Table
of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,
2009
or
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 000-51774
ProUroCare
Medical Inc.
(Exact name of registrant
as specified in its charter)
Nevada
|
|
20-1212923
|
(State or other
jurisdiction
of incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
6440 Flying Cloud Drive, Suite 101
Eden Prairie, MN 55344
(Address of principal
executive offices, and Zip Code)
(952) 476-9093
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES
x
NO
o
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). YES
o
NO
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting
company
x
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). YES
o
NO
x
The registrant has 11,192,079 shares of common stock
outstanding as of November 12, 2009.
Table
of Contents
ProUroCare
Medical Inc.
Quarterly
Report on Form 10-Q for the
Quarter
Ended September 30, 2009
Table of Contents
Table
of Contents
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Balance Sheets
|
|
September 30,
2009
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
|
|
$
|
269,875
|
|
$
|
3,900
|
|
Restricted cash
|
|
|
|
44,214
|
|
Other current assets
|
|
85,669
|
|
31,634
|
|
Total current assets
|
|
355,544
|
|
79,748
|
|
Equipment and
furniture, net
|
|
452
|
|
|
|
Deferred offering
expenses
|
|
110,538
|
|
729,924
|
|
Debt issuance costs,
net
|
|
65,868
|
|
266,882
|
|
|
|
$
|
532,402
|
|
$
|
1,076,554
|
|
Liabilities and Shareholders Deficit
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Notes payable, bank
|
|
1,300,000
|
|
1,600,000
|
|
Notes payable
|
|
649,332
|
|
34,425
|
|
Notes payable, related
party
|
|
26,000
|
|
634,000
|
|
Convertible debt, net
of original issue discount
|
|
|
|
1,033,484
|
|
Convertible debt
related parties, net of original issue discount
|
|
|
|
1,179,913
|
|
Accounts payable
|
|
967,404
|
|
1,203,549
|
|
Accrued license and
development fees
|
|
15,000
|
|
1,327,835
|
|
Accrued expenses
|
|
451,650
|
|
937,253
|
|
Total current
liabilities
|
|
3,409,386
|
|
7,950,459
|
|
|
|
|
|
|
|
Commitments and
contingencies:
|
|
|
|
|
|
Long-term note payable,
bank
|
|
100,025
|
|
|
|
Long-term note payable
|
|
300,000
|
|
|
|
Long-term note payable
- related party
|
|
243,000
|
|
|
|
Long-term convertible
debt, net of original issue discount
|
|
|
|
221,199
|
|
Long-term convertible
debt - related parties net of original issue discount
|
|
|
|
162,759
|
|
Total liabilities
|
|
4,052,411
|
|
8,334,417
|
|
Shareholders deficit:
|
|
|
|
|
|
Common stock, $0.00001
par. Authorized 50,000,000 shares;
issued and outstanding 9,946,325 and 1,811,429 shares on September 30,
2009 and December 31, 2008, respectively
|
|
99
|
|
18
|
|
Additional paid-in
capital
|
|
20,332,965
|
|
13,677,932
|
|
Deficit accumulated
during development stage
|
|
(23,853,073
|
)
|
(20,935,813
|
)
|
Total shareholders
deficit
|
|
(3,520,009
|
)
|
(7,257,863
|
)
|
|
|
$
|
532,402
|
|
$
|
1,076,554
|
|
See accompanying notes to consolidated financial
statements.
1
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements
of Operations
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Period from August 17,1999 (Inception) to
|
|
|
|
September 30
|
|
September 30
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
132,744
|
|
$
|
30,000
|
|
$
|
341,625
|
|
$
|
330,155
|
|
$
|
5,796,932
|
|
General
and administrative
|
|
358,886
|
|
263,987
|
|
1,070,513
|
|
726,521
|
|
10,901,686
|
|
Total
operating expenses
|
|
491,630
|
|
293,987
|
|
1,412,138
|
|
1,056,676
|
|
16,698,618
|
|
Operating
loss
|
|
(491,630
|
)
|
(293,987
|
)
|
(1,412,138
|
)
|
(1,056,676
|
)
|
(16,698,618
|
)
|
Interest
income
|
|
|
|
124
|
|
21
|
|
502
|
|
18,316
|
|
Interest
expense
|
|
(50,687
|
)
|
(473,782
|
)
|
(1,139,159
|
)
|
(1,328,273
|
)
|
(6,301,626
|
)
|
Debt
extinguishment expense
|
|
(41,717
|
)
|
(29,045
|
)
|
(365,984
|
)
|
(74,876
|
)
|
(871,145
|
)
|
Net
loss
|
|
$
|
(584,034
|
)
|
$
|
(796,690
|
)
|
$
|
(2,917,260
|
)
|
$
|
(2,459,323
|
)
|
$
|
(23,853,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.06
|
)
|
$
|
(0.45
|
)
|
$
|
(0.32
|
)
|
$
|
(1.41
|
)
|
$
|
(14.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
9,899,013
|
|
1,779,854
|
|
9,188,409
|
|
1,744,972
|
|
1,646,820
|
|
See accompanying notes to
consolidated financial statements.
2
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements
of Cash Flows
(Unaudited)
|
|
Nine Months Ended
September 30
|
|
Period from August
17, 1999 (inception) to
|
|
|
|
2009
|
|
2008
|
|
September 30, 2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,917,260
|
)
|
$
|
(2,459,323
|
)
|
$
|
(23,853,073
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
109
|
|
459
|
|
20,906
|
|
Gain
on sale of furniture and equipment
|
|
|
|
|
|
(2,200
|
)
|
Stock-based
compensation
|
|
192,122
|
|
48,085
|
|
1,956,469
|
|
Common
stock issued to related parties for services rendered
|
|
7,250
|
|
37,964
|
|
214,621
|
|
Common
stock issued for debt guarantees
|
|
|
|
|
|
106,667
|
|
Common
stock issued for debt issuance cost
|
|
|
|
|
|
6,667
|
|
Common
stock issued for debt extinguishment
|
|
33,333
|
|
|
|
33,333
|
|
Notes
payable issued for intangibles expensed as research and development
|
|
|
|
150,000
|
|
150,000
|
|
Warrants
issued for services
|
|
26,400
|
|
|
|
567,036
|
|
Warrants
issued for debt guarantees
|
|
|
|
|
|
355,197
|
|
Warrants
issued for debt extinguishment
|
|
607
|
|
66,548
|
|
360,007
|
|
Warrants
issued for debt extinguishment-related parties
|
|
|
|
|
|
26,828
|
|
Warrants
issued for debt issuance cost
|
|
|
|
|
|
12,834
|
|
Amortization
of note payable-original issue discount
|
|
|
|
88,888
|
|
152,247
|
|
Amortization
of note payable-related parties original issue discount
|
|
2,720
|
|
|
|
142,964
|
|
Amortization
of convertible debt-original issue discount
|
|
507,902
|
|
253,619
|
|
1,146,587
|
|
Amortization
of convertible debt-related parties original issue discount
|
|
444,328
|
|
377,292
|
|
1,194,132
|
|
Amortization
of debt issuance costs
|
|
354,678
|
|
299,999
|
|
2,060,411
|
|
Bargain
conversion option added to note payable-related parties for debt
extinguishment
|
|
|
|
|
|
48,214
|
|
Write-off
debt issuance cost for debt extinguishment
|
|
|
|
|
|
42,797
|
|
Write-off
of deferred offering cost
|
|
|
|
|
|
59,696
|
|
License
rights expensed as research and development, paid by issuance of common stock
to CS Medical Technologies, LLC
|
|
|
|
|
|
475,000
|
|
License
rights expensed as research and development, paid by issuance of common stock
to Profile, LLC
|
|
|
|
|
|
1,713,600
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Other
current assets
|
|
27,310
|
|
7,570
|
|
(28,352
|
)
|
Accounts
payable
|
|
(60,926
|
)
|
146,022
|
|
868,908
|
|
Accrued
development expense
|
|
(827,835
|
)
|
|
|
500,000
|
|
Accrued
expenses
|
|
(105,523
|
)
|
12,646
|
|
1,034,273
|
|
Net
cash used in operating activities
|
|
(2,314,785
|
)
|
(970,231
|
)
|
(10,634,231
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of equipment and furniture
|
|
(561
|
)
|
|
|
(21,358
|
)
|
Deposit
into a restricted cash account
|
|
|
|
|
|
(44,214
|
)
|
Withdrawal
from a restricted cash account
|
|
44,214
|
|
|
|
44,214
|
|
Net
cash provided by (used in) investing activities
|
|
43,653
|
|
|
|
(21,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
3
Table
of Contents
ProUroCare
Medical Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows (continued)
(Unaudited)
|
|
Nine Months Ended
September 30
|
|
Period from August
17, 1999 (inception) to
|
|
|
|
2009
|
|
2008
|
|
September 30, 2009
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
of note payable, bank
|
|
100,000
|
|
|
|
600,000
|
|
Payments
of note payable, bank
|
|
(400,000
|
)
|
|
|
(900,000
|
)
|
Proceeds
of notes payable
|
|
|
|
|
|
340,500
|
|
Payment
of notes payable
|
|
(111,938
|
)
|
(320,976
|
)
|
(1,482,456
|
)
|
Proceeds
of notes payable - related parties
|
|
93,638
|
|
112,500
|
|
653,738
|
|
Payments
of notes payable - related parties
|
|
(34,000
|
)
|
(76,450
|
)
|
(237,300
|
)
|
Proceeds
from long-term notes payable and bank debt
|
|
400,025
|
|
833,625
|
|
4,207,362
|
|
Proceeds
from long-term notes payable, related parties
|
|
243,000
|
|
207,000
|
|
1,363,500
|
|
Payments
on long-term bank debt
|
|
|
|
|
|
(600,000
|
)
|
Proceeds
from warrants
|
|
|
|
46,875
|
|
104,500
|
|
Payments
for debt issuance costs
|
|
(600
|
)
|
(146,452
|
)
|
(674,037
|
)
|
Payment
for rescission of common stock
|
|
|
|
|
|
(100,000
|
)
|
Payments
for offering expenses
|
|
(366,618
|
)
|
(44,035
|
)
|
(483,925
|
)
|
Cost
of reverse merger
|
|
|
|
|
|
(162,556
|
)
|
Net
proceeds from issuance of common stock
|
|
2,613,600
|
|
|
|
8,296,138
|
|
Net
cash provided by financing activities
|
|
2,537,107
|
|
612,087
|
|
10,925,464
|
|
Net
increase (decrease) in cash
|
|
265,975
|
|
(358,144
|
)
|
269,875
|
|
Cash,
beginning of the period
|
|
3,900
|
|
444,613
|
|
|
|
Cash,
end of the period
|
|
$
|
269,875
|
|
$
|
86,469
|
|
$
|
269,875
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
100,779
|
|
$
|
105,726
|
|
$
|
817,188
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Deferred
offering costs included in accounts payable
|
|
(162,926
|
)
|
176,634
|
|
408,518
|
|
Deferred
offering costs included in accrued expenses
|
|
|
|
89,404
|
|
70,000
|
|
Debt
issuance costs included in accounts payable
|
|
|
|
60,099
|
|
114,156
|
|
Warrants
issued pursuant to notes payable
|
|
3,327
|
|
169,739
|
|
467,191
|
|
Warrants
issued for debt issuance costs
|
|
|
|
|
|
298,021
|
|
Prepaid
expenses financed by note payable
|
|
81,345
|
|
54,504
|
|
246,871
|
|
Convertible
debt issued in lieu of cash for accrued expenses
|
|
|
|
23,750
|
|
31,413
|
|
Common
stock issued in lieu of cash for accrued expenses
|
|
20,250
|
|
21,670
|
|
259,053
|
|
Common
stock issued in lieu of cash for accrued development cost
|
|
500,000
|
|
|
|
500,000
|
|
Common
stock issued for debt issuance cost
|
|
153,064
|
|
|
|
317,898
|
|
Warrants
issued in lieu of cash for accrued expenses
|
|
|
|
1,250
|
|
1,250
|
|
Conversion
of notes payable, related parties into convertible debentures
|
|
|
|
|
|
200,000
|
|
4
Table
of Contents
ProUroCare
Medical Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows (continued)
(Unaudited)
|
|
Nine Months Ended
September 30
|
|
Period from August
17, 1999 (inception) to
|
|
|
|
2009
|
|
2008
|
|
September 30, 2009
|
|
Common
stock issued in lieu of cash for accounts payable
|
|
|
|
|
|
122,291
|
|
Common
stock issued in lieu of cash for notes payable-related parties
|
|
|
|
|
|
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
|
|
12,293
|
|
|
|
253,906
|
|
Conversion
of accrued expenses to note payable
|
|
13,569
|
|
|
|
13,569
|
|
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
|
|
Deferred
offering costs offset against gross proceeds of offering
|
|
823,078
|
|
|
|
823,078
|
|
Conversion
of convertible debt to units (see Note 2)
|
|
1,638,750
|
|
|
|
1,638,750
|
|
Conversion
of convertible debt-related parties to units (see Note 2)
|
|
1,323,334
|
|
|
|
1,323,334
|
|
Conversion
of convertible debt-related parties to common stock
|
|
281,000
|
|
|
|
281,000
|
|
Conversion
of accrued expenses to units (see Note 2)
|
|
331,261
|
|
|
|
331,261
|
|
See accompanying notes to consolidated financial
statements.
5
Table
of Contents
ProUroCare Medical Inc.
(A Development Stage
Company)
Notes
to Consolidated Financial Statements
September 30,
2009 and 2008 and the period from
August 17,
1999 (Inception) to September 30, 2009
(Unaudited)
(1) Description of Business and Summary of
Significant Accounting Policies.
(a)
Description of Business,
Development Stage Activities
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 prostate mechanical imaging system, designed for use as an aid to the
physician in visualizing and documenting 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 acquiring several technology licenses, purchasing intellectual
property, entering into product development agreements and conducting clinical
studies.
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 Companys 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 2). 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.
On
September 25, 2009, the Company commenced a tender offer to holders of
certain outstanding warrants to provide additional consideration for the
exercise of such warrants (the Replacement Warrant Offering). Pursuant to the offer, the Company
temporarily
6
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modified
the terms of the warrants so that each holder who tendered warrants for early
exercise on or before November 6, 2009 received, in addition to the shares
of common stock purchased upon exercise, an equal number of new three-year
warrants to purchase shares of ProUroCare common stock at an exercise price of
$1.30 per share (the Replacement Warrants).
Warrants to purchase 1,244,829 shares of common stock were tendered
resulting in gross proceeds to the Company of $1,618,278 (see Note 10).
(b)
Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP)
and pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC) for interim financial information. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with GAAP have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures made are adequate to make
the information not misleading.
Operating results for the three and nine months ended September 30,
2009 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009 or any other period. The accompanying financial statements and
related notes should be read in conjunction with the audited financial
statements of the Company, and notes thereto, contained in our Annual Report on
Form 10-K for the year ended December 31, 2008.
The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
PUC. Significant intercompany accounts
and transactions have been eliminated in consolidation. 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. The financial information
furnished reflects, in the opinion of management, all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the results
of the interim periods presented.
(c)
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. Dilutive common-equivalent
shares have not been included in the computation of diluted net loss per share
because their inclusion would be antidilutive.
Antidilutive common equivalent shares issuable based on future exercise
of stock options or warrants could potentially dilute basic loss per common
share in subsequent years. All options
and warrants outstanding were anti-dilutive for the three and nine months ended
September 30, 2009 and 2008, and the period from August 17, 1999
(Inception) to September 30, 2009 due to the Companys net losses. 8,686,033 shares of common stock issuable
under stock options and warrants were excluded from the computation of diluted
net loss per common share for each of the three and nine months ended September 30,
2009. 1,605,386 shares of common stock
issuable under stock options, warrants, convertible debentures and contingent
shares and warrants issuable under agreements with loan guarantors were excluded
from the computation of diluted net loss per common share for each of the three
and nine months ended September 30, 2008.
Also excluded for the three and nine months ended September 30,
2008 were the undetermined number of shares issuable pursuant to the
convertible notes and warrants issued in connection with our private
placements, whose terms of conversion were based on the price of the equity
securities offered in the Companys public offering. The number of such shares
7
Table
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was
determined on the January 7, 2009 effective date of the 2009 Public
Offering to be 2,997,898 shares.
(d)
Stock-Based Compensation
The Companys policy is to
grant stock options at fair value at the date of grant and to record
stock-based employee compensation expense at fair value. The Company recognizes the expense related to
the fair value of the award on a straight-line basis over the vesting
period. From time to time, the Company
issues options to consultants. The fair
value of options issued to non-employees (typically consultants) is measured on
the earlier of the date the performance is complete or the date the consultant is
committed to perform. In the event that
the measurement date occurs after an interim reporting date, the options are
measured at their then-current fair value at each interim reporting date. The fair value of options so determined are
expensed on a straight-line basis over the associated performance period.
The Company uses the
Black-Scholes pricing model to estimate the fair value of options. 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 stock options.
Stock-based compensation cost related to stock options was
$33,889, $192,122 and $1,833,895 for the three and nine months ended September 30,
2009 and the period from August 17, 1999 (Inception) to September 30,
2009, respectively, or $0.00, $0.02 and $1.12 on a per share basis. Stock-based
employee and non-employee compensation cost related to stock options was
$18,366 and $33,585 for the three and nine months ended September 30,
2008, respectively. The Company
estimates the amount of future stock-based compensation expense related to
currently outstanding options to be approximately $462,000, $244,000 and
$12,000 for the years ending December 31, 2009, 2010 and 2011,
respectively.
In determining the
compensation cost of the options granted during the three and nine months ended
September 30, 2009 and 2008, the fair value of each option grant has been
estimated on the date of grant using the Black-Scholes pricing model and the
weighted-average assumptions used in these calculations are summarized as
follows:
|
|
Three
Months Ended
September 30
|
|
Nine
Months Ended
September 30
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Risk-free
Interest Rate
|
|
1.80%
|
|
3.13%
|
|
1.73%
|
|
3.13%
|
|
Expected Life of
Options Granted
|
|
3.6 years
|
|
4.3 years
|
|
3.6 years
|
|
4.3 years
|
|
Expected
Volatility
|
|
134.0%
|
|
131.2%
|
|
134.6%
|
|
131.2%
|
|
Expected
Dividend Yield
|
|
0
|
|
0
|
|
0
|
|
0
|
|
The expected life of the options is determined using a
simplified method, computed as the average of the option vesting periods and
the contractual term of the option. 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. Expected volatility is based on
a
8
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simple average of weekly price data since the date of the
Merger. Based on the lack of history to
calculate a forfeiture rate, the Company has not adjusted the calculated value
of the options. The risk-free rates for
the expected terms of the stock options and awards are based on the U.S.
Treasury yield curve in effect at the time of grant.
(e)
Warrants
The Companys policy is to
record warrants issued to non-employees as consideration for goods or services
received at their fair value on the issue date and expense them as an operating
expense depending on the nature of the goods or services received.
Stock-based
consideration related to warrants issued to non-employees for goods and
services received was $26,400, $26,400 and $689,121 for the three and nine
months ended September 30, 2009 and the period from August 17, 1999
(inception) to September 30, 2009, respectively, or less than $0.01, less
than $0.01 and $0.42 on a per share basis, respectively. Stock-based
consideration related to warrants issued to non-employees for goods and
services received was $14,500 and $14,500 for the three and nine months ended September 30,
2008, respectively.
In
addition to warrants issued to non-employees as consideration for goods or
services, from time to time the Company has issued warrants as consideration
for loan or loan guarantees. Warrants
related to loans or loan guarantees are recorded as a debt issuance cost asset
and amortized as interest expense on a straight-line basis over the term of the
underlying loan.
The weighted-average fair
value of warrants granted during the three and nine months ended September 30,
2009, excluding the 2009 Units, was $0.88 and $0.88, respectively, and such
warrants were immediately vested and exercisable on the date of grant.
The weighted-average fair value of the
warrants granted during the three and nine months ended September 30, 2008
was $1.33 and $1.23, respectively, and such warrants were immediately vested
and exercisable on the date of grant.
The fair value of stock
warrants is the estimated present value at grant date using the Black-Scholes
pricing model with the following weighted average assumptions:
|
|
Three
Months Ended
September 30
|
|
Nine
Months Ended
September 30
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Risk-free
Interest Rate
|
|
1.08%
|
|
2.82%
|
|
1.08%
|
|
3.12%
|
|
Expected Life of
Warrants Granted (1)
|
|
2.0 years
|
|
4.2 years
|
|
2.0 years
|
|
3.6 years
|
|
Expected
Volatility
|
|
135.2%
|
|
134.0%
|
|
135.2%
|
|
131.2%
|
|
Expected
Dividend Yield
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(1)
Based on the contractual term of the
warrants.
The expected volatility is based on a simple average of
weekly price data since the date of the Merger.
Based on the lack of history to calculate a forfeiture rate, the Company
has not adjusted the calculated value of the warrants. The risk-free rates for the expected terms of
the stock warrants are based on the U.S. Treasury yield curve in effect at the
time of grants.
9
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(f)
Deferred Offering Costs
The legal, accounting,
printing and certain other expenses directly related to the Companys
Replacement Warrant Offering were recorded as a deferred offering cost asset as
of September 30, 2009. Upon the November 6,
2009 closing of the Warrant Replacement Offer, the deferred offering costs were
recorded as a cost of the offering and a reduction of additional paid-in
capital (see Note 10).
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. The deferred offering costs of $823,078 were
recorded as a cost of the offering and a reduction of additional paid-in
capital upon its closing on January 12, 2009.
(g)
Debt Issuance Costs
Unamortized debt issuance
costs at December 31, 2008 totaling $266,882, consisting of
legal and
accounting fees, printing costs and
commissions paid to the placement agents
related to the
Companys 2007 and 2008 private placements and the 2008 unit put arrangement,
were expensed as interest expense upon the conversion of the related debt
following the closing of the Companys 2009 Public Offering (see Note 2).
On March 19, 2009, pursuant to
guaranties received relating to the Companys renewal of its $1.2 million Crown
Bank promissory note, the Company issued an aggregate of 133,334 shares of its
common stock
as consideration to the guarantors (see Note 3). The $66,667 value of the shares on the
issuance date was recorded as debt issuance cost and was amortized on a
straight-line basis through August 31, 2009.
On June 16, 2009, pursuant
to a guarantee received relating to the Companys $100,000 Crown Bank
promissory note, the Company issued 6,667 shares of its common stock as
consideration to the guarantor (see Note 3).
The $5,467 value of the shares on the issuance date along with $600 of
loan origination fees was recorded on the balance sheet as debt issuance cost
and is being amortized on a straight-line basis through December 31, 2009.
Debt issuance costs are
summarized as follows:
|
|
September 30,
2009
|
|
December 31,
2008
|
|
Debt issuance costs, gross
|
|
153,664
|
|
701,238
|
|
Less amortization
|
|
(87,796
|
)
|
(434,356
|
)
|
|
|
|
|
|
|
Other assets
|
|
$
|
65,868
|
|
$
|
266,882
|
|
|
|
|
|
|
|
|
|
Amortization
expense related to debt issuance costs was $45,149, $354,678 and $2,060,411 for
the three and nine months ended September 30, 2009 and the period from August 17,
1999 (Inception) to September 30, 2009, respectively. Amortization expense related to debt issuance
costs was $114,180 and $299,999 for the three and nine months ended September 30,
2008, respectively.
10
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(h)
Restricted Cash
Pursuant to the 2007 renewal
of the Crown Bank promissory notes, the Company agreed to deposit with Crown
Bank four months worth of future interest payments due under the notes. On March 19, 2009, pursuant to the
renewal of a Crown Bank promissory note, this restriction was removed.
(i)
Going
Concern
We have incurred operating losses, accumulated deficit and negative
cash flows from operations since inception.
As of September 30, 2009, we had an accumulated deficit of
approximately $23,853,000. These
factors, among others, raise substantial doubt about our ability to continue as
a going concern. The accompanying
unaudited consolidated financial statements do not include any adjustments
related to recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should we be unable
to continue as a going concern.
Note 2. 2009 Public Offering; Automatic Conversion of
Convertible Debt.
On January 7,
2009, the Companys 2009 Public Offering was declared effective by the SEC, and
on January 12, 2009 the 2009 Public Offering was closed. In the offering, the Company sold 3,050,000
of 2009 Units at $1.00 per unit resulting in net cash received of $1,790,442,
after offering costs of $1,259,558.
The completion of the 2009 Public Offering triggered
automatic conversion provisions of several outstanding convertible debt instruments:
·
Upon the January 7, 2009 effective date
of the 2009 Public Offering, $733,334 of convertible
debentures originally issued a
s consideration to guarantors of the Crown Bank loan,
along with $143,815 interest accrued thereon, converted into
292,384 shares of the Companys common stock.
Unamortized original issue discount relating to the
convertible debentures totaling $33,796 was expensed as interest expense upon
the conversion.
·
Upon the January 12,
2009 closing of the 2009 Public Offering, the $1,757,500 aggregate amount of
promissory notes issued in private debt placements between December 27,
2007 and July 30, 2008, along with $162,959 of interest accrued thereon,
automatically converted into 2,743,535 units identical to the 2009 Units (based
on 70 percent of the offering price, or $0.70 per share). Also, the $142,500 promissory note issued to
James Davis, a greater than five percent shareholder of the Company, on December 27,
2007, along with $14,923 of interest accrued thereon, automatically converted
into 314,846 units identical to the 2009 Units (based on 50 percent of the
offering price, or $0.50 per share). The
closing of the 2009 Public Offering resolved a contingent conversion feature of
the promissory notes. Consequently, the
valuation of the beneficial conversion feature of the promissory notes was
recalculated, resulting in the recording of a $47,046 increase in the original
issue discount. Unamortized original
issue discount relating to the warrants and the beneficial conversion feature
of these notes (including the adjustment resulting from the new valuation)
totaling $434,215 and unamortized debt issuance cost of $207,575 was expensed
as interest expense upon the conversion.
·
On February 6,
2009 (30 days after the effective date of the 2009 Public Offering), the
$299,250 outstanding promissory notes issued pursuant to the Companys unit put
11
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arrangement,
along with the $9,563 interest accrued thereon, automatically converted into
441,165 shares of the Companys common stock.
The notes and accrued interest converted at 70 percent of the 2009
Public Offering price, or $0.70 per share.
The closing of the 2009 Public Offering resolved a contingent conversion
feature of the promissory notes.
Consequently, the valuation of the beneficial conversion feature of the
promissory notes was recalculated, resulting in the recording of a $81,059
increase in the original issue discount.
Unamortized original issue discount relating to the warrants and the
beneficial conversion feature of the notes (including the adjustment resulting
from the new valuation) totaling $209,879 and unamortized debt issuance cost of
$44,686 was expensed as interest expense upon the conversion.
Note 3. Notes Payable Bank.
(a)
Short
Term
On
March 19, 2009, the Company renewed its $1.2 million Crown Bank promissory
note, and repaid its $400,000 Crown Bank promissory note. 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 guaranteed by two individual guarantors. The Company issued an aggregate of 133,334
shares of its common stock as
consideration to the guarantors (see Note 6(a)) and will accrue for
issuance 22,222 shares of its common stock for each month or portion thereof
that the principal amount of the loan remains outstanding beginning September 1,
2009. As of September 30, 2009,
22,222 shares of common stock had been accrued for issuance. All accrued shares
will be issued upon repayment of the loan.
On June 16, 2009, the Company borrowed $100,000
from Crown Bank pursuant to a promissory note that is collateralized by all
Company assets and guaranteed by an individual guarantor.
The note matures on March 28,
2010 and bears interest at the prime rate plus one percent
,
but never less
than 6.00 percent. The Company issued
6,667 shares of its common stock as
consideration to the guarantor (see Note 6(a)), and will accrue for issuance
1,111 shares of its common stock for each month or portion thereof that
the principal amount of the loan remains outstanding beginning January 1,
2010. All accrued shares will be
issued upon repayment of the loan.
(b)
Long Term
On
September 23, 2009, the Company borrowed $100,025 from Central Bank
pursuant to a promissory note. The
promissory note matures on January 17, 2011, and bears interest at the
prime rate plus one percent, with a minimum rate of 6.0 percent. The promissory note was guaranteed by an
individual guarantor. As consideration for
providing the guaranty, the Company issued to the guarantor 6,667 shares of
stock (see Note 6(a)), and will accrue
for issuance 1,111 shares of its common stock for each month or portion
thereof that the principal amount of the loan remains outstanding beginning March 23,
2010. All accrued shares will be issued
upon repayment of the loan. In addition,
the Company executed a security agreement with the guarantor, providing him
with a subordinated security interest in the Companys assets.
Note 4. Notes Payable.
On January 13, 2009, following the
closing of the 2009 Public Offering,
the Company repaid the remaining $9,350 principal
amount of the loan from an investor and issued an immediately
12
Table
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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
January 22, 2009,
the Company repaid the remaining $34,000
principal balance of a promissory note due and issued to the lender 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
March 19, 2009, the Company renewed and amended a $600,000 promissory note
with an investor. 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.
Between May 1, 2009
and September 16, 2009, James Davis, a greater than 10 percent
shareholder of the Company, made various payments for the benefit of the
Company and provided the Company with certain cash advances totaling
approximately $243,000. The purpose of
these payments and advances was to help fund specific Company activities
related to product development, clinical studies and Food and Drug
Administration (FDA) related activities.
On September 21, 2009, Mr. Davis and the Company executed a
promissory note in the principal amount of $243,000 (the Davis Note) to
formalize the Companys obligation to Mr. Davis for these amounts. Upon execution of the Davis Note, the Company
agreed, as consideration for making the payments and advances represented by
the Davis Note, to issue to Mr. Davis 19,833 shares of its common stock
and to accrue for future issuance to Mr. Davis 2,700 shares of common
stock for each month (or portion thereof) that the Davis Note is outstanding
after March 21, 2010. In addition,
under the terms of the Davis Note, the Company will accrue for issuance to Mr. Davis,
in lieu of cash interest, 1,618 shares of its common stock for each month (or
portion thereof) that the principal amount of the Davis Note is
outstanding. All of the shares accrued
for issuance to Mr. Davis will be issued upon repayment of the Davis
Note. The Davis Note matures on March 28,
2011.
The promissory note provides Mr. Davis with a subordinated
security interest in the Companys assets.
On
September 23, 2009, the Company borrowed $300,000 from an investor
pursuant to a secured promissory note.
The promissory note matures on March 28, 2011. Under the terms of
the promissory note, the Company will accrue for issuance to the investor 1,998
shares of its common stock for each month or portion thereof that the principal
amount of the loan remains outstanding, in lieu of cash interest. As consideration for making the loan, the
Company issued to the investor 20,000 shares of stock and will accrue for
issuance 3,333 shares of its common stock for each month or portion thereof
that the principal amount of the loan remains outstanding beginning March 23,
2010. All accrued shares will be issued
upon repayment of the loan. The
promissory note provides the investor a subordinated security interest in the
Companys assets.
Note 5. Convertible Notes Payable.
On April 3, 2008, the
Company borrowed $112,500 pursuant to three promissory notes
that were convertible upon the
Companys closing of an underwritten public offering at 70 percent of the
public offering price. On January 15,
2009, the Company repaid $37,500 of the notes.
On January 22, 2009, the Company repaid $8,000 and converted
$29,500 of another note pursuant to its terms.
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.
13
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On September 25, 2008, the Company borrowed $150,000 pursuant to a
convertible promissory note issued in favor of Mr. Davis. 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 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 discussed above (and $3,646 of accrued interest
thereon), another $2,632 payable to Mr. Davis and $12,293 of expenses paid
by Mr. Davis on behalf of the Company.
Mr. Davis also agreed to loan to the Company an additional $67,638
to pay for the exhibition of the prostate mechanical imaging 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 was to mature on March 19, 2010, bore no interest and was
convertible into our common stock at $0.55 per share at the option of Mr. Davis. It
was determined that a substantial modification of the terms of the note was
made as the present value of the cash flows under the new convertible
promissory note was greater than 10 percent different from the present value of
the cash flows under the original note.
Accordingly, $113,709 of unamortized original issue discount related to
the original $150,000 note was expensed as debt extinguishment expense and the
bargain conversion option of the new note, valued at $123,000 using the
Black-Sholes pricing model, was recorded as original issue discount and
amortized as debt extinguishment expense over the term of the note. On May 26, 2009, Mr. Davis
exercised his conversion rights under the promissory note, and the note was
converted into 510,909 shares of the Companys common stock.
Note 6. Shareholders Equity.
(a)
Common
Stock
On January 7, 2009, upon the effective date of
the 2009 Public Offering, the Company issued 292,384 shares of common stock to
the guarantors of the Crown Bank loan pursuant to the automatic conversion of
$733,334 of convertible debentures and $143,815 interest accrued thereon.
On January 12, 2009, the Company issued 3,050,000
of 2009 Units pursuant to the closing of the 2009 Public Offering, and
3,058,381 units identical to the 2009 Units pursuant to the automatic
conversions of convertible debt (see Note 2).
On January 15, 2009, the Company issued 454,546
shares of common stock to Artann Laboratories Inc. (Artann) in satisfaction of
a $500,000 liability pursuant to its license agreement with Artann.
On January 22, 2009, pursuant to the conversion
of $29,500 of the principal balance of a convertible promissory note, the
Company issued 42,143 shares of common stock to the note holder (see Note 5).
On February 6, 2009,
the $299,250 outstanding promissory notes issued
pursuant to the Companys 2008 unit put arrangement, along with the $9,563
interest accrued thereon, automatically converted into 441,165 shares of the
Companys common stock (see Note 2)
14
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On March 19, 2009, pursuant to the renewal of its
$600,000 promissory note with an individual lender, the Company issued 66,667
shares of its common stock
as consideration to the lender and
will issue a further 11,111 shares per month for each month the related notes
remain outstanding after August 31, 2009.
It was determined that a substantial modification of the terms of the
note was made as the present value of the cash flows under the new convertible
promissory note was greater than 10 percent different from the present value of
the cash flows under the original note.
Accordingly, the $33,333 value of the initial 66,667 shares issued was
expensed as debt extinguishment expense.
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. During the three
months ended September 30, 2009, 11,111 shares were accrued for issuance
pursuant to this loan guarantee compensation arrangement, resulting in
additional debt extinguishment expense of $5,556.
On March 19, 2009, pursuant to guaranties
received relating to the Companys renewal of its $1.2 million Crown Bank
promissory note, the Company issued an aggregate 133,334 shares of its common
stock
as consideration to Mr. Davis and another guarantor, and will issue
a further 22,222 shares per month for each month the related notes remain
outstanding after August 31, 2009.
It was determined that a substantial modification of the terms of the
note was made as the present value of the cash flows under the new convertible
promissory note was greater than 10 percent different from the present value of
the cash flows under the original note.
Accordingly, the $66,667 value of the initial 133,334 shares issued was
capitalized as debt issuance cost and expensed as debt extinguishment expense
on a straight-line basis through August 31, 2009. In addition, the $12,000 loan origination fee
was immediately expensed as debt extinguishment expense. 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. During the three months ended September 30,
2009, 22,222 shares were accrued for issuance pursuant to this loan guarantee
compensation arrangement, resulting in additional debt extinguishment expense
of $11,112.
On April 13, 2009, the Company
issued an aggregate of 27,366 shares to its independent directors, David
Koenig, Robert Rudelius and Scott Smith, as payment of $20,250 directors fees
accrued through December 31, 2008, in lieu of cash.
On May 26, 2009, the Company issued 510,909 shares of common stock
to Mr. Davis upon the conversion of a $281,000 convertible promissory note
pursuant to the terms thereof (see Note 5).
On June 16, 2009, the Company issued 6,667 shares valued at $5,467
to a guarantor as consideration for providing a guarantee of a $100,000 bank
loan (see Note 3).
On September 21, 2009, the Company issued 19,833 shares valued at
$28,262 to Mr. Davis as consideration for providing a $243,000 loan (see
Note 3).
On September 23, 2009, the Company issued 6,667 shares valued at
$9,000 to a guarantor as consideration for providing a guarantee of a $100,025
bank loan (see Note 3).
On September 23, 2009, the Company issued 20,000 shares valued at
$27,000 to
an
individual lender
as consideration for providing a $300,000 loan (see Note 4).
On September 29, 2009, the Company
issued 4,834 shares to Mr. Koenig
as payment of $7,250
directors fees accrued through June 30, 2009, in lieu of cash.
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(b)
Stock Options
On
March 3, 2009, the Company granted non-qualified stock options to acquire
an aggregate of 70,000 shares of its common stock to its non-employee
directors, and incentive options to acquire 45,000 shares of its common stock
to Richard Thon, our Chief Financial Officer (the CFO). The options are fully vested and are
exercisable for a period of seven years at an exercise price of $0.85 per
share. The 115,000 options were valued
at $0.68 per share using the Black-Scholes pricing model and $78,200 was
immediately expensed as general and administrative expense.
Also
on March 3, 2009, the Company granted an incentive stock option to acquire
an aggregate of 100,000 shares of its common stock to Richard Carlson, our
Chief Executive Officer (the CEO). Of
the options, 90,000 shares vest immediately and 10,000 shares will vest on January 2,
2010. At the same time, Mr. Carlson
agreed to cancel existing, unvested stock options to acquire 5,000 shares of
common stock at an exercise price of $7.50 per share. The options that were cancelled and
simultaneously reissued were treated as a modification of the terms of the
original option. Accordingly, the
incremental compensation cost of the fully vested portion of the newly issued
options valued at $0.68 per share using the Black-Scholes pricing model over
the $0.07 per share value of the cancelled options on the cancellation date, or
$61,200, was expensed immediately as general and administrative expense.
On
July 23, 2009, the Company granted a non-qualified stock option to acquire
an aggregate of 6,500 shares of its common stock to a consultant pursuant to a
consulting arrangement. The options are
fully vested and are exercisable for a period of five years at an exercise
price of $1.21 per share. The options
were valued at $0.87 per share using the Black-Scholes pricing model and $5,655
was immediately expensed as general and administrative expense.
On
July 23, 2009, the Company granted a non-qualified stock option to acquire
an aggregate of 100,000 shares of its common stock to a consultant pursuant to
a consulting arrangement. The options
expire seven years from the date of issuance and have an exercise price of
$1.21 per share. Options to purchase
50,000 shares vested immediately, and were valued at $0.97 per share using the
Black-Scholes pricing model. Options to
purchase the remaining 50,000 shares vest on July 23, 2010 if the
consultant remains a consultant to the Company at that time. The cost of these options will ultimately be measured
on the date that the consultants performance is complete, which is the vesting
date. For purposes of measuring the cost
during interim periods, the options are measured at their then-current fair
value at each interim reporting date.
The fair value of the unvested options as of September 30, 2009 as
determined using the Black Scholes pricing model was $1.25 per share. The value of the options to purchase all
100,000 shares is being recognized as general and administrative expense over
the 12 month consulting period. The
Company expensed $18,500 and $18,500 in the three and nine months ended September 30,
2009, respectively.
On August 11, 2009, 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 fully vested and exercisable for a period of seven years at an exercise
price of $1.25 per share. The options
were valued at $1.00 per share using the Black-Scholes pricing model and $3,000
was immediately expensed as general and administrative expense.
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On
September 29, 2009, the Company issued non-qualified stock options to each
of its three outside directors, Mr. Koenig (50,000 options), Mr. Smith
(30,000 options) and Mr. Rudelius (30,000 options). On the same date, the Company issued
incentive stock options to its executive officers, Mr. Carlson (150,000
options) and Mr. Thon (60,000 options).
The options expire seven years from the date of issuance, are
exercisable at $1.50 per share and vest upon the latter of the date that the
Company is cleared by the FDA to sell its ProUroScan system in the United
States or the date that the Company closes on an aggregate of $2 million or
more of incremental financing after the date of grant, including financing
received upon the exercise of existing warrants. The options were valued at $1.21 per share
using the Black-Scholes pricing model and are being expensed over the estimated
vesting period as general and administrative expense. No expense was recognized in the three and
nine months ended September 30, 2009.
(c)
Warrants
On January 12,
2009, the Company issued 3,050,000 2009 Units pursuant to the closing of the
2009 Public Offering, and 3,058,381 units identical to the 2009 Units pursuant
to the automatic conversions of convertible debt (see Notes 2 and 6(a)). Each five-year warrant is exercisable at
$1.30 per share. The Company may redeem
outstanding
warrants at a price of $0.01 per warrant upon a minimum 30 days prior
written notice if the last sale price of its common stock equals or exceeds
$1.82 per share for a period of ten consecutive trading days.
As additional
compensation pursuant to the 2009 Public Offering, we sold to the underwriter,
Feltl & Company, for nominal consideration, a warrant (the Underwriters
Warrant) to purchase up to 305,000 units. The Underwriters Warrant is
not exercisable until January 7, 2010 and thereafter is exercisable at a
price per unit equal to $1.20 for a period of four years. The warrants underlying the units that are
subject to the Underwriters Warrant are subject to redemption as described
above commencing January 7, 2010.
The warrants issued described
below are exempt from registration under Section 4(2) of the
Securities Act as they were or will be issued in non-public offerings to a
limited number of subscribers. Each of
the following warrants was valued using the Black-Scholes pricing model:
On January 13, 2009,
the Company repaid the remaining $9,350
principal amount of a promissory note due to
an individual lender
, and issued an immediately exercisable five-year
warrant to the lender to acquire 4,295 shares of the Companys common stock at
$1.50 per share pursuant to the terms of the note (see Note 4).
On
January 22, 2009,
the Company repaid the remaining $34,000 principal
balance of an outstanding convertible promissory note due to
an individual lender
and issued to
the lender
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
(see Note 4)
.
On July 23, 2009,
the Company issued a two-year warrant to purchase 30,000 shares of our common
stock at an exercise price of $1.25 per share to it public relations firm as
consideration for services provided to the Company during the three months
ended September 30, 2009. The
warrant, valued at $26,400 using the Black-Scholes pricing model, was recorded
as general and administrative expense.
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Note
7. Income Taxes.
The
Company has adopted the policy of classifying interest in interest expense and
penalties in general and administrative expense. The Company had recorded no accrued interest
or penalties as of the date of adoption.
The
Company had no significant unrecognized tax benefits as of September 30,
2009 and December 31, 2008 and, likewise, no significant unrecognized tax
benefits that, if recognized, would affect the effective tax rate. The Company had no positions for which it
deemed that it is reasonably possible that the total amounts of the
unrecognized tax benefit will significantly increase or decrease. Any interest or penalties are expensed as
general and administrative expense as incurred.
The
Company has generated net operating loss carryforwards of approximately $6.1
million which, if not used, will begin to expire in 2021. Federal and state tax laws impose significant
restrictions on the utilization of net operating loss carryforwards in the
event of a change in ownership of the Company that constitutes an ownership
change, as defined by Section 382 of the Internal Revenue Code of 1986,
as amended (the Code). The Company has
analyzed the 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.
The Company reviewed the beneficial conversion
features of its issuances of convertible debt from January 1, 2006 through
September 30, 2009 and determined that there are no differences in book
and tax basis and no deferred tax liability as of September 30, 2009. The Company reduced its net operating loss
carryover and valuation allowance by approximately $881,000 for the
non-deductibility of the beneficial conversion features during this period.
When the valuation allowance related to deferred tax assets reverses, the
Company will record an $881,000 tax benefit related to the beneficial
conversion feature with a corresponding decrease to additional paid-in capital.
The net operating loss carryforwards are subject to
examination until they expire. The tax
years that remain subject to examination by major tax jurisdictions currently
are:
Federal 2006 - 2008
State of Minnesota 2006 - 2008
Note 8.
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
nine months ended September 30, 2009, the following significant
transactions were made between the Company and those parties that were related
parties at the time of each transaction:
On January 15, 2009, the Company repaid an
outstanding $37,500 loan along with accrued interest thereon to William Reiling,
then a greater than five percent shareholder.
On March 19, 2009, pursuant to the guaranties
received relating to the Companys renewal of its $1,200,000 Crown Bank
promissory note, the Company issued an aggregate 66,667 shares of its common
stock
as consideration to each of Mr. Davis and Mr. Reiling, and will
issue a further 11,111 shares to each per month for each month the notes remain
outstanding after August 31, 2009.
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On March 19,
2009, a $37,500 convertible promissory note and a $150,000 convertible
promissory note due to Mr. Davis were refinanced and combined with other
loans and advances on behalf of the Company from Mr. Davis in a $281,000
convertible promissory note. On May 26,
2009, Mr. Davis exercised his conversion rights under the promissory note
and the note was converted into 510,909 shares of the Companys common stock
(see Note 5).
On April 13, 2009, the Company
issued an aggregate of 27,366 shares of its common stock to Mr. Koenig, Mr. Rudelius
and Mr. Smith as payment of $20,250 directors fees accrued through December 31,
2008, in lieu of cash.
On September 1,
2009, the Company borrowed $26,000 from Mr. Smith for working capital
purposes. On November 6, 2009, the
entire amount due to Mr. Smith was applied toward his exercise of warrants
tendered in the Replacement Warrant Offering.
Although no promissory note was issued, on November 6, 2009, the
Company issued 925 shares of its common stock valued at $1,322 to Mr. Smith
as consideration for making the loan and in lieu of cash interest.
Between May 1, 2009
and September 16, 2009, Mr. Davis made various payments for the
benefit of the Company and provided the Company with certain cash advances
totaling approximately $243,000. On September 21,
2009, Mr. Davis and the Company executed the Davis Note. Upon execution of the Davis Note, the Company
agreed, as consideration for making the payments and advances represented by
the Davis Note, to issue to Mr. Davis 19,833 shares of its common stock
and to accrue for future issuance to Mr. Davis 2,700 shares of common
stock for each month (or portion thereof) that the Davis Note is outstanding
after March 21, 2010. In addition,
under the terms of the Davis Note, the Company will accrue for issuance to Mr. Davis
in lieu of cash interest, 1,618 shares of its common stock for each month (or
portion thereof) that the principal amount of the Davis Note is
outstanding. All of the shares accrued
for issuance to Mr. Davis will be issued upon repayment of the Davis
Note. The Davis Note matures on March 28,
2011.
The promissory note provides Mr. Davis with a subordinated
security interest in the Companys assets (see Note 4).
Note
9. Contingencies
Litigation
On July 15, 2009,
Rensselaer Polytechnic Institute (RPI) filed a lawsuit against the Company
seeking payment of $202,716 plus interest, penalties, costs and disbursements,
including attorneys fees. In the complaint, RPI alleges that the Company has
breached obligations to pay RPI an aggregate of $202,716 under the terms of a
license agreement dated July 13, 2001 between RPI and the Company and a
sponsored research agreement dated as of December 9, 2005 between RPI and
the Company. The Company believes that
the amounts being sought by RPI substantially exceed any amounts due to RPI
under such agreements and intends to defend itself vigorously against such
claims.
Note 10. Subsequent Events.
The
Company had the following significant subsequent events through November 13,
2009, which is the date the financial statements were available to be issued
for events requiring recording or disclosure in the financial statements for
the three and nine months ended September 30, 2009.
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On
September 25, 2009, the Company commenced its Replacement Warrant
Offering. The warrants subject to the
offer were: (a) 3,050,000 publicly traded warrants to purchase common
stock that were issued on January 12, 2009; and (b) 3,058,381
unregistered warrants to purchase common stock which were also issued on January 12,
2009 (together, the Warrants).
Pursuant to the offer, the Company temporarily modified the terms of the
Warrants so that each holder who tendered Warrants for early exercise on or before
November 6, 2009 received, in addition to the shares of common stock
purchased upon exercise, new three-year warrants to purchase the same number of
shares of ProUroCare common stock at an exercise price of $1.30 per share (the Replacement
Warrants). Warrants to purchase
1,244,829 shares of common stock were tendered resulting in gross proceeds to
the Company of $1,618,278, including the cancellation of a $26,000 loan from
Scott Smith and $11,250 of directors fees owed to Robert Rudelius in lieu of cash
payments for the exercise of a portion the Warrants they exercised.
The
$1,356,864 fair value of the Replacement Warrants was expensed with an
offsetting entry to additional paid-in capital.
The $1,618,278 purchase price of the stock issued pursuant to the
Warrant exercise, less the expenses of the offering (estimated to be
approximately $172,000 when all expenses are received) will be recorded as
capital stock and additional paid-in capital.
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Item
2. Managements Discussion and Analysis
of Financial Condition and Results of Operation.
The accompanying
Managements Discussion and Analysis of Financial Condition and Results of
Operation should be read in conjunction with our unaudited consolidated
financial statements, and notes thereto, filed with this Quarterly Report on Form 10-Q
for the quarter ended September 30, 2009.
Disclosure Regarding Forward-Looking Statements
Certain
statements contained in this Quarterly Report on Form 10-Q may be deemed
to be forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995, and the Company intends that such
forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements relate to,
among other things: general economic or industry conditions, nationally
and in the physician, urology and medical device communities in which we intend
to do business; our ability to raise capital to fund our 2009 and 2010 working
capital needs and introduce our products into the marketplace; our ability to
complete the development of our existing and proposed products on a timely
basis or at all; legislation or regulatory requirements, including our securing
of all U.S. Food and Drug Administration (FDA) and other regulatory approvals
on a timely basis, or at all, prior to being able to market and sell our
products in the United States; competition from larger and more well
established medical device companies and other competitors; the development of
products that may be superior to the products offered by us; securing and
protecting our intellectual property and assets, and enforcing breaches of the
same; clinical results not anticipated by management of the Company; the
quality or composition of our products and the strength and reliability of our
contract vendors and partners; changes in accounting principles, policies or
guidelines; financial or political instability; acts of war or terrorism; and
other economic, competitive, governmental, regulatory and technical factors
affecting our operations, proposed products and prices. We caution that these statements are qualified by important factors
that could cause actual results to differ materially from those reflected by
the forward-looking statements contained herein.
Overview;
Product Offerings
ProUroCare Medical Inc. (ProUroCare,
the Company, we, us or our, which terms include reference to our wholly
owned subsidiary, ProUroCare Inc. (PUC)) has developed and intends to market
an innovative prostate imaging system known as the ProUroScan
TM
system.
The ProUroScan system incorporates our new proprietary elasticity
imaging technology to create a map and an electronic record of the prostate.
The ProUroScan system is
an imaging system designed for use as an aid to the physician in visualizing
and documenting abnormalities in the prostate that have been previously
detected by a digital rectal exam (DRE). As an adjunct to DRE, the ProUroScan
system will be used following an abnormal DRE to generate a real-time image and
map of the prostate.
The final
composite image is saved as a permanent electronic record and can be
conveniently retrieved to view previous test results
.
Our approach to imaging
is based on the fact that most abnormalities in otherwise homogenous organ
tissue is less elastic than normal tissue.
The ProUroScans unique technology uses measurements of relative tissue
elasticity as detected by mechanical sensors and interpreted by mathematical
algorithms to create images, rather than using ultrasound or other alternative
technologies. Using the systems
specially designed rectal probe, physicians can quickly and cost-effectively
visualize the prostate gland and document specific areas of concern. The real-time map can be saved as a permanent
electronic record.
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Our imaging technology is
based on work originally performed in the late 1990s by Artann Laboratories
Inc. (Artann), a scientific technology company based in Trenton, New Jersey,
that is focused on early-stage technology development. In 2002, we licensed the
rights to this technology and since then have worked with Artann on its
development. In September 2006, Artann was awarded a $3 million Small
Business Innovation Research Phase II Competitive Renewal grant from the
National Institute of Health and the National Cancer Institute to help advance
the development and application for clearance of the ProUroScan system by the
FDA. In July 2008, the Company
entered into new license and development and commercialization agreements with
Artann relating to their existing technology and know-how and all future
technology developed by Artann in our field of use. After we obtain FDA
clearance, it is our intent to expand our working relationship with Artann to
include their participation in the development and licensing of future
mechanical imaging technology.
The ProUroScan system is
not currently marketed or sold and is not cleared for marketing by the FDA. Our
initial goal is to obtain a basic mapping and data maintenance claim from the
FDA under a 510(k) application for the current generation system. Once FDA
510(k) clearance is obtained on our current 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 worldwide presence in the urology
market.
We recently completed a
multi-site clinical study of the ProUroScan imaging system designed to provide
documentation to the FDA of the systems effectiveness in visualizing and
documenting abnormalities of the prostate detected by DRE. We expect to complete and submit to the FDA a
510(k) application for clearance to market this technology in the U.S
within the next few weeks.
We believe there is a
market need to be able to visualize and create an electronic record or map that
can show the position of abnormalities in the prostate gland. We believe the
ProUroScan System will offer a solution that meets these needs and that will
enable physicians to monitor and compare images of the prostate over time
(assuming we apply for and obtain FDA approval or clearance for this
indication).
We believe the ProUroScan
Systems existing technology provides a platform on which to develop multiple
future generation systems. In the future, following our initial FDA 510(k) clearance,
we intend to work with Artann to develop and introduce enhanced versions and
additional indications. For example, we
plan to study and develop an enhanced version of the system that may be able to
monitor changes in prostate tissue over time, guide biopsy of the prostate
gland and assess changes in prostate size following drug treatment for benign
prostatic hypertrophy. Future generation
systems will require us to obtain regulatory approval or clearance for use of
the ProUroScan system for additional related indications and file additional
submissions with the FDA if we are to obtain expanded labeling claims.
During the remainder of 2009 and into early 2010, we
expect to obtain FDA clearance on a basic mapping and data maintenance labeling claim and prepare to launch
our product into the market, although there can be no assurance that we will be
successful in meeting these milestones.
We are currently exploring potential marketing relationships with
medical product companies that are interested in marketing products in the
prostate cancer detection market. We expect such a relationship
would provide both financial support and access to down stream engineering,
regulatory, clinical, manufacturing and marketing capabilities.
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Recent
Financing Activity
On
January 12, 2009, we closed on the 2009 Public Offering and realized net
proceeds of approximately $1,790,000. In
addition, 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;
·
$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, each consisting of one share of common
stock and one warrant to purchase common stock at $1.30 per share (a Unit);
and
·
$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.
On
March 19, 2009, we reached an agreement with James Davis to refinance a
$150,000 promissory note (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 $12,293 of expenses paid by Mr. Davis on our
behalf. Mr. Davis also agreed to
lend to us an additional $67,638 to pay for our exhibition of the prostate
mechanical imaging 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. On May 26, 2009, Mr. Davis exercised his conversion rights under the
promissory note and the note was converted into 510,909 shares of the Companys
common stock
In
March 2009, we renewed $1.2 million of the secured bank debt to mature on March 28,
2010 and repaid $400,000 of the secured debt.
On June 16, 2009, we borrowed $100,000 pursuant to a promissory
note issued in favor of Crown Bank. The
promissory note matures on March 28, 2010 and bears interest at the prime
rate plus one percent
,
but never
less than 6.00 percent, and is guaranteed by Ian Friendly. The note, along with the existing $1.2
million promissory note, is collateralized by all Company assets.
Between May 1, 2009
and September 16, 2009, Mr. Davis, made various payments for the
benefit of the Company and provided us with certain cash advances totaling
approximately $243,000, including $100,000 loaned to us on July 29, 2009
and $40,000 loaned to the Company on September 16, 2009. The purpose of these payments and advances
was to help fund specific Company activities related to product development,
clinical studies and FDA related activities.
On September 21, 2009, Mr. Davis and the Company executed a
promissory note in the principal amount of $243,000 (the Davis Note) to
formalize our obligation to Mr. Davis for these amounts. The Davis Note matures on March 28,
2011. Upon execution of the Davis Note,
we agreed, as consideration for making the payments and advances represented by
the Davis Note, to issue to Mr. Davis 19,833 shares of its common stock
and to accrue for future issuance to Mr. Davis 2,700 shares of common
stock for each month (or portion thereof) that the Davis Note is outstanding
after March 21, 2010. In addition,
under the terms of the Davis Note, we will accrue for issuance to Mr. Davis
in lieu of cash interest, 1,618 shares of our common stock for each month (or
portion thereof) that the principal amount of the Davis Note is
outstanding. All of the shares accrued
for issuance to Mr. Davis will be issued upon repayment of the Davis Note.
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On September 23,
2009, we borrowed $300,000 from Jack Petersen pursuant to a secured promissory
note. The promissory note matures on March 28,
2011. Under the terms of the promissory note, we will accrue for issuance to Mr. Petersen
1,998 shares of our common stock for each month or portion thereof that the
principal amount of the loan remains outstanding, in lieu of cash
interest. As consideration for making
the loan, we issued to Mr. Petersen 20,000 shares of stock and will accrue
for issuance 3,333 shares of our common stock for each month or portion thereof
that the principal amount of the loan remains outstanding beginning March 23,
2010. All accrued shares will be issued
upon repayment of the loan. The
promissory note provides Mr. Petersen with a subordinated security
interest in our assets.
On September 23,
2009, we borrowed $100,025 from Central Bank pursuant to a promissory
note. The promissory note matures on January 17,
2011, and bears interest at the prime rate plus one percent, with a minimum
rate of 6.0 percent. The promissory note
was guaranteed by Bruce Johnson. As
consideration for providing the guaranty, we issued to Mr. Johnson 6,667
shares of stock and will accrue for issuance 1,111 shares of our common stock
for each month or portion thereof that the principal amount of the loan remains
outstanding beginning March 23, 2010.
All accrued shares will be issued upon repayment of the loan. In addition, we executed a security agreement
with Mr. Johnson, providing him with a subordinated security interest in
our assets.
On
September 25, 2009, the Company commenced a tender offer to holders of
certain outstanding warrants to provide additional consideration for the
exercise of such warrants. The warrants
subject to the tender offer were: (a) 3,050,000 publicly traded warrants
to purchase common stock that were issued on January 12, 2009; and (b) 3,058,381
unregistered warrants to purchase common stock which were also issued on January 12,
2009 (together, the Warrants).
Pursuant to the offer, the Company temporarily modified the terms of the
Warrants so that each holder who tendered Warrants for early exercise on or
before November 6, 2009 received, in addition to the shares of common
stock purchased upon exercise, new three-year warrants to purchase the same
number of shares of ProUroCare common stock at an exercise price of $1.30 per
share (the Replacement Warrants).
Warrants to purchase 1,244,829 shares of common stock were tendered
resulting in gross proceeds to the Company of $1,618,278, including the
cancellation of a $26,000 loan from Scott Smith and $11,250 of directors fees
owed to Robert Rudelius in lieu of cash payments for the exercise of a portion
the Warrants they exercised.
Results
of Operations
The following discussion
of the financial condition and results of operations should be read in
conjunction with the consolidated financial statements included herewith. This
discussion should not be construed to imply that the results discussed herein
will necessarily continue into the future, or that any conclusion reached
herein will necessarily be indicative of actual operating results in the
future.
Three
months ended September 30, 2009 compared to the three months ended September 30,
2008:
Operating
Expenses/Operating Loss
.
Our operating
expenses (and our operating loss) for the three months ended September 30,
2009 were $491,630, an increase of $197,643, or 67 percent, compared to
$293,987 last year. Approximately
$86,000 of consulting expenses related to conducting our clinical trials was
incurred during the three months ended September 30, 2009. Contracted engineering and development costs
increased 137% to approximately $71,000 in 2009 from $30,000 in 2008, or, as we
initiated manufacturing engineering efforts to bring the ProUroScan system into
production. Increased public and
investor relations efforts resulted in an increase of expense to approximately
$61,000 in 2009 from $6,900 in 2008, including approximately $26,000 of expense
related to the issuance of warrants to consultants.
24
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Net
Interest Expense
.
Net interest expense for the three months
ended September 30, 2009 was $50,687, a decrease of 89 percent, compared
to $473,658 last year. Included in the
2008 expense was approximately $360,000 of original issue discount and debt
issuance cost amortization primarily related to our 2006, 2007 and 2008 private
debt placements. Upon the closing of the
2009 Public Offering and the subsequent automatic conversion of approximately
$3.3 million of debt and accrued interest into equity, the related original
issue discount and debt issuance cost was expensed. Consequently, the related amortization
expense has been eliminated going forward.
Also included in the 2008 expense was approximately $66,000 of interest
on the 2007 and 2008 private debt placements.
Debt Extinguishment Expense
.
Our debt extinguishment expense arises primarily from the issuance of
stock or warrants as consideration to loan guarantors in certain refinancing
transactions. Our debt extinguishment expense for the three months ended September 30,
2009 was $41,717, an increase of 44 percent, compared to $29,045 last year.
Nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008:
Operating
Expenses/Operating Loss
.
Our operating
expenses (and our operating loss) for the nine months ended September 30,
2009 were $1,412,138, an increase of $355,462, or 34 percent, compared to
$1,056,676 last year. Compensation and
benefits costs in the nine months ended September 30, 2009 increased
approximately $42,000, or 17 percent, compared to last year as a result of a
$40,000 bonus awarded in recognition of the efforts of the Companys officers
in the completion of the 2009 Public Offering.
Stock-based compensation increased approximately $144,000, or 300
percent, compared to last year, as a result of the granting of options to
purchase an aggregate of 644,500 shares of our common stock to directors,
officers and consultants. Expenses
incurred during the first nine months of 2009 that were not incurred during
2008 included product development expenses of $190,000 incurred under the
Artann development agreement, approximately $150,000 of consulting costs
related to the management of the ProUroScan clinical trials, new investor and
public relations programs that cost approximately $90,000, contracted
engineering costs of approximately $31,000 related to manufacturing engineering
to bring the ProUroScan system into production, the recording of a $25,000
lawsuit contingency reserve and trade show attendance costs of approximately
$23,000. Offsetting these increases were
one-time costs incurred in 2008 including acquisition of patents for $300,000,
which was expensed at the time of the purchase, approximately $85,000 of legal
fees related to negotiating development and licensing agreements and a $38,000
stock grant to directors.
Net
Interest Expense
.
Net interest expense for the nine months
ended September 30, 2009 was $1,139,138, a decrease of $188,633, or 14
percent, compared to $1,327,771 last year.
The largest portion of our interest expenses in both years was related
to the expensing of original issue discount and debt issuance costs related to
our 2006, 2007 and 2008 private debt placements and the 2008 unit put
arrangement. In 2009, we wrote-off
approximately $980,000 of unamortized original issue discount and debt issuance
costs upon the closing of the 2009 Public Offering and the subsequent automatic
conversion of approximately $3.3 million of debt and accrued interest into
equity. Included in the 2008 expense was
approximately $1,011,000 of original issue discount and debt issuance cost
amortization. Also included in the 2008
expense was approximately $181,000 of interest on the 2007 and 2008 private
debt placements, compared to approximately $5,000 in 2009. Other interest expense increased to $145,000
in 2009 from approximately $136,000 in 2008, or about 7 percent, as a result of
finance charges accrued on certain vendor payables.
Debt Extinguishment Expense
.
Our debt extinguishment expense arises primarily from the issuance of
stock or warrants issued pursuant to the provisions of short-term loans from
certain lenders in certain refinancing transactions. Our debt extinguishment
expense for the nine months ended September 30,
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2009 was $365,984, an
increase of $291,108, or 387 percent, compared to $74,876 last year. The increase is due to the expensing of
approximately $123,000 of original issue discount related to a beneficial
conversion feature of a $281,000 promissory note issued to Mr. Davis upon
its conversion, the write-off of $113,000 of unamortized original issue
discount upon the refinancing of a $150,000 note with Mr. Davis, the
issuance of 66,667 shares of stock valued at $33,333 to the Phillips W. Smith
Family Trust (the Smith Trust) upon the extension of the $600,000 Smith Trust
loan and a $13,000 fee associated with refinancing of $1.3 million loans with
Crown Bank during the nine months ended September 30, 2009. Additionally, during the nine months ended September 30,
2009, approximately $81,000 of the cost of stock issued to guarantors of the
bank loans was amortized.
Current Operations Employees and Expenses
We currently employ 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 remainder of 2009 and in early 2010,
we expect to complete the clinical and regulatory process leading to FDA 510(k) market
clearance and establish a contract manufacturing capability 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 750 square feet of office
space on a month-to-month basis at a cost of approximately $800 per month.
Other expenses incurred include executive officer compensation, travel,
insurance, telephone, supplies and other miscellaneous expenses.
Liquidity and Capital Resources
Net
cash used in operating activities
was approximately $2.3 million during the nine months
ended September 30, 2009 compared to approximately $970,000 last
year. The increase in cash used was
primarily the result of payments to Artann of $600,000 and $250,000 for accrued
licensing fees and accrued development costs pursuant to our licensing and
development agreements, respectively. We also paid $174,500 to Artann for
development work performed under the development agreement. In addition to normal operating expenses,
other uses of cash included payments for accounts payable and other accrued
expenses, including a portion of the accrued compensation, following the
completion of the 2009 Public Offering.
Net cash provided by
financing activities was approximately $2.5 million during the nine months
ended September 30, 2009 compared to approximately $612,000 last
year. Proceeds from the 2009 Public
Offering less underwriters commissions and other payments for expenses of the
offering were approximately $2.3 million during the nine months ended September 30,
2009. In June and September, 2009,
we borrowed a total of $200,025 pursuant to two bank loans, and $543,000
pursuant to two loans from investors.
Offsetting this was our pay-down of $400,000 bank debt in March 2009. During the nine months ended September 30,
2008, we received net proceeds from our private convertible debt placements,
including warrants, with individual investors of approximately $914,000 and
approximately $263,000 from other private loans. These loan receipts were offset by repayments
of notes payable and loans from directors totaling approximately $410,000 and
payments made for debt issuance and deferred offering costs totaling
approximately $190,000.
During
the remainder of 2009, we expect to submit an FDA 510(k) application for
market clearance and make certain preparations for commercialization. Our ability to pursue additional activities,
such as
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establishing
a contract manufacturing capability, developing a more portable imaging system
and other product enhancements and expanding the number of our clinical study
sites, is dependent upon the success and timing of our financing efforts
outlined above.
We
expect that our cash needs for our normal operating expenses (excluding the
milestone payments due to Artann explained below) will be approximately
$1,150,000 during the fourth quarter of 2009 and through the first half of
2010.
To
the extent we are successful in obtaining sufficient financing, we will advance
other projects and activities needed for the long-term success of the
business. These projects include
contracting for certain product engineering and development work to reduce the
size and cost of the ProUroScan system and make certain enhancements that we
estimate will cost approximately $325,000; establishing a contract
manufacturing capability, including production tooling and molds, estimated to
cost approximately $350,000; and placing systems and performing additional
patient studies at certain key institutions, at a cost of approximately
$170,000. During this same period, and
depending on our level of success in obtaining sufficient financing to do so,
we expect to make payments of approximately $360,000 towards certain
outstanding liabilities.
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 required 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
required to make a further cash payment of $750,000 and a second $1,000,000
equity payment. We are currently working
with Artann to potentially restructure these payment terms.
As of September 30,
2009, we had approximately $270,000 of cash on hand and current liabilities of
$3.4 million, including $1.8 million of secured debt that matures on March 28,
2010. On November 6, 2009,
1,244,829 warrants were tendered in our Warrant Replacement Offer, from which
we realized net cash proceeds of approximately $1.4 million. We will need additional financing to fund
operations and to initiate production of the ProUroScan system throughout 2010
and beyond. We are actively pursuing
several potential near-term sources of funding to provide the working capital
needed to repay our existing debt and to fund a commercial launch into the
urology market. These potential sources
include cash advances from shareholders, additional loans or guaranteed bank
debt, working with lenders to extend the maturity dates of our existing secured
debt and one or more rounds of private placements of debt or equity securities.
We are also working to
establish a distribution relationship with a medical products company during
the next six to nine months. We expect
such a distribution partner could provide financial support in the form of licensing
fees, loans, equity investment or some combination. In addition to financial support, a
successful collaboration with such a partner would allow us to gain access to
downstream engineering, manufacturing, clinical and marketing support. 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.
Finally, we may redeem
unexercised warrants 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, it will allow
all holders of warrants a period of 30 days to exercise their warrants at $1.30
per share. 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 to occur.
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If additional funds are
raised by the issuance of convertible debt or equity securities, such as the
issuance of stock, the issuance and exercise of warrants or the issuance and
conversion of convertible debt, 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.
If adequate funds are not
available through our financing initiatives on a timely basis or on acceptable
terms, we may be unable to commercialize our products during the expected time
frame. We do not know what impact the
unprecedented volatility in worldwide credit and equity markets in late 2008
and early 2009 may have on our ability to obtain future financing. During that
period, we saw unprecedented turmoil in equity and credit markets that 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
unsettled today, we cannot predict what effect these events will have on our
ability to obtain financing in the future.
If for any reason the regulatory clearance process is significantly
delayed, it would 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.
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 $1,300,000 of senior bank notes and
$1,243,000 of subordinated notes and, as a result, are not available to secure
other senior debt financing.
Assuming we are
successful in obtaining the financing required to establish a contract
manufacturing capability, we anticipate purchasing approximately $60,000 of
tooling molds and other capital for production, computer equipment, software
and general office furniture and equipment through the first half of 2010. We
do not anticipate selling any significant assets in the near term.
Going Concern
We
have incurred operating losses, accumulated deficit and negative cash flows
from operations since inception. As of September 30, 2009, we had an
accumulated deficit of approximately $23.9 million. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements included in this Quarterly
Report on Form 10-Q do not include any adjustments related to
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should we be unable to continue
as a going concern.
Critical Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, or GAAP. The application of GAAP
requires that we make estimates that affect our reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. We base our estimates on historical experience and
on various other assumptions that we believe to be
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reasonable
under the circumstances. We evaluate our estimates and assumptions on an
ongoing basis. Our actual results may differ significantly from these
estimates.
A
description of the Companys critical accounting policies that represent the
more significant judgments and estimates used in the preparation of the Companys
financial statements was provided in the Managements Discussion and Analysis
of Financial Condition and Results of Operations section of the Companys
Annual Report on Form 10-K for the year ended December 31, 2008. There were not any material changes to our
critical accounting policies during the nine months ended September 30,
2009.
Item
4T. Controls and Procedures.
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
and Exchange Act of 1934, as amended (the Exchange Act) is recorded,
processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission (the SEC). As of September 30,
2009, the end of the period covered by this Quarterly Report on Form 10-Q,
we carried out an evaluation, under the supervision and with the participation
of management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 under the Exchange Act.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
During
the quarter ended September 30, 2009, 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.
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
As previously
reported in the Companys Quarterly Report on Form 10Q for the quarter
ended June 30, 2009,on July 28, 2009, (the Company) was notified
that the Rensselaer Polytechnic Institute (RPI) filed a complaint against the
Company on July 15, 2009 in the Supreme Court of the State of New York,
County of Rensselaer. In the complaint,
RPI alleges that the Company has breached obligations to pay RPI an aggregate
of $202,716 under the terms of a license agreement dated July 13, 2001
between RPI and the Company and a sponsored research agreement dated as of December 9,
2005 between RPI and the Company. RPI is
seeking damages in the amount of $202,716, plus interest, penalties, costs and
disbursements, including attorneys fees.
The Company believes that the amounts being sought by RPI substantially
exceed any amounts due to RPI under such agreements and intends to defend
itself vigorously against such claims.
Item
1A. Risk Factors.
Investing in our common stock involves a high degree
of risk. You should carefully consider the risks and uncertainties set forth
under Item 1A of our Annual Report on Form 10-K for the year ended
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December 31, 2008, as well as the material
changes to those risk factors set forth in Part II, Item 1A to our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009
and June 30, 2009, and the material changes set forth below before
purchasing our common stock. These risks
and uncertainties are not the only ones facing our Company; additional risks
and uncertainties may also impair our business operations. If any of the
following risks actually occur, our business, financial condition, results of
operations or cash flows would likely suffer. In that case, the trading price
of our common stock could fall, and you may lose all or part of your
investment. We undertake no obligation
to update or revise any forward-looking statement except as required by the
SEC.
Risk
factors
disclosed in our Annual Report on Form 10-K relating to our need for additional financing and potential dilution to
existing shareholders have been revised to read as follows:
We will need additional financing, and any such financing will likely
be dilutive to our existing shareholders.
As of September 30,
2009, we had approximately $270,000 of cash on hand and current liabilities of
$3.4 million, including $1.8 million of secured debt that matures on March 28,
2010. On November 6, 2009,
1,244,829 warrants were tendered in our Warrant Replacement Offer, from which
we realized net cash proceeds of approximately $1.4 million. We will need additional financing to fund
operations and to ramp-up production of the ProUroScan system to meet
commercial demands throughout 2010 and beyond.
We will also need funding to pay, for example, up to $1,000,000 of
future payments to Artann related to FDA 510(k) clearance
milestones. 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.
We are actively pursuing
several potential near-term sources of funding to provide the working capital
needed to repay our existing debt and to fund a commercial launch into the
urology market. These potential sources
include cash advances from shareholders, additional loans or guaranteed bank
debt, working with lenders to extend the maturity dates of existing debt and
one or more rounds of private placements of debt or equity securities.
If additional funds are raised by the issuance of
convertible debt or equity securities, such as the issuance of stock or the
issuance and exercise of warrants or the issuance and conversion of convertible
debt, 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 $1,300,000 of senior bank notes, $1,143,000 of notes issued
to investors and $100,000 of other bank debt and, as a result, are not
available to secure other senior debt financing. Upon the occurrence of an
event of default, the banks security interests in our assets will be assigned
to guarantors of the bank notes and the holders of such $1,143,000 of
promissory notes.
Our $1,300,000 senior
debt financing through Crown Bank, Minneapolis, Minnesota, has required us to
pledge all of our assets and certain licenses, as well as to provide personal
guarantees of certain shareholders. In addition, we have issued a total of
$1,243,000 of promissory notes to three individual
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investors and a bank that
have subordinated interests in all of our assets and certain licenses. Due to such security interests, we will not
be in a position in the future to pledge our assets to secure any debt or lending
facility in the event we desire or need to borrow such funds on a secured
lending basis. It is doubtful that we 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 the facilitys
guarantors, in the event of any default by us with our senior lender that
causes the personal guarantees to be called and honored, all of the banks
security interests in our assets shall be assigned to such guarantors, pro
rata, in consideration of such breach and obligation to pay under the
respective guarantees. In addition, the holders and guarantor of the $1,243,000
of promissory notes have a security interest in our assets in the event of a
default under the note. Thus, our common shareholders, and any existing and
future investors in our common stock, would, if the foregoing breach and
circumstances occurred, not have access or recourse to the assets and
collateral, and thus, would likely face a complete loss of their investment in
the Company.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
Common Stock
On September 29, 2009, we issued 4,834 shares of our common stock
to David Koenig as payment for $7,250 of directors fees, in lieu of cash.
Warrants
On July 23, 2009,
the Company issued a two-year warrant to purchase 30,000 shares of our common
stock at an exercise price of $1.25 per share to Kohnstamm Communications as
consideration for services provided to the Company during the three months
ended September 30, 2009. The
warrant, valued at $26,400 using the Black-Scholes pricing model, was recorded
as general and administrative expense.
Sales of the
securities described above were made in compliance with the requirements of Rule 506
of Regulation D under the Securities Act of 1933, as amended (the Securities
Act) and the exemption from registration provided under Section 4(2) of
the Securities Act. In qualifying for
such exemption, the Company relied upon representations from the investors
regarding their status as accredited investors under Regulation D and the
limited manner of the offering.
Item 4.
Submission of Matters to a Vote of Security Holders.
The Company held our Annual Meeting of Shareholders on August 11,
2009, at which the shareholders took the following actions:
Matter 1: Election of
Directors
The director nominees
described in the Companys Proxy Statement were elected as follows:
|
|
For
|
|
Withhold
|
|
Richard
C. Carlson
|
|
5,159,372
|
|
12,062
|
|
David
F. Koenig
|
|
5,016,365
|
|
155,069
|
|
Robert
Rudelius
|
|
5,039,705
|
|
131,729
|
|
Scott
E. Smith
|
|
5,034,705
|
|
136,729
|
|
Each director has
consented to hold office until the next annual meeting of shareholders or until
his successor is elected and shall have qualified.
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Matter 2: Approve and adopt the 2009 Stock Plan
The adoption of our 2009
Stock Plan was approved as follows:
For
|
|
Against
|
|
Abstain
|
|
4,334,101
|
|
161,958
|
|
223,4260
|
|
Matter 3: Approve and
adopt Amended and Restated Articles of Incorporation:
The adoption of our Amended and Restated Articles of
Incorporation was approved as follows:
For
|
|
Against
|
|
Abstain
|
|
5,104,911
|
|
61,023
|
|
5,500
|
|
Matter 4: Appointment of Independent Registered
Accounting Firm
The appointment of Baker Tilly Virchow Krause, LLP as
the Companys independent registered public accounting firm for the 2009 fiscal
year was ratified as follows:
For
|
|
Against
|
|
Abstain
|
|
5,161,435
|
|
10,000
|
|
0
|
|
Item 5. Other Information.
None.
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Item 6. Exhibits
.
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
ProUroCare Medical Inc.
Amended and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to Current Report on Form 8-K filed August 7,
2009).
|
|
|
|
10.1
|
|
ProUroCare
Medical Inc. 2009 Stock Plan (incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed August 17, 2009).
|
|
|
|
10.2
|
|
Promissory Note dated
September 21, 2009 issued in favor of James L. Davis (incorporated by
reference to Exhibit 10
.44 to Registration
Statement filed on Form S-4 October 16, 2009).
|
|
|
|
10.3
|
|
Promissory Note dated
September 23, 2009 issued in favor of Jack Petersen (incorporated by
reference to Exhibit 10.45
to Registration Statement
on Form S-4 filed October 16, 2009).
|
|
|
|
10.4
|
|
Promissory Note dated
September 23, 2009 issued in favor of Central Bank (incorporated by
reference to Exhibit 10.46
to Registration Statement
on Form S-4 filed October 16, 2009).
|
|
|
|
10.5
|
|
Security Agreement with
Bruce Johnson dated September 23, 2009 (incorporated by reference to
Exhibit 10.47
to Registration Statement on Form S-4 filed
October 16, 2009).
|
|
|
|
31.1
|
*
|
|
Certification
of Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.2
|
*
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.1
|
*
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
*Filed herewith.
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SIGNATURES
Pursuant to the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
|
ProUroCare
Medical Inc.
|
|
|
|
|
Date: November 13, 2009
|
By:
|
/s/
Richard C. Carlson
|
|
Name:
|
Richard
C. Carlson
|
|
Title:
|
Chief
Executive Officer
|
|
|
|
|
Date: November 13, 2009
|
By:
|
/s/
Richard Thon
|
|
Name:
|
Richard
Thon
|
|
Title:
|
Chief
Financial Officer
|
|
|
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Exhibit Index
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
ProUroCare Medical Inc.
Amended and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to Current Report on Form 8-K filed August 7,
2009).
|
|
|
|
10.1
|
|
ProUroCare
Medical Inc. 2009 Stock Plan (incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed August 17,
2009).
|
|
|
|
10.2
|
|
Promissory Note dated
September 21, 2009 issued in favor of James L. Davis (incorporated by
reference to Exhibit 10
.44 to Registration
Statement filed on Form S-4 October 16, 2009).
|
|
|
|
10.3
|
|
Promissory Note dated
September 23, 2009 issued in favor of Jack Petersen (incorporated by
reference to Exhibit 10.45
to Registration Statement
on Form S-4 filed October 16, 2009).
|
|
|
|
10.4
|
|
Promissory Note dated
September 23, 2009 issued in favor of Central Bank (incorporated by
reference to Exhibit 10.46
to Registration Statement
on Form S-4 filed October 16, 2009).
|
|
|
|
10.5
|
|
Security Agreement with
Bruce Johnson dated September 23, 2009 (incorporated by reference to
Exhibit 10.47
to Registration Statement on Form S-4 filed
October 16, 2009).
|
|
|
|
31.1
|
*
|
|
Certification
of Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.2
|
*
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.1
|
*
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
*Filed herewith.
35
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