agreement. During the year ended December 31,
2008, debt issuance cost of $10,891 was recorded as interest expense.
F-42
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Each unit issued in the Unit Put Agreement
included a Unit Put warrant (see Note 11(c)).
The
purchase price of the warrant portion of each unit was $500. The Unit Put Warrants will remain exercisable
until December 31, 2012 at an exercise price of $1.00 per share. On September 16, 2008, the Company
exercised $162,500 of its put options under the Unit Purchase Agreement, and
upon the September 24, 2008 closing thereof, issued 32,500 Unit Put
Warrants. On October 17, 2008, the
Company exercised the remaining $162,500 of its put option under the Unit Put
Agreement and on October 28, 2008 and December 11, 2008, closed on
$127,500 and $25,000 of this exercise, respectively. Pursuant to these closings, the Company
issued 30,500 Unit Put Warrants. The
$17,493 relative fair value of the Unit Put Warrants was 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.
Under the terms of the Unit Put Arrangement, the promissory notes
issued along with interest accrued thereon automatically converted into shares
of the Companys common stock on February 6, 2009 (see Note 14). The unamortized original issue discount and
unamortized debt issuance cost was expensed as interest cost upon this
conversion.
·
On September 25, 2008, the
Company borrowed $150,000 pursuant to a convertible promissory note issued in
favor of James Davis (see Note 11(d)).
As consideration for providing the loan, the Company issued an
immediately exercisable, five-year warrant to purchase 100,000 shares of the
Companys common stock at $1.50 per share to Mr. Davis. The $46,604 relative fair value of the
warrant was recorded as original issue discount and is being expensed as
interest expense over the term of the promissory note. During the year ended December 31, 2008,
original issue discount of $8,280 was expensed as interest expense.
Any unamortized
original issue discount relating to the warrants will be expensed immediately
in the event that the promissory note is converted into common stock.
·
On March 19, 2009, pursuant to the
renewal of its $600,000 Smith Trust promissory note and guaranties received
relating to the Companys renewal of its $1,200,000 Crown Bank promissory note,
the Company issued an aggregate 200,001 shares of its common stock
as consideration to the
Smith Trust, James Davis, and William Reiling, and will issue a further 33,333
shares per month for each month the notes remain outstanding after August 31,
2009
(see Note 14)
.
(g)
Warrants summary
Warrant activity was as
follows for the years ended December 31:
|
|
Warrants
|
|
Weighted-Average Exercise
Price
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Outstanding,
January 1
|
|
639,504
|
|
215,949
|
|
$
|
10.18
|
|
$
|
14.61
|
|
Granted
|
|
538,297
|
|
432,920
|
|
1.66
|
|
4.91
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(103,787
|
)
|
(9,365
|
)
|
16.37
|
|
3.62
|
|
Outstanding,
December 31
|
|
1,074,014
|
|
639,504
|
|
$
|
4.45
|
|
$
|
10.18
|
|
The
fair value of stock warrants is the estimated present value at grant date using
the Black-Scholes pricing model (see Note 1(k)).
The weighted-average fair
value of the warrants granted during the years ended December 31, 2008 and
2007 was $1.37 and $3.80, respectively.
The expense related to warrants issued to lenders and
debt guarantors was $262,305, $423,096 and $1,097,185 for the years ended December 31,
2008 and 2007, and the period from August 17, 1999 (inception) to December 31,
2008, respectively (excluding warrants issued in connection with the 2007 and
2008 Private Placement
F-43
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and
Unit Put Agreements). Stock-based
compensation cost related to warrants issued to the Companys consultants and
suppliers was $14,500, $168,000 and $651,136 for the years ended December 31,
2008 and 2007, and the period from August 17, 1999 (inception) to December 31,
2008, respectively. Stock-based
compensation cost related to warrants issued to directors (in lieu of stock
options) was $0, $0 and $12,075 for the years ended December 31, 2008 and
2007, and the period from August 17, 1999 (inception) to December 31,
2008, respectively.
(h)
Stock Options
Stock Option Plans
In April 2002, the Companys Board of Directors
passed a resolution adopting the ProUroCare Medical Inc. 2002 Stock Plan (the 2002
Plan), reserving 150,000 shares of the Companys common stock for issuance.
In July 2004, the Companys Board of Directors passed a resolution
adopting the ProUroCare Medical Inc. 2004 Stock Option Plan (the 2004 Plan),
which was approved by the Companys shareholders in July 2005. The Company has reserved 150,000 shares of
common stock for issuance under the 2004 Plan.
The plans permit the Company to grant incentive and nonqualified
options, stock appreciation rights, stock awards, restricted stock awards,
performance shares and cash awards to Company employees and independent
contractors. The exercise price for all
options granted under the plans shall be determined by the Board of Directors.
The term of each stock option and period of exercisability will also be set by
the Board of Directors, but will not exceed a period of ten years and one day
from grant date. The agreements also include provisions for anti-dilution of
options.
Stock Option Grants
Each of the options granted below were valued using the
Black-Scholes pricing model (see Note 1(j)) and are being expensed over the
vesting period as general and administrative expense.
·
In March 2002, the Company granted an
aggregate of 90,000 employee stock options to officers and directors that were
exercisable at $11.33 per share. The
officers options vested ratably over a 36-month period through December 2004,
while the directors options vested ratably over a 24-month period through April 2004. An aggregate $342,782 of stock-based
compensation expense related to these options was recognized in the period from
August 17, 1999 (inception) to December 31, 2008.
In
October 2003, an officer resigned from the Company and 15,000 of his
unvested options were forfeited and in October 2004 his remaining 21,000
options expired. In February 2004,
a director resigned from the Board of Directors, and 375 of his unvested
options were forfeited, and in October 2005 his remaining 2,625 options
expired. Effective May 1, 2007,
Maurice Taylor, the Companys former Chairman and Chief Executive Officer,
retired from the Company. Pursuant to a May 11,
2007 agreement to defer payment of his unpaid salary, the Company extended the
date through which Mr. Taylor may exercise 45,000 options (including
options gifted to his children) following his separation to April 1,
2012. The Company recorded stock-based
compensation expense of $103,500 related to the extension of the exercise date
in the year ended December 31, 2007.
·
In April 2002, the Company issued a
nonqualified stock option to a consultant to acquire 3,000 shares of common
stock at $11.33 per share. This option expired unexercised. At the same time, the Company also issued a
nonqualified stock option to another consultant to acquire 3,000 shares
F-44
Table of
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of common stock at $11.33 per share. This option vested ratably over a
two-year period through April 2004.
An aggregate of $27,600 of stock-based compensation expense related to
these options was recognized in the period from August 17, 1999
(inception) to December 31, 2008.
·
In February 2004, the
Company issued 45,000 employee stock options to Michael Grossman, our former
President and Chief operating Officer.
These options were valued at $6.70 per share, vested ratably over a
three-year period and are exercisable at $20.00 per share. The Company expensed, $16,811 and $303,000
related to these options during the year ended December 31, 2007 and the
period from August 17, 1999 (inception) to December 31, 2008,
respectively. Pursuant to a May 11,
2007 separation agreement, the Company extended the date through which Mr. Grossman
may exercise 45,000 options (including options gifted to his children)
following his separation until February 1, 2012. The Company recorded stock-based compensation
expense of $117,000 related to the extension of the exercise date in the year
ended December 31, 2007.
·
In February 2004, the
Company issued 3,000 nonqualified stock options to a consultant in
consideration of services rendered. The
options were valued at $6.70 per share, and vested as to 1,500 shares upon
issuance and as to the remaining 1,500 shares on January 1, 2005. These options are exercisable at $20.00 per
share through February 2014. The
Company expensed $20,200 related to these options during the period from August 17,
1999 (inception) to December 31, 2008.
·
In July 2004, the
Company issued 20,000 employee stock options to Mr. Thon in connection
with his employment agreement. These
options were valued at $15.00 per share, vested ratably over a three-year
period, and are exercisable at $25.00 per share through July 2014. The Company expensed $58,314 and $300,000
related to these options during the year ended December 31, 2007 and the
period from August 17, 1999 (inception) to December 31, 2008,
respectively. On July 11, 2008, in
connection with the issuance of new options to Mr. Thon (see below), these
options were cancelled.
·
In January 2005,
the Company issued 15,000 stock options to Mr. Carlson, who at the time
was the Companys Vice President of Marketing and Sales. The options were valued at $16.20 per share,
vest ratably over a three-year period, and are exercisable at $23.50 per share
through January 2015. The Company
expensed $6,729, $81,006, and $243,000 related to these options during the
years ended December 31, 2008 and 2007 and the period from August 17,
1999 (inception) to December 31, 2008, respectively. On July 11, 2008, in connection with the
issuance of new options to Mr. Carlson (see below), these options were
cancelled.
·
In September 2005,
the Company issued 15,000 stock options exercisable at $6.00 per share to Mr. Haggerty. The options were valued at $5.30 per share
and expired unexercised. The Company
expensed $15,460 related to these options during the period from August 17,
1999 (inception) to December 31, 2008.
·
On March 1, 2006, the
Company issued to five of its employees five-year stock options to acquire a
total of up to 20,000 shares of common stock at $7.50 per share. The options, valued at $5.60 per share, vest
upon the Company securing FDA approval of its ProUroScan
TM
system. 10,000 of these options were awarded to
employees who subsequently left the Company and have been forfeited. The remaining options are being expensed over
the vesting period (estimated by the Company as forty-one months) as general
and administrative expense. The Company
expensed $9,663, $33,245 and $91,184 related to these options during the years
ended December 31, 2008 and 2007, and the period from August 17, 1999
(inception) to December 31, 2008, respectively.
F-45
Table of
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·
On May 30, 2006, the
Company issued 3,000 nonqualified stock options to Mr. Smith, a director,
upon his appointment to the Board of Directors.
The options were valued at $5.90 per share, and vested over a two year
period. These options are exercisable at
$7.00 per share through May 2013.
The Company expensed $3,688, $8,850 and $17,700 related to these options
during the years ended December 31, 2008 and 2007, and the period from August 17,
1999 (inception) to December 31, 2008, respectively.
·
On February 1, 2007,
the Company granted to Mr. Carlson, a seven-year option to acquire up to
20,000 shares of the Companys common stock at a price of $5.00 per share. The options were valued at $3.40 per share
using the Black-Scholes pricing model and will be expensed over the vesting
period as general and administrative expense.
The options vested as follows:
(a)
5,000 shares vested immediately.
(b)
5,000
shares vest upon the Companys closing on new equity financing arrangements
aggregating to $3,000,000 or more after February 1, 2007 and prior to December 31,
2007. This objective was not met, and
these options did not vest and were forfeited.
(c)
5,000 shares vest if the Company records gross product revenues of
$1,000,000 or more in the Companys 2008 fiscal year. This objective was not met, and these options
did not vest and were forfeited.
(d)
5,000
shares vested on December 31, 2008.
The Company expensed $1,143,
$32,857 and $34,000 related to these options during the year ended December 31,
2008 and 2007, and the period from August 17, 1999 (inception) to December 31,
2008, respectively.
·
On June 14, 2007, the Company issued
3,000 nonqualified stock options to Mr. Rudelius, upon his appointment to
the Board of Directors. The options were
valued at $2.40 per share, and vest ratably over a 24-month period through June 14,
2009. These options are exercisable at
$2.90 per share through May 2014.
The Company expensed $3,600, $1,800 and $5,400 related to these options
during the year ended December 31, 2008 and 2007
,
and
the period from August 17, 1999 (inception) to December 31, 2008,
respectively.
·
On July 11, 2008, the Company issued
incentive stock options to acquire 70,000 shares of its common stock to Mr. Carlson. The options are exercisable for a period of
seven years at an exercise price of $1.00 per share. Of the options, 10,000 shares vest
immediately 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. SFAS 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. The Company
expensed $11,750 related to these options during the year ended December 31,
2008.
·
On July 11, 2008, the Company issued
incentive stock options to acquire 35,000 shares of its common stock to Mr. Thon. The options are exercisable for a period of
seven years at an exercise price of $1.00 per share. Of the options, 10,000 shares vest immediately
and 8,333 shares 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
F-46
Table of
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per share. SFAS 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. The Company expensed $6,042 related to these
option during the year ended December 31, 2008.
·
On August 11, 2008, the Company issued
1,000 non-qualified stock options (immediately exercisable) to each of its
three outside directors, Mr. Koenig, Mr. Smith and Mr. Rudelius,
pursuant to its standard annual option award program, upon their re-election to
the Companys Board of Directors. The
options are exercisable for a period of seven years at an exercise price of
$0.90 per share, and were valued at $0.71 per share. The Company expensed $2,130 related to these
option during the year ended December 31, 2008.
·
On March 3,
2009, the Company granted a total of 215,000 options to its officers and
directors (See Note 14).
(i)
Stock options summary
Stock option activity was as follows for the years
ended December 31:
|
|
Options
|
|
Weighted-Average Exercise
Price
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Outstanding,
January 1
|
|
175,500
|
|
160,417
|
|
$
|
15.16
|
|
$
|
16.17
|
|
Granted
|
|
108,000
|
|
23,000
|
|
1.00
|
|
4.73
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(50,500
|
)
|
(7,917
|
)
|
19.16
|
|
5.37
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31
|
|
233,000
|
|
175,500
|
|
$
|
7.73
|
|
$
|
15.16
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31
|
|
132,250
|
|
152,210
|
|
$
|
12.20
|
|
$
|
16.54
|
|
F-47
Table
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The following table
summarizes information about stock options outstanding as of December 31,
2008:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number of
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Number of
Options
|
|
Weighted
Average
Exercise Price
|
|
$0.90-$7.50
|
|
134,000
|
|
$
|
1.96
|
|
6.28
|
|
33,250
|
|
$
|
2.26
|
|
$11.33
|
|
51,000
|
|
$
|
11.33
|
|
3.26
|
|
51,000
|
|
$
|
11.33
|
|
$20.00
|
|
48,000
|
|
$
|
20.00
|
|
3.21
|
|
48,000
|
|
$
|
20.00
|
|
|
|
233,000
|
|
$
|
7.73
|
|
4.99
|
|
132,250
|
|
$
|
12.20
|
|
The aggregate intrinsic value of the options
outstanding and exercisable at December 31, 2008 was $5,700 and $1,450,
respectively. The average fair value of
each option granted during the years ended December 31, 2008 and 2007, and
the period from August 17, 1999 (inception) to December 31, 2008, as
determined using the Black-Scholes pricing model (see Note 1(j)) was $0.84,
$3.27 and $4.83, respectively. The
stock-based employee and non-employee compensation cost related to stock
options was $44,745, $453,384 and $1,641,772 for the years ended December 31,
2008 and 2007, and the period from August 17, 1999 (inception) to December 31,
2008, respectively.
(13)
Related Parties
The Company considers its
directors, executives and beneficial shareholders of more than five percent of
its common stock to be related parties.
During the years ended December 31, 2008 and 2007, the following
significant transactions were made between the Company and those parties that
were related parties at the time of each transaction:
From March 1, 2007
to January 31, 2009, the Company rented executive offices within the
offices of a former Company director, Mr. Alex Nazarenko. Our rental cost for these offices was
approximately $2,129 per month, which is the market price for similar office
space in Minneapolis, Minnesota.
On
April 17, 2007, the Company borrowed $75,000 from Mr. Nazarenko. In consideration, the Company executed and
delivered to Mr. Nazarenko a $75,000 unsecured demand promissory
note. The note bore interest at an
annual rate of the Prime Rate plus one percent, and was repaid on May 8,
2007.
As consideration to Mr. James Davis, Mr. William
Reiling, the Smith Trust and Mr. Bruce Culver to provide their guarantees
for the Crown Bank promissory notes (see Note 10), in 2006 the Company issued
$733,334 of unsecured convertible 10 percent debentures. On March 21,
2007, the Company and the four guarantors 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 $49,911 of
accrued interest.
On December 27, 2007, the
holders of the 10 percent unsecured convertible subordinated debentures agreed
to further 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
(see Note 11(a)).
On
June 12, 2007, the Company borrowed $10,000 from Mr. Nazarenko. The loan bore no interest. On June 25, 2007, the Company borrowed
an additional $27,000 from Mr. Nazarenko.
In consideration of these two loans, the Company executed and delivered
to Mr. Nazarenko a $37,000 unsecured demand promissory note. The note bore interest at an annual rate of
the Prime Rate plus one percent. The
principal amounts of these loans were repaid to Mr. Nazarenko on December 28,
2007.
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On
July 3, 2007, the Company borrowed $10,000 from Mr. Nazarenko (see
Note 9) and was repaid in 2007.
On July 31, 2007, the
Company borrowed $100,000 from the Smith Trust (see Note 9).
On August 29, October 31,
and November 30, 2007,
the Company borrowed for working capital needs $50,000,
$100,000 and $25,000, respectively, from James Davis
pursuant to promissory
notes (see Note 9).
Effective October 15, 2007,
the Company borrowed $600,000 from the Smith Trust pursuant to a long-term
promissory note (see Note 9). The
proceeds were used to retire bank notes payable.
On September 28, 2007, the
Company borrowed for working capital purposes $15,000 from Mr. Smith and
$10,000 from Mr. Rudelius, both directors of the Company
(see Note 9)
. Upon the first closing of the
2007 Private Placement, these loans were converted into investment units under
that offering
(see Note 11(b)).
On December 27,
2007, the Company closed on its 2007 Private Placement (see Note 11(b)). Mr. Davis acquired $225,000 of the units
sold in the 2007 Private Placement, including the conversion into units of
$25,000 of loans made to the Company. In
addition, the
Company converted $150,000 of existing
loans from Mr. Davis into a note (the Davis Note) and warrants similar
to those sold in the 2007 Private Placement,
except that his note was 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 his warrant 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
the same date, Mr. Reiling acquired $50,000 of the units sold in the 2007
Private Placement.
On February 28,
2008, Mr. Rudelius acquired $10,000 of the units sold in the 2008 Private
Placement.
On April 3, 2008, in
connection with the Companys purchase of the Profile Assets, the Company
borrowed an aggregate of $112,500 pursuant to three promissory notes each in
the amount of $37,500 (see Note 11(d)). The promissory notes were issued in
favor of Mr. Davis, Mr. Reiling and the Smith Trust. On September 12, 2008, these three
promissory notes were amended to extend their due dates to the earlier of seven
days following the close of an underwritten public offering or December 31,
2008, and to give the holders an option to convert their notes into shares of
our common stock at a conversion price equal to 70% of the price of the Units
sold in such offering.
On September 16, 2008, Mr. Davis
agreed to purchase $100,000 of the puts pursuant to the Unit Put Agreement (see
Note 11(d)). On September 24, 2008,
we closed on $50,000 of Mr. Davis put commitment, and issued a $47,500
convertible note and a warrant to acquire 10,000 shares of our common stock at
an exercise price of $1.00 per share. On October 28, 2008, we closed on
the remaining $50,000 of Mr. Davis put commitment, and issued a $47,500
convertible note and a warrant to acquire 10,000 shares of our common stock at
an exercise price of $1.00 per share.
On September 25, 2008,
we borrowed $150,000 pursuant to a promissory note issued in favor of Mr. Davis
and used the proceeds to retire the $150,000 principal amount of the Profile
Note (see Note 11(d)). As consideration for providing the loan, we issued an
immediately exercisable, five-year warrant to purchase 100,000 shares of our
common stock at $1.50 per share to Mr. Davis.
On March 19, 2009, pursuant to the renewal of its
$600,000 Smith Trust promissory note and guaranties received relating to the
Companys renewal of its $1,200,000 Crown Bank promissory note, the Company
issued an aggregate 200,001 shares of its common stock
as consideration to the
Smith Trust, James Davis,
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and William
Reiling, and will issue a further 33,333 shares per month for each month the
notes remain outstanding after August 31, 2009
(see Note 14)
.
On March 19,
2009, a $37,500 convertible promissory note and a $150,000 convertible
promissory note due to Mr. Davis were refinanced and combined with other
loans and advances on behalf of the Company from Mr. Davis in a $281,000
convertible promissory note (see Note 14).
(14)
Subsequent Events
On January 7,
2009, the Companys 2009 Public Offering was declared effective by the United
States Securities and Exchange Commission, and January 12, 2009 the 2009
Public Offering was closed. In the
offering, the Company sold 3,050,000 units at $1.00 per unit, with each unit
consisting of one share of common stock and one redeemable warrant to purchase
one share of common stock at an exercise price of $1.30 per share resulting in
net cash of $1,883,626, after costs of $1,666,374.
On the January 7, 2009 effective date of the
Companys 2009 Public Offering, the $1,757,500 aggregate amount of the 2007
Notes and the 2008 Notes, along with $162,959 of interest accrued thereon,
automatically converted into 2,743,535 units identical to those sold in the
2009 Public Offering (based on 70 percent of the offering price, or $0.70 per
share). On the same date, the $142,500
of Davis Note, along with $14,923 of interest accrued thereon, automatically
converted into 314,846 units identical to those sold in the 2009 Public
Offering (based on 50 percent of the offering price, or $0.50 per share).
The exercise price of the 2007 Warrants, the Davis
Warrants and the 2008 Warrants was set upon the January 7, 2009 effective
date of the Companys 2009 Public Offering at $0.50 per share (based on 50
percent of the offering price. All of
these warrants became exercisable upon the January 12, 2009 closing of the
2009 Public Offering and will remain exercisable until December 31,
2012. Mr. Davis agreed that the
equity securities issued upon exercise of the Davis Warrant will not be
transferable until January 7, 2010.
Unamortized original issue discount relating to the warrants and the
beneficial conversion feature of the notes totaling $387,169 and unamortized
debt issuance cost of $207,575 was expensed as interest expense upon the
conversion.
As
consideration to the guarantors to provide their guarantees for the Crown Bank
promissory notes (see Note 10), the Company issued $733,334 of unsecured
convertible 10 percent debentures (see Note 11(a)).
On January 12, 2009, the Company closed on its 2009 Public
Offering, which triggered the automatic conversion of the $733,334 convertible debentures
along with $143,815 interest accrued thereon into 292,384 shares of the Companys
common stock.
On June 1, 2006, the
Company borrowed $75,000 from Roman Pauly pursuant to a promissory note (see
Note 9). The Company had repaid a total
of $65,650 of the note through December 31, 2008. In January 2009,
following the closing of the 2009 Public Offering, the Company repaid
the remaining $9,350 principal amount of the Pauly loan and issued an
immediately exercisable five-year warrant to acquire 4,295 shares of the
Companys common stock at $1.50 per share pursuant to the terms of the note.
On
July 31, 2007, the Company borrowed $100,000 from the Smith Trust pursuant
to a promissory note. The Company had
repaid a total of $66,000 of the note through December 31, 2008.
In January 2009, following the closing of the 2009 Public Offering,
the Company repaid the remaining $34,000
principal balance and issued to the Smith Trust a five-year, immediately
exercisable warrant to acquire 28,656 shares of the Companys common stock at
$5.00 per share pursuant to the terms of the note.
On February 6, 2009 (30
days after the effective dates of the Companys 2009 Public Offering), the
$299,250 outstanding Unit Put Notes (see Note 11(c)) along with the $9,563
interest accrued thereon automatically
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converted into 441,165
shares of the Companys common stock on February 6, 2009. The notes and accrued interest converted at
70 percent of the 2009 Public Offering price, or $0.70 per share. Unamortized original issue discount relating
to the warrants and the beneficial conversion feature of the notes totaling
$138,440 and unamortized debt issuance cost of $44,686 was expensed as interest
expense upon the conversion.
On April 3, 2008, the Company borrowed $112,500
pursuant to three convertible promissory notes (see Note 11(d)). In January 2009, following the closing
of the 2009 Public Offering, the Company repaid $45,500 of the notes, and
$29,500 of the notes were converted into common stock at $0.70 per share (based
on 70 percent of the 2009 Public Offering price).
On March 19,
2009, the remaining $37,500 promissory note, due to Mr. James Davis, was
refinanced along with another $150,000 promissory note due to Mr. Davis
(see below).
On
September 25, 2008, the Company borrowed $150,000 pursuant to a
convertible promissory note issued in favor of Mr. Davis (see Note
11(b)). The note was convertible upon
the Companys closing of an underwritten public offering, at 70 percent of the
public offering price. As the holders
ability to exercise the conversion feature of the note was contingent upon an
event outside the control of the holder, the bargain conversion feature valued
at $103,396 was not recorded until the January 12, 2009 closing of the
Companys 2009 Public Offering when the contingency was removed.
On March 19, 2009, Mr. Davis agreed
to refinance the $150,000 debt (and $7,291 of interest accrued thereon) along
with the $37,500 note noted above (and ($3,646 of accrued interest thereon),
another $2,632 payable to Mr. Davis and $15,293 of expenses paid by Mr. Davis
on behalf of the Company. Mr. Davis
also agreed to loan to the Company an additional $64,638 to pay for the
exhibition of the ProUroScan system at the annual American Urology Association
meeting, the retention of an investor relations firm and the initiation of a
clinical advisory board. He also agreed
to have certain website maintenance services performed for the Company.
Pursuant to the refinancing and the other arrangements, the Company issued a
$281,000 unsecured convertible promissory note to Mr. Davis. The promissory note matures on March 19,
2010, bears no interest, and is convertible into our common stock at $0.55 per
share at the option of Mr. Davis. The guidance provided by EITF Issue 96-19
indicates that a substantial modification of debt terms should be accounted for
as an extinguishment of debt. As the
present value of the cash flows under the new convertible promissory note was
greater than 10 percent different from the present value of the cash flows
under the original note, the issuance of the new note will be treated as a debt
extinguishment. Accordingly, the
$123,000 value of the bargain conversion option as computed using the
Black-Sholes pricing model will be recorded as original issue discount at the
inception of the loan and amortized as debt extinguishment expense over the
term of the note. Interest imputed on
the new convertible note, using a 6.0 percent assumed interest rate, of $16,000
will be recorded as a note discount and amortized as interest expense over the
term of the note.
On
March 3, 2009, the Company issued non-qualified stock options to acquire
an aggregate of 70,000 shares of its common stock to its non-employee
directors, and incentive options to acquire 45,000 shares of its common stock
to Richard Thon. The options are fully
vested and are exercisable for a period of seven years at an exercise price of
$0.85 per share. The 115,000 options
will be valued at $0.68 per share using the Black-Scholes pricing model and
immediately expensed as general and administrative expense.
Also
on March 3, 2009, the Company granted incentive stock option to acquire an
aggregate of 100,000 shares of its common stock to Richard Carlson. Of the options, 90,000 shares vest
immediately and 10,000 shares will vest on January 2, 2010. At the same time, Mr. Carlson agreed to
cancel existing, unvested stock options to acquire 5,000 shares of common stock
at an exercise price of $7.50 per share.
SFAS 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 $0.68 per share using the Black-Scholes pricing model over the $0.07
per share value of the cancelled options on the cancellation date, or $67,850,
will be expensed immediately as general and administrative expense.
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On
March 19, 2009, the Company renewed the $1,200,000 Crown Bank promissory
note, and temporarily paid down the $400,000 Crown Bank promissory note (see
Note 10) pending the Company obtaining a satisfactory guaranty of that
amount. The renewed note matures on March 28,
2010 and bears interest at the Prime Rate plus one percent
,
but never
less than 6.00 percent. No other note
terms were changed. The note remains
collateralized by all Company assets and continues to be guaranteed by James
Davis and William Reiling.
On
March 19, 2009, the Company amended the $600,000 Smith Trust promissory
note (see Note 9). Under the terms of the amendment, the notes maturity date
was extended to March 28, 2010, and the interest rate floor was lowered
from 6.50 percent to 6.00 percent. No
other terms were changed.
On March 19, 2009, pursuant to the renewal of its
$600,000 Smith Trust promissory note and guaranties received relating to the
Companys renewal of its $1,200,000 Crown Bank promissory note, the Company
issued an aggregate 200,001 shares of its common stock
as consideration to the
Smith Trust, James Davis and William Reiling, and will issue a further 33,333
shares per month for each month the related notes remain outstanding after August 31,
2009. The guidance provided by EITF
Issue 96-19 indicates that a substantial modification of debt terms should be
accounted for as an extinguishment of debt.
As the present value of the cash flows under both loan renewals was
greater than 10 percent different from the present value of the cash flows
under the original agreements, the renewals of the notes will be treated as
debt extinguishments. Accordingly, the
$100,000 value of the initial 200,001 shares issued will be recorded as
original issue discount and expensed as debt extinguishment expense on a straight-line
basis through August 31, 2009.
Additional accruals of stock to be issued if the promissory notes remain
outstanding after August 31, 2009 will be expensed each month as debt
extinguishment expense. In addition, the
$12,000 loan origination fee will be recorded as original issue discount and
expensed as debt extinguishment expense over the term of the promissory notes.
F-52
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ITEM 9:
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
ITEM 9A(T): 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 Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and
Exchange Commission. As of December 31, 2008, the end of the period
covered by this Annual Report on Form 10-K, 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.
Managements Annual Report on Internal Control Over Financial Reporting
The
financial statements, financial analyses and all other information included in
this Annual Report on Form 10-K were prepared by the Companys management,
which is responsible for establishing and maintaining adequate internal control
over financial reporting.
The
Companys internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Companys internal control over
financial reporting includes those policies and procedures that:
·
pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
·
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
·
provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition and use or
disposition of the Companys assets that could have a material effect on the
financial statements.
There
are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal controls can provide only
reasonable assurances with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal controls may
vary over time.
Management
assessed the design and effectiveness of the Companys internal control over
financial reporting as of December 31, 2008. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in
Internal ControlIntegrated Framework
. Based on managements
assessment using this framework, it believes that, as of December 31,
2008, the Companys internal control over financial reporting is effective.
This
Annual Report on Form 10-K does not include an attestation report of the
Companys independent registered public accounting firm regarding internal
control over financial reporting.
Managements report was not subject to
44
Table
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attestation
by the Companys independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only managements report in this Annual Report on Form 10-K
Changes in Internal Control Over Financial Reporting
During
the quarter ended December 31, 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.
ITEM 9B:
|
|
OTHER INFORMATION
|
On
March 19, 2009, we renewed our $1,200,000 Crown Bank promissory note. The renewed note matures on March 28,
2010 and bears interest at the Prime Rate plus 1.0 percent
,
but never
less than 6.00 percent. No other note
terms were changed. The note remains
secured by all Company assets and continues to be guaranteed by James Davis and
William Reiling. At the same time, we
temporarily paid down the $400,000 Crown Bank promissory note pending our
obtaining a satisfactory guaranty of that amount. It is our intent to renew the $400,000
promissory note within 60 days; however, there can be no assurance that such a
guarantee can be provided. Assuming we are successful in identifying
such guarantors, we expect to issue additional consideration to guarantors of
the $400,000 Crown Bank promissory note upon its renewal.
On
March 19, 2009, we amended our $600,000 promissory note with the Smith
Trust. Under the terms of the amendment, the notes maturity date was extended
to March 28, 2010, and the interest rate floor was lowered from 6.50
percent to 6.00 percent. No other terms
were changed.
On March 19,
2009, pursuant to the renewal of the $600,000 Smith Trust promissory note and
guaranties received relating to renewal of our $1,200,000 Crown Bank promissory
note, we issued an aggregate 200,001 shares of our common stock
as consideration to the
Smith Trust, James Davis and William Reiling, and will issue a further 33,333
shares per month for each month the related notes remain outstanding after August 31,
2009.
PART III
ITEM
10:
|
|
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
|
Directors and Executive Officers
The following information
sets forth the names of our executive officers and directors, their ages and
their present positions with the Company as of March 23, 2009. The directors
serve for a term of one year or until the next annual meeting of the
shareholders. Each officer serves at the discretion of the Board of Directors.
Name
|
|
Age
|
|
Position
|
Richard C. Carlson
|
|
57
|
|
Chief Executive Officer and Acting Chairman
|
Richard B. Thon
|
|
53
|
|
Chief Financial Officer
|
David F. Koenig
|
|
68
|
|
Director
|
Robert J. Rudelius
|
|
53
|
|
Director
|
Scott E. Smith
|
|
53
|
|
Director
|
45
Table
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Richard C.
Carlson
was elected
to our Board of Directors in December 2006 and became Acting Chairman in May 2007.
Mr. Carlson was hired as our Vice President of Marketing and Sales in January 2005,
and was promoted to Chief Executive Officer in November 2006. Immediately
prior to joining ProUroCare, Mr. Carlson was a marketing consultant for
several medical device companies. From 1998 to April 2004, Mr. Carlson
held several positions with SurModics, Inc. (SurModics), a company that
provides surface modification solutions for medical device and biomedical
applications. From February 2003 until April 2004, Mr. Carlson
was the Vice President of Strategic Planning for SurModics, where he structured
the companys performance targets, developed market segmentation plans and
long-term strategies. Prior to that, Mr. Carlson served as the Vice
President of Marketing for SurModics, where he was responsible for developing
the marketing and sales organization.
Richard B.
Thon
was engaged as
our Chief Financial Officer on a part-time consulting basis from 2002 until July 2004,
when he became employed by the Company in that position on a full-time basis.
From 2001 to 2004, Mr. Thon was also the part-time Chief Financial Officer
of CHdiagnostics, LLC, a marketer of blood glucose diagnostic supplies.
David F.
Koenig
served as a
director of our predecessor company, ProUroCare, Inc. (PUC), from 1999
until April 2004, when he became a director of the Company as a result of
the Merger. From 1996 to 2005, Mr. Koenig was the Executive Vice President
and Chief Operating Officer of Solar Plastics, Inc., a manufacturer of
custom rotationally molded plastic parts. Mr. Koenig is Chairman of the
Compensation Committee and a member of the Audit and Nominating and Governance
Committees.
Robert J.
Rudelius
was elected
to the Companys Board of Directors in June 2007. Since 2003, Mr. Rudelius
has been the Managing Director and CEO of Noble Ventures, LLC, a company
he founded, providing advising and consulting services to early-stage companies
in the information technology, renewable energy and loyalty marketing fields. Mr. Rudelius
is also the Managing Director and CEO of Noble Logistics, LLC, a holding
company he founded in 2002 to create, acquire and grow a variety of businesses
in the freight management, logistics and information technology industries. Mr. Rudelius
is the Chairman of the Nomination and Governance Committee and a member of the
Compensation Committee.
Scott E.
Smith
has been a
director of the Company since 2006. He is employed by F-2 Intelligence Group (F-2),
a company engaged in providing critical insights to multinational corporations
and private equity clients on a broad range of strategic issues. From 2002 to
2004, Mr. Smith served as F-2s Director of Corporate Accounts, where he
was responsible for selling strategic consulting services primarily to Fortune
500 companies. In 2004, Mr. Smith transitioned to and is currently serving
as F-2s Regional Director of Sales for Private Equity, where he sells market
and competitive intelligence consulting services to private equity firms. Prior to joining F-2, Mr. Smith was
employed by the accounting firm Arthur Andersen for 23 years and served
the last 10 years as an audit partner. Mr. Smith is a Certified
Public Accountant and a Certified Management Accountant. Mr. Smith is
Chairman of the Audit Committee.
There are no family
relationships among our executive officers or directors.
Audit Committee
Our Board of Directors has
established a two-member Audit Committee that currently consists of Messrs. Smith,
the Chairman, and Koenig. The Board of
Directors has adopted a written charter for the Audit Committee, which is available
on our website www. prourocare.com. The
Audit Committee was formed after the Merger.
Prior to the Merger, the Company had no such Audit Committee.
The board of directors has
determined that both members of the Audit Committee, Mr. Smith and Mr. Koenig,
are audit committee financial experts as that term is defined in Item 407(d)(5) of
Regulation S-K promulgated under the Exchange Act. Mr. Smith was an Audit Partner for
Arthur Andersen and is a Certified Public Accountant and a Certified Management
Accountant. Mr. Koenigs relevant
experience includes his previous service as the Chief
46
Table of Contents
Financial Officer and
director of Quadion Corporation, and his past consulting experience, which
involved his oversight and supervision of the performance of business
enterprises respecting the preparation, audit and evaluation of financial
statements. Both members of the Audit
Committee qualify as independent directors, as such term is defined in Section 4200(a)(15)
of the NASDAQ listing standards.
Moreover, the board of directors has determined that each of the Audit
Committee members is able to read and understand fundamental financial
statements and has past employment experience in finance or accounting.
Code of Ethics Disclosure
Compliance
On February 15, 2005, our Board of
Directors adopted a Code of Ethics for Financial Executives, which includes our
Companys principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions, as
required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002. Our Code of Ethics
is available on our website
www.prourocare.com, and we will provide a copy, without charge, to any
shareholder upon written request to Dick Thon, ProUroCare Medical Inc., 6440
Flying Cloud drive, Suite 101, Eden Prairie, MN 55344.
Section 16(a) Beneficial
Ownership Reporting Compliance
The rules of the Securities and Exchange Commission require our
directors, executive officers and holders of more than 10 percent of our common
stock to file reports of stock ownership and changes in ownership with the
Securities and Exchange Commission.
Based on the Section 16 reports filed by our directors and
executive officers and written representations of our directors and executive
officers we believe there were no late or inaccurate filings for transactions
occurring during fiscal 2008, except as follows:
Name
|
|
Number of Late
Reports
|
|
Number of
Transactions Reported
Late
|
David Koenig
|
|
1
|
|
1
|
Robert Rudelius
|
|
1
|
|
1
|
Scott Smith
|
|
1
|
|
1
|
James Davis
|
|
2
|
|
2
|
ITEM 11: EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets
forth the compensation earned for services rendered in all capacities by our
Chief Executive Officer and Chief Financial Officer. There were no other
executive officers or other individuals who earned more than $100,000 during
2008. The individuals named in the table will be hereinafter referred to as the
Named Executive Officers.
Summary Compensation Table
Name and Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
Awards
($)(3)
|
|
All Other
Compensation
($)(4)
|
|
Total
($)
|
|
Richard
Carlson(1)
|
|
2008
|
|
$
|
150,000
|
|
$
|
|
|
$
|
25,451
|
|
$
|
2,103
|
|
$
|
177,554
|
|
Chief Executive Officer
and Acting Chairman of the Board
|
|
2007
|
|
$
|
150,000
|
|
$
|
|
|
$
|
120,898
|
|
$
|
|
|
$
|
270,898
|
|
Richard Thon(2)
|
|
2008
|
|
$
|
136,375
|
|
$
|
|
|
$
|
10,873
|
|
$
|
4,825
|
|
$
|
152,073
|
|
Chief Financial
Officer
|
|
2007
|
|
$
|
140,000
|
|
$
|
|
|
$
|
65,348
|
|
$
|
1,200
|
|
$
|
206,548
|
|
47
Table
of Contents
(1)
|
|
All compensation Mr. Carlson earned is related
to his duties as an officer. Due to funding limitations, $124,335 of
Mr. Carlsons salary earned in 2006, 2007 and 2008 was unpaid as of
December 31, 2008. See Executive CompensationEmployment Agreements
for the terms of Mr. Carlsons current employment arrangements with us.
|
|
|
|
(2)
|
|
Due to funding
limitations, $144,818 of Mr. Thons salary and bonus earned in 2006,
2007 and 2008 was unpaid as of December 31, 2008. See Executive
CompensationEmployment Agreements for the terms of Mr. Thons current
employment arrangements with us.
|
|
|
|
(3)
|
|
Option awards
are valued in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment
(SFAS 123R). See Notes 1(j) and 10(h) to the
Consolidated Financial Statements for the fiscal year ended December 31,
2007 and Notes 1(f) and 7(b) to the Consolidated Financial
Statements for the fiscal year ended December 31, 2008 included in Item
8 of this Annual Report on Form 10-K for the material terms of stock
option grants.
|
|
|
|
(4)
|
|
Other
compensation represents insurance premiums paid by us with respect to term
life insurance and long-term care polices for the benefit of the executive.
There is no cash surrender value associated with the policies.
|
Outstanding Equity Awards at December 31,
2008
No stock options or
stock-appreciation rights were exercised during fiscal year 2008, and no
stock-appreciation rights were outstanding at the end of such fiscal year. The
table below sets forth outstanding but unexercised options of our Named
Executive Officers as of December 31, 2008.
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
(# Exercisable)(1)
|
|
Number of
Securities
Underlying
Unexercised
Options
(# Unexercisable)(1)
|
|
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
Option
Exercise
Price
|
|
Option Expiration
Date
|
|
Richard Carlson
|
|
|
|
|
|
5,000
|
(2)
|
$
|
7.50
|
|
March 1, 2011
|
|
|
|
10,000
|
|
|
|
|
|
$
|
5.00
|
|
February 1, 2017
|
|
|
|
10,000
|
|
60,000
|
(3)
|
|
|
$
|
1.00
|
|
July 11, 2015
|
|
Richard Thon
|
|
|
|
|
|
5,000
|
(2)
|
$
|
7.50
|
|
March 1, 2011
|
|
|
|
3,000
|
|
|
|
|
|
$
|
11.33
|
|
April 18, 2012
|
|
|
|
10,000
|
|
25,000
|
(4)
|
|
|
$
|
1.00
|
|
July 11, 2015
|
|
(1)
|
|
See
Notes 1(j) and 12(h) to the Consolidated Financial Statements
for the fiscal year ended December 31, 2008 included in Item 8 in this
Annual Report on Form 10-K for the material terms of stock option
grants.
|
|
|
|
(2)
|
|
Equity Incentive
Plan Awards vest upon the Company securing FDA approval of its ProUroScan
System.
|
|
|
|
(3)
|
|
On July 11,
2008, the Company issued incentive stock options to acquire 70,000 shares of
its common stock to Mr. Carlson. The options are exercisable for a
period of seven years at an exercise price of $1.00 per share. Of the
options, 10,000 shares vest immediately 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.
|
|
|
|
(4)
|
|
On July 11,
2008, the Company issued incentive stock options to acquire 35,000 shares of
its common stock to Mr. Thon. The options are exercisable for a period
of seven years at an exercise price of $1.00 per share. Of the options,
10,000 shares vest immediately and 8,333 shares will vest on July 1 of
each 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.
|
48
Table
of Contents
Director Compensation
Effective July 1, 2008,
our Board of Directors established a policy that each of our non-employee
directors receives an annual cash payment of $10,000 for annual services to the
Company, that the chairpersons of our Compensation, Audit and Nominating and
Governance committees receive an additional annual payment of $2,500 and that
each committee member receive an annual payment of $1,000 per committee. In
addition, we have also agreed to grant to all non-employee directors a one-time
non-qualified stock option upon election or appointment to the Board of
Directors to purchase 3,000 shares of our common stock at fair market value and,
additionally, to grant options to purchase 1,000 shares of our common stock at
a fair market value to each director upon their annual re-election to the
Board. These director options vest ratably over two years of service.
Prior to July 1, 2008,
each of our non-employee directors received an annual cash payment of $5,000
for services to the Company and the chairpersons of our Compensation, Audit and
Nominating and Governance committees received an additional annual payment of
$2,500. All non-employee directors were granted a one-time non-qualified stock
option upon appointment to the Board of Directors to purchase 3,000 shares of
our common stock at fair market value. These director options vested ratably
over two years of service. The options granted to Mr. Nazarenko and Mr. Koenig
have a ten-year term, and to Mr. Smith and Mr. Rudelius have a
seven-year term.
All directors shall be
reimbursed for travel and other out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors and its committees.
The table below sets forth
director compensation earned during 2008:
Name
|
|
Fees Earned
or Paid in
Cash
($)
|
|
Stock
Awards(5)
($)
|
|
Option
Awards(6)
($)
|
|
Total
($)
|
|
David Koenig(1)
|
|
$
|
7,250
|
|
$
|
13,750
|
|
$
|
710
|
|
$
|
21,710
|
|
Alexander
Nazarenko(2)
|
|
$
|
|
|
$
|
9,842
|
|
|
|
$
|
9,842
|
|
Scott Smith(3)
|
|
$
|
6,250
|
|
$
|
13,750
|
|
$
|
4,398
|
|
$
|
24,398
|
|
Robert
Rudelius(4)
|
|
$
|
6,750
|
|
$
|
13,125
|
|
$
|
4,310
|
|
$
|
24,185
|
|
(1)
|
|
Chairman of the
Compensation Committee as of March 14, 2008. Prior to March 14,
2008, Mr. Koenig was Chairman of the Nominating and Governance
Committee.
|
|
|
|
(2)
|
|
Mr. Nazarenko
resigned from the Board of Directors on March 11, 2008.
Mr. Nazarenko served as Chairman of the Compensation Committee until
that time.
|
|
|
|
(3)
|
|
Chairman of the
Audit Committee.
|
|
|
|
(4)
|
|
Chairman of the
Nominating and Governance Committee as of March 14, 2008.
|
|
|
|
(5)
|
|
On July 11,
2008, we issued a total of 12,500 shares of our common stock to our directors
in lieu of cash as payment of directors fees earned in 2008. In addition, a
total of 37,967 shares of our common stock were issued to our directors in
recognition of the extraordinary amount of time and effort they have put
forth on the Companys restructuring and refocusing efforts since January 1,
2007. Finally, 9,167 shares of common stock were issued to our directors in
lieu of cash as payment for directors fees earned in 2007 (not included in
the 2008 compensation). The dollar amount included in this column is the
amount recognized for financial statement reporting purposes with respect to
the fiscal year ended December 31, 2008 in accordance with SFAS 123R.
|
|
|
|
(6)
|
|
Each outside
director held options to acquire 4,000 shares at December 31, 2008.
Options awarded during the fiscal year are valued in accordance with
SFAS 123R. See Notes 1(j) and 12(h) to the Consolidated
Financial Statements for the fiscal year ended December 31, 2008
included in Item 8 of this Annual Report on Form 10-K for the material
terms of stock option grants.
|
49
Table
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Employment Agreements
On July 16, 2008, we
entered into an employment agreement with Mr. Carlson, our 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 our board of directors. The agreement
provides for severance payments if we terminate 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
following termination of his employment. The agreement will extend through December 31,
2009.
On July 21, 2007, we
entered into an employment agreement with our Chief Financial Officer, Richard
Thon. The agreement extends through June 30, 2009. The agreement provides
for a minimum annual salary of $140,000, a cash incentive bonus potential of up
to 30 percent of Mr. Thons base pay and eligibility to participate
in an annual grant of options to purchase shares of common stock, as determined
by our Board of Directors. The agreement provides for severance payments if we
terminate Mr. Thon without cause or if Mr. Thon terminates the
agreement for good reason, including four months of base salary plus one month
of base salary for each year of service (up to a maximum of nine months of base
salary), payment of earned bonuses, continued payment of existing health and
life insurance benefits for a period of four months and immediate vesting of
all unvested stock options then held by Mr. Thon. 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. Thon will
receive as severance, nine 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. Thon.
The agreement prohibits Mr. Thon from directly or indirectly participating
in the ownership, management, operation or control of a competitive business
for a period of one year following termination of his employment
From June 2006 through December 2007,
the Company deferred payment of the majority of our remaining executive teams
compensation. We expect to pay a portion of the balance of the deferred
compensation out of the proceeds of the 2009 Public Offering, and intend to pay
the balance during the course of 2009 as funding allows. As of December 31,
2008, approximately $269,000 of our remaining executive teams compensation had
not been paid, and was recorded as an accrued liability.
ITEM 12:
|
|
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The following table sets forth certain information
regarding beneficial ownership of our common stock as of March 23, 2009, by (i) each
person known by us to be the beneficial owner of more than five percent of the
outstanding common stock, (ii) each director of the Company, (iii) each
executive officer of the Company and (iv) all executive officers and
directors as a group.
The number of shares beneficially owned is determined under
rules promulgated by the SEC and the information is not necessarily
indicative of beneficial ownership for any other purpose. The definition of beneficial ownership for
proxy
50
Table
of Contents
statement purposes includes shares over which a person has
sole or shared voting power or dispositive power, whether or not a person has
any economic interest in the shares. The definition also includes shares that a
person has a right to acquire currently or within 60 days of March 23, 2009. Including those shares in the tables does
not, however, constitute an admission that the named stockholder is a direct or
indirect beneficial owner of those shares.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares that power with that persons
spouse) with respect to all shares of common stock listed as owned by that
person or entity. Unless otherwise
indicated, the address of each of the following persons is 6440 Flying Cloud
Drive, Suite 101, Eden Prairie, MN 55344.
Name
|
|
Shares
Beneficially Owned
|
|
Percent of Class
|
|
Richard C.
Carlson(1)
|
|
110,850
|
|
1.2
|
|
David F. Koenig(2)
|
|
101,502
|
|
1.1
|
|
Robert J.
Rudelius(3)
|
|
99,056
|
|
1.1
|
|
Scott E. Smith(4)
|
|
163,097
|
|
1.7
|
|
Richard B. Thon(5)
|
|
58,000
|
|
*
|
|
All
directors and officers as a group (5 total)(6)
|
|
532,505
|
|
5.5
|
|
James Davis (7)(8)
|
|
2,955,549
|
|
26.9
|
|
William Reiling(9)(10)
|
|
509,985
|
|
5.4
|
|
*Less than one percent.
(1)
Includes 850 shares held directly and currently
exercisable options to purchase 110,000 shares of common stock.
(2)
Includes 1,875 shares held by Clinical
Network Management Corp. and 26,572 shares held by Clinical Network, Inc.
with respect to each of which Mr. Koenig is an officer and minority
owner. Also includes 39,055 shares of
common stock held directly and currently exercisable options to purchase up to
34,000 shares of common stock.
(3)
Includes 45,195 shares held directly,
warrants to purchase 29,986 shares of common stock and options to purchase up
to 23,875 shares of common stock that are currently exercisable or exercisable
within 60 days of March 23, 2009.
(4)
Includes 86,622 shares held directly,
warrants to purchase 52,475 shares of common stock and currently exercisable
options to purchase up to 24,000 shares of common stock.
(5)
Includes currently exercisable directly
held options to purchase up to 58,000 shares of common stock.
(6)
Includes Messrs. Carlson, Koenig,
Rudelius, Smith and Thon.
(7)
The
address of Mr. Davis is 6446 Flying Cloud Drive, Eden Prairie, MN 55344.
(8)
Shares beneficially owned includes the following directly held shares
and immediately exercisable warrants and convertible notes: 1,208,468 shares of
common stock, $281,000 of convertible notes convertible into 510,909 shares of
common stock, and warrants to purchase 989,530 shares of common stock. Shares beneficially owned also includes the following
shares and immediately exercisable warrants held by Davis &
Associates Inc., 401K PSP, of which Mr. Davis has sole voting
power: 74,964 shares of common stock and warrants to purchase 91,014 shares of
common stock. Shares beneficially owned
also includes the following shares and immediately exercisable warrants held by
Davis & Associates Inc., of which Mr. Davis has sole voting
power: 37,482 shares of common stock and warrants to purchase 43,182 shares of
common stock.
(9)
The address of Mr. Reiling
is 200 University Avenue W., Suite 200, St. Paul, MN 55103.
(10)
Shares beneficially owned includes the following 336,027 directly held
shares and immediately exercisable warrants to purchase 173,958 shares.
51
Table
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Securities Authorized for Issuance under Equity Compensation Plans as
of Last Fiscal Year (December 31, 2008)
|
|
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
|
|
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
|
Number of Securities
Remaining Available
for Issuance Under
Equity Compensation
Plans (excluding
securities reflected in
column (a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation
plans approved by stockholders (1)
|
|
233,000
|
|
$
|
7.73
|
|
67,000
|
|
Equity
compensation plans not approved by stockholders (2)
|
|
611,514
|
|
$
|
3.98
|
|
|
|
Total
|
|
854,514
|
|
$
|
5.02
|
|
67,000
|
|
(1)
Includes shares of our common stock
issuable under options granted under our 2002 and 2004 Plans (as defined
below).
(2)
Consists of warrants issued to vendors,
consultants and lenders and loan guarantors.
The Board of Directors
adopted the ProUroCare Inc. 2002 Stock Plan (the 2002 Plan) and the
ProUroCare Inc. 2004 Stock Option Plan (and the 2004 Plan) to provide a means
by which our employees, directors, officers and consultants may be given an
opportunity to purchase our stock, to assist in retaining the services of such
persons, to secure and retain the services of persons capable of filling such
positions and to provide incentives for such persons to exert maximum efforts
for our success. Under the 2002 and 2004
Plans, we are able to grant incentive and non-qualified options, stock
appreciation rights, stock awards, restricted stock awards and performance
shares. Incentive stock options granted
under the 2002 Plan and 2004 Plan are intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the Code).
Non-qualified stock options granted under the 2004 Plan will not qualify
as incentive stock options under the Code.
The Compensation Committee of the board of directors determines the
vesting provisions of stock-based awards under the 2002 Plan and 2004 Plan on a
case-by-case basis. In accordance with
SFAS 123 and SFAS 123R, we have elected to utilize the fair-value method of
accounting for these options. An
aggregate of $44,745, $453,384 and $1,626,823 of stock-based compensation
related to these options was recognized in the years ended December 31,
2008, 2007 and the period from August 17, 1999 to December 31, 2008,
respectively.
2002 Plan
In April 2002, PUC
adopted the 2002 Stock Plan, pursuant to which PUC granted options to officers,
directors, employees and independent contractors. The Company adopted the 2002 Plan as part of
the Merger, and on February 15, 2005 our board of directors approved an
amendment to the 2002 Stock Plan that provides for the cashless exercise of options
granted under the plan, at the discretion of a committee of independent
directors. On March 27, 2008, our
board of directors approved a second amendment to the 2002 Plan that made
certain technical changes to make it compliant with Section 409A of the
Code. Following the amendment, the plan
was restated to include the amendment and to reflect the effects of the Merger
and the February 2008 reverse stock split and was renamed as the Amended
and Restated 2002 Stock Plan.
As of December 31,
2008, there were options to purchase 147,000 shares of our common stock
outstanding under the 2002 Plan that are exercisable at prices ranging from
$0.90 to $20.00. All of these options
are held by Company officers, former officers, consultants and directors.
52
Table
of Contents
2004 Plan
On July 12, 2005, our
stockholders approved a resolution adopting the 2004 Plan. On March 27, 2008, our board of
directors approved an amendment to the 2004 Plan that made certain technical
changes to make it compliant with Section 409A of the Code. Following the amendment, the plan was
restated to include the amendment and to reflect the effects of the Merger and
the February 2008 reverse stock split and was renamed as the Amended and
Restated 2004 Stock Option Plan.
We have reserved 150,000
shares of common stock for issuance under the 2004 Plan. As of December 31, 2008, there were
options to purchase 86,000 shares of our common stock outstanding under the
2004 Plan that are exercisable at prices ranging from $1.00 to $7.00 per share.
All of these options have been issued to Company officers and directors.
ITEM 13:
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Throughout 2008,
we rented executive offices within the offices of a former director, Mr. Alex
Nazarenko. Our rental cost for these
offices was approximately $2,129 per month, which is the market price for
similar office space in Minneapolis, Minnesota.
On April 3, 2008, the Company purchased the Profile Assets from
Profile pursuant to an asset purchase agreement. At the time of the transaction, Profile was a
5% beneficial owner of the Company. The
purchase price of the Profile Assets was $300,000.
On April 3, 2008, in connection with our
purchase of the Profile Assets, we borrowed an aggregate of $112,500 pursuant
to three promissory notes each in the amount of $37,500 (see Note 11(d)). The
promissory notes were issued in favor of Mr. Davis, Mr. Reiling and
the Smith Trust. On September 12,
2008, these three promissory notes were amended to extend their due dates to
the earlier of seven days following the close of an underwritten public
offering or December 31, 2008, and to give the holders an option to
convert their notes into shares of our common stock at a conversion price equal
to 70% of the price of the Units sold in such offering.
On
July 11, 2008, our directors received 21,667 of shares of our common stock
in lieu of cash for $21,667 of unpaid directors fees accrued through June 30,
2008.
On
July 11, 2008, we issued a total
of 37,967 shares of our common stock to our directors in recognition of extraordinary
amount of time and effort they have spent on our restructuring and refocusing
efforts since January 2007. The
shares were valued at $1.00 per share and expensed on the date of issuance.
On September 16, 2008, Mr. Davis
agreed to purchase $100,000 of the puts pursuant to the Unit Put Agreement (see
Note 11(d)). On September 24, 2008,
we closed on $50,000 of Mr. Davis put commitment, and issued a $47,500
convertible note and a warrant to acquire 10,000 shares of our common stock at
an exercise price of $1.00 per share. On October 28, 2008, we closed on
the remaining $50,000 of Mr. Davis put commitment, and issued a $47,500
convertible note and a warrant to acquire 10,000 shares of our common stock at
an exercise price of $1.00 per share.
On September 25, 2008, we borrowed
$150,000 pursuant to a promissory note issued in favor of Mr. Davis and
used the proceeds to retire the $150,000 principal amount of the Profile Note
(see Note 11(d)). As consideration for providing the loan, we issued an
immediately exercisable, five-year warrant to purchase 100,000 shares of our
common stock at $1.50 per share to Mr. Davis.
53
Table
of Contents
Director Independence
Each of Messrs. Koenig,
Rudelius and Smith qualifies as an independent director, as such term is
defined in Section 4200(a)(15) of the NASDAQ listing standards. As an executive officer of the Company, Mr. Carlson
does not qualify as an independent director.
ITEM 14:
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and
Services
The
following is a summary of the fees billed to the Company by Virchow, Krause &
Company, LLP (Virchow Krause) for professional services rendered for the
fiscal years ended December 31, 2008 and 2007, respectively:
Fee Category
|
|
Fiscal 2008 Fees
|
|
Fiscal 2007 Fees
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
82,471
|
|
$
|
77,103
|
|
Audit-related
Fees
|
|
|
|
3,750
|
|
Tax Fees
|
|
1,300
|
|
|
|
All Other Fees
|
|
44,790
|
|
9,825
|
|
Total Fees
|
|
$
|
128,561
|
|
$
|
90,678
|
|
Audit
Fees.
These consist of fees billed by
our auditors for professional services rendered for the audit of our
consolidated financial statements and review of the interim consolidated
financial statements included in quarterly reports.
Audit-related
Fees.
These consist of fees billed by
our auditors for professional services rendered for the review of an SEC comment letter.
Tax
Fees
. These consist of fees billed
by our auditors for professional services for tax compliance, tax advice
and tax planning.
All
Other Fees.
There consist of fees billed by our auditors for
professional services rendered for the review of private placement memorandums
and registration statement filings on Form S-1 and Form S-8.
Preapproval
Policies
The policy of our Audit Committee is to review and
preapprove both audit and non-audit services to be provided by the independent
auditors (other than with de minimus exceptions permitted by the Sarbanes-Oxley
Act of 2002). This duty may be delegated
to one or more designated members of the Audit Committee with any such approval
reported to the committee at its next regularly scheduled meeting. Approval of non-audit services shall be
disclosed to investors in periodic reports required by Section 13(a) of
the Exchange Act. 100 percent of the
fees paid to Virchow Krause were pre-approved as aforesaid.
No services in connection with appraisal or
valuation services, fairness opinions or contribution-in-kind reports were
rendered by Virchow Krause. Furthermore,
no work of Virchow Krause with respect to its services rendered to the Company
was performed by anyone other than Virchow Krause.
54
Table
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PART IV
ITEM 15:
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibit
No.
|
|
Description
|
2.1
|
|
Agreement of Merger and Reorganization by and among Global Internet
Communications, Inc., GIC Acquisition Co., and
ProUroCare Inc. dated April 5, 2004 (incorporated by reference to
Exhibit 2.1 to our Current Report on Form 8-K filed April 20,
2004).
|
2.2
|
|
Articles of Merger relating to the merger of
GIC Acquisition Co., then a wholly owned subsidiary of the
registrant with and into ProUroCare Inc., as filed with the Minnesota
Secretary of State on April 5, 2004 (incorporated by reference to
Exhibit 2.2 to our Current Report on Form 8-K filed April 20,
2004).
|
3.1
|
|
Amended and Restated Bylaws of ProUroCare Medical Inc.
(incorporated by reference to Exhibit 3.2 to Annual Report on
Form 10-KSB filed March 31, 2005).
|
4.1
|
|
Warrant to acquire 300,000 shares of common stock of ProUroCare
Medical Inc., issued in favor of BINA Enterprises on April 5,
2004 (incorporated by reference to Exhibit 4.2 to Registration Statement
on Form SB-2 filed August 3, 2004).
|
4.2
|
|
Form of Warrant to acquire 300,000 shares of common stock of
ProUroCare Medical Inc., issued in favor of Artann
Laboratories, Inc. and Vladimir Drits effective as of July 19, 2004
and December 2, 2004 (incorporated by reference to Exhibit 4.6 to
Registration Statement on Form SB-2/A filed October 1, 2004).
|
4.3
|
|
Form of warrants issued to promissory note guarantors and a
lender between September 14 and October 19, 2005 (incorporated by
reference to Exhibit 4.9 to Annual Report on Form 10-KSB filed
March 31, 2006).
|
4.4
|
|
Warrant to acquire 25,000 shares of common stock of ProUroCare
Medical, Inc. issued in favor of Adron Holdings, LLC, dated
January 25, 2006 (incorporated by reference to Exhibit 10.7 to
Current Report on Form 8-K filed January 31, 2006).
|
4.5
|
|
Security Agreement between Crown Bank and ProUroCare, Inc.,
dated January 11, 2006 and executed February 16, 2006 (incorporated
by reference to Exhibit 4.8 to Current Report on Form 8-K filed
February 23, 2006).
|
4.6
|
|
Security Agreement between Crown Bank and ProUroCare, Inc.,
dated February 28, 2006 (incorporated by reference to Exhibit 4.9
to Current Report on Form 8-K filed March 3, 2006).
|
4.7
|
|
Security Agreement between Crown Bank and ProUroCare
Medical, Inc., dated February 28, 2006 (incorporated by reference
to Exhibit 4.10 to Current Report on Form 8-K filed March 3,
2006).
|
4.8
|
|
Warrant to acquire 37,500 shares of common stock of ProUroCare
Medical, Inc. issued in favor of Roman Pauly and Maryjo Pauly, dated
June 1, 2006 (incorporated by reference to Exhibit 10.7 to Current
Report on Form 8-K filed June 6, 2006).
|
4.9
|
|
Form of warrant to acquire shares of common stock of
ProUroCare Medical, Inc. issued to lenders in connection with a $100,000
promissory note, dated November 29, 2006 and January 3, 2007
(incorporated by reference to Exhibit 4.17 to Annual Report on
Form 10-KSB filed March 30, 2007).
|
4.10
|
|
Form of warrants to acquire shares of common stock of
ProUroCare Medical Inc. issued in favor of subscribers of the Companys
$500,000 Investment Unit offering dated January 18 and January 23,
2007 (incorporated by reference to Exhibit 4.18 to Annual Report on
Form 10-KSB filed March 30, 2007).
|
4.11
|
|
Form of revised Convertible Subordinated Debenture issued to William
Reiling, James Davis, Bruce Culver, and the Phillips W. Smith Family
Trust in replacement of Convertible Subordinated Debentures dated
February 17, 2006 and February 28, 2006 (incorporated by reference
to Exhibit 4.23 to Annual Report on Form 10-KSB filed
March 30, 2007).
|
4.12
|
|
Amendment No. 1 to warrant to acquire 300,000 shares of
common stock of ProUroCare Medical Inc., originally issued in favor of
BINA Enterprises on April 5, 2004, dated April 5, 2007
(incorporated by reference to Exhibit 4.14 to Annual Report on
Form 10-KSB filed March 31, 2008).
|
55
Table
of Contents
Exhibit
No.
|
|
Description
|
4.13
|
|
Form of Amendment No. 1 to Convertible Subordinated
Debentures issued to William Reiling, James Davis, Bruce Culver, and the
Phillips W. Smith Family Trust, dated December 28, 2007
(incorporated by reference to Exhibit 4.15 to Annual Report on
Form 10-KSB filed March 31, 2008).
|
4.14
|
|
Form of warrant issued pursuant to the Companys 2007 Private
Placement dated December 27, 2007 (incorporated by reference to
Exhibit 4.16 to Annual Report on Form 10-KSB filed March 31,
2008).
|
4.15
|
|
Warrant issued to James Davis dated December 27, 2007
(incorporated by reference to Exhibit 4.17 to Annual Report on
Form 10-KSB filed March 31, 2008).
|
4.16
|
|
Form of warrant issued pursuant to the Companys 2008 Private
Placement dated February 13, 2008 (incorporated by reference to
Exhibit 4.18 to Annual Report on Form 10-KSB filed March 31,
2008).
|
4.17
|
|
Form of warrants issued to William Reiling, James Davis and the
Phillips W. Smith Family Trust dated April 3, 2008 (incorporated by
reference to Exhibit 4.1 to Quarterly Report on Form 10-Q filed
May 8, 2008).
|
4.18
|
|
Form of Origination Warrant issued pursuant to the Companys
Unit Put Agreement dated September 16, 2008 (incorporated by reference
to Exhibit 4.22 to Registration Statement on Form S-1 filed
September 19, 2008).
|
4.19
|
|
Form of Put Warrant issued pursuant to the Companys exercise of
its put right pursuant to the Unit Put Agreement dated September 16,
2008 (incorporated by reference to Exhibit 4.23 to Registration
Statement on Form S-1 filed September 19, 2008).
|
4.20
|
|
Warrant issued to James Davis dated September 25, 2008
(incorporated by reference to Exhibit 4.1 to Quarterly Report on
Form 10-Q filed October 23, 2008).
|
4.21
|
|
Form of Warrant issued to James Davis, Bruce Culver,
William S. Reiling and the Smith Family Trust, dated October 31,
2008 (incorporated by reference to Exhibit 4.25 to Amendment No. 1
to Registration Statement on Form S-1 filed November 10, 2008).
|
4.22
|
|
Form of Underwriters Warrant Agreement (incorporated by
reference to Exhibit 4.26 to Amendment No. 3 to Registration
Statement on Form S-1 filed December 18, 2008).
|
4.23
|
|
Form of Warrant Agreement between ProUroCare Medical Inc. and
Interwest Transfer (incorporated by reference to Exhibit 4.27 to
Amendment No. 3 to Registration Statement on Form S-1 filed
December 18, 2008).
|
4.24
|
|
Specimen Warrant (incorporated by reference to Exhibit 4.28 to
Amendment No. 3 to Registration Statement on Form S-1 filed
December 18, 2008).
|
4.25
|
|
Form of Unit Certificate (incorporated by reference to
Exhibit 4.29 to Amendment No. 3 to Registration Statement on
Form S-1 filed December 18, 2008).
|
4.26
|
|
Form of Unit Agreement between ProUroCare Medical Inc. and
Interwest Transfer (incorporated by reference to Exhibit 4.30 to
Amendment No. 3 to Registration Statement on Form S-1 filed December 18,
2008).
|
10.1*
|
|
ProUroCare Medical Inc. Amended and Restated 2002 Stock Plan
(incorporated by reference to Exhibit 4.1 to Registration Statement on
Form S-8 filed March 31, 2008).*
|
10.2*
|
|
ProUroCare Medical Inc. Amended and Restated 2004 Stock Option
Plan (incorporated by reference to Exhibit 4.2 to Registration Statement
on Form S-8 filed March 31, 2008).*
|
10.3
|
|
Guaranty provided to Crown Bank on behalf of ProUroCare
Medical Inc. dated January 10, 2006 (incorporated by reference to
Exhibit 4.4 to Current Report on Form 8-K filed February 23,
2006).
|
10.4
|
|
Guaranty provided to Crown Bank on behalf of ProUroCare
Medical Inc. dated February 28, 2006 (incorporated by reference to
Exhibit 4.5 to Current Report on Form 8-K filed March 3,
2006).
|
10.5
|
|
Promissory Note issued in favor of Crown Bank, dated
February 28, 2006 (incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed March 3, 2006).
|
10.6
|
|
Promissory Note issued in favor of Roman Pauly, dated June 1,
2006 (incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K filed June 6, 2006).
|
56
Table
of Contents
Exhibit
No.
|
|
Description
|
10.7
|
|
Amendment #1 to Promissory Note dated June 1, 2006 issued in
favor of Roman Pauly, dated August 24, 2006 (incorporated by reference
to Exhibit 10.3 to Quarterly Report on Form 10-QSB filed
September 18, 2006).
|
10.8
|
|
Promissory Note issued in favor of Adron Holdings, LLC, dated
November 29, 2006, as amended March 21, 2007 (incorporated by
reference to Exhibit 10.37 to Annual Report on Form 10-KSB filed
March 30, 2007).
|
10.9
|
|
Amendment #2 to Promissory Note dated June 1, 2006 issued in
favor of Roman Pauly, dated March 21, 2007 (incorporated by reference to
Exhibit 10.38 to Annual Report on Form 10-KSB filed March 30,
2007).
|
10.10
|
|
Termination and Intent for Cooperation Agreement dated April 16,
2007 by and between ProUroCare Medical Inc. and Artann Laboratories, Inc.
(incorporated by reference to Exhibit 10.4 to Quarterly Report on
Form 10-QSB filed May 15, 2007).
|
10.11
|
|
Promissory Note issued in favor of Alexander Nazarenko, dated
April 17, 2007 (incorporated by reference to Exhibit 10.5 to
Quarterly Report on Form 10-QSB filed May 15, 2007).
|
10.12
|
|
Maurice Taylor Agreement to Defer Payment of Accrued Salary dated
May 11, 2007 (incorporated by reference to Exhibit 10.6 to
Quarterly Report on Form 10-QSB filed May 15, 2007).
|
10.13
|
|
Michael Grossman Final Separation Agreement dated May 11, 2007
(incorporated by reference to Exhibit 10.7 to Quarterly Report on
Form 10-QSB filed May 15, 2007).
|
10.14
|
|
Promissory Note issued in favor of Alexander Nazarenko, dated
June 25, 2007 (incorporated by reference to Exhibit 10.2 to
Quarterly Report on Form 10-QSB filed August 14, 2007).
|
10.15*
|
|
Employment Agreement by and between ProUroCare Inc. and
Richard B. Thon, dated July 21, 2007 (incorporated by reference to
Exhibit 10.3 to Quarterly Report on Form 10-QSB filed August 14,
2007).
|
10.16
|
|
Promissory Note issued in favor of Phillips W. Smith Family
Trust, dated July 31, 2007 (incorporated by reference to
Exhibit 10.4 to Quarterly Report on Form 10-QSB filed
August 14, 2007).
|
10.17
|
|
Amendment # 2 to Promissory Note issued in favor of Adron
Holdings, LLC on November 29, 2006, dated August 8, 2007
(incorporated by reference to Exhibit 10.5 to Quarterly Report on
Form 10-QSB filed August 14, 2007).
|
10.18
|
|
Promissory Note issued in favor of James Davis, dated August 29,
2007 (incorporated by reference to Exhibit 10.4 to Quarterly Report on
Form 10-QSB filed November 14, 2007).
|
10.19
|
|
Promissory Note issued in favor of the Phillips W. Smith Family
Trust, executed on October 31, 2007 effective as of October 15,
2007 (incorporated by reference to Exhibit 10.35 to Annual Report on
Form 10-KSB filed March 31, 2008).
|
10.20
|
|
Security Agreement issued in favor of the Phillips W. Smith
Family Trust, executed on October 31, 2007 effective as of
October 15, 2007 (incorporated by reference to Exhibit 10.36 to
Annual Report on Form 10-KSB filed March 31, 2008).
|
10.21
|
|
$400,000 Promissory Note issued in favor of Crown Bank, executed
October 31, 2007(incorporated by reference to Exhibit 10.37 to
Annual Report on Form 10-KSB filed March 31, 2008).
|
10.22
|
|
$1,200,000 Promissory Note issued in favor of Crown Bank, executed
October 31 2007 (incorporated by reference to Exhibit 10.38 to
Annual Report on Form 10-KSB filed March 31, 2008).
|
10.23
|
|
Commercial Loan and Security Agreement with Crown Bank, executed
October 31, 2007 and effective as of December 28, 2007
(incorporated by reference to Exhibit 10.39 to Annual Report on
Form 10-KSB filed March 31, 2008).
|
10.24
|
|
Guaranty provided to Crown Bank on behalf of ProUroCare
Medical Inc. by Bruce Culver dated October 10, 2007 (incorporated
by reference to Exhibit 10.40 to Annual Report on Form 10-KSB filed
March 31, 2008).
|
10.25
|
|
Guaranty provided to Crown Bank on behalf of ProUroCare
Medical Inc. by James Davis dated October 10, 2007 (incorporated by
reference to Exhibit 10.41 to Annual Report on Form 10-KSB filed
March 31, 2008).
|
57
Table
of Contents
Exhibit
No.
|
|
Description
|
10.26
|
|
Guaranty provided to Crown Bank on behalf of ProUroCare
Medical Inc. by Phillips W. Smith Family Trust dated October 10,
2007 (incorporated by reference to Exhibit 10.42 to Annual Report on
Form 10-KSB filed March 31, 2008).
|
10.27
|
|
Promissory Note issued in favor of James Davis, dated
October 31, 2007 (incorporated by reference to Exhibit 10.43 to
Annual Report on Form 10-KSB filed March 31, 2008).
|
10.28
|
|
Promissory Note issued in favor of James Davis, dated
November 30, 2007 (incorporated by reference to Exhibit 10.44 to
Annual Report on Form 10-KSB filed March 31, 2008).
|
10.29
|
|
Form of Convertible Note issued pursuant to the Companys 2007
Private Placement dated December 27, 2007 (incorporated by reference to
Exhibit 10.45 to Annual Report on Form 10-KSB filed March 31,
2008).
|
10.30
|
|
Convertible Note issued to James Davis dated December 27, 2007
(incorporated by reference to Exhibit 10.46 to Annual Report on
Form 10-KSB filed March 31, 2008).
|
10.31
|
|
Form of Convertible Note issued pursuant to the Companys 2008
Private Placement dated February 13, 2008 (incorporated by reference to
Exhibit 10.47 to Annual Report on Form 10-KSB filed March 31,
2008).
|
10.32
|
|
Amendment #1 to Promissory Note dated July 31, 2007 between
ProUroCare Medical, Inc. and the Phillips W. Smith Family Trust,
Dated March 11, 2008 (incorporated by reference to Exhibit 10.48 to
Annual Report on Form 10-KSB filed March 31, 2008).
|
10.33
|
|
Amendment #1 to $600,000 Promissory Note dated October 15, 2007
between ProUroCare Medical, Inc. and the Phillips W. Smith Family
Trust, dated March 11, 2008 (incorporated by reference to
Exhibit 10.49 to Annual Report on Form 10-KSB filed March 31,
2008).
|
10.34
|
|
Asset Purchase Agreement by and between ProUroCare Medical Inc.
and Profile, LLC dated April 3, 2008 (incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q filed May 8,
2008).
|
10.35
|
|
Security Agreement by and between ProUroCare Medical Inc. and
Profile, LLC dated April 3, 2008 (incorporated by reference to
Exhibit 10.2 to Quarterly Report on Form 10-Q filed May 8,
2008).
|
10.36
|
|
Promissory Note by and between ProUroCare Medical Inc. and
Profile, LLC dated April 3, 2008 (incorporated by reference to
Exhibit 10.3 to Quarterly Report on Form 10-Q filed May 8,
2008).
|
10.37
|
|
Form of Promissory Notes by and between ProUroCare
Medical Inc. and each of William Reiling, James Davis and the
Phillips W. Smith Family Trust dated April 3, 2008 (incorporated by
reference to Exhibit 10.4 to Quarterly Report on Form 10-Q filed May 8,
2008).
|
10.38*
|
|
Employment Agreement by and between ProUroCare Inc. and Richard
Carlson dated July 16, 2008 (incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q filed August 14,
2008).
|
10.39*
|
|
Form of Stock Option Agreement and Notice of Stock Option Grant
for incentive stock options issued to Richard Carlson and Richard Thon on
July 11, 2008 (incorporated by reference to Exhibit 10.4 to
Quarterly Report on Form 10-Q filed August 14, 2008).
|
10. 40
|
|
License Agreement by and between ProUroCare Medical Inc. and
Artann Laboratories Inc. dated July 25, 2008 (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q filed
August 14, 2008).
|
10.41
|
|
Development and Commercialization Agreement by and between ProUroCare
Medical Inc. and Artann Laboratories Inc. dated July 25, 2008
(incorporated by reference to Exhibit 10.3 to Quarterly Report on
Form 10-Q filed August 14, 2008).
|
10.42
|
|
Amendment Number 1 to Promissory Note by and between ProUroCare
Medical Inc. and Profile, LLC dated April 3, 2008
(incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K filed September 16, 2008).
|
10.43
|
|
Form of Amendment Number 1 to Promissory Notes by and
between ProUroCare Medical Inc. and each of William Reiling, James Davis
and the Phillips W. Smith Family Trust dated April 3, 2008
(incorporated by reference to Exhibit 10.2 on Form 8-K filed
September 16, 2008).
|
58
Table
of Contents
Exhibit
No.
|
|
Description
|
10.44
|
|
Unit Put Agreement dated September 16, 2008 (incorporated by
reference to Exhibit 10.43 to Registration Statement on Form S-1
filed September 19, 2008).
|
10.45
|
|
Form of Unit Put Origination Warrant to be issued to Unit Put
Agreement dated September 16, 2008 (incorporated by reference from
Exhibit 4.23 to Registration Statement on Form S-1 filed
September 19, 2008).
|
10.46
|
|
Form of Unit Put Warrant to be issued to Unit Put Agreement dated
September 16, 2008 (incorporated by reference from Exhibit 4.22 to
Registration Statement on Form S-1 filed September 19, 2008).
|
10.47
|
|
Form of Convertible Promissory Note issued pursuant to the
Companys exercise of its put right pursuant to the Unit Put Agreement dated
September 16, 2008 (incorporated by reference to Exhibit 10.44 to
Registration Statement on Form S-1 filed September 19, 2008).
|
10.48
|
|
Convertible Promissory Note dated September 25, 2008 issued in
favor of James Davis (incorporated by reference to Exhibit 10.7 to
Quarterly Report on Form 10-Q filed October 23, 2008).
|
10.49
|
|
Amendment of License Agreement by and between ProUroCare Medical Inc.
and Artann Laboratories, Inc. dated December 19, 2008 (incorporated
by reference to Exhibit 10.46 to Amendment No. 4 to Registration
Statement on Form S-1 filed December 22, 2008).
|
10.50
|
|
Amendment to Development and Commercialization Agreement by and
between ProUroCare Medical Inc. and Artann Laboratories, Inc. dated
December 19, 2008 (incorporated by reference to Exhibit 10.46 to
Amendment No. 4 to Registration Statement on Form S-1 filed
December 22, 2008).
|
10.51
|
|
Promissory Note dated March 19, 2009 issued in favor of Crown
Bank (filed herewith).
|
10.52
|
|
Financing Agreement by and between ProUroCare Medical Inc. and James
Davis dated March 19, 2009 (filed herewith).
|
10.53
|
|
Form of Loan Guarantor Compensation Letter Agreement dated
March 19, 2009 (filed herewith).
|
10.54
|
|
Letter agreement by and between ProUroCare Medical Inc. and the
Phillips W. Smith Family Trust dated March 19, 2009 (filed herewith).
|
10.55
|
|
Amendment #2 to $600,000 Promissory Note dated October 15, 2007
between ProUroCare Medical, Inc. and the Phillips W. Smith Family
Trust, dated March 19, 2009 (filed herewith).
|
10.56
|
|
Convertible Promissory Note dated March 19, 2009 issued in favor of
James Davis (filed herewith).
|
21.1
|
|
List of Subsidiaries of ProUroCare Medical Inc. (incorporated by
reference to Exhibit 21.1 to Registration Statement on Form SB-2
filed August 3, 2004).
|
23.1
|
|
Consent of Virchow, Krause & Company, LLP (filed
herewith).
|
24.1
|
|
Power of Attorney (included on signature page hereof).
|
31.1
|
|
Certification of Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer
pursuant to pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
*
Management contract or compensatory plan.
Note:
In
order that share data agree with the underlying documents, no share data in
this list of Exhibits have been restated to reflect the Companys one-for-ten
effect of the February, 2008 reverse stock split.
59
Table
of Contents
SIGNATURES
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ProUroCare Medical, Inc.
By:
|
/s/ Richard C. Carlson
|
|
|
Richard C. Carlson
|
|
|
Chief Executive Officer
|
|
|
Date: March 26, 2009
|
|
Pursuant to the requirements
of the Securities Act of 1934, this Annual Report has been signed as of March 26,
2009, by the following persons in the capacities indicated.
Name
|
|
Title
|
|
|
|
/s/ Richard C. Carlson
|
|
Chief
Executive Officer (Principal Executive Officer)
|
Richard C. Carlson
|
|
|
|
|
|
/s/ Richard Thon
|
|
Chief
Financial Officer (Principal Financial and
|
Richard Thon
|
|
Accounting
Officer)
|
|
|
|
/s/ David Koenig
|
|
Director
|
David
Koenig
|
|
|
|
|
|
/s/ Robert Rudelius
|
|
Director
|
Robert Rudelius
|
|
|
|
|
|
/s/ Scott E. Smith
|
|
Director
|
Scott
E. Smith
|
|
|
60
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