Filed
pursuant to Rule 424(b)(3)
Registration
No. 333 - 167969
This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state or other jurisdiction where the offer
is not permitted, nor shall there be any sale of these securities in any state
or other jurisdiction in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such state or other jurisdiction.
Dated
July 26, 2010
OFFER
LETTER/PROSPECTUS
OFFER
TO HOLDERS OF
FIVE-YEAR
$1.30 COMMON STOCK PURCHASE WARRANTS AND THREE-YEAR $1.30 COMMON STOCK PURCHASE
WARRANTS OF PROUROCARE MEDICAL INC.
TO
RECEIVE UPON EXERCISE OF THEIR WARRANTS, IN ADDITION TO THE COMMON STOCK
PURCHASED, AN EQUAL NUMBER OF NEW THREE-YEAR $1.30 COMMON STOCK PURCHASE
WARRANTS (THE “2010 REPLACEMENT WARRANTS”)
AND
PROSPECTUS
FOR (i) THE 2010 REPLACEMENT WARRANTS, (ii) 5,750,536 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THE 2010 REPLACEMENT WARRANTS, (iii) 1,244,829 SHARES
OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THE 2009 REPLACEMENT WARRANTS AND
(iv) 1,752,760 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF REGISTERED
FIVE-YEAR $1.30 COMMON STOCK PURCHASE WARRANTS
________________
THE
OFFER EXPIRES AT 4:00 P.M., CENTRAL TIME, ON AUGUST 2, 2010
UNLESS
WE EXTEND THE OFFER
________________
The
Offer
For a
limited period of time, ProUroCare Medical Inc. (“we,” “us,” or the “Company”)
is offering to certain of its warrant holders the opportunity to receive new,
three-year warrants upon the exercise of their existing warrants (the
“Offer”). The Offer is being made to (i) all holders of our publicly
traded warrants to purchase common stock issued in connection with our 2009
public offering of units, referred to as the “Public Warrants”; (ii) all holders
of our unregistered warrants to purchase common stock that were issued on
January 12, 2009 pursuant to the automatic conversions of convertible debt,
referred to as the “Private Warrants”; and (iii) all holders of our warrants
that were issued to participating holders of Public Warrants and Private
Warrants, pursuant to a 2009 exchange offer whereby such holders had the
opportunity to receive, upon the exercise of such warrants, new three-year
warrants, referred to as the “2009 Replacement Warrants.” The Public
Warrants, Private Warrants and 2009 Replacement Warrants will be referred to
collectively as the “Warrants.” The Company will receive all of the proceeds
from the exercise of the Warrants.
During
the Offer Period defined below, each Warrant holder who tenders Warrants for
early exercise will receive, in addition to the shares of common stock purchased
upon exercise, new three-year warrants to purchase an equal number of shares of
our common stock at an exercise price of $1.30 per share (each, a “2010
Replacement Warrant”). The Company may elect to redeem the 2010 Replacement
Warrants at any time after the last sales price of the Company’s common stock
equals or exceeds $4.00 for 10 consecutive trading days (the same redemption
terms as for the 2009 Replacement Warrants, in contrast to the existing Public
Warrants and Private Warrants, which are currently redeemable by the Company).
The Company must provide 30 days’ prior written notice of its decision to redeem
the 2010 Replacement Warrants, at $0.01 per warrant, during which time holders
may choose to exercise the 2010 Replacement Warrants according to their terms
rather than submitting them for redemption.
The
Public Warrants were issued on January 12, 2009 pursuant to the closing of our
public offering of 3,050,000 units (the “Units”), each such Unit consisting of
one share of common stock and one redeemable warrant to purchase one share of
common stock. Between January 12, 2009 and the date of this prospectus,
1,297,240 Public Warrants have been exercised. We are offering pursuant to
this Offer Letter/Prospectus 1,752,760 shares of our common stock for issuance
upon exercise of the Public Warrants.
The
Private Warrants were issued on January 12, 2009 pursuant to the automatic
conversions of convertible debt that resulted in the issuance of warrants to
purchase 3,058,381 shares of common stock. The terms of the Private
Warrants are identical to the terms of the Public Warrants, but we have not
registered the shares of common stock issuable upon exercise of the Private
Warrants and will be able to issue such shares only if exemptions from the
registration requirements of any applicable federal or state securities laws are
available. Between January 12, 2009 and the date of this prospectus,
305,434 Private Warrants have been exercised.
The 2009
Replacement Warrants were issued on November 6, 2009. On September 26,
2009, the Company commenced a similar warrant exchange offer for the Public
Warrants and Private Warrants. Pursuant to the 2009 offer, the Company
temporarily modified the terms of the Public Warrants and Private Warrants so
that each holder who tendered Public Warrants or Private 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. On November 6, 2009, Public Warrants and Private Warrants to
purchase 1,244,829 shares of common stock were tendered. Between November
6, 2009 and the date of this prospectus, no 2009 Replacement Warrants have been
exercised. The terms of the 2010 Replacement Warrants will be identical to
the terms of the 2009 Replacement Warrants except for the expiration date of the
warrants. We are offering pursuant to this Offer Letter/Prospectus
1,244,829 shares of our common stock for issuance upon exercise of the 2009
Replacement Warrants.
The Offer
is made upon the terms and conditions in this Offer Letter/Prospectus and
related Letter of Transmittal. The Offer will be open until August 2, 2010
at 4:00 p.m. Central Time, unless earlier withdrawn or otherwise extended by the
Company (the period during which the Offer is open, giving effect to any
withdrawal or further extension, is referred to herein as the “Offer
Period”). The Offer is not made to those holders who reside in states or
other jurisdictions where an offer, solicitation or sale would be unlawful. We
will pay no interest on the cash tendered for the exercise price of the Warrants
regardless of any extension of, or amendment to, the Offer or any delay.
The Company may withdraw the Offer only if the conditions of the Offer are not
satisfied prior to expiration of the Offer Period. Promptly upon any such
withdrawal, the Company will return the tendered Warrants along with any cash
delivered therewith.
You may
tender some or all of your Warrants on these terms.
If you elect to
tender Warrants in response to this Offer, please follow the instructions in
this document and the related documents, including the Letter of
Transmittal.
If you tender Warrants, you may withdraw your tendered
Warrants before the expiration of the Offer Period and retain them on their
original terms, by following the instructions herein. If the Offer Period is
extended, you may withdraw your tendered Warrants at any time until the
expiration of such extended Offer Period. In addition, Warrants that are not
accepted by us for payment by August 31, 2010 may be withdrawn.
Warrants
which are not tendered, or which are tendered and withdrawn in accordance with
the procedures herein, will retain their current terms. The Public
Warrants and Private Warrants have an exercise price of $1.30 per share, expire
January 7, 2014 and may be redeemed by the Company at any time prior to
expiration. The 2009 Replacement Warrants have an exercise price of $1.30
per share, expire November 12, 2012 and may be redeemed by the Company at any
time after the last sales price of the Company’s common stock equals or exceeds
$4.00 for 10 consecutive trading days.
This
Offer is conditioned upon the existence of effective amendments to the Company’s
registration statements regarding the common stock issuable upon exercise of the
Public Warrants and the 2009 Replacement Warrants and an effective Registration
Statement on Form S-4 regarding the 2010 Replacement Warrants and the common
stock issuable upon exercise thereof.
The
Company’s Board of Directors has approved this Offer. However, neither the
Company nor any of its directors, officers or employees makes any recommendation
as to whether to exercise Warrants. Each holder of a Warrant must make his, her
or its own decision as to whether to exercise some or all of his, her or its
Warrants.
The
Company reserves its right to redeem the Warrants pursuant to their original
terms, including those which provide that the Public Warrants and Private
Warrants may be redeemed at the Company’s discretion at any time prior to
expiration and those which provide that the 2009 Replacement Warrants may be
redeemed by the Company at any time after the last sales price of the Company’s
common stock equals or exceeds $4.00 for 10 consecutive trading days.
The Company must provide 30 days’ written notice of a decision to redeem
the Warrants, at $0.01 per Warrant, during which time holders may choose to
exercise the Warrants according to their terms rather than submitting them for
redemption.
If you
have any questions or need assistance, you should contact the Company. You
may also request additional copies of this document, the Letter of Transmittal
or the Notice of Guaranteed Delivery from the Company. All questions and
requests for additional information should be directed to Dick Thon, ProUroCare
Medical Inc., 6440 Flying Cloud Dr., Suite 101, Eden Prairie, MN 55344,
telephone (952) 476-9093, email:
rthon@prourocare.com
.
We will
amend our offering materials, including this Offer Letter/Prospectus, to the
extent required by applicable securities laws to disclose any material changes
to information previously published, sent or given to Warrant
holders.
Previous
Offer
On
September 26, 2009, the Company commenced a similar warrant exchange offer for
the Public Warrants and Private Warrants. Pursuant to the 2009 offer, the
Company temporarily modified the terms of the Public Warrants and Private
Warrants so that each holder who tendered Public Warrants or Private 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. On November 6, 2009, Public Warrants and Private
Warrants to purchase 1,244,829 shares of common stock were tendered resulting in
gross proceeds to the Company of $1,618,278, including the cancellation of a
$26,000 loan from a director and $11,250 of directors’ fees owed to another
director in lieu of cash payments for the exercise of a portion the Public
Warrants or Private Warrants they exercised. The terms of the 2010
Replacement Warrants will be identical to the terms of the 2009 Replacement
Warrants except for the expiration date of the warrants.
Scope
of the Prospectus
This
Offer Letter/Prospectus discloses the terms of the Warrants during the Offer
Period. This Offer Letter/Prospectus also sets forth the terms of the 2010
Replacement Warrants to be issued to those Warrant holders who elect to
participate in the Offer and describes the common stock issuable upon exercise
of the 2010 Replacement Warrants.
Additionally,
this Offer Letter/Prospectus relates to (i) 1,752,760 shares of Company common
stock, par value $0.00001 per share, which are issuable upon exercise of the
Public Warrants during or after the Offer Period and (ii) 1,244,829 shares of
Company common stock, par value $0.00001 per share, which are issuable upon
exercise of the 2009 Replacement Warrants during or after the Offer
Period. The Public Warrants and the 2009 Replacement Warrants have an
exercise price of $1.30 per share, subject to adjustment.
This
Offer Letter/Prospectus does not apply to the shares of Company common stock
which are issuable upon exercise of the Private Warrants. The Company may
issue such common stock only if exemptions from the registration requirements of
any applicable federal or state securities laws are available. This Offer
Letter/Prospectus is not an offer to sell or the solicitation of an offer to buy
Company common stock issuable upon exercise of the Private
Warrants.
The
securities offered by this Offer Letter/Prospectus involve a high degree of
risk.
See
“Risk Factors” beginning on page 6.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved these
securities or determined that this prospectus is truthful or complete. A
representation to the contrary is a criminal offense.
The date
of this prospectus is July 2, 2010.
Table
of Contents
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PROSPECTUS
SUMMARY
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1
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RISK
FACTORS
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6
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THE
OFFER
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20
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INFORMATION
CONCERNING THE COMPANY
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36
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
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65
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USE
OF PROCEEDS
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66
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DETERMINATION
OF OFFERING PRICE
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66
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DILUTION
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67
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PLAN
OF DISTRIBUTION
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67
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DESCRIPTION
OF SECURITIES TO BE REGISTERED
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68
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ABOUT
THIS PROSPECTUS
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69
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WHERE
YOU CAN FIND MORE INFORMATION
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LEGAL
MATTERS
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70
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EXPERTS
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70
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Index
to Financial Statements and Supplementary Data
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F-1
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PROSPECTUS
SUMMARY
This
summary provides a brief overview of the key aspects of this offering.
Because it is only a summary, it does not contain all of the detailed
information contained elsewhere in this Offer Letter/Prospectus or in the
documents included as exhibits to the registration statement that contains this
Offer Letter/Prospectus. Accordingly, you are urged to carefully review this
Offer Letter/Prospectus in its entirety (including all documents filed as
exhibits to the registration statement that contains this Offer
Letter/Prospectus, which may be obtained by following the procedures set forth
herein in the section entitled “Where You Can Find More
Information”).
Summary
of the Offer
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The
Company
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ProUroCare
Medical Inc., a Nevada corporation, has developed and is bringing to
market its innovative ProUroScan
TM
prostate imaging system. The ProUroScan System incorporates our new
proprietary elasticity imaging technology to create an image and document
abnormalities of the prostate.
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Corporate
Contact Information
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Our
principal executive offices are located at 6440 Flying Cloud Drive, Suite
101, Eden Prairie, Minnesota 55344, telephone (952)
476-9093.
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Warrants
that qualify for the Offer
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“Public
Warrants”
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As
of June 30, 2010, we had outstanding Public Warrants to purchase an
aggregate of 1,752,760 shares of common stock, which were issued on
January 12, 2009 pursuant to the closing of our public offering of
3,050,000 Units. Each Unit consisted of one share of our common stock and
one redeemable warrant to purchase one share of common stock. We are
offering pursuant to this Offer Letter/Prospectus 1,752,760 shares of our
common stock for issuance upon exercise of the Public Warrants. The shares
issued upon exercise of the Public Warrants will be unrestricted and
freely transferable.
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“Private
Warrants”
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As
of June 30, 2010, we had outstanding Private Warrants to purchase an
aggregate of 2,752,947 shares of common stock, which were issued on
January 12, 2009, pursuant to the automatic conversions of convertible
debt. The terms of the Private Warrants are identical to the terms
of the Public Warrants, but we have not registered the shares of common
stock issuable upon exercise of the Private Warrants and will be able to
issue such shares only if exemptions from the registration requirements of
any applicable federal or state securities laws are available. The shares
issued upon exercise of the Private Warrants will be restricted as to
transfer and certificates representing such shares will bear a restrictive
legend.
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“2009
Replacement Warrants”
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As
of June 30, 2010, we had outstanding 2009 Replacement Warrants to purchase
an aggregate of 1,244,829 shares of common stock, which were issued on
November 6, 2009. We are offering pursuant to this Offer
Letter/Prospectus 1,244,829 shares of our common stock for issuance upon
exercise of the 2009 Replacement Warrants. The shares issued upon exercise
of the 2009 Replacement Warrants will be unrestricted and freely
transferable.
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General
Terms of the Warrants
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Each
Warrant is exercisable for one share of common stock at a cash exercise
price of $1.30. We may elect to redeem the Public Warrants and the Private
Warrants at any time prior to expiration. We may elect to redeem the
2009 Replacement Warrants at any time after the last sales price of our
common stock equals or exceeds $4.00 for 10 consecutive trading days. We
must provide 30 days’ prior written notice of our decision to redeem the
Warrants, at $0.01 per warrant, during which time holders may choose to
exercise the Warrants according to their terms rather than submitting them
for redemption. The Public Warrants and the Private Warrants will expire
on January 7, 2014, unless sooner exercised or redeemed. The 2009
Replacement Warrants will expire on November 12,
2012.
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Market
Price of the Common Stock
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Our
common stock is quoted on the OTC Bulletin Board under the symbol
“PUMD”. On June 25, 2010, the last reported sale price of our common
stock was $1.85. The Public Warrants and the 2009 Replacement
Warrants are quoted on the Pink Sheets under the symbols “PUMDW” and
“PUMWW,” respectively. Our Units are also quoted on the Pink Sheets,
under the symbol “PUMDU.” No active market exits for our Units,
Public Warrants or 2009 Replacement Warrants.
There is no
established trading market for the Private Warrants. See “The
Offer—Price Range of Common Stock” starting on page 29.
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The
Offer/Terms of 2010 Replacement Warrants
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Each
Warrant holder who tenders Warrants for early exercise during the Offer
Period will receive, in addition to the shares of common stock purchased
upon exercise, an equal number of new warrants, each referred to as a
“2010 Replacement Warrant.” Each 2010 Replacement Warrant will have a cash
exercise price of $1.30 per share and have a three-year
term.
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For
example, if a Warrant holder tenders 1,000 Warrants during the Offer
Period, the Warrant holder will be required to pay the Warrant exercise
price of $1.30 per share, for a total of $1,300, and will receive as a
result of the Warrant exercise 1,000 shares of our common stock plus a
2010 Replacement Warrant to purchase 1,000 shares. See “The
Offer—General Terms—Terms of the 2010 Replacement Warrants” starting on
page 21.
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The
Company may elect to redeem the 2010 Replacement Warrants at any time
after the last sales price of the Company’s common stock equals or exceeds
$4.00 for 10 consecutive trading days. The Company must provide 30 days’
prior written notice of its decision to redeem the 2010 Replacement
Warrants, at $0.01 per warrant, during which time holders may choose to
exercise the 2010 Replacement Warrants according to their terms rather
than submitting them for redemption.
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The
Company expects the 2010 Replacement Warrants to be quoted on the Pink
Sheets under a ticker symbol to be determined. The quoting of the 2010
Replacement Warrants on the Pink Sheets is dependent upon the existence of
an effective registration statement regarding the 2010 Replacement
Warrants and the cooperation of market makers for the 2010 Replacement
Warrants.
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This
Offer is being made to all Warrant holders except those holders who reside
in states or other jurisdictions where an offer, solicitation or sale
would be unlawful. The purpose of the Offer is to provide an
incentive to exercise the Warrants and thereby raise additional capital
for the Company. See “The Offer—General Terms” and “—Background and
Purpose of the Offer” starting on pages 20 and 27,
respectively.
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Expiration
Date of Offer
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Four
O’ Clock p.m., Central Time, on August 2, 2010, unless earlier withdrawn
or extended by the Company. All Warrants and related paperwork, as well as
payment for Warrants exercised for cash, must be received by the
depositary by this time, as described in this Offer
Letter/Prospectus.
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If
the Offer Period is extended, the Company will make a public announcement
of such extension by no later than 8:00 a.m., Central Time, on the next
business day following the scheduled expiration date of the
Offer.
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The
Company may withdraw the Offer only if the conditions of the Offer are not
satisfied prior to expiration of the Offer Period. Promptly upon any such
withdrawal, the Company will return the tendered Warrants along with any
cash delivered therewith. The Company will announce any intention to
withdraw the offer by disseminating notice by public announcement or
otherwise as permitted by applicable law.
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See
“The Offer—General Terms—Offer Period” starting on page
21.
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Withdrawal
Rights
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If
you tender your Warrants and change your mind, you may withdraw your
tendered Warrants at any time until the expiration of the Offer Period, as
described in greater detail in the section entitled “The Offer—Withdrawal
Rights” starting on page 25. If the Offer Period is extended, you may
withdraw your tendered Warrants at any time until the expiration of such
extended Offer Period. In addition, Warrants that are not accepted by the
Company for payment by August 31, 2010 may be
withdrawn.
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Participation
by Officers, Directors and Affiliates
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Several
of our directors intend to exercise Warrants in accordance with the terms
of the offer: James L. Davis, intends to exercise approximately
330,000 Warrants, David Koenig intends to exercise 50,000 Warrants (such
Warrants to be obtained pursuant to an exchange transaction with Mr.
Davis) and Robert Rudelius intends to exercise 20,000 Warrants. In
lieu of cash, these individuals may pay the exercise price of some or all
of their Warrants tendered in this Offer by cancelling amounts we owe
them.
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Absence
of Dissenters’ Rights
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Holders
of the Warrants do not have any appraisal or dissenters' rights under
applicable law in connection with the Offer.
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Tax
Consequences of the Offer
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For
U.S. federal income tax purposes, we intend to treat a holder’s
participation in the Offer as a deemed material modification of the terms
of the Warrant which qualifies as a tax-free recapitalization exchange,
followed by an exercise of the modified Warrant for common stock and the
2010 Replacement Warrant, which would not result in the recognition of
taxable income. The U.S. federal income tax consequences of participation
in the Offer are, however, uncertain. Alternative characterizations
are possible, and such alternative characterizations could result in
taxable income being recognized currently by a holder that participates in
the Offer.
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See
“The Offer—U.S. Federal Income Tax Consequences”
starting on page
31.
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Conditions
of the Offer
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The
conditions of the Offer are:
·
the existence of an effective amendment to our registration
statement, as amended, regarding the Public Warrants, and the common stock
issuable upon the exercise of such warrants;
·
the
existence of an effective amendment to our registration statement, as
amended, regarding the 2009 Replacement Warrants, and the common stock
issuable upon the exercise of such warrants;
·
the
existence of an effective registration statement regarding the 2010
Replacement Warrants, and the common stock issuable upon the exercise of
such warrants; and
·
each
Warrant holder desiring to participate in the Offer delivering to us in a
timely manner a completed Letter of Transmittal, along with the holder’s
Warrants and proper cash payment.
We
may withdraw the Offer only if the conditions of the Offer are not
satisfied prior to expiration of the Offer Period. Promptly upon any such
withdrawal, we will return the tendered Warrants along with any cash
delivered therewith. We will announce any intention to withdrawal by
disseminating notice by public announcement or otherwise as permitted by
applicable law.
Except
for the requirements of applicable federal and state securities laws, we
know of no federal or state regulatory requirements to be complied with or
approvals to be obtained by us in connection with the Offer. In the event
that we make material changes to the Offer, we may be required to file an
amendment to this Registration Statement.
See
“The Offer—Extension of Tender Period; Termination; Amendments;
Conditions” starting on page 30.
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Risk
Factors
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There
are risks associated with participating in the Offer. For a
discussion of some of the risks you should consider before deciding
whether to participate in the Offer, you are urged to carefully review and
consider the information in the section entitled “Risk Factors” starting
on page 6.
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How
to Tender Warrants
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To
tender your Warrants, you must complete one of the actions described in
this Offer Letter/Prospectus in the section entitled “The Offer—Procedure
for Exercising and Tendering Warrants” starting on page 22 before the
expiration of the Offer Period. You may also contact the Company or
your broker for assistance.
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Further
Information
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Please
direct questions or requests for assistance, or for additional copies of
this Offer Letter/Prospectus, Letter of Transmittal or other material to
the Company. The contact information for the Company is Dick Thon,
ProUroCare Medical Inc., 6440 Flying Cloud Dr., Suite 101, Eden Prairie,
MN 55344, telephone (952) 698-1161, e-mail:
rthon@prourocare.com
.
We
will amend our offering materials, including this Offer Letter/Prospectus,
to the extent required by applicable securities laws to disclose any
material changes to information previously published, sent or given to
Warrant holders.
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Depositary
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The
depositary for the Offer is Interwest Transfer Company,
Inc.
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Offering
of 2010 Replacement Warrants and Common Stock Issuable Upon Exercise of the
Public Warrants and the 2009 Replacement Warrants
The Company is offering 1,752,760
shares of Company common stock, par value $0.00001 per share, for issuance upon
exercise of the Public Warrants during or after the Offer Period. The Public
Warrants have an exercise price of $1.30 per share, subject to
adjustment.
The Company is offering 1,244,829
shares of Company common stock, par value $0.00001 per share, which are issuable
upon exercise of the 2009 Replacement Warrants during or after the Offer
Period. The 2009 Replacement Warrants have an exercise price of $1.30 per
share, subject to adjustment.
The Company is offering 2010
Replacement Warrants to purchase up to 5,750,536 shares of Company common stock,
par value $0.00001 per share, and up to 5,750,536 shares of Company common
stock, par value $0.00001 per share, for issuance upon exercise of the 2010
Replacement Warrants. The 2010 Replacement Warrants have an exercise price
of $1.30 per share, subject to adjustment.
This Offer Letter/Prospectus does not
apply to the shares of Company common stock which are issuable upon exercise of
the Private Warrants. The Company may issue such common stock only if exemptions
from the registration requirements of any applicable federal or state securities
laws are available. This Offer Letter/Prospectus is not an offer to sell or the
solicitation of an offer to buy Company common stock issuable upon exercise of
the Private Warrants.
Shares of Common Stock Offered and
Outstanding
|
Common
stock outstanding before the exercise of Public Warrants, Private
Warrants, 2009 Replacement Warrants and
2010
Replacement Warrants
(1)
|
|
13,045,375
shares
|
|
|
|
|
|
Common
stock issuable under the Public Warrants
|
|
1,752,760
shares
|
|
|
|
|
|
Common
stock issuable under the 2009 Replacement Warrants
|
|
1,244,829
shares
|
|
|
|
|
|
Common
stock issuable under the 2010 Replacement Warrants
(2)
|
|
5,750,536
shares
|
|
|
|
|
|
Common
stock outstanding after the exercise of Public Warrants, Private
Warrants, 2009 Replacement Warrants and
2010
Replacement Warrants
(3)
|
|
24,546,447
shares
|
__________
(1) The
calculation is based on the number of shares outstanding as of June 28, 2010,
not including 1,752,760 shares issuable upon exercise of the Public Warrants,
2,752,947 shares issuable upon exercise of the Private Warrants, 1,244,829
shares issuable upon exercise of the 2009 Replacement Warrants and approximately
2,418,660 shares issuable upon exercise of various other warrants and options to
purchase our common stock.
(2) Assumes
all outstanding Public Warrants, Private Warrants and 2009 Replacement Warrants
are tendered into the Offer.
(3) In
order to show the effect of the Offer on the number of shares of Company common
stock outstanding, the exercise of all Public Warrants, Private Warrants and
2009 Replacement Warrants during the Offer Period and the exercise of all 2010
Replacement Warrants is assumed. The calculation is based on the number of
shares outstanding as of June 28, 2010, not including approximately 2,418,660
shares issuable upon exercise of various other warrants and options to purchase
our common stock. This Offer Letter/Prospectus does not apply to the shares of
Company common stock which are issuable upon exercise of the Private
Warrants.
RISK
FACTORS
Before investing in our common stock,
you should consider carefully the following risk factors, in addition to the
other information contained in this Offer
Letter/Prospectus. Investing in our common stock involves a high
degree of risk.
In addition to the risk factors
identified below, there may be other risks and uncertainties not presently known
to us, or that we currently deem immaterial that could impair our business
operations. If any of the matters identified as potential risks
materialize, our business could be harmed. In that event, the trading
price of our common stock could decline to prices below that paid pursuant to an
exercise of the Warrants.
Risk
Factors Associated with this Offering
We do not meet the criteria to list our
securities on an exchange such as The NASDAQ Capital Market and our common stock
is illiquid and may be difficult to sell.
Our common stock is quoted on the OTC
Bulletin Board (“OTCBB”). Generally, securities that are quoted on the OTCBB
lack liquidity and analyst coverage. This may result in lower prices for our
common stock than might otherwise be obtained if we met the criteria to list our
securities on a larger or more established exchange, such as The NASDAQ Capital
Market and could also result in a larger spread between the bid and asked prices
for our common stock.
In addition, there has been only
limited trading activity in our common stock. The relatively small trading
volume will likely make it difficult for our stockholders to sell their common
stock as, and when, they choose. As a result, investors may not always be able
to resell shares of our common stock publicly at the time and prices that they
feel are fair or appropriate.
There is no assurance that our 2010
Replacement Warrants will be quoted on the Pink Sheets or the OTCBB, and they
may be illiquid and difficult to sell.
There is no assurance that our 2010
Replacement Warrants will be quoted on the Pink Sheets or the OTCBB. If
the 2010 Replacement Warrants are not quoted on the Pink Sheets or the OTCBB, it
will likely be difficult for our warrantholders to sell their 2010 Replacement
Warrants.
In
addition, generally, securities that are quoted on the Pink Sheets lack
liquidity and analyst coverage. This may result in lower prices for the 2010
Replacement Warrants than might otherwise be obtained if we met the criteria to
list them on a larger or more established exchange, such as The NASDAQ Capital
Market and could also result in a larger spread between the bid and asked prices
for such warrants.
In addition, there has been only
limited trading activity in the 2009 Replacement Warrants. It is likely that
there will be relatively small trading volume in the 2010 Replacement Warrants,
if they are quoted, and this will likely make it difficult for our stockholders
to sell their 2010 Replacement Warrants as, and when, they choose. As a result,
investors may not always be able to resell such warrants publicly at the time
and prices that they feel are fair or appropriate.
Because our stock is deemed a “penny
stock,” you may have difficulty selling shares of our common stock.
Our common stock is a “penny stock” and
is therefore subject to the requirements of Rule 15g-9 under the Securities
Exchange Act of 1934, as amended. Under this rule, broker-dealers who sell penny
stocks must provide purchasers of these stocks with a standardized
risk-disclosure document prepared by the SEC. The penny stock rules severely
limit the liquidity of securities in the secondary market, and many brokers
choose not to participate in penny stock transactions. As a result, there is
generally less trading in penny stocks and you may not always be able to resell
shares of our common stock publicly at the time and prices that you feel are
fair or appropriate. Under applicable regulations, our common stock will
generally remain a penny stock until such time as its per-share price is $5.00
or more (as determined in accordance with SEC regulations), or until we meet
certain net asset or revenue thresholds. These thresholds include the possession
of net tangible assets (that is, total assets less intangible assets and
liabilities) in excess of $5,000,000, and the recognition of average revenues
equal to at least $6,000,000 for each of the last three years. We do not
anticipate meeting any of the thresholds in the foreseeable
future.
The exercise price of our Public
Warrants, 2009 Replacement Warrants and 2010 Replacement Warrants has been
arbitrarily determined.
The exercise price of our Public
Warrants, 2009 Replacement Warrants and 2010 Replacement Warrants has been
arbitrarily determined; the exercise price of the Public Warrants was originally
determined by negotiation between the Company and our underwriter at the time of
our 2009 public offering of units. Our Board of Directors established the
exercise price for the 2009 Replacement Warrants and 2010 Replacement Warrants
based on its estimation of those warrant terms that would encourage Warrant
holders to participate in the Offer. The exercise prices of the Public
Warrants, 2009 Replacement Warrants and 2010 Replacement Warrants bear no
relationship to our assets, book value, lack of earnings, net worth or other
recognized criteria of value, including quoted stock prices.
Because we will have broad discretion
over the use of the net proceeds from the exercise of the Warrants, you may not
agree with how we use them and the proceeds may not be invested
successfully.
We will have broad discretion on the
use of the proceeds for the exercise of the Warrants. While we currently
anticipate that we will use the net proceeds to fund manufacturing and market
scale-up activities, expand our intellectual property rights, form a scientific
advisory panel and conduct clinical studies, reduce amounts outstanding on
certain liabilities including an existing line of credit with a director, and
for other general corporate purposes. The allocation of proceeds toward
any of these purposes will depend upon the amount of net proceeds
received.
Our management may allocate the net
proceeds among these purposes as it deems necessary. In addition, market or
other factors may require our management to allocate portions of the net
proceeds for other purposes. Accordingly, you will be relying on the judgment of
our management with regard to the use of the net proceeds from exercise of the
Warrants, and you will not have the opportunity, as part of your investment
decision, to assess whether the proceeds are being used appropriately. It is
possible that the proceeds will be invested in a way that does not yield a
favorable, or any, return for the Company.
If you elect to tender Warrants and
purchase common stock in this offering, you will experience immediate
dilution.
If you elect to tender Warrants in
response to the Offer and purchase our common stock in this offering, you will
experience immediate dilution, which would have been $0.79 per share as of March
31, 2010, because the price that you pay for our common stock will be greater
than the net tangible book value per share of our common stock. See
“Dilution,” page 67 for more information.
There must be a current prospectus and
state registration in order for you to exercise the Public Warrant, 2009
Replacement Warrants and 2010 Replacement Warrants.
Investors will be able to exercise the
Public Warrants, 2009 Replacement Warrants and 2010 Replacement Warrants only if
a current prospectus relating to the common stock underlying the warrants is
then in effect and only if such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of warrants reside. Although we will use our best efforts to (i)
maintain the effectiveness of a current prospectus covering the common stock
underlying the warrants and (ii) maintain the registration of such common stock
under the securities laws of the states in which we initially qualified the
units for sale in our public offering that closed on January 12, 2009, there can
be no assurance that we will be able to do so. We will be unable to issue common
stock to those persons desiring to exercise their warrants if a current
prospectus covering the common stock issuable upon the exercise of the warrants
is not kept effective or if such common stock is not qualified nor exempt from
qualification in the states in which the holders of the warrants
reside.
The Warrants are subject to redemption
by the Company.
The Public Warrants and Private
Warrants are subject to redemption by the Company for $0.01 per Warrant upon 30
days prior written notice at any time prior to expiration. The 2009
Replacement Warrants and 2010 Replacement Warrants are subject to redemption by
the Company for $0.01 per Warrant upon 30 days prior written notice, provided
that the last sales price of our common stock equals or exceeds $4.00 for 10
consecutive trading days. If the warrants are redeemed, warrant holders
will lose their right to exercise the warrants except during such 30 day
redemption period. Redemption of the warrants could force the holders to
exercise the warrants at a time when it may be disadvantageous for the holders
to do so or to sell the warrants at the then-market price or accept the
redemption price, which likely would be substantially less than the market value
of the warrants at the time of redemption.
Our outstanding options and warrants
may have an adverse effect on the market price of our common stock and increase
the difficulty of effecting a future business combination.
At June 11, 2010, we had outstanding
options and warrants to purchase 8,169,196 shares of common stock, including the
Warrants. The potential for the issuance of substantial numbers of additional
shares of common stock upon exercise of these warrants and options could make us
a less attractive acquisition target in the eyes of a prospective business
partner. Such securities, when exercised, will increase the number of issued and
outstanding shares of our common stock and reduce the value of the shares
issued. Additionally, the sale, or even the possibility of sale, of the shares
underlying the warrants and options could have an adverse effect on the market
price for our securities or on our ability to obtain future
financing.
The price of our common stock may
fluctuate significantly, which may make it difficult for stockholders to resell
common stock when they want or at a price they find attractive.
We expect that the market price of our
common stock will fluctuate. Our common stock price can fluctuate as a result of
a variety of factors, many of which are beyond our control. These factors
include:
|
|
·
|
actual
or anticipated variations in our quarterly operating
results;
|
|
|
·
|
changes
in interest rates and other general economic
conditions;
|
|
|
·
|
significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our
competitors;
|
|
|
·
|
operating
and stock price performance of other companies that investors deem
comparable to us;
|
|
|
·
|
news
reports relating to trends, concerns, litigation, regulatory changes and
other issues in our industry;
|
|
|
·
|
geopolitical
conditions such as acts or threats of terrorism or military conflicts;
and
|
|
|
·
|
relatively
low trading volume.
|
We have never paid dividends and do not
expect to pay dividends in the foreseeable future.
We have never paid dividends on our
capital stock and do not anticipate paying any dividends for the foreseeable
future. Future debt covenants may prohibit payment of dividends.
Risk
Factors Associated with our Business, Operations and Securities
We
are a development stage company. We have no operating history and our business
plan has not yet been fully tested. We anticipate incurring future losses and
may continue incurring losses after our products are completed, regulatory
clearance or approval is secured and our products are introduced and accepted in
the United States and worldwide markets.
We are a
development-stage company. We have yet to commence active operations to
manufacture or sell any products associated with the proprietary urology-based
imaging technologies that we intend to market. We have no prior operating
history from which to evaluate our likelihood of success in operating our
business, generating any revenues or achieving profitability. As of March 31,
2010, we have generated no revenue and have recorded losses since inception of
approximately $29.5 million. There can be no assurance that our plans for
developing and marketing our urology-based products will be successful, or that
we will ever attain significant sales or profitability. We anticipate that we
will incur losses in the near future.
We
have a history of operating losses and have received a “going-concern”
qualification from our independent registered public accounting
firm.
We have
incurred operating losses and negative cash flows from operations since
inception. As of March 31, 2010, we had an accumulated deficit of approximately
$29.5 million. We have not yet generated any revenues. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements included in this prospectus do
not include any adjustments related to recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern.
Our
independent registered public accounting firm included an explanatory paragraph
in their report on our financial statements for the year ended December 31, 2009
indicating that such deficit accumulated during the development stage raises
substantial doubt as to our ability to continue as a going concern. The
likelihood of our success must be considered in light of the expenses,
difficulties and delays frequently encountered in connection with development
stage businesses and the competitive environment in which we will operate. Our
ability to achieve profitability is dependent in large part on obtaining FDA
clearance or approval for the ProUroScan System, implementing a “patient pay”
sales model, achieving third-party coverage and reimbursement, establishing
distribution channels, forming relationships with third-party manufacturers and
gaining market acceptance of the ProUroScan System. There can be no assurance
that the Company will successfully market the ProUroScan System or operate
profitably.
If
adequate funds are not available on a timely basis, we could potentially be
forced to cease operations.
If
adequate funds are not available on a timely basis, or are not available on
acceptable terms, we may be unable to repay our existing debt, to fund
expansion, or to develop or enhance our products. Until such time as we are able
to enter the market and achieve positive cash flow from operations, we will
continue to depend on our ability to obtain additional new investment to fund
operations. Ultimately, if adequate financing is not obtained, we could
potentially be forced to cease operations.
Our
assets are pledged to secure $1,000,000 of senior bank notes and $643,000 of
notes issued to investors and a bank and, as a result, are not available to
secure other senior debt financing. Upon the occurrence of an event of default,
the bank’s security interests in our assets will be assigned to guarantors of
the bank notes and the holders of such $643,000 of promissory
notes.
Our
$
1,000,000 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
$643,000 of promissory notes to three individual 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 will be difficult for
us to obtain significant additional debt financing on an unsecured
basis.
Moreover,
under the terms and conditions of the Crown Bank facility and our agreement with
the facility’s guarantors, in the event of any default by us with our senior
lender that causes the personal guarantees to be called and honored, all of the
bank’s security interests in our assets shall be assigned to such guarantors,
pro rata, in consideration of such breach and obligation to pay under the
respective guarantees. In addition, the holders and guarantor of $643,000 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.
We
will need additional financing, and any such financing will likely be dilutive
to our existing shareholders.
We will
need additional financing to fund operations while we ramp up production of the
ProUroScan System and begin to enter the market. We will also need funding
to pay, for example, the $750,000 payment due to Artann upon achieving the
FDA market clearance milestone. If we fail to secure a distribution
partner on terms acceptable to us, or at all, we could be required to undertake
distribution activity at our expense, which could significantly increase our
capital requirements and may delay the commercialization of our
products.
As of
June 11, 2010, we had approximately $910,000 of cash on hand. In addition,
on that date we had 5,750,536 redeemable warrants outstanding. These
warrants have an exercise price of $1.30 per share. Of these, we currently
have the right to redeem 4,515,607 warrants. Upon our exercise of our
right to redeem the warrants, holders of the warrants will have a period of 30
days to exercise their warrants. We could realize up to approximately $5.9
million depending on the number of shares actually exercised. We may call these
warrants in 2010 to meet our financing needs outlined above. In addition,
we will gain the ability to redeem the remaining 1,244,829 2009 Replacement
Warrants if the last sale price of our common stock were to equal or exceed
$4.00 per share for a period of 10 consecutive trading days. If we were to
subsequently exercise our redemption right on these warrants, we could realize
up to an additional $1.6 million depending on the number of shares actually
exercised pursuant to such redemption. There can be no assurance that we
will be able to redeem the warrants, or how much would be realized if such
redemption were made.
We plan
to identify a distribution partner during 2010 to help market our
products. We expect such a distribution partner may provide financial
support in the form of licensing fees, loans, equity investment or a combination
of these. In addition to financial support, a successful collaboration
with such a partner would allow us to gain access to downstream marketing,
manufacturing and sales support. There can be no assurance that a
distribution partner can be successfully identified and engaged during 2010, if
at all.
In
addition to these actions, we may pursue additional private funding in 2010 and
2011 to finance additional product development and operations pursuant to a
commercial market launch. The amounts of such additional funding will
depend upon the amount of funding we receive from exercise of the outstanding
warrants, including the Warrants that are the subject of this Offer
Letter/Prospectus. The additional private funding may be in the form of
convertible debt, equity securities, private debt or debt guarantees for which
stock-based consideration is paid, the exercise of outstanding warrants pursuant
to a warrant call or a combination of these. If any of these funding
events should occur, existing shareholders will likely experience dilution in
their ownership interest.
There
is no guarantee that the FDA will grant timely market clearance of the
ProUroScan System, if at all, and failure to obtain such timely clearance would
adversely affect our ability to market that product in the United
States.
Our goal
is to have the ProUroScan System regulated by the FDA as a Class II
device. A Class II classification is designed for low risk devices in
which sufficient information exists to establish general and specific controls
that provide reasonable assurance of safety and effectiveness. In November
2009, Artann filed a 510(k) application for market clearance. In a 510(k)
application, applicants must demonstrate that the proposed device is
substantially equivalent to an existing approved product, or “predicate
device.” If a product employs new or novel technology such that no
predicate device exists, the FDA will so notify the applicant and automatically
classify the device as a Class III device under regulatory statute. The
applicant may then request that a risk-based classification determination be
made for the device under Section 513(f)(2) of the Food, Drug and Cosmetic Act
(the “FDCA”). This process is also known as a “
de novo
” or “risk based”
classification.
In April,
2010, the FDA determined that a predicate device did not exist for the
ProUroScan System. In response, on May 21, 2010 Artann submitted a
request for FDA clearance under the
de novo
protocol as required
by the Section 513(f)(2) guidance document. This request asked the FDA to
define mechanical imaging systems as devices that are intended to produce an
elasticity image of the prostate as an aid in documenting abnormalities of the
prostate that are initially identified by digital rectal examination and to be
used by physicians as a documentation tool. There is no guarantee that the
FDA will grant market clearance or designate the ProUroScan System as a Class II
device in a timely manner, if at all. Failure to obtain clearance for the
ProUroScan System under the
de
novo process
would require Artann to submit a Premarket Approval
Application (a “PMA”) for FDA approval. Even if FDA clearance is received,
Artann may encounter significant delays in receiving such clearance. If
unexpected clearance delays occur, or if Artann needs to submit a PMA, it could
have a material adverse effect on our business, requiring additional financing
or potential discontinuance of our operations.
Our
reliance upon Artann to obtain regulatory clearance of the ProUroScan System
could result in delays.
The
ProUroScan System is subject to regulation by the FDA and by comparable agencies
in various foreign countries. The process of complying with the requirements of
the FDA and comparable agencies is costly, time consuming and burdensome. Under
the terms of its contract with us, Artann is responsible for submitting and
obtaining initial FDA regulatory clearance for the ProUroScan System. Once
cleared and upon ProUroCare’s first commercial sale of a ProUroScan System,
Artann will transfer the clearance to ProUroCare.
Our
reliance on Artann to obtain regulatory clearance of the ProUroScan System means
that we do not have sole control of the timing and content of FDA submissions
and interactions. If Artann fails to obtain market clearance of the
ProUroScan System, or if Artann encounters significant delays in receiving such
clearance, it could have a material adverse effect on our business, requiring
additional financing or potential discontinuance of our operations.
Even
if clearance from the FDA is obtained, our products may not be commercially
viable or may not be accepted by the marketplace.
Even if
the FDA grants market clearance of the ProUroScan System and we are able to
successfully develop future products, we may not be able to contract for the
manufacture of such products in commercial quantities at prices that will be
commercially viable. Further, there is risk that the ProUroScan System and our
future products may not prove to be as effective as currently available medical
or diagnostic products or those developed in the future. The inability to
successfully complete development of a product or application or a determination
by us, for financial, technical or other reasons not to complete development of
any product or application, particularly in instances in which we have made
sufficient capital expenditures, could have a material adverse effect on our
business. With respect to the ProUroScan System, under our current Artann
Development Agreement, Artann is to transfer the 510(k) to us once we make the
first commercial sale of the ProUroScan System. If we are not able to procure a
commercial sale of at least one ProUroScan System, Artann would not be obligated
to transfer the 510(k) to us and might not do so, thus inhibiting our ability to
develop future generations of the product.
Even if
successfully developed, the ProUroScan System and our future products will be
competing against other imaging and diagnostic products in the medical device
marketplace, including those developed in the future that may render the
ProUroScan System obsolete. The digital rectal examination (“DRE”), in
combination with a Prostate Specific Antigen (“PSA”) test, is part of today’s
“standard of care” to evaluate patients over the age of 50 for prostate cancer
or other ailments relating to the prostate. In addition, other modalities that
can be used for diagnostic imaging include transrectal ultrasound, magnetic
resonance imaging, computed tomography and nuclear medicine. Therefore, there
can be no assurance that physicians, providers, patients, third-party payors or
the medical device market, in general, will accept our products.
There
is no guarantee that the FDA will grant 510(k) clearance or PMA approval of our
future products and claims and failure to obtain necessary clearances or
approvals for our future products and claims would adversely affect our ability
to expand utilization of the technology in other prostate applications or in
other soft tissue organs in the body, which may affect our ability to grow our
business.
In the
future, we may seek to obtain additional indications for use of the ProUroScan
System beyond the basic imaging and documentation claim, as well as clearance
and approval of new products. Some of these expanded claims and future products
may require FDA clearance of a 510(k). Other claims and future products will
require FDA approval of a PMA. Moreover, some of our future products and the
additional claims on the ProUroScan System we may seek may require clinical
trials to support regulatory approval, and we may not successfully complete
these clinical trials. The FDA may not approve or clear these future products,
or future generations of the ProUroScan System for the indications that are
necessary or desirable for successful commercialization. Indeed, the FDA may
refuse our requests for 510(k) clearance or PMA approval of new products.
Failure to receive clearance or approval for additional claims for the
ProUroScan System, or for our future products, would have an adverse effect on
our ability to expand our business.
Clinical
trials necessary to support our future products and claims will be expensive and
may require the enrollment of large numbers of patients, and suitable patients
may be difficult to identify and recruit. These trials may require the
submission of an investigational device exemption, for which there is no
guarantee that the FDA will approve. Delays or failures in our clinical trials
will prevent us from commercializing any modified or new products and will
adversely affect our business, operating results and prospects.
Initiating
and completing clinical trials necessary to support 510(k)s or PMAs for future
generations of the ProUroScan System will be time consuming and expensive and
the outcome uncertain. Moreover, the results of early clinical trials are not
necessarily predictive of future results, and any product we advance into
clinical trials may not have favorable results in later clinical
trials.
Conducting
successful clinical studies may require the enrollment of large numbers of
patients, and suitable patients may be difficult to identify and recruit.
Patient enrollment in clinical trials and completion of patient participation
and follow-up depend on many factors, including: the size of the patient
population; the number of patients to be enrolled; the nature of the trial
protocol; the attractiveness of, or the discomforts and risks associated with,
the treatments received by enrolled subjects; the availability of appropriate
clinical trial investigators, support staff, and proximity of patients to
clinical sites; and the patients’ ability to meet the eligibility and exclusion
criteria for participation in the clinical trial and patient compliance. For
example, patients may be discouraged from enrolling in our clinical trials if
the trial protocol requires them to undergo extensive post-treatment procedures
or follow-up to assess the safety and effectiveness of our products or if they
determine that the treatments received under the trial protocols are not
attractive or involve unacceptable risks or discomforts. In addition, patients
participating in clinical trials may die before completion of the trial or
suffer adverse medical events unrelated to investigational
products.
Development
of sufficient and appropriate clinical protocols to demonstrate safety and
efficacy are required, and we may not adequately develop such protocols to
support clearance and approval. Significant risk trials will require the
submission and approval of an investigational device exemption (“IDE”) from the
FDA. There is no guarantee that the FDA will approve our future IDE submissions.
Further, the FDA may require us to submit data on a greater number of patients
than we originally anticipated and/or for a longer follow-up period or change
the data collection requirements or data analysis applicable to our clinical
trials. Delays in patient enrollment or failure of patients to continue to
participate in a clinical trial may cause an increase in costs and delays in the
approval and attempted commercialization of our products or result in the
failure of the clinical trial. In addition, despite considerable time and
expense invested in our clinical trials, the FDA may not consider our data
adequate to demonstrate safety and efficacy. Such increased costs and delays or
failures could adversely affect our business, operating results and
prospects.
We
have no manufacturing experience, and will rely on third parties to manufacture
the ProUroScan System in an efficient manner. If design specification changes
are needed to develop an efficient manufacturing process, those changes may
require FDA clearance of a new 510(k) or approval of a PMA, which we may not be
able to obtain in a timely manner, if at all.
To be
successful, the ProUroScan System will need to be manufactured in sufficient
quantities, in compliance with regulatory requirements and at an acceptable
cost. We have no manufacturing experience. We have identified a third-party
manufacturer to produce commercial units of the ProUroScan System for
distribution after 510(k) clearance or PMA approval is obtained. This
third-party manufacturer is in the process of developing and optimizing the
manufacturing process to produce commercial ProUroScan Systems. If device design
changes are required to implement an efficient manufacturing process, these
design changes will need to be evaluated and implemented in accordance with
applicable Quality Systems Regulation (“QSR”) requirements. If we implement
design changes after the FDA has cleared the ProUroScan System, we will need to
assess whether those design changes could significantly affect the safety or
effectiveness of the device, and require the submission and clearance of a new
510(k), or even require the submission of a PMA. If we determine that these
modifications require a new 510(k) clearance or PMA approval, we may not be able
to obtain this additional clearance in a timely manner, or at all. In general,
obtaining additional clearances can be a time consuming process, and delays in
obtaining required future clearances would adversely affect our ability to
market the ProUroScan System in a timely manner, which in turn would harm our
potential for future growth.
If
we or our third-party manufacturers or suppliers fail to comply with ongoing FDA
or other foreign regulatory authority requirements, or if we experience
unanticipated problems with our products, these products could be subject to
restrictions or withdrawal from the market.
Any
product for which we obtain FDA clearance or approval, and the manufacturing
processes, reporting requirements, post-approval clinical data and promotional
activities for such product, will be subject to continued regulatory review,
oversight and periodic inspections by the FDA and other domestic and foreign
regulatory bodies. In particular, we and our third-party manufacturers and
certain of our suppliers will be required to comply with the FDA’s QSR,
regulations for the manufacture of our products and other regulations which
cover the methods and documentation of the design, testing, production, control,
quality assurance, labeling, packaging, storage and shipping of any product for
which we obtain clearance or approval. Regulatory bodies, such as the FDA,
enforce the QSR and other regulations through periodic inspections. The failure
by us or one of our third-party manufacturers or suppliers to comply with
applicable statutes and regulations administered by the FDA and other regulatory
bodies, or the failure to timely and adequately respond to any adverse
inspectional observations or product safety issues, could result in, among other
things, any of the following enforcement actions:
•
warning letters or untitled letters;
•
fines and civil penalties;
•
unanticipated expenditures to address or defend such
actions;
•
delays in clearing or approving, or refusal to clear or approve,
our products;
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withdrawal
or suspension of approval of our products or those of our third-party
suppliers by the FDA or other regulatory
bodies;
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product recall or seizure;
•
orders for physician notification or device repair, replacement or
refund;
•
interruption of production;
•
operating restrictions;
•
injunctions; and
•
criminal prosecution.
If any of
these actions were to occur it would harm our reputation and cause our product
sales and profitability to suffer and may prevent us from generating revenue.
Furthermore, our third-party manufacturers and suppliers may not be in
compliance with all applicable regulatory requirements which could result in
failure to supply our products in required quantities, if at all.
Even if
regulatory clearance or approval of a product is granted, such clearance or
approval may be subject to limitations on the intended uses for which the
product may be marketed and reduce our potential to successfully commercialize
the product and generate revenue from the product. If the FDA determines that
our promotional materials, labeling, training or other marketing or educational
activities constitute promotion of an unapproved use, it could request that we
cease or modify our training or promotional materials or subject us to serious
regulatory enforcement actions, including some of those listed above. It is also
possible that other federal, state or foreign enforcement authorities might take
action if they consider our training or other promotional materials to
constitute promotion of an unapproved use, which could result in significant
fines or penalties under other statutory authorities, such as laws prohibiting
false claims for reimbursement.
In
addition, we may be required to conduct costly post-market testing and
surveillance to monitor the safety or effectiveness of our products, and we must
comply with medical device reporting requirements, including the reporting of
adverse events and malfunctions related to our products. Later discovery of
previously unknown problems with our products, including unanticipated adverse
events or adverse events of unanticipated severity or frequency, manufacturing
problems or failure to comply with regulatory requirements such as QSR, may
result in changes to labeling, restrictions on such products or manufacturing
processes, withdrawal of the products from the market or regulatory enforcement
actions.
Our
products may in the future be subject to product recalls that could harm our
reputation, business and financial results.
The FDA
and similar foreign governmental authorities have the authority to require the
recall of commercialized products in the event of material deficiencies or
defects in design or manufacture. In the case of the FDA, the authority to
require a mandatory recall must be based on an FDA finding that there is a
reasonable probability that the device would cause serious adverse health
consequences or death. In addition, foreign governmental bodies have the
authority to require the recall of our products in the event of material
deficiencies or defects in design or manufacture. Manufacturers may, under their
own initiative, initiate a field correction or removal, known as a recall, for a
product if any material deficiency in a device is found. A government mandated
or voluntary recall by us or one of our third-party manufacturers or suppliers
could occur as a result of component failures, manufacturing errors, design or
labeling defects or other deficiencies and issues. Recalls of any of our
products would divert managerial and financial resources and have an adverse
effect on our financial condition and results of operations. The FDA requires
that certain classifications of recalls be reported to the FDA within 10 working
days after the recall is initiated. Companies are required to maintain certain
records of recalls, even if they are not reportable to the FDA. We may initiate
voluntary recalls involving our products in the future that we determine do not
require notification of the FDA. If the FDA disagrees with our determinations,
they could require us to report those actions as recalls. A future recall
announcement could harm our reputation with customers and negatively affect our
sales. In addition, the FDA could take enforcement action for failing to report
the recalls when they were conducted.
If
our marketed products cause or contribute to a death or a serious injury, or
malfunction in certain ways, we will be subject to medical device reporting
regulations, which can result in voluntary corrective actions or agency
enforcement actions.
Under the
FDA medical device reporting regulation, medical device manufacturers are
required to report to the FDA information that a device has or may have caused
or contributed to a death or serious injury or has malfunctioned in a way that
would likely cause or contribute to death or serious injury if the malfunction
of the device or one of our similar devices were to recur. If we fail to report
these events to the FDA within the required timeframes, or at all, the FDA could
take enforcement action against us. Any such adverse event involving our
products also could result in future voluntary corrective actions, such as
recalls or customer notifications, or agency action, such as inspection or
enforcement action. Any corrective action, whether voluntary or involuntary, as
well as defending ourselves in a lawsuit, will require the dedication of our
time and capital, distract management from operating our business, and may harm
our reputation and financial results.
We
will depend upon others for the manufacturing of our products, which will
subject our business to the risk that we will be unable to fully control the
supply of our products to the market.
Our
ability to develop, manufacture and successfully commercialize our future
products depends upon our ability to enter into and maintain contractual and
collaborative arrangements with others. We do not intend to establish any of our
own manufacturing facilities for the ProUroScan System or any of our future
products. Instead, we intend to retain QSR-compliant and FDA-registered contract
manufacturers. We may also have to rely on a sole supplier for certain
components of our ProUroScan System. There can be no assurance that such
manufacturers will be able to supply our products in the required quantities, at
appropriate quality levels or at acceptable costs. We may be adversely affected
by any difficulties encountered by such third-party manufacturers that result in
product defects, production delays or the inability to fulfill orders on a
timely basis. If a manufacturer cannot meet our quality standards and delivery
requirements in a cost-efficient manner, we could suffer interruptions of
delivery while we arrange for alternative manufacturing sources. Any extended
disruption in the delivery of our products could result in our inability to
satisfy customer demand for our products. Consequently, our inability to obtain
alternative sources on a timely basis may have a material adverse effect on our
business.
We
may incur significant liability if it is determined that we are promoting
off-label use of our products in violation of federal and state regulations in
the United States or elsewhere.
Artann
initially intends to seek clearance of the ProUroScan System from the FDA as a
device that is intended to produce an elasticity image of the prostate as an aid
in documenting abnormalities initially identified by digital rectal examination
(“DRE”). We believe that seeking clearance for this limited indication is the
most applicable definition for how physicians will use the device in clinical
practice. Once clearance is obtained the ProUroScan System approval status
will be transferred to us from Artann, allowing us to begin active
commercialization. Other applications of this technology in the prostate
will require additional regulatory submissions and clearances. Some of
these clearances will likely require submission of a PMA and significantly
larger or more costly clinical studies. Unless and until we receive
regulatory clearance or approval for use of the ProUroScan System in these
applications, use of the ProUroScan System for other than basic imaging and
documentation will be considered off-label use. Under the FDCA and other
similar laws, we are prohibited from labeling or promoting our products, or
training physicians, for such off-label uses.
The FDA
and other regulatory agencies actively enforce regulations prohibiting promotion
of off-label uses and the promotion of products for which marketing clearance
has not been obtained. A company that is found to have improperly promoted
off-label uses may be subject to significant liability, including civil and
administrative remedies as well as criminal sanctions. Due to these legal
constraints, our sales and marketing efforts will focus only on the general
technical attributes and benefits of the ProUroScan System and the FDA cleared
indications for use.
Federal
regulatory reforms may adversely affect our ability to sell our products
profitably.
From time
to time, legislation is drafted and introduced in Congress that could
significantly change the statutory provisions governing the clearance or
approval, manufacture and marketing of a medical device. In addition, FDA
regulations and guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted or FDA
regulations, guidance or interpretations changed, and what the impact of such
changes, if any, may be.
Without
limiting the generality of the foregoing, last year, the Food and Drug
Administration Amendments Act of 2007 (the “FDA Amendments Act”) were enacted.
The FDA Amendments Act requires, among other things, that the FDA propose, and
ultimately implement, regulations that will require manufacturers to label
medical devices with unique identifiers unless a waiver is received from the
FDA. Once implemented, compliance with those regulations may require us to take
additional steps in the manufacture of our products and labeling. These steps
may require additional resources and could be costly. In addition, the FDA
Amendments Act will require us to, among other things, comply with clinical
trial registration requirements once our clinical trials are
initiated.
A
failure to successfully implement a “patient pay” sales model prior to
establishing third-party reimbursement could have a material adverse effect on
our product sales and financial results.
Until
third-party reimbursement coverage for the ProUroScan System procedure is
established, if at all, we anticipate using a “patient pay model” for physicians
to receive payment. Under a patient pay model, in the absence of coverage from
their health insurance, patients pay for the scan out of their own funds. Any
failure to successfully establish a patient pay model could have a material
adverse effect on our product sales and financial results.
The
financial success of the ProUroScan System and other future medical device
products will materially depend on our ability to obtain coverage and
reimbursement for them.
The
financial success of the ProUroScan System and other medical device products
will materially depend on the scope of coverage for each device and the ability
of medical service providers to obtain third-party reimbursement from private
and public insurance sources, such as Medicare, Medicaid and private payors. It
is difficult to predict the timing and outcome of coverage and reimbursement
decisions. There can be no assurance that coverage and reimbursement will be
obtained or will be obtained at a level that will provide a suitable return to
providers of services using our technology.
Because
the incidence of prostate cancer increases with age, we expect that a
significant percentage of our patients will be Medicare beneficiaries. Obtaining
Medicare coverage and reimbursement will be critical to our success. Ensuring
adequate Medicare coverage and reimbursement, however, can be a lengthy and
expensive endeavor and we cannot provide assurances that we will be
successful.
Significantly,
the U.S. Congress may pass laws that impact coverage and reimbursement for
healthcare services, including Medicare reimbursement to physicians and
hospitals. Furthermore, many private payors look to Medicare’s coverage and
reimbursement policies in setting their coverage policies and reimbursement
amounts. If the Centers for Medicare and Medicaid Services (“CMS”), the federal
agency that administers the Medicare program, or Medicare contractors limit
coverage or payments to physicians for the ProUroScan System, private payors may
similarly limit coverage or payments. In addition, state legislatures may enact
laws limiting or otherwise affecting the level of Medicaid reimbursement for
procedures using the ProUroScan System. As a result, physicians may not purchase
our ProUroScan System, and, consequently, our business and financial results
would be adversely affected.
We do not
currently receive coverage and reimbursement from any party for the use of our
products because we have no products fully developed and currently available for
sale in the marketplace. As a result, we have not taken any steps to obtain
approval for coverage and reimbursement for the use of the ProUroScan
System.
Our
failure to receive the third-party coverage for our products could result in
diminished marketability of our products.
Generally,
Medicare does not cover and pay for items and services that are not reasonable
or necessary for the diagnosis or treatment of illness or injury or to improve
the functioning of a malformed body member. This means that Medicare does not
usually cover and pay for preventative services, including routine screening
tests for patients who do not present with any signs or symptoms of disease,
unless the law specifically provides for such preventative coverage. Such
statutory coverage currently exists for prostate cancer screening tests.
Specifically, the law states that Medicare will cover a prostate screening test
that consists of a DRE and/or a PSA test provided for the purpose of early
detection of prostate cancer to a man over 50 years of age who has not had
such test during the preceding year. In addition, the law provides the Secretary
of Health and Human Services (the “Secretary”) the authority to cover other
prostate screening tests based upon changes in technology and standards of
medical practice, availability, effectiveness, costs and other factors deemed
appropriate by the Secretary. Thus, for the ProUroScan System to receive
Medicare coverage as a prostate screening test, the Secretary would need to add
the scan to the list of appropriate procedures for prostate cancer screening.
This could be a significant hurdle for the ProUroScan System to receive Medicare
coverage as a prostate screening test. Additionally, Congress recently created
an alternative pathway for Medicare to cover preventative services. Preventative
services that receive a grade “A” or “B” by the United States Preventive
Services Task Force (“USPSTF”) are eligible for Medicare coverage. The USPSTF
does not currently recommend prostate cancer screening with either
grade.
We
anticipate, however, that the ProUroScan System may be covered by Medicare as a
diagnostic test for patients who have clinical signs or symptoms of disease.
Obtaining Medicare coverage as a diagnostic test is more straightforward as long
as the test is reasonable and necessary. For example, the PSA test is covered as
a diagnostic test when used to differentiate benign from malignant disease in
men with lower urinary tract signs and symptoms (e.g., hematuria, slow
urine stream, hesitancy, urgency, frequency, nocturia and incontinence) as well
as with patients with palpably abnormal prostate glands on physician exam, and
in patients with other laboratory or imaging studies that suggest the
possibility of a malignant prostate disorder. We anticipate that the first
generation of the ProUroScan System will be used to image the prostate and to
maintain historical records for future tracking for men who have an abnormal DRE
or other signs or symptoms of disease. Thus, providers who perform prostate
imaging using the first generation ProUroScan System likely will seek Medicare
coverage and payment as a diagnostic, rather than a screening test. Even as a
diagnostic test, however, CMS or its contractors could determine that procedures
using the ProUroScan System are not medically necessary and therefore decide not
to cover them.
Even
if covered, our failure to receive appropriate reimbursement from third-party
payors could slow market uptake of our products.
Regardless
of whether the ProUroScan System is covered as a screening tool or a diagnostic
test, there is a risk that Medicare and other payors will bundle payment for it
into the payment for a covered office visit furnished to the patient on the same
day. For example, Medicare currently bundles billing and payment for a DRE into
payment for a covered evaluation and management office visit when the two
services are furnished to a Medicare beneficiary on the same day. If the DRE is
the only service or is provided as part of an otherwise non-covered service, it
may be separately paid if other coverage requirements are met. On the other
hand, the PSA typically is separately paid as a clinical diagnostic laboratory
service. Specifically, CMS could determine that due to the ease and short amount
of time needed to perform the ProUroScan System procedure, separate
reimbursement is not warranted if the physician already is billing an office
visit.
In order
for physicians and providers who perform procedures using the ProUroScan System
to receive separate reimbursement, they must bill a Current Procedure
Terminology (“CPT”) code that appropriately describes the service performed.
Although initially physicians and providers will be able to bill a miscellaneous
code to submit claims for ProUroScan System procedures, eventually we will want
to apply for a unique CPT code. The CPT application process is lengthy, and
there is no guarantee that we will receive a unique CPT code or that we will
receive a unique CPT code in a timely manner. Should we receive a unique CPT
code, the code is then valued for purposes of receiving reimbursement by the
American Medical Association’s Relative Value Scale Update Committee. The
valuation process depends on the amount of time the procedure takes and
difficulty of work involved, the practice expense and the malpractice expense
associated with using the ProUroScan System. CMS then takes the recommendation
of this committee into account when establishing the reimbursement amount. The
amount of reimbursement the physician will receive generally depends on the
values assigned to the various components of the procedure multiplied by a
conversion factor. This value is updated annually as part of the Medicare
Physician Fee Schedule. There is no guarantee that this process will result in
an appropriate level of reimbursement or an amount that supports the price and
revenues we have projected.
Even
if a unique CPT code is obtained for the test, the level of reimbursement
established may not provide adequate economic incentive to physicians, which
could deter them from using our products and limit our sales
growth.
At this
time, we do not know the extent to which physicians or providers would consider
third-party reimbursement levels adequate to cover the cost of our products.
Failure by physicians or providers to receive an amount that they consider to be
adequate reimbursement could deter them from using our products and limit our
sales growth. In addition, Medicare Physician Fee Schedule payments may decline
over time, which could deter physicians from using the ProUroScan System. If
physicians or providers are unable to justify the costs of the ProUroScan System
or they are not adequately compensated for using our product, they may
experience an economic disincentive to purchase or use them, which would
significantly harm our business.
Notwithstanding
current or future FDA clearances, if granted, third-party payors may deny
reimbursement if the payor determines that the ProUroScan System is unnecessary,
inappropriate, not cost-effective or experimental, or is used for a non-approved
indication. Further, all third-party payors, whether governmental or private,
whether domestic or international, are developing increasingly sophisticated
methods of controlling healthcare costs. These cost control methods include
prospective payment systems, capitated rates, benefit redesigns, or
pre-authorization requirements. Increased scrutiny particularly is being placed
on medical imaging. Additionally, payors are emphasizing and covering wellness
and healthier lifestyle interventions and other cost-effective methods of
delivering healthcare in exchange for covering more procedures. These cost
control methods also potentially limit the amount that healthcare providers may
be willing to pay for medical technology which could, as a result, adversely
affect our business and financial results. In addition, in the U.S., no uniform
policy of coverage and reimbursement for medical technology exists among all
third-party payors. Therefore, coverage and reimbursement for medical technology
can differ significantly from payor to payor. There also can be no assurance
that current levels of reimbursement will not be decreased or eliminated in the
future, or that future legislation, regulation or reimbursement policies of
third-party payors will not otherwise adversely affect the demand for the
ProUroScan System or our ability to sell the ProUroScan System on a profitable
basis.
If
we commercialize the ProUroScan System, we will be subject, directly or
indirectly, to federal and state healthcare fraud and abuse laws and regulations
and could face substantial penalties if we are unable to fully comply with such
laws.
Although
we do not control referrals of healthcare services or directly bill Medicare,
Medicaid or other third-party payors, many healthcare laws and regulations will
apply to our business. For example, we could be subject to healthcare fraud and
abuse and patient privacy regulation and enforcement by both the federal
government and the states in which we conduct our business. The healthcare laws
and regulations that may affect our ability to operate include:
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the
federal healthcare programs’ Anti-Kickback Law, which prohibits, among
other things, persons or entities from soliciting, receiving, offering or
providing remuneration, directly or indirectly, in return for or to induce
either the referral of an individual for, or the purchase order or
recommendation of, any item or service for which payment may be made under
a federal healthcare program such as the Medicare and Medicaid
programs;
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federal
false claims laws which prohibit, among other things, individuals or
entities from knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid or other third-party payors that are false
or fraudulent, or are for items or services not provided as claimed, and
which may apply to entities like us to the extent that our interactions
with customers may affect their billing or coding
practices;
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the
federal Health Insurance Portability and Accountability Act of 1996, or
HIPAA, which established new federal crimes for knowingly and willfully
executing a scheme to defraud any healthcare benefit program or making
false statements in connection with the delivery of or payment for
healthcare benefits, items or services, as well as leading to regulations
imposing certain requirements relating to the privacy, security and
transmission of individually identifiable health information;
and
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state
law equivalents of each of the above federal laws, such as anti-kickback
and false claims laws which may apply to items or services reimbursed by
any third-party payor, including commercial insurers, and state laws
governing the privacy of health information in certain circumstances, many
of which differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance
efforts.
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The
healthcare sector is, and in recent years has been, under heightened scrutiny as
the subject of government investigations and enforcement actions involving
manufacturers who allegedly offered unlawful inducements to potential or
existing customers in an attempt to procure their business, including
specifically arrangements with physician consultants. We may have arrangements
with physicians and other entities which may be subject to scrutiny. For
example, we may lease the ProUroScan System to physicians or others through
consulting agreements. Payment for these consulting services sometimes may be in
the form of cash, stock options or royalties. If our operations are found to be
in violation of any of the laws described above or any other governmental
regulations that apply to us, we may be subject to penalties, including civil
and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid
programs, and the curtailment or restructuring of our operations. Any penalties,
damages, fines, exclusions, curtailment or restructuring of our operations could
adversely affect our ability to operate our business and our financial results.
The risk of our being found in violation of these laws is increased by the fact
that many of these laws are broad and their provisions are open to a variety of
interpretations. Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur significant legal
expenses and divert our management’s attention from the operation of our
business. If the physicians or other providers or entities with whom we do
business are found to be non-compliant with applicable laws, they may be subject
to sanctions, which could also have a negative impact on our
business.
Any
failure in our efforts or our contractor’s efforts to train physicians or other
medical staff could result in lower than expected product sales.
A
critical component of our sales and marketing efforts is the training of a
sufficient number of physicians and other medical staff to properly use the
ProUroScan System. We rely on physicians and other medical staff to devote
adequate time to learn to use our products. Convincing physicians and other
medical staff to dedicate the time and energy for adequate training in the use
of our system may be challenging, and we cannot guarantee that this will occur.
If physicians and other medical staff are not properly trained, they may misuse
or ineffectively use our products. Insufficient training may result in
unsatisfactory patient outcomes, patient injury and related liability or
negative publicity, which could have an adverse effect on our product sales or
create substantial potential liabilities.
Rapid
technological change in our competitive marketplace may render the ProUroScan
System obsolete or may diminish our ability to compete in the
marketplace.
The
prostate cancer detection, imaging and medical device markets are extremely
competitive, dominated by large and well financed competition and are subject to
rapid technological advances and changes. The discovery of new technologies and
advances in the application of such technologies to the medical marketplace in
general, and the market for urology-based imaging products in particular, may
render our products obsolete or non-competitive. Any such changes and advances
could force us to abandon our currently proposed products, which would have a
material adverse effect on our business.
We
may not be able to enter into manufacturing agreements or other collaborative
agreements on terms acceptable to us, if at all, which could have a material
adverse effect on our business.
We cannot
be sure that we will be able to enter into manufacturing or other collaborative
arrangements with third parties on terms acceptable to us, if at all. If we fail
to establish such arrangements when, and as necessary, we could be required to
undertake these activities at our own expense, which would significantly
increase our capital requirements and may delay the development, manufacturing
and commercialization of our products. If we are unable to address these capital
requirements, it may have a material adverse effect on our
business.
We
expect to rely materially on Artann and other consultants and contractors, some
of whom may be partially or wholly paid through issuances of common stock
dilutive to our shareholders.
We
materially rely on consultants and contractors to perform a significant amount
of research and development, pre-manufacturing, clinical, regulatory and
marketing activities. Specifically, we issued 769,231 shares of our common stock
to Artann on March 15, 2010 related to the FDA 510(k) filing milestone, and upon
receipt of FDA clearance we expect to issue additional equity securities to
Artann valued at up to $700,000. We expect that certain other consultants and
contractors will also accept payment of a portion of their compensation in the
form of our equity securities. Any such issuances would be dilutive to
shareholders.
We
are highly dependent on the services provided by certain key
personnel.
We are
highly dependent upon the services of our executive officers, Richard Carlson
and Richard Thon. We have not obtained “key-man” life insurance policies
insuring the lives of either of these persons. If the services of either of
these persons become unavailable to us, for any reason, our business could be
adversely affected.
If
we lose our right to license and use from Artann certain critical intellectual
property for any reason, our entire business would be in jeopardy.
If we
breach or fail to perform the material conditions including payment obligations
of, or fail to extend the term of, the agreement with Artann that licenses
critical intellectual property, we may lose all or some of our rights to such
critical intellectual property and our license may terminate. If we should lose
our right to license and use technology covered by such license that is critical
to our business, such loss would have a materially adverse effect on our
business. In such a case, the viability of the Company would be in question. Our
only alternatives would be to find existing and non-infringing technology to
replace that lost, if any exists, or develop new technology ourselves. The
pursuit of any such alternative would likely cause significant delay in the
development and introduction of our proposed products.
The
protections for our key intellectual property may be successfully challenged by
third parties.
We own
various key intellectual properties. No assurance can be given that any
intellectual property claims will not be successfully challenged by third
parties. Any challenge to our intellectual property, regardless of merit, would
likely involve costly litigation which could have a material adverse effect on
our business. If a successful challenge were made to intellectual property that
is critical to our proposed products, the pursuit of any such alternative would
likely cause significant delay in the development and introduction of such
products. Moreover, a successful challenge could call into question the validity
of our business.
As
we lose patent protection on our critical technologies, it may have a material
adverse effect on our business.
We rely
on certain patents to provide us with exclusive rights for our technology. The
first of our primary patents on our core technology will expire in December
2012. As we begin to lose certain patent protections on our prostate imaging
systems and related critical patented technologies, we may face strong
competition as a result, which could have a material adverse effect our
business.
The
government has rights to certain of our patents.
Certain
of our patents emanated from work performed by Artann under grants from the
National Institutes of Health (“NIH”). As a result, certain standard NIH grant
obligations apply, which are designed to ensure that the U.S. investment is used
in the interest of U.S. industry and labor and that inventions are reported to
NIH. Additionally, the U.S. government retains a non-exclusive license to these
patents. As a non-exclusive licensee of certain of these patents, the U.S.
government, in addition to utilizing the inventions itself, could in certain
limited circumstances, request additional licenses to the patents be granted to
other parties and, if such license request is refused, grant the licenses
itself. Any actions by the U.S. government to require the grant of additional
licenses could materially and adversely affect our business.
We
may not be able to successfully compete against companies in our industry with
greater resources, or with any competition.
If our
development plan is successful, we expect to experience significant competition
in the medical device market. Although we believe that we may currently have a
niche in the prostate imaging marketplace, many factors beyond our control will
likely encourage new competitors. In particular, there are several large
companies that have indicated an interest in the prostate imaging business.
Therefore, no assurance can be given that we will be able to successfully
compete with these, or any other companies in the marketplace, if at
all.
Our
ability to use operating loss carryforwards to offset income in future years may
be limited.
As of
March 31, 2010, the Company had generated net operating loss carryforwards
of approximately $8.3 million which, if not used, will begin to expire in
2021. Federal and state tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a change in
ownership of the Company that constitutes an “ownership change,” as defined by
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).
The Company has analyzed its equity ownership changes and believes that such an
ownership change occurred upon the completion of its 2009 public offering.
The Company’s use of its net operating loss carryforwards of approximately $5.3
million and built-in loss incurred prior to the closing of the 2009 public
offering will be limited as a result of this change; however, the amount of
limitation will not be known until a full Section 382 study is
completed.
Our
business and products subject us to the risk of product liability
claims.
The
manufacture and sale of medical products and the conduct of clinical trials
using new technology involve customary risks of product liability claims. There
can be no assurance that our insurance coverage limits will be adequate to
protect us from any liabilities which we might incur in connection with the
clinical trials or the commercialization of any of our products. Product
liability insurance is expensive and in the future may not be available on
acceptable terms, if at all. A successful product liability claim or series of
claims brought against us in excess of our insurance coverage would have a
material adverse effect on our business. In addition, any claims, even if not
ultimately successful, could have a material adverse effect on the marketplace’s
acceptance of our products.
THE
OFFER
Participation
in the Offer involves a number of risks, including, but not limited to, the
risks identified in the section entitled “Risk Factors.” Warrant holders
should carefully consider these risks and are urged to speak with their personal
financial, investment and/or tax advisor as necessary before deciding whether or
not to participate in this Offer. In addition, we strongly encourage you
to read this Offer Letter/Prospectus in its entirety and the publicly-filed
information about the Company referenced herein, before making a decision
regarding the Offer.
General
Terms
For a
limited period of time, ProUroCare Medical Inc. is offering to certain of its
warrant holders the opportunity to receive new, three-year warrants upon the
exercise of their existing warrants. During the Offer Period, each Warrant
holder who tenders Warrants for early exercise will receive, in addition to the
shares of common stock purchased upon exercise, three-year 2010 Replacement
Warrants to purchase an equal number of shares of our common stock at an
exercise price of $1.30 per share. For example, if a Warrant holder
tenders 1,000 Warrants during the Offer Period, the Warrant holder will be
required to pay the Warrant exercise price of $1.30 per share, for a total of
$1,300, and will receive 1,000 shares of our common stock as a result of the
Warrant exercise plus a 2010 Replacement Warrant to purchase 1,000 shares of our
common stock.
Each 2010
Replacement Warrant may be redeemed by the Company at any time after the last
sales price of the Company’s common stock equals or exceeds $4.00 for 10
consecutive trading days, at a price of $0.01 per warrant
.
The Offer is subject
to the terms and conditions contained in this Offer Letter/Prospectus and the
Letter of Transmittal.
You may
tender some or all of your Warrants on these terms.
If you elect to
tender Warrants in response to this Offer, please follow the instructions in
this Offer Letter/Prospectus and the related documents, including the Letter of
Transmittal.
If you
tender Warrants, you may withdraw your tendered Warrants before the expiration
of the Offer Period and retain them on their original terms, by following the
instructions herein. If the Offer Period is extended, you may withdraw your
tendered Warrants at any time until the expiration of such extended Offer
Period. In addition, Warrants that are not accepted by us for payment by August
31, 2010 may be withdrawn.
Terms
of the 2010 Replacement Warrants
During
the Offer Period, each Warrant holder who tenders Warrants for early exercise
will receive, in addition to the shares of common stock purchased upon exercise,
three-year 2010 Replacement Warrants to purchase an equal number of shares of
our common stock at an exercise price of $1.30 per share. The terms of the
2010 Replacement Warrants will be substantially the same as the terms of the
2009 Replacement Warrants, except that each 2010 Replacement Warrant will expire
three years from the date of issuance. Like the 2009 Replacement Warrants, the
2010 Replacement Warrants may be redeemed by the Company at any time after the
last sales price of the Company’s common stock equals or exceeds $4.00 for 10
consecutive trading days, compared to the existing Public Warrants and Private
Warrants that are currently redeemable by the Company at any time prior to
expiration. The Company must provide 30 days’ prior written notice of its
decision to redeem the 2010 Replacement Warrants at a price of $0.01 per
warrant, during which time holders may choose to exercise the 2010 Replacement
Warrants according to their terms rather than submitting them for redemption.
For additional details regarding the terms of the 2010 Replacement Warrants, see
“Description of Securities to be Registered—2010 Replacement Warrants” starting
on page 67.
The
Company expects the 2010 Replacement Warrants to be quoted on the Pink Sheets
under a ticker symbol to be determined. The quoting of the 2010
Replacement Warrants on the Pink Sheets is dependent upon the existence of an
effective registration statement regarding the 2010 Replacement Warrants and the
cooperation of market makers for the 2010 Replacement Warrants.
Offer
Period
The Offer
will be open until August 2, 2010 at 4:00 p.m., Central Time, unless earlier
withdrawn or extended by the Company. We expressly reserve the right, in
our sole discretion, at any time or from time to time, to extend the period of
time during which the Offer is open. There can be no assurance that we will
exercise our right to extend the Offer Period. During any extension, all Warrant
holders who previously tendered Warrants will have a right to withdraw such
previously tendered Warrants until the expiration of the Offer Period, as
extended. We will pay no interest on cash tendered for the exercise price of the
Warrants regardless of any extension of, or amendment to, the Offer. If we
extend the Offer Period, we will make a public announcement of such extension by
no later than 8:00 a.m., Central Time, on the next business day following the
scheduled expiration of the Offer.
We may
withdraw the Offer only if the conditions of the Offer are not satisfied prior
to expiration of the Offer Period. Promptly upon any such withdrawal, we will
return the tendered Warrants along with any cash delivered therewith. We will
announce any intention to withdrawal by disseminating notice by public
announcement or otherwise as permitted by applicable law.
At the
expiration of the Offer Period, the original terms of the Warrants, including,
but not limited to, the $1.30 per share cash exercise price and the Company’s
right to redeem the Public Warrants and Private Warrants at any time prior to
expiration and the 2010 Replacement Warrants at any time after the last sales
price of the Company’s common stock equals or exceeds $4.00 for 10 consecutive
trading days, shall resume and continue to apply until the Warrants expire by
their terms of their respective expiration dates.
Partial
Exercise Permitted
If you
choose to participate in the Offer, you may exercise less than all of your
Warrants pursuant to the terms of the Offer.
WARRANTS
NOT EXERCISED DURING THE OFFER PERIOD SHALL, AFTER THE EXPIRATION OF THE OFFER
PERIOD, BE EXERCISABLE IN ACCORDANCE WITH THE GENERAL TERMS OF SUCH WARRANTS, AS
THE TERMS OF SUCH WARRANTS EXISTED PRIOR TO THE COMMENCEMENT OF THIS
OFFER. UNEXERCISED PUBLIC WARRANTS AND PRIVATE WARRANTS SHALL EXPIRE IN
ACCORDANCE WITH THEIR TERMS ON JANUARY 7, 2014 AND UNEXERCISED 2009 REPLACEMENT
WARRANTS SHALL EXPIRE IN ACCORDANCE WITH THEIR TERMS ON NOVEMBER 12, 2012,
UNLESS, IN EACH CASE, SOONER REDEEMED AS PERMITTED BY THEIR RESPECTIVE
TERMS.
Conditions
to the Offer
This
Offer is conditioned upon the existence of an effective amendment to our
registration statement regarding the Public Warrants and the 2009 Replacement
Warrants, and the common stock issuable upon the exercise of such Warrants, as
amended by the post-effective amendments to such registration statements
.
We
have filed with the Securities and Exchange Commission (the “SEC”)
post-effective amendments to our registration statements regarding the Public
Warrants and the 2009 Replacement Warrants.
Additionally,
the Offer is conditioned upon the existence of an effective registration
statement on Form S-4 regarding the 2010 Replacement Warrants, and the common
stock issuable upon the exercise of such warrants. In order to register
the 2010 Replacement Warrants to be issued upon the exercise of the Warrants in
this Offer, we have filed with the SEC a registration statement.
We will
not complete the Offer unless and until the post-effective amendments and
registration statement described above are declared effective by the SEC.
If there is a delay in such effectiveness, we may, in our discretion, extend,
suspend or cancel the Offer, and will inform Warrant holders of such event. If
we extend the Offer Period, we will make a public announcement of such extension
by no later than 8:00 a.m., Central Time, on the next business day following the
scheduled expiration of the Offer.
Finally,
the Offer is conditioned upon each Warrant holder desiring to participate in the
Offer delivering to the depositary in a timely manner a completed Letter of
Transmittal, along with the holder’s Warrants, proper cash payment, and any
other paperwork the depositary deems necessary to effect such
participation.
We may
withdraw the Offer only if the conditions of the Offer are not satisfied prior
to expiration of the Offer Period. Promptly upon any such withdrawal, we will
return the tendered Warrants along with any cash delivered therewith. We will
announce any intention to withdrawal by disseminating notice by public
announcement or otherwise as permitted by applicable law.
No
Recommendation; Warrant Holder’s Own Decision
Neither
the Company, its directors, officers or employees makes any recommendations to
any Warrant holder as to whether to exercise their Warrants. Each Warrant
holder must make his, her or its own decision as to whether to exercise their
Warrants.
Procedure
for Exercising and Tendering Warrants
Issuance
of common stock and 2010 Replacement Warrants upon exercise of Warrants pursuant
to this Offer and acceptance of Warrants pursuant to this Offer will be made
only if Warrants are exercised and tendered pursuant to the procedures below. An
exercise of Warrants pursuant to the procedures below will constitute a binding
agreement between the exercising holder of Warrants and the Company upon the
terms and subject to the conditions of the Offer.
Proper Exercise and Tender of Warrants
by Registered Owners
Required
Submissions
Warrant
holders who have received a Letter of Transmittal are considered “registered
owners” of Warrants and, in order to exercise and tender Warrants pursuant to
the Offer, must ensure that the depositary receives the following: (i) a
properly completed and duly executed Letter of Transmittal or
photocopy/facsimile thereof; (ii) the holder’s Warrant or Unit certificate(s);
(iii) any required signature guarantees; and (iv) proper payment for the
exercise of the tendered Warrants.
The
method of delivery of all required documents is at the option and risk of the
tendering Warrant holders. If delivery is by mail, we recommend registered mail
with return receipt requested (properly insured). In all cases, sufficient time
should be allowed to assure timely delivery. Warrants will be deemed properly
tendered during the Offer Period only if the Warrants being exercised are
delivered to the depositary by 4:00 p.m., Central Time, on August 2, 2010, at
the address of the depositary set forth in the section entitled “The
Offer—Depositary,” and are accompanied by proper payment and a properly
completed and duly executed Letter of Transmittal or, if applicable, the
guaranteed delivery procedures set forth herein are followed.
In the
Letter of Transmittal, the exercising Warrant holder must: (1) set forth his,
her or its name and address; (2) set forth the number of Warrants exercised; and
(3) set forth the number of the Warrant or Unit certificate(s) representing such
Warrants.
If you are a
registered owner and the Warrants you are tendering are part of Units held by
you, then you must submit your Unit certificate to the depositary when tendering
Warrants pursuant to the Offer.
The depositary will then promptly return
to you a certificate representing the common stock portion of your Units. The
common stock and 2010 Replacement Warrants to be issued upon exercise of
Warrants during the Offer Period, along with a certificate representing the
balance of any unexercised Warrants, will be delivered as set forth in the
section of this Offer Letter/Prospectus entitled “The Offer—Acceptance for
Issuance of Shares and 2010 Replacement Warrants,” beginning on page
26.
If the
Letter of Transmittal is signed by someone other than the registered owner of
the Warrants (for example, if the registered owner has appointed a Power of
Attorney, assigned the Warrants to a third-party, or is unable to execute the
Letter of Transmittal), the Warrants must be endorsed or accompanied by
appropriate assignment documents, in either case signed exactly as the name(s)
of the registered owner(s) appear on the Warrants, with the signature(s) on the
Warrants or assignment documents guaranteed.
ALL
DELIVERIES IN CONNECTION WITH THE OFFER, INCLUDING THE LETTER OF TRANSMITTAL,
WARRANTS AND PROPER PAYMENT FOR THE EARLY EXERCISE OF THE TENDERED WARRANTS,
MUST BE MADE TO THE DEPOSITARY. NO DELIVERIES SHOULD BE MADE TO THE
COMPANY, AND ANY DOCUMENTS DELIVERED TO THE COMPANY WILL NOT BE FORWARDED TO THE
DEPOSITARY AND THEREFORE WILL NOT BE DEEMED TO BE PROPERLY TENDERED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Signature
Guarantees
In
certain cases, all signatures on the Letter of Transmittal must be guaranteed by
an “Eligible Institution.” An “Eligible Institution” is a bank, broker
dealer, credit union, savings association or other entity that is a member in
good standing of the Securities Transfer Agents Medallion Program or a bank,
broker, dealer, credit union, savings association or other entity which is an
“eligible guarantor institution,” as that term is defined in Rule 17Ad-15
promulgated under the Exchange Act.
Signatures
on the Letter of Transmittal need not be guaranteed if (1) the Letter of
Transmittal is signed by the registered owner of the Warrants tendered therewith
and such holder has not completed the box entitled “Special Delivery
Instructions” or “Special Issuance Instructions” in the Letter of Transmittal;
or (2) such Warrants are tendered for the account of an Eligible
Institution.
Where
Warrants are exercised by a registered owner of the Warrants who has completed
either the box entitled “Special Payment Instructions” or the box entitled
“Special Delivery Instructions” on the Letter of Transmittal, all signatures on
the Letter of Transmittal must be guaranteed by an Eligible Institution.
Additionally, where the Letter of Transmittal is signed by someone other than
the registered owner of the Warrants, all signatures on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
Proper
Exercise and Tender of Warrants by Beneficial Owners
Required Communications by
Beneficial Owners
Warrant
holders whose Warrants are held through a direct or indirect Depository Trust
Company (“DTC”) participant, such as a broker, dealer, commercial bank, trust
company or other financial intermediary are not considered registered owners,
but are “beneficial owners,” and must instruct the broker, dealer, commercial
bank, trust company or other financial intermediary to exercise Warrants on
their behalf.
Instructions to Brokers for
Book-Entry Delivery
The depositary has established an
account for the Warrants at the DTC for purposes of the Offer. Any financial
institution that is a participant in DTC’s system may make book-entry delivery
of Warrants by causing DTC to transfer such Warrants into the depositary’s
account in accordance with DTC’s procedure for such transfer. However, brokers,
dealers and other financial intermediaries should note that even though delivery
of Warrants may be effected through book-entry transfer into the depositary’s
account at DTC, the guaranteed delivery procedures set forth herein must be
followed (as explained in the section below entitled “The Offer—Procedure for
Exercising and Tendering Warrants—Guaranteed Delivery Procedures for Registered
Owners and Beneficial Owners”). Alternatively, the depositary must receive, at
its address set forth in the section of this Offer Letter/Prospectus entitled
“The Offer—Depositary” prior to the expiration of the Offer Period, a properly
completed and duly executed Letter of Transmittal or photocopy/facsimile
thereof, with any required signature guarantees (or a properly completed and
duly executed letter of transmittal based on the form distributed to
participants by DTC.
Delivery of a
Notice of Guaranteed Delivery or the Letter of Transmittal (or other required
documentation) to DTC does not constitute delivery to the depositary.
Warrants
will be deemed properly tendered during the Offer Period only if the Warrants
being exercised are delivered to the depositary by 4:00 p.m., Central Time, on
August 2, 2010, accompanied by proper payment and a properly completed and duly
executed Letter of Transmittal or, if applicable, the guaranteed delivery
procedures set forth herein are followed.
Guaranteed
Delivery Procedures for Registered Owners and Beneficial Owners
If either
a registered owner or a beneficial owner of Warrants want to exercise his, her
or its Warrants pursuant to the Offer, but (1) for registered owners, the
Warrant or Unit certificates are not immediately available, (2) for beneficial
owners and their brokers, dealers or other financial intermediaries, the
procedure for book-entry transfer cannot be completed on a timely basis, or (3)
in either case, time will not permit all required documents to reach the
depositary prior to the expiration of the Offer Period, Warrant holders can
still exercise their Warrants if all the following conditions are
met:
|
|
1.
|
the
tender is made by or through an “Eligible
Institution”;
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|
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2.
|
the
depositary receives by hand, mail, overnight courier or facsimile
transmission, prior to the expiration of the Offer Period, a properly
completed and duly executed Notice of Guaranteed Delivery in the form the
Company has provided with this document, with signatures guaranteed by an
Eligible Institution (in the case of beneficial owners, such Notice of
Guaranteed Delivery will in most instances be delivered to the depositary
by DTC, but a beneficial owner’s broker is also permitted to complete the
form), accompanied by proper payment for the early exercise of the
tendered Warrants; and
|
|
|
3.
|
the
depositary receives, within three Pink Sheets quotation days after the
date of its receipt of the Notice of Guaranteed
Delivery:
|
|
|
a.
|
in
the case of registered owners:
|
|
|
i.
|
the
certificates for all tendered Warrants,
and
|
|
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ii.
|
a
properly completed and duly executed Letter of Transmittal or
photocopy/facsimile thereof , and
|
|
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iii.
|
any
other required documents.
|
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b.
|
in
the case of beneficial owners and their brokers, dealers or other
financial intermediaries:
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i.
|
confirmation
of receipt of the Warrants pursuant to the procedure for book-entry
transfer as described above, and
|
|
|
ii.
|
any
other required documents.
|
In any
event, the issuance of shares of common stock and 2010 Replacement Warrants for
Warrants exercised pursuant to the Offer and accepted pursuant to the Offer will
be made only if the depositary has timely received the applicable foregoing
items.
Determination
of Validity
All
questions as to the form of documents and the validity, eligibility (including
time of receipt) and acceptance for payment of any tender of Warrants will be
determined by us, in our sole discretion, and our determination shall be final
and binding, subject to the judgment of any court with jurisdiction over us. We
reserve the absolute right, subject to the judgment of any court, to reject any
or all tenders of Warrants that we determine are not in proper form or reject
Warrants that may, in the opinion of our counsel, be unlawful. We also reserve
the absolute right, subject to the judgment of any court with jurisdiction over
us, to waive any defect or irregularity in any tender of the Warrants. Neither
we nor any other person will be under any duty to give notice of any defect or
irregularity in tenders, nor shall any of them incur any liability for failure
to give any such notice.
The
exercise of Warrants pursuant to the procedure described above will constitute a
binding agreement between the tendering Warrant holder and the Company upon the
terms and subject to the conditions of the Offer.
Withdrawal
Rights
Tenders
of Warrants made pursuant to the Offer may be withdrawn at any time prior to the
expiration of the Offer Period. If the Offer Period is extended, you may
withdraw your tendered Warrants at any time until the expiration of such
extended Offer Period. After the Offer Period expires, such tenders are
irrevocable, provided, however, that Warrants that are not accepted by us for
payment by August 31, 2010
may be withdrawn. We
will pay no interest on the exercise price of the Warrants regardless of any
withdrawal of tendered warrants during the Offer Period, or any extension of, or
amendment to, the Offer.
To be
effective, a written notice of withdrawal must be timely received by the
depositary at its address identified in this Offer Letter/Prospectus. Any notice
of withdrawal must specify the name of the person who tendered the Warrants for
which tenders are to be withdrawn and the number of Warrants to be withdrawn. If
the Warrants to be withdrawn have been delivered to the depositary, a signed
notice of withdrawal must be submitted prior to release of such Warrants. In
addition, such notice must specify the name of the registered owner (if
different from that of the tendering Warrant holder) and the serial numbers
shown on the particular certificates evidencing the Warrants to be withdrawn.
Withdrawal may not be cancelled, and Warrants for which tenders are withdrawn
will thereafter be deemed not validly tendered for purposes of the Offer.
However, Warrants for which tenders are withdrawn may be tendered again by
following one of the procedures described above in the section entitled “The
Offer—Procedure for Exercising and Tendering Warrants” at any time prior to the
expiration of the Offer Period.
A holder
of Warrants desiring to withdraw tendered Warrants previously delivered through
DTC should contact the DTC participant through which such holder holds his, her
or its Warrants. In order to withdraw previously tendered Warrants, a DTC
participant may, prior to the expiration of the Offer Period, withdraw its
instruction previously transmitted through the WARR PTS function of DTC’s ATOP
procedures by (1) withdrawing its acceptance through the WARR PTS function, or
(2) delivering to the depositary by mail, hand delivery or facsimile
transmission, notice of withdrawal of such instruction. The notices of
withdrawal must contain the name and number of the DTC participant. A withdrawal
of an instruction must be executed by a DTC participant as such DTC
participant’s name appears on its transmission through the WARR PTS function to
which such withdrawal relates. A DTC participant may withdraw a tendered Warrant
only if such withdrawal complies with the provisions described in this
paragraph.
A holder
who tendered his, her or its Warrants other than through DTC should send written
notice of withdrawal to the depositary specifying the name of the Warrant holder
who exercised the Warrants being withdrawn. All signatures on a notice of
withdrawal must be guaranteed by an Eligible Institution, as described above in
the section entitled “The Offer—Procedure for Exercising and Tendering
Warrants—Signature Guarantees;” provided, however, that signatures on the notice
of withdrawal need not be guaranteed if the Warrants being withdrawn are held
for the account of an Eligible Institution. Withdrawal of a prior Warrant
tender will be effective upon receipt of the notice of withdrawal by the
depositary. Selection of the method of notification is at the risk of the
Warrant holder, and notice of withdrawal must be timely received by the
depositary.
All
questions as to the form and validity (including time of receipt) of any notice
of withdrawal will be determined by us, in our sole discretion, which
determination shall be final and binding, subject to the judgments of any courts
with jurisdiction over us that might provide otherwise. Neither we nor any other
person will be under any duty to give notification of any defect or irregularity
in any notice of withdrawal or incur any liability for failure to give any such
notification, subject to the judgment of any court with jurisdiction over
us.
Acceptance
for Issuance of Shares and 2010 Replacement Warrants
Upon the
terms and subject to the conditions of the Offer, we will accept for exercise
Warrants validly tendered until 4:00 p.m., Central Time, on August 2, 2010,
unless earlier withdrawn or further extended by the Company. The common stock
and 2010 Replacement Warrants to be issued upon exercise of Warrants during the
Offer Period, along with a certificate representing the balance of any
unexercised Warrants, will be delivered promptly following the expiration of the
Offer Period (the “Closing Date”). In all cases, Warrants will only be accepted
for exercise pursuant to the Offer after timely receipt by the depositary of (i)
certificates for Warrants or Units tendered either physically or through
book-entry delivery, (ii) a properly completed and duly executed Letter of
Transmittal or manually signed photocopy/facsimile thereof, (iii) a
certified bank check or wire transfer of immediately available funds in
accordance with the instructions herein, in the amount of the purchase price of
the common stock being acquired upon exercise of the Warrants tendered, payable
to Interwest Transfer Company, Inc., as warrant agent and depositary, and (iv)
any required signature guarantees.
For
purposes of the Offer, we will be deemed to have accepted for exercise Warrants
that are validly tendered and for which tenders are not withdrawn, unless we
give written notice to the Warrant holder of our non-acceptance.
Executive
Overview of the Company
We have
developed and intend to market an innovative prostate imaging system known as
the ProUroScan™ System. The ProUroScan System incorporates our new
proprietary elasticity imaging technology to create an image and document
abnormalities 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 document abnormalities 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 are less elastic than normal tissue. The
ProUroScan’s 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 system’s specially designed rectal probe,
physicians can quickly and cost-effectively visualize the prostate gland and
document specific areas of concern. The real-time image can be saved as a
permanent electronic record.
Our
imaging technology is based on work originally performed 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 U.S.
Food and Drug Administration (“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 additional prostate and other
urologic technologies.
The
ProUroScan System is not currently marketed or sold and has not yet been cleared
for marketing by the FDA. Our goal is to have ProUroScan System regulated by the
FDA as a Class II device. A Class II classification is designed for low
risk devices in which sufficient information exists to establish general and
specific controls that provide reasonable assurance of safety and effectiveness.
In a 510(k) application, applicants must demonstrate that the proposed device is
substantially equivalent to an existing approved product, or “predicate
device”. Products that employ new or novel technologies, and for which
through the 510(k) review process is found to have no comparable predicate
device, may be cleared for marketing under Section 513(f) of the Food, Drug and
Cosmetic Act (“FDCA”). This path, referred to as a “
de novo”
application, is
intended to allow low risk new technological devices to be cleared for marketing
when an appropriate predicate device does not exist.
In
November 2009, a 510(k) application for market clearance was filed with the FDA
that incorporated a basic imaging and documentation claim. From that
submission, the FDA determined that the ProUroScan System is not
substantially equivalent (NSE) to a device currently being marketed. As
required by Section 513(f)(2) of the FDCA, a submission was made on May 21, 2010
to request 510(k) clearance under the
de novo
process. This
request asked the FDA to define mechanical imaging systems as devices that are
intended to produce an elasticity image of the prostate as an aid in documenting
abnormalities of the prostate that are initially identified by digital rectal
examination and to be used by physicians as a documentation tool.
Once FDA
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 to be determined
medical products company that has an established worldwide presence in the
urology market.
We have
identified a market need to be able to create an image and document
abnormalities of the prostate. 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 System’s existing technology provides a platform on which
to develop multiple future generation systems. In the future, following our
initial FDA regulatory clearance, we intend to work with Artann to develop and
introduce enhanced versions and additional indications for this
technology. For example, we plan to study and develop an enhanced version
of the system that may be able to monitor changes in prostate tissue over time,
guide prostate biopsies and assess changes in prostate size following drug
treatment for benign prostate hyperplasia (“BPH”). Future generation
systems will require us to obtain regulatory approval or clearance 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.
Corporate
Information
ProUroCare
Inc. (“PUC”) was incorporated in 1999 as a Minnesota corporation. In
January 2002, PUC licensed the rights to certain advanced prostate mechanical
imaging technology, and became engaged in the business of developing this
technology for assessing characteristics of the prostate. In 2004, through
a reverse merger transaction with Global Internet Communications (“Global”), a
Nevada corporation, PUC became the wholly owned and sole operating subsidiary of
Global, which was then renamed ProUroCare Medical Inc.
Our
executive offices are located at 6440 Flying Cloud Drive, Suite 101, Eden
Prairie, Minnesota 55344. Our telephone number is (952) 476-9093, and our
Internet site is
www.prourocare.com
.
The information contained in our Internet site is not a part of this
prospectus.
Background
and Purpose of the Offer
Purpose
of the Offer
The
purpose of the Offer is to provide an incentive to exercise the Warrants and
thereby raise additional capital. The Warrants that are tendered for early
exercise pursuant to the Offer will be retired. The proceeds we raise as a
result of the Offer will be used to obtain market clearance of the ProUroScan
System, fund manufacturing and market scale-up activities, expand our
intellectual property rights, form a scientific advisory panel and conduct
clinical studies, reduce amounts outstanding on certain liabilities including an
existing line of credit with a director, and for other general corporate
purposes. See the section entitled “Use of Proceeds” on page 66 for
additional information.
Agreements,
Regulatory Requirements and Legal Proceedings
Other
than as set forth under the sections entitled “The Offer—Interests of Directors,
Officers and Affiliates” and “The Offer—Transactions and Agreements Concerning
Our Securities,” beginning on page 28 and page 30, respectively, and as set
forth in our Amended and Restated Articles of Incorporation or Amended and
Restated Bylaws, there are no present or proposed agreements, arrangements,
understandings or relationships between the Company, or any of its directors,
executive officers, affiliates or any other person relating, directly or
indirectly, to the Offer or to the securities of the Company that are the
subject of this Offer.
There are
no present plans or proposals which relate to or would result in: (a) other
than the acquisition of 2010 Replacement Warrants and common stock pursuant to
this Offer, the acquisition by any person of additional securities of the
Company, or the disposition of securities of the Company; (b) an
extraordinary corporate transaction, such as a merger, reorganization or
liquidation involving the Company or any of its subsidiaries; (c) a
purchase, sale or transfer of a material amount of assets of the Company or any
of its subsidiaries; (d) any change in the present board of directors or
management of the Company; (e) any material change in the present dividend
rate or policy, or indebtedness or capitalization of the Company; (f) any
other material change in the Company’s corporate structure or business;
(g) changes in the Company’s Amended and Restated Articles of Incorporation
or Amended and Restated Bylaws or instruments corresponding thereto or other
actions which may impede the acquisition of control of the Company by any
person; (h) a class of equity security of the Company becoming eligible for
termination of registration pursuant to Section 12(g)(4) of the
Exchange Act; or (i) the suspension of the Company’s obligation to file
reports pursuant to Section 15(d) of the Exchange
Act.
The
exercise of the Warrants pursuant to the Offer would trigger the acquisition by
such exercising holders of the 2010 Replacement Warrants and additional shares
of the common stock of the Company.
Except
for the requirements of applicable federal and state securities laws, we know of
no federal or state regulatory requirements to be complied with or approvals to
be obtained by us in connection with the Offer. There are no antitrust
laws applicable to the Offer. The margin requirements under Section 7 of
the Exchange Act, and the related regulations thereunder, are
inapplicable.
There are
no pending legal proceedings relating to the Offer.
Interests
of Directors, Officers and Affiliates
The
Company does not beneficially own any of the Warrants. The following table
sets forth the Warrants owned by our executive officers, directors and
affiliates:
|
Name
|
|
Aggregate Warrants
beneficially owned
|
|
|
Percentage of Warrants
beneficially owned
|
|
|
Richard
C. Carlson
|
|
|
-
|
|
|
|
-
|
|
|
Michael
Chambers
(1)
|
|
|
73,776
|
|
|
|
1.3
|
%
|
|
James
L. Davis
(2)
|
|
|
847,182
|
|
|
|
14.7
|
%
|
|
David
F. Koenig
(3)
|
|
|
-
|
|
|
|
-
|
|
|
Robert
J. Rudelius
(4)
|
|
|
44,742
|
|
|
|
0.8
|
%
|
|
Scott
E. Smith
(5)
|
|
|
62,475
|
|
|
|
1.1
|
%
|
|
Richard
B. Thon
|
|
|
-
|
|
|
|
-
|
|
_________
|
|
(1)
|
Represents
73,776 Private Warrants acquired as the result of a conversion of
convertible debt purchased in a private
placement
|
|
|
(2)
|
Represents
652,182 Private Warrants acquired as the result of a conversion of
convertible debt purchased in a private placement and 195,000 Public
Warrants acquired in our 2009 public
offering.
|
|
|
(3)
|
Although
Mr. Koenig holds no Warrants as of the date hereof, Mr. Koenig intends to
exercise 50,000 Warrants obtained in an exchange transaction with Mr.
Davis. See “Certain Relationships and Related Transactions” for more
information.
|
|
|
(4)
|
Represents
24,742 Private Warrants acquired as the result of a conversion of
convertible debt purchased in a private placement and 20,000 2009
Replacement Warrants acquired as the result of the exercise of Private
Warrants pursuant to our 2009 tender
offer.
|
|
|
(5)
|
Represents
32,475 Private Warrants acquired as the result of a conversion of
convertible debt purchased in a private placement, 10,000 Public Warrants
acquired in our 2009 public offering and 20,000 2009 Replacement Warrants
acquired as the result of the exercise of Private Warrants pursuant to our
2009 tender offer.
|
Several
of our directors intend to exercise Warrants in accordance with the terms of the
offer: James L. Davis, intends to exercise approximately 330,000 Warrants,
David Koenig intends to exercise 50,000 Warrants (such Warrants to be obtained
pursuant to an exchange transaction with Mr. Davis) and Robert Rudelius intends
to exercise 20,000 Warrants. In lieu of cash, these individuals may pay
the exercise price of some or all of their Warrants tendered in this Offer by
cancelling amounts we owe them.
Market
Price, Dividends and Related Stockholder Matters
Price
Range of Common Stock
We
currently have four equity securities that are quoted on the OTC Bulletin Board
(the “OTCBB”) or the Pink Sheets: common stock, Units, and two warrant
issues. Our common stock is quoted under the symbol “PUMD” on the
OTCBB. The Units, consisting of one share of common stock and one
five-year warrant to purchase a share of common stock at $1.30 per share, are
quoted under the symbol “PUMDU” on the Pink Sheets. Upon their separation
from the Units, the Public Warrants are separately quoted under the symbol
“PUMDW” (the “Public Warrants”) on the Pink Sheets. Finally, the 2009
Replacement Warrants are quoted under the symbol “PUMWW” on the Pink
Sheets. The Company expects the 2010 Replacement Warrants to be quoted on
the Pink Sheets under a ticker symbol to be determined. The listing of the 2010
Replacement Warrants on the Pink Sheets is dependent upon the existence of an
effective registration statement regarding the 2010 Replacement Warrants and the
cooperation of market makers for the 2010 Replacement Warrants.
We
recommend that Warrant holders obtain current market quotations for the common
stock before deciding whether or not to exercise their Warrants.
The
following table lists the high and low bid information for our common stock as
quoted on the OTCBB, by quarter from January 1, 2008 through June 25, 2010 (as
adjusted for the February 2008 one-for-ten reverse stock split). Our
common stock began trading in December 2003. On June 25, 2010, the last
reported sale price of our common stock was $1.85.
No active market exits
for our Units, Public Warrants and 2009 Replacement Warrants.
|
|
|
High
|
|
|
Low
|
|
|
2008
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.95
|
|
|
$
|
0.30
|
|
|
Second
Quarter
|
|
$
|
2.01
|
|
|
$
|
0.30
|
|
|
Third
Quarter
|
|
$
|
3.05
|
|
|
$
|
0.30
|
|
|
Fourth
Quarter
|
|
$
|
1.85
|
|
|
$
|
0.41
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.21
|
|
|
$
|
0.20
|
|
|
Second
Quarter
|
|
$
|
0.70
|
|
|
$
|
0.50
|
|
|
Third
Quarter
|
|
$
|
1.45
|
|
|
$
|
0.55
|
|
|
Fourth
Quarter
|
|
$
|
4.00
|
|
|
$
|
1.10
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
2.85
|
|
|
$
|
1.90
|
|
|
Second
Quarter (through June 25, 2010)
|
|
$
|
2.10
|
|
|
$
|
0.95
|
|
__________
The
quotations listed above reflect interdealer prices, without retail markup,
markdown or commission, and may not necessarily represent actual transactions.
As of June 25, 2010, the number of holders of record of our common stock was
138.
Dividend
Policy
We have
never declared or paid any cash dividends on our capital stock and do not expect
to pay any dividends for the foreseeable future. We intend to use future
earnings, if any, in the operation and expansion of our business. Any future
determination relating to our dividend policy will be made at the discretion of
our board of directors, based on our financial condition, results of operations,
contractual restrictions, capital requirements, business properties,
restrictions imposed by applicable law and other factors our board of directors
may deem relevant. Future debt covenants may prohibit payment of
dividends.
Source
and Amount of Funds
Because
this transaction is an offer to holders to exercise their existing Warrants,
there is no source of funds or other cash consideration being paid by us to
those tendering Warrants. We will use existing working capital to pay
expenses associated with this Offer, estimated to be $70,000.
Transactions
and Agreements Concerning Our Securities
Other
than as set forth below and under “Certain Relationships and Related
Transactions,” and as set forth in our Amended and Restated Articles of
Incorporation or Amended and Restated Bylaws, there are no agreements,
arrangements or understandings between the Company, or any of its directors or
executive officers, and any other person with respect to the securities of the
Company that are the subject of this Offer.
In
connection with the public offering of the Units, we entered into a Warrant
Agreement with Interwest Transfer Company, Inc., appointing Interwest as warrant
agent for the Public Warrants and Private Warrants. In connection with our
2009 Replacement Warrant Offer, we amended the Warrant Agreement to appoint
Interwest as warrant agent for the 2009 Replacement Warrants. In connection with
this Offer, we have again amended the Warrant Agreement to appoint Interwest as
warrant agent for the 2010 Replacement Warrants. As amended, the Warrant
Agreement provides for the various terms, restrictions and governing provisions
that dictate all of the terms of the Public Warrants, Private Warrants and 2010
Replacement Warrants.
On June
11, 2010, the Company closed on a private placement of $885,000 of unsecured
promissory notes (the “2010 Private Placement”). During the first 30 days
of the note term, each note will bear interest payable in warrants to purchase
shares of the Company’s common stock. For every $13,000 original principal
amount of notes, warrant interest will accrue at a rate of 333.333 shares of
common stock per day, up to a maximum of 10,000 warrants per $13,000 of original
principal amount of notes. The warrants have an exercise price of $1.30
per share, a three-year term and are immediately exercisable. The Company
may elect to redeem the warrants at any time after the last sales price of the
Company’s common stock equals or exceeds $4.00 for 10 consecutive trading
days. Following the initial 30 days of the note term, each note will bear
interest at a 6% annual rate, payable in cash at maturity. The Notes will mature
on December 1, 2010. The Company may prepay, in whole or in part, the
unpaid principal of the Notes at any time prior to the maturity date. By
their terms, cancellation of the principal and cash interest accrued on the
notes may be used to pay for the exercise price of any warrants held by the
holder of the note. See “Certain Relationships and Related
Transactions.”
Accounting
Treatment
The fair
value of the 2010 Replacement Warrants issued will be recorded as an incentive
for early warrant exercise expense, with an offsetting entry to additional
paid-in capital. The fair value of the 2010 Replacement Warrants issued
will be determined using the Black-Scholes pricing model on the Closing
Date.
Extension
of Tender Period; Termination; Amendments; Conditions
We
expressly reserve the right, in our sole discretion and at any time or from time
to time, to extend the period of time during which the Offer is open. There can
be no assurance, however, that we will exercise our right to extend the Offer
Period. During any such extension, all Warrant holders who previously tendered
Warrants will have a right to withdraw such previously tendered Warrants until
the expiration of the Offer Period, as extended.
Material
changes to information previously published, sent or given to holders of the
Warrants in this Offer, including this Offer Letter/Prospectus, or in documents
furnished subsequent thereto will be disseminated to holders of Warrants to the
extent required by applicable securities laws. Also, should we, pursuant to the
terms and conditions of the Offer, materially amend the Offer, we will ensure
that the Offer remains open long enough to comply with U.S. federal securities
laws. It is possible that such changes could involve an extension of the
Offer of up to 10 additional business days.
If we
materially change the terms of the Offer or the information concerning the
Offer, or waive a material condition of the Offer, we will extend the Offer to
the extent required under applicable law. The minimum period during which the
Offer must remain open following any material change in the terms of the Offer
or information concerning the Offer (other than a change in price, change in
dealer’s soliciting fee or change in percentage of securities sought, all of
which require up to 10 additional business days) will depend on the facts and
circumstances, including the relative materiality of such terms or
information.
If we
extend the Offer Period, we will make a public announcement of such extension by
no later than 8:00 a.m., Central Time, on the next business day following the
scheduled expiration of the Offer.
The
conditions to the Offer are:
|
|
·
|
the
existence of an effective amendment to our registration statement
regarding the Public Warrants and the common stock issuable upon the
exercise of such warrants;
|
|
|
·
|
the
existence of an effective registration statement regarding the 2009
Replacement Warrants and the common stock issuable upon the exercise of
such warrants;
|
|
|
·
|
the
existence of an effective registration statement regarding the 2010
Replacement Warrants and the common stock issuable upon the exercise of
such warrants; and
|
|
|
·
|
each
Warrant holder desiring to participate in the Offer delivering to us in a
timely manner a completed Letter of Transmittal, along with the holder’s
Warrants and proper cash payment.
|
We may
withdraw the Offer only if the conditions of the Offer are not satisfied prior
to expiration of the Offer Period. Promptly upon any such withdrawal, we will
return the tendered Warrants along with any cash delivered therewith. We will
announce any intention to withdrawal by disseminating notice by public
announcement or otherwise as permitted by applicable law.
Except
for the requirements of applicable federal and state securities laws, we know of
no federal or state regulatory requirements to be complied with or approvals to
be obtained by us in connection with the Offer.
Absence
of Dissenters’ Rights
Holders of the Warrants do not have any
appraisal or dissenters' rights under applicable law in connection with the
Offer.
U.S. Federal Income Tax Consequences
General
The following summary describes the
material U.S. federal income tax consequences of the Offer to U.S. Holders (as
defined below) of the Warrants, and the acceptance by such holders of the
limited offer to exercise the Warrants to acquire common stock and 2010
Replacement Warrants. This description also addresses the material U.S.
federal income tax consequences of the exercise, disposition and lapse of the
2010 Replacement Warrants and the acquisition, ownership and disposition of the
common stock received upon the exercise of the Warrants. This summary
assumes that holders hold the Warrants, and will hold the 2010 Replacement
Warrants and common stock received upon exercise of the Warrants or 2010
Replacement Warrants, as capital assets (generally, property held for
investment). This description does not address the tax considerations
applicable to holders that may be subject to special tax rules, such as
financial institutions, insurance companies, real estate investment trusts,
regulated investment companies, grantor trusts, tax exempt organizations,
dealers or traders in securities, or holders that hold common stock or Warrants
as part of a position in a straddle or as part of a hedging, conversion or
integrated transaction for U.S. federal income tax purposes or holders that have
a functional currency other than the U.S. dollar.
The following description addresses the
U.S. federal income tax consequences to U.S. Holders only. A holder of
common stock or Warrants is a “U.S. Holder” if such holder is:
|
|
·
|
an
individual who is a citizen of the United
States;
|
|
|
·
|
a
corporation created or organized in or under the laws of the United States
or any State thereof, including the District of
Columbia.
|
|
|
·
|
an
estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
|
|
|
·
|
a
trust (i) if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more U.S.
Persons, as defined in Section 7701(a)(30) of the Code, have the authority
to control all substantial decisions of such trust or (ii) that has a
valid election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. citizen.
|
This description does not address the
tax consequences to any person that is not a U.S. Holder. A holder of
Warrants that is not a U.S. Holder should consult its own tax advisor regarding
the U.S. federal income tax consequences of participation in the Offer in light
of its particular tax circumstances. If a partnership (or any other entity
treated as a partnership for U.S. federal income tax purposes) holds common
stock or Warrants, the tax treatment of the partnership and a partner in such
partnership generally will depend on the status of the partner and the nature of
the activities of the partnership. Such partner should consult its own tax
advisor as to the application of the U.S. tax laws to its particular
situation.
Moreover, this description does not
address the U.S. federal estate and gift tax, alternative minimum tax or other
tax consequences of the acquisition, ownership and disposition of common stock,
exercise of the Warrants, or the exercise, disposition and lapse of the 2010
Replacement Warrants. Holders should consult their tax advisors with
respect to the application of the U.S. tax laws to their particular
situation.
This description is based on the
Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed
Treasury Regulations promulgated thereunder, judicial decisions, published
positions of the Internal Revenue Service (the “IRS”) and other applicable
authorities, each as in effect on the date hereof. All of the foregoing
are subject to change, possibly with retroactive effect, or differing
interpretations by the IRS or a court, which could affect the tax consequences
described herein. We have not obtained, and have no plans to obtain, an
opinion of counsel regarding any of the tax consequences described below.
We have not obtained, and have no plans to request, a ruling from the IRS with
respect to any of the U.S. federal income tax consequences described below, and
as a result there can be no assurance that the IRS or the courts will agree with
any of the conclusions described herein.
This summary is for general information
only and is not intended to constitute a complete description of all tax
consequences for U.S. Holders relating to the exercise of Warrants in exchange
for our common stock and the 2010 Replacement Warrants and the ownership and
disposition of our common stock and the 2010 Replacement Warrants. You are
urged to consult with your tax advisor regarding the tax consequences to you
(including the application and effect of any state, local, or foreign income
tax, estate tax and other tax laws) of participation in the Offer, the receipt
of common stock and the 2010 Replacement Warrants, the ownership and disposition
of our common stock, and the exercise, disposition and lapse of the 2010
Replacement Warrants.
The Offer
If you participate in the Offer in
accordance with the procedures set forth in this Offer Letter/Prospectus, we
intend to treat your participation for U.S. federal income tax purposes in the
manner described below.
The U.S. federal income tax
consequences of participation in the Offer are uncertain. We intend to
treat the Offer as (i) a material modification of the terms of the Warrant to
provide that it is exercisable for common stock and the 2010 Replacement
Warrant, followed by (ii) an exercise of the modified Warrant. For U.S.
federal income tax purposes, upon such a modification the participating holder
would be deemed to exchange the “old” Warrants for “new” Warrants and then to
exercise the “new” Warrants. We intend to treat any such deemed exchange
of “old” Warrants for “new” Warrants as a tax-free “recapitalization” within the
meaning of Section 368(a)(1)(E) of the Code.
In accordance with such treatment as a
recapitalization, (i) you generally would recognize no gain or loss on the
deemed exchange; (ii) your tax basis in the “new” Warrant received in the deemed
exchange would be equal to the tax basis in your existing Warrant; and (iii)
your holding period in the “new” Warrant would include your holding period in
the “old” Warrant.
Due to lack of direct legal authority,
it is unclear whether the IRS will agree with this characterization and whether
the Offer will qualify as a recapitalization followed by an exercise of the
“new” Warrants for common stock and the 2010 Replacement Warrant. The
IRS could take the position that the deemed exchange is properly treated as a
fully taxable deemed exchange of “old” Warrants for “new” Warrants, in which
case the holder would recognize capital gain or loss equal to the difference
between the holder’s adjusted tax basis in the “old” Warrant and the fair market
value of the “new” Warrant. In the alternative, it is also possible
that the IRS could take the position that the Offer should be treated as an
early exercise of the Warrants (without a deemed exchange of the Warrants),
accompanied by the receipt of a taxable “fee” or Section 305 distribution,
taxable to the participating holder as described below. The following
discussion assumes that the Offer will be treated as a recapitalization exchange
followed by exercise of the “new” Warrant.
Subject to the following discussion
regarding the receipt of the 2010 Replacement Warrant upon the exercise of a
Warrant during the Offer Period, you should not recognize gain or loss on the
exercise of the Warrant and related receipt of common stock. The U.S.
federal income tax consequences of the receipt of a 2010 Replacement Warrant
upon exercise of a Warrant during the Offer Period are, however,
uncertain. We intend to take the position that a holder should be
treated as simultaneously purchasing common stock and a 2010 Replacement Warrant
upon the exercise of the Warrant during the Offer Period, in which case the
holder would not be required to recognize income or gain upon the receipt of the
2010 Replacement Warrant or common stock. In that case your aggregate
tax basis in the common stock and the 2010 Replacement Warrant received would
equal your tax basis in the Warrant plus the exercise price paid pursuant to the
Offer, and this aggregate basis would be allocated between the common stock and
the 2010 Replacement Warrant based on their relative fair market
values. Your holding period for the common stock and the 2010
Replacement Warrant received will begin on the day following the date of
exercise.
The IRS may take the position, however,
that the 2010 Replacement Warrant represents a taxable fee for exercising the
Warrant during the Offer Period, in which case you generally would recognize
ordinary income in an amount equal to the fair market value of the 2010
Replacement Warrant on the date of receipt. In that case, your tax
basis in the 2010 Replacement Warrant would equal the amount of income
recognized and your tax basis in the common stock received would equal the sum
of your tax basis in the Warrant plus the exercise price paid pursuant to the
Offer. Your holding period for the common stock and 2010 Replacement
Warrant received would begin on the day following the date of
exercise. In this connection, we note that for financial accounting
purposes the fair value of the 2010 Replacement Warrants issued will be recorded
as an incentive for early warrant exercise expense, with an offsetting entry to
additional paid-in capital. See “The Offer—Accounting Treatment”
starting on page
30.
In the alternative, the IRS may take
the position that the receipt of a 2010 Replacement Warrant should be treated as
a distribution of a right to acquire stock under Section 305 of the Code, which
could result in a taxable distribution to you in an amount equal to the fair
market value of the 2010 Replacement Warrant on the date of receipt, depending
on the circumstances (for example, if cash is distributed to holders of common
stock within 36 months of the date of receipt of the 2010 Replacement Warrant).
See the discussion below under the heading “Ownership and Disposition of Common
Stock” regarding tax treatment of distributions. In that case, the
tax basis in the common stock received would equal the sum of your tax basis in
the Warrant plus the exercise price paid pursuant to the Offer, and the tax
basis in the 2010 Replacement Warrant would depend on the particular
circumstances. Your holding period for the common stock and 2010
Replacement Warrant received would begin on the day following the date of
exercise.
You should consult your own tax advisor
regarding the tax consequences to you of participation in the Offer, in
particular regarding the possibility that the Offer may result in current
recognition of taxable income.
If you do not participate in the Offer,
we intend to treat the Offer as not resulting in any U.S. federal income tax
consequences to you.
Ownership
and Disposition of Common Stock
The
following discussion summarizes the material U.S. federal income tax
consequences of the ownership and disposition of the common stock applicable to
U.S. Holders, subject to the limitations described above.
Ownership
of Common Stock
Distributions
of cash or property that we pay in respect to the common stock will constitute
dividends for U.S. federal income tax purposes to the extent paid from our
current or accumulated earnings and profits (as determined under U.S. federal
income tax principles) and will be includible in the U.S. Holder’s gross income
upon receipt. Any such dividend will be eligible for the dividends received
deduction if received by an otherwise qualifying corporate U.S. Holder that
meets the holding period and other requirements for the dividends received
deduction. Dividends paid by us to certain non-corporate U.S. Holders
(including individuals), with respect to taxable years beginning on or before
December 31, 2010, are eligible for U.S. federal income taxation at the rates
generally applicable to long-term capital gains for individuals, provided that
the holder receiving the dividend satisfies applicable holding period and other
requirements. If the amount of a distribution exceeds our current and
accumulated earnings and profits, such excess will be treated first as a
tax-free return of capital to the extent of the U.S. Holder’s tax basis in such
Holder’s common stock, and thereafter will be treated as capital
gain.
Dispositions
of Common Stock
Upon a
sale, exchange or other taxable disposition of shares of the common stock, a
U.S. Holder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale, exchange or other taxable
disposition and such holder’s adjusted tax basis in its shares of common
stock. Such capital gain or loss will be long-term capital gain or
loss if such holder has held such common stock for more than one year at the
time of disposition. The deductibility of capital losses is subject
to limitations under the Code.
Exercise,
Disposition and Lapse of the 2010 Replacement Warrants.
Exercise of 2010 Replacement
Warrants
You will
not recognize gain or loss on the exercise of a 2010 Replacement Warrant and
related receipt of common stock. Your initial tax basis in the common stock
received on the exercise of a 2010 Replacement Warrant will equal the sum of
(i) your tax basis in such 2010 Replacement Warrant plus (ii) the
exercise price paid on the exercise of such 2010 Replacement Warrant. Your
holding period for the common stock received on the exercise of a 2010
Replacement Warrant should begin on the date that you exercise the 2010
Replacement Warrant.
Disposition of 2010 Replacement
Warrants
You will
recognize gain or loss on the sale or other taxable disposition of a 2010
Replacement Warrant in an amount equal to the difference, if any, between
(i) the amount of cash plus the fair market value of any property received
and (ii) your tax basis in the 2010 Replacement Warrant sold or otherwise
disposed of. Any such gain or loss generally will be a capital gain or loss. Any
such capital gain or loss will be short-term capital gain or loss or long-term
capital gain or loss, depending on whether the 2010 Replacement Warrants are
held for more than one year.
Lapse of 2010 Replacement
Warrant
Upon the
lapse or expiration of a 2010 Replacement Warrant, you should recognize a loss
in an amount equal to your tax basis in the 2010 Replacement Warrant. Any such
loss generally will be a capital loss. Any such capital loss will be
short-term capital loss or long-term capital loss, depending on whether the 2010
Replacement Warrants are held for more than one year.
Adjustment to Conversion
Ratio
Under
Section 305 of the Code, an adjustment to the number of shares of common
stock that will be issued on exercise of the 2010 Replacement Warrants, or an
adjustment to the exercise price of the 2010 Replacement Warrants, may be
treated as a constructive distribution to a holder of the 2010 Replacement
Warrants if, and to the extent that, such adjustment has the effect for U.S.
federal income tax purposes of increasing such U.S. Holder's proportionate
interest in the earnings and profits or assets of the Company, depending on the
circumstances of such adjustment (for example, if such adjustment is to
compensate for a distribution of cash or other property to
shareholders).
U.S.
Backup Withholding Tax and Information Reporting Requirements
Information
reporting generally will apply to payments of dividends on the common stock and
proceeds from the sale or exchange of the common stock or Warrants made within
the United States to a U.S. Holder, other than an exempt recipient (including a
corporation). If information reporting applies to any such payment,
we or our paying agent will be required to withhold backup withholding tax from
the payment if the holder fails to furnish its correct taxpayer identification
number or otherwise fails to comply with, or establish an exemption from, such
backup withholding tax requirements.
Backup
withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a U.S. Holder will be refunded or
credited against the U.S. Holder’s U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
Risk
Factors
For a
detailed discussion of some of the risks you should consider before
participating in the Offer, you are urged to carefully review and consider the
section entitled “Risk Factors” beginning on page 6 of this Offer
Letter/Prospectus.
Additional
Information; Miscellaneous
We have filed with the SEC a Tender
Offer Statement on Schedule TO, of which this Offer Letter/Prospectus is a part.
This Offer Letter/Prospectus does not contain all of the information contained
in the Schedule TO and the exhibits to the Schedule TO. We recommend
that Warrant holders review the Schedule TO, including the exhibits, and our
other materials that have been filed with the SEC before making a decision on
whether to accept the Offer.
We will
assess whether we are permitted to make the Offer in all jurisdictions. If we
determine that we are not legally able to make the Offer in a particular
jurisdiction, we reserve the right to withdraw the Offer in that particular
jurisdiction and we will inform Warrant holders of this decision. If we withdraw
the Offer in a particular jurisdiction, the Offer will not be made to, nor will
exercises or tenders be accepted from or on behalf of, the holders residing in
that jurisdiction.
Our Board
of Directors recognizes that the decision to accept or reject this Offer is an
individual one that should be based on a variety of factors and Warrant holders
should consult with personal advisors if they have questions about their
financial or tax situation. The information about this Offer from us is limited
to this Offer Letter/Prospectus and the Schedule TO relating to this
Offer.
We are
subject to the information requirements of the Securities and Exchange Act of
1934 and in accordance therewith file and furnish reports and other information
with the SEC. All reports and other documents we have filed or furnished with
the SEC, including the Schedule TO relating to the Offer, or will file or
furnish with the SEC in the future, can be accessed electronically on the SEC’s
website at www.sec.gov.
If you
have any questions regarding the Offer or need assistance, you should contact
the Company. You may request additional copies of this document, the
Letter of Transmittal or the Notice of Guaranteed Delivery from the
Company. All such questions or requests should be directed to Dick
Thon, ProUroCare Medical Inc., 6440 Flying Cloud Dr., Suite 101, Eden Prairie,
MN 55344, telephone (952) 698-1161, email: rthon@prourocare.com.
We will
amend our offering materials, including this Offer Letter/Prospectus, to the
extent required by applicable securities laws to disclose any material changes
to information previously published, sent or given to Warrant
holders.
Depositary
The
depositary for our Offer is:
Interwest
Transfer Company, Inc.
By mail,
hand or overnight delivery:
Interwest
Transfer Company, Inc.
1981
Murray Holladay Road
Suite
100
Salt Lake
City, Utah 84117
By
facsimile transmission:
Interwest
Transfer Company, Inc.
Facsimile: (801)
277-3147
Confirm
by telephone: (801) 272-9294
Wire
Instructions:
Interwest Transfer Co, Inc. TTEE
Depositary Warrant Agent
Account
F/B/O/ ProUroCare Medical, Inc.
First
Utah Bank 3826 South 2300 East
Salt Lake
City Utah 84109
ABA
Routing #124302613
Account
Number 11026473
Reference:
ProUroCare Warrant Exercise Funds.
INFORMATION
CONCERNING THE COMPANY
Overview
We have
developed and intend to market an innovative prostate imaging system known as
the ProUroScan™ System. The ProUroScan System incorporates our new
proprietary elasticity imaging technology to create an image and document
abnormalities 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 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 are less elastic than normal tissue. The
ProUroScan’s 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 system’s specially designed rectal probe,
physicians can quickly and cost-effectively visualize the prostate gland and
document specific areas of concern. The real-time image can be saved
as a permanent electronic record.
Our
imaging technology is based on work originally performed 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 U.S.
Food and Drug Administration (“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 additional
technologies.
The
ProUroScan System is not currently marketed or sold and has not yet been cleared
for marketing by the FDA. Our goal is to have ProUroScan System regulated by the
FDA as a Class II device. We are implementing a regulatory strategy
to obtain FDA clearance of the ProUroScan System for a basic imaging and
documentation claim and for the ProUroScan System to serve as an adjunct to a
DRE. The current status of the FDA market clearance process is
described below under the caption “ProUroCare System Status.”
Once FDA
clearance is obtained on our current generation ProUroScan System, we intend to
have the systems manufactured by one or more FDA-regulated contract
manufacturers and market the system in cooperation with a to be
determined medical products company that has an established worldwide
presence in the urology market.
We have
identified a market need to be able to create an image and document
abnormalities of the prostate. 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 System’s existing technology provides a platform on which
to develop multiple future generation systems. In the future, following our
initial FDA regulatory clearance, we intend to work with Artann to develop and
introduce enhanced versions and additional indications for this
technology. For example, we plan to study and develop an enhanced
version of the system that may be able to monitor changes in prostate tissue
over time, guide prostate biopsies and assess changes in prostate size following
drug treatment for benign prostate hyperplasia (“BPH”). Future
generation systems will require us to obtain regulatory approval or clearance
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.
Corporate
Information
ProUroCare
Inc. (“PUC”) was incorporated in 1999 as a Minnesota corporation. In
January 2002, PUC licensed the rights to certain advanced prostate mechanical
imaging technology, and became engaged in the business of developing this
technology for assessing characteristics of the prostate. In 2004,
through a reverse merger transaction with Global Internet Communications
(“Global”), a Nevada corporation, PUC became the wholly owned and sole operating
subsidiary of Global, which was then renamed ProUroCare Medical
Inc.
Our
executive offices are located at 6440 Flying Cloud Drive, Suite 101, Eden
Prairie, Minnesota 55344. Our telephone number is (952) 476-9093, and our
Internet site is
www.prourocare.com
. The
information contained in our Internet site is not a part of this
prospectus.
Market
Focus—Prostate Disease
Prostate
cancer is the most common form of cancer and the second leading cause of cancer
death in men. According to the National Cancer Institute, more than
192,000 men were expected to be diagnosed with prostate cancer and over
28,000 were expected to die from the disease in 2009. Currently, there are
approximately 42 million men in the U.S. over the age of 50. For men in
this age category, the standard of care to screen for the presence of prostate
cancer is to have a physical exam each year in which two tests are routinely
performed: the DRE and the Prostate Specific Antigen (“PSA”) blood test.
Although used for many years, the specificity of these tests has been widely
questioned. Data from community based studies suggest that the positive
predictive value of a DRE for prostate cancer is 15% to 30% and varies
relatively little with age. For elevated PSA levels between 4 and 10ng/mL,
the positive predictive value is approximately 20%. For studies in which
biopsies were done when the results of either test were abnormal, 18% to
26% of screened patients had suspicious results, cancer was actually detected in
approximately 4% of screened patients and the positive predictive value of the
tests combined was 15% to 21%. In another study involving 6,630 volunteers,
the combination of DRE and PSA detected 26% more cancers than PSA alone.
Although PSA and DRE provide some positive predictive value, neither of these
tests creates a physical or visual record of the abnormality or its position in
the prostate.
We
believe there is a market need to create an image and document abnormalities of
the prostate. We believe that the ProUroScan System offers a solution that meets
these needs and one 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). With additional development and further FDA
approvals, we believe the ProUroScan System may eventually be used to guide
prostate biopsy and assess the effect of medical treatments of
BPH.
Prostate
Cancer Screening and Diagnosis
The two
most common screening tests for identifying prostate cancer are the DRE and the
PSA. These tests have been used for years, but have often been criticized for
their lack of specificity and selectivity.
In a DRE
exam, a physician wearing a latex glove inserts a lubricated finger into the
rectum to palpate the prostate gland to detect abnormalities. The clinician must
rely on his or her experience and sensitivity of touch to estimate the size of
the prostate and detect irregularities in shape or hardness. There is
significant subjectivity inherent in the DRE exam which can be negatively
affected by poor examiner training, lack of experience or poor ability to
interpret the results, as well as other patient related limitations including
excessive obesity, patient discomfort and unusual anatomical positioning of the
prostate.
Data from
community-based studies indicate that the positive predictive value of a DRE in
detecting cancer is 15% to 30% and varies relatively little with age. In a
Scandinavian study, the positive predictive value of DRE was found to be only
22% to 29%. According to the Eighth Edition of Campbell’s Urology, a DRE
has only fair reproducibility even with experienced examiners and the test
misses a substantial proportion of cancers before they become advanced and less
amenable to treatment.
The other
primary screening test for detecting prostate cancer is the measurement of PSA
in serum. The advantages offered by PSA testing are its simplicity,
objectivity, reproducibility and low level of invasiveness. Although PSA is
specific to prostate tissue, it is not specific to prostate cancer. Older men
that have benign enlargement of the prostate and acute prostatitis often have
elevated PSA levels. Serum levels of PSA can also be elevated for a period
of time after transrectal needle biopsy, acute urinary retention and prostate
surgery. Because of the prevalence of these conditions in men over the age
of 50, the positive predictive value of PSA measurements decreases with
age.
In
clinical practice, a PSA level greater than 4ng/mL is generally considered an
abnormal result. Recent community-based studies show that PSA levels
greater than 4ng/mL are seen in about 15% of men who are older than
50 years of age. The probability, or positive predictive value, that a man
who is older than 50 having prostate cancer if his PSA level is elevated is
approximately 20% to 30%. However, the likelihood of cancer depends on the
degree of elevation in the PSA levels. For levels between 4 and 10ng/mL, the
positive predictive value is about 20 percent. This value increases to
between 42 percent and 64 percent if the PSA level is greater
than 10ng/nL. Despite these variances, PSA testing has increased the
detection rate of early-stage prostate cancers, which are more curable than
late-stage cancers.
Most
clinicians have adopted the strategy of performing both tests in combination,
which has been shown to increase the combined predictive value. In fact, in a
large study of volunteers, the combination of DRE and PSA detected 26% more
cancers than PSA alone. However, because of the significant risk of prostate
cancer, prostate biopsy is recommended for all men who have DRE abnormalities,
regardless of PSA level, because 25% of men with cancer have
PSA levels less than 4mg/nL.
A patient
with a positive DRE or an elevated PSA is typically referred to a urologist for
further diagnosis. The urologist will usually perform a prostate biopsy to
obtain tissue samples for microscopic analysis. The prostate is biopsied by a
needle that is guided by ultrasound into the prostate through the rectal wall.
Since the existence and exact location of possible cancerous tissue is not
known, the urologist will usually take 10 to 14 samples in a scattered pattern
throughout the prostate in an attempt to find the suspect tissue. The tissue
samples are then sent to a laboratory for analysis and interpretation, and the
results are reported several days later. If the results are negative or
indeterminate, the urologist may suggest a second biopsy procedure, or that the
patient increase the frequency of future screening examinations. According to
Oregon Health and Science University, approximately one million patients are
biopsied each year in the United States, but only approximately 25% of biopsy
procedures performed detect the presence of cancer.
The
treatment path for patients who test positive for prostate cancer depends on
many variables, including age, location and pathology of the cancerous tissue
and general health of the patient. Generally, a younger, otherwise healthy
patient will elect to have the prostate removed to eliminate the possibility
that it might spread beyond the prostate. Older, less healthy patients may elect
not to undergo surgery, and instead monitor the disease closely by semi-annual
PSA and DRE exams, and annual biopsies. This monitoring regimen is commonly
referred to as “active surveillance.” Some patients may elect radiation or drug
treatments, in addition to necessary ongoing active surveillance. The National
Cancer Institute estimates that there are approximately two million men
alive who have a history of cancer of the prostate. On this basis, we estimate
that the number of men over the last decade that have elected against prostate
removal and thus are undergoing ongoing active surveillance exceeds one
million.
The
ProUroScan Prostate Imaging System
The
ProUroScan System is an imaging system designed for use as an aid to the
physician in visualizing and documenting abnormalities in the
prostate. As an adjunctive tool to DRE, it will be used after a
physician identifies abnormalities during a DRE examination. The first
generation system will provide an image or record of the pressures that are
generated from palpation of the posterior surface of the prostate using a sensor
probe. The system’s operation is based on measurement of the stress pattern
created when the probe is pressed against the prostate through the rectal wall.
Temporal and spatial changes in the stress pattern provide information on the
elastic structure of the gland and allow two-dimensional reconstruction of
prostate anatomy and visualization of prostate mechanical properties. The data
acquired allow the calculation of prostate features such as size and shape. The
prostate image is displayed on a screen that allows physicians to visualize
tissue abnormalities in the prostate gland. In addition to the real time visual
image, the results are stored electronically as a digital record.
The
ProUroScan System consists of arrays of pressure sensors mounted on a probe, a
central processing unit, proprietary software and image construction algorithms,
and a color monitor. The probe is specially designed for the rectal anatomy to
minimize patient discomfort. It is ergonomic for the clinician and similar to a
traditional DRE for the patient. The probe utilizes highly sensitive pressure
sensors located on the face of the probe head to palpate the prostate. The
probe’s positioning system ensures that the person administering the scan
examines the entire surface of the prostate, and assists prostate image
construction.
To
perform a scan, the clinician inserts the tip of the probe into the patient’s
rectum and palpates the prostate. As the prostate is palpated, a color image of
the prostate is produced and displayed on the computer monitor, along with
indicators of the amount of pressure being applied to help guide the clinician.
Differences in tissue density or elasticity will be depicted in real time on a
color monitor.
ProUroScan
System Status
The first
generation ProUroScan System has been tested in laboratory experiments on
prostate models and in a pre-clinical study. In addition, the system was used
for over two years and on approximately 168 patients at the Robert Wood Johnson
Medical Center in New Brunswick, New Jersey. In March 2008, an
article authored by Artann scientists and published in the peer- reviewed
journal
Urology
reported that in 84% of the cases in this pre-clinical study, the ProUroScan
System was able to construct a real-time color image of the
prostate.
On
September 25, 2009, we completed a multi-site clinical study of the ProUroScan
imaging system designed to provide documentation to the FDA of the system’s
effectiveness in visualizing and documenting abnormalities of the prostate
detected by DRE. The trial included a final patient count of 56
patients assessed at the following medical centers:
|
|
·
|
Veterans
Affairs Medical Center, Minneapolis,
MN;
|
|
|
·
|
Robert
Wood Johnson Medical School Division of Urology, New Brunswick,
NJ;
|
|
|
·
|
Mayo
Clinic, Rochester, MN;
|
|
|
·
|
AccuMed
Research Associates, Garden City, NY;
and
|
|
|
·
|
Urological
Associates of Lancaster, Lancaster,
PA.
|
The
ProUroScan System is not currently marketed or sold and has not yet been cleared
for marketing by the FDA. Our goal is to have ProUroScan System regulated by the
FDA as a Class II device. A Class II device is one in which general
and specific controls exist to ensure that the device is safe and
effective. In a 510(k) application, applicants must demonstrate that
the proposed device is substantially equivalent to an existing approved product,
or “predicate device.” Products that employ new or novel
technologies, and for which through the 510(k) review process is found to have
no comparable predicate device, may be cleared for marketing under Section
513(f) of the FDCA. This path, referred to as a “
de novo”
application, is
intended to allow new or novel technology devices to be cleared for marketing
when an appropriate predicate device does not exist.
In
November 2009, a 510(k) application for market clearance was filed with the FDA
that incorporated a basic imaging and documentation claim. From that
submission, the FDA determined that the ProUroScan System is not substantially
equivalent (“NSE”) to a device currently being marketed. As required
by Section 513(f)(2) of the FDCA Act, a submission was made on May 21, 2010 to
request 510(k) clearance under the
de novo
process. This
request asked the FDA to define mechanical imaging systems as devices that are
intended to produce an elasticity image of the prostate as an aid in documenting
abnormalities of the prostate that are initially identified by digital rectal
examination and to be used by physicians as a documentation tool.
The
de novo
submission also
recommended that the classification regulation state that a “mechanical imaging
system” device consists of a trans-rectal probe with pressure sensor arrays and
a motion tracking system that provides real time images of the
prostate. These proprietary components are unique to the ProUroScan
system.
Once
cleared, the ProUroScan may serve as a predicate for future filings and expanded
indications for use. The time allowed for review of the de novo
application is defined by statue under Section 513(f)(2) of the
FDCA.
Under the
terms of its contract with us, Artann is responsible for submitting and
obtaining the initial regulatory clearance for the ProUroScan System for the
basic imaging and documentation claim. Once cleared and upon
ProUroCare’s first commercial sale of a ProUroScan System, Artann will transfer
the 510(k) to ProUroCare.
Planned Development of the ProUroScan
System
We
believe that the ProUroScan System’s existing technology provides a platform on
which to develop multiple future generation systems. Once FDA clearance is
obtained for a basic imaging and documentation claim, the 510(k) will be
transferred to us from Artann. In the future, we intend to work with
Artann to develop more enhanced labeling claims and product features. Future
generation systems will require us to obtain regulatory approval or clearance
for use of the ProUroScan System for additional prostate related indications and
file additional submissions with the FDA to obtain expanded labeling claims.
Such regulatory clearances or approvals may require us to perform additional
clinical studies. Future generations of the ProUroScan System may also require
us to secure rights to additional intellectual property.
Active Surveillance
We
believe that one of the more valuable future applications for the ProUroScan
System, assuming we obtain any necessary FDA clearance or approval, will be to
allow physicians to monitor changes in the prostate over time. The ProUroScan
System is designed to produce a digital image of the prostate showing the size
and symmetry of the prostate and the location of abnormalities within the
prostate. The ProUroScan System creates a digital record of the exam that can be
stored and used for comparison to subsequent exams. We believe its ability to
digitally store not only the scan results but all of the individual pressure
readings taken during the course of the procedure should facilitate a
quantitative analysis of the progression of the disease over time. By comparing
the data taken in a baseline examination to subsequent examinations during the
course of active surveillance, we believe the urologist will gain valuable
information about changes in the patient’s condition that can influence their
decision to pursue additional treatment or continue surveillance. We believe
that this expanded use of the ProUroScan System will provide consistent imaging
over time as compared to variations resulting from differences in technique and
experience of clinicians performing DREs. We believe this will enable physicians
to compare and contrast the patient’s results from exam to exam, and to get
second opinions on the patient’s status in regards to the diagnosis without an
additional office visit. We believe that comparisons of multiple scans over time
will also enable physicians to make longitudinal assessments of the patient’s
disease.
Three-Dimensional Imaging
We
believe that another future enhancement of the current generation system may be
the capability to identify the specific three-dimensional location of lesions
found in the prostate. This can be accomplished by creating a three-dimensional
image of the position of the lesions allowing physicians to rotate the image to
assist in identifying the actual position of the lesion in the prostate gland.
We believe that having this capability may prove helpful in providing a
diagnosis of the patient’s condition in conjunction with other commercially
available diagnostic tools.
Guiding Biopsy
We
believe that use of three-dimensional imaging may facilitate guiding biopsy
needles to specific areas in the prostate where suspicious lesions. Having this
capability increases the likelihood of finding cancerous tissue while also
potentially minimizing the number of biopsies that are taken on an individual
patient. According to Oregon Health and Science University, approximately one
million patients are biopsied each year in the United States, but only
25 percent of biopsy procedures performed detect the presence of
cancer.
Evaluating Drug Treatment for BPH
Patients
For
patients who have symptoms of BPH, we believe that future generations of the
ProUroScan System may also be used to monitor changes in prostate size before
and during the course of drug treatments, allowing physicians to more quickly
assess the effectiveness of alternative therapeutic approaches. Assuming future
FDA approval or clearance is granted, use of the ProUroScan System in patients
diagnosed with BPH will allow physicians to monitor changes in the size and
volume of the prostate following treatment with drugs or other tissue reducing
technologies. Timely, accurate assessment of prostate volume changes and the
effectiveness of treatment should enable physicians to recommend alternative
treatments sooner than current assessment methods, and thus provide more
immediate relief to patients.
Marketing
and Distribution
Our
business plan is built on the premise that the image and physical record created
by the ProUroScan System will become a valuable tool in assisting physicians and
patients in understanding the scope of the abnormalities that are identified
with a DRE.
Current
Procedural Terminology (“CPT”) codes are used by physicians and other providers
to submit claims. We anticipate that the ProUroScan System would be covered by
Medicare as a diagnostic test for patients who have clinical signs or symptoms
of disease. At the outset, however, there will not be a unique CPT code for the
ProUroScan procedure. During this period of time, physicians will have the
option of submitting claims under a “miscellaneous” CPT code with proper
documentation. We also expect to use a “patient pay” model in which the patient
would pay directly for the cost of the scan. During the first year or two
following market entry, we will collect the clinical and economic data necessary
in order to apply for a unique CPT code from the American Medical Association
(“AMA”). Our initial commercial rollout will focus on urologists in
the United States. By focusing on urologists, we expect to establish the
clinical and economic value of the scan for patients, and to demonstrate to both
private and government payors the rationale and parameters for establishing a
CPT code and that the scan should be covered and adequately
reimbursed.
We
believe that the cost of establishing our own direct sales force of sufficient
size and with the capability to commercialize the ProUroScan System worldwide
would require a considerable period of time and significant
funding. As an effective way to develop our understanding of
different international markets and accelerate sales and marketing activities we
plan to establish a distribution agreement with a large urology or diagnostic
products company. We believe that establishing such a relationship
would allow us to penetrate markets more quickly and afford us an opportunity to
obtain additional financial support in the form of licensing fees, equity
investments and “in kind assistance” from key functional groups within the
licensing organization. We have begun exploring marketing
opportunities with four of the eight to ten potential partner companies we have
targeted.
In the
United States, in advance of establishing such a distribution agreement, we plan
to hire a small direct sales force that will focus on large urology practices in
major metro markets. The concentration of large urology group
practices in the U.S. enables us to access a disproportionate number of
physicians with a highly targeted sales force. Once a distribution
partner has been identified and a distribution agreement put in place, our sales
force will be used in business-to-business support to the partnering
organization. They will also be used to assist in the initial
analysis and development of other markets.
We
anticipate that, in time, the majority of our revenue will be generated from
testing fees bundled together with the sale of disposable supplies consumed in
the scanning process. Additional revenue will be generated by the
sale of ProUroScan Systems, which likely will be placed in clinics under a
variety of programs, which may include outright sales, operating leases,
financing leases or arrangements where payments are based upon the usage of the
system.
Manufacturing
The
ProUroScan System has two major proprietary hardware components: a central
processor and a rectal probe. There are also certain off-the-shelf components
that presently are widely available. Artann has provided five clinical prostate
imaging systems used in performing clinical trials and for contract
manufacturing assessment. Artann will transfer ownership of these units to us
upon the date of first commercial sale of the ProUroScan System.
We have
contracted with Logic (Minneapolis, MN), a contract engineering and
manufacturing firm that is Quality Systems Regulation (“QSR”) compliant, to
initiate production on the first commercial ProUroScan Systems. The QSR requires
manufacturers, including certain third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance procedures
during all aspects of the manufacturing process. Because of the unique nature of
the two major proprietary components of the ProUroScan System, it is likely that
one or more additional third-party manufacturers will be chosen to assemble the
certain components or sub-assemblies. Our goal is to reduce the cost of
producing systems over the first two years, taking advantage of manufacturing
scale and purchasing discounts, as well as engineering changes designed to
eliminate components and reduce component costs.
ProUroScan
System Development Partner
The
ProUroScan System is based on work originally performed by Artann and its
affiliate, ArMed LLC. In 2002, we licensed the rights to this technology
developed by Artann from its owner, Profile LLC (“Profile”), a technology
holding company, and since then have worked with Artann and our other technology
partners on its development. In April 2008, we acquired the patents, patent
applications and other know-how associated with this technology previously
licensed from Profile. In July 2008, we entered into two new agreements
with Artann relating to this technology, namely, a license agreement (the
“Artann License Agreement”) and a development and commercialization agreement
(the “Artann Development Agreement”). In December 2008 and November
2009, we amended these agreements to revise the effective dates of the
agreements and alter the timing of certain payments to be made under the
agreements. We have expensed $2,240,000 and $598,000 for research and
development activities in 2009 and 2008, respectively, primarily for contracted
work performed by Artann under the Artann Development Agreement.
Under the
Artann License Agreement, Artann has granted us an exclusive, worldwide,
sub-licensable license to certain patent applications and other know-how needed
to make, use and market certain mechanical imaging products for the diagnosis or
treatment of urologic disorders of the prostate, kidney or liver. Artann also
agreed to transfer to us possession of five clinical prostate imaging systems
and grant us full access to all relevant documentation thereto. As an upfront
license fee pursuant to the Artann License Agreement, on January 14, 2009 we
paid Artann $600,000 in cash and $500,000 in shares of our common
stock. In addition, we have agreed to pay Artann:
• a
royalty fee equal to 4% of the first $30,000,000 of net cumulative sales of
licensed products, 3% of the next $70,000,000 of net cumulative sales and 2% of
net cumulative sales over $100,000,000; and
• a
technology royalty fee of 1% of net sales of the prostate imaging system
products through the earlier of December 31, 2016 or the date of last
commercial sale of such products.
The
combined royalties are subject to a minimum annual royalty equal to $50,000 per
year for each of the first two years after FDA clearance for commercial sale and
$100,000 per year for each year thereafter until termination or expiration of
the Artann License Agreement. We also agreed to grant Artann a non-exclusive,
fully paid, sub-licensable, worldwide license to our patents, patent
applications and know-how relating to the manufacture, use or sale of any
mechanical imaging system for the diagnosis or treatment of disorders of the
female breast.
Under the
Artann Development Agreement, we will collaborate with Artann to develop,
commercialize and market prostate imaging systems. Artann will conduct and
complete all pre-clinical activities and testing on the prostate imaging system,
conduct clinical trials, prepare and submit FDA regulatory submissions and
provide hardware and software development, refinement and debugging services to
ready the prostate imaging system for commercial sale. For these development
services, we paid Artann:
• $250,000
in cash upon initiation of the clinical study to support the basic imaging and
documentation claim;
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$250,000
in cash as a milestone payment upon completion of that study and
submission of the 510(k) application to support the basic imaging and
documentation claim;
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• monthly
retainer fees totaling $360,000 for technical advice and training by Artann
personnel; and.
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769,231
shares of our common stock as a milestone payment upon submission of the
510(k) application, on March 15, 2010 (the $1,565,000 value of these
shares was accrued for issuance as of December 31,
2009).
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Future
payments due to Artann under the Artann Development Agreement, as amended,
include:
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up
to $1,000,000 in shares of our common stock upon FDA clearance that allows
the ProUroScan System to be commercially sold in the United States
(subject to reduction of the number of shares by 10% for each full month
that FDA clearance is delayed after March 23, 2010; as of June 23, 2010,
such amount was reduced to
$700,000).
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Under the
Artann Development Agreement, Artann will also facilitate the transfer of
commercial production to our contract manufacturer, Logic.
The
Artann License Agreement and the Artann Development Agreement each became
effective on December 23, 2008. Under the Artann License Agreement, we have
a 30-day cure period from the date of receipt of written notice from Artann of a
breach of our payment obligations under either the Artann License Agreement or
Artann Development Agreement. If we have not cured such payment breach within
five days of receipt of the Artann notice, the exclusive licenses convert to
non-exclusive licenses; however, neither party may sub-license or grant
additional licenses for a period of 60 days after receipt of such notice.
Under the Artann Development Agreement, we have a 60-day cure period from the
date of receipt of written notice from Artann of a breach of our payment
obligations under either the Artann License Agreement or the Artann Development
Agreement. If we do not cure a breach of our payment obligations by the end of
the 30-day cure period, the licenses granted under the Artann License Agreement
will terminate. Subject to earlier termination due to breach,
bankruptcy and certain other events, the Artann License Agreement will terminate
upon expiration of all royalty obligations, and the Artann Development Agreement
will terminate on its third anniversary, subject to renewal for additional one
year terms upon mutual agreement of us and Artann.
Intellectual
Property
Our
objective as a medical device company is to effectively and aggressively obtain,
maintain and enforce patent protection for our products, formulations,
processes, methods and other proprietary technologies, preserve our trade
secrets and licenses, and operate without infringing the proprietary rights of
other parties both in the United States and in all other countries where we may
do business. We seek to obtain, where appropriate and financially feasible, the
broadest intellectual property protection possible for our products, proprietary
information and proprietary technology through a combination of contractual
arrangements, licenses, and patents, both in the United States and throughout
the rest of the world.
We also
depend upon the skills, knowledge and experience of scientific and technical
personnel that we hire or outside organizations with whom we contract, as well
as our advisors and consultants. To help protect our proprietary know-how that
is not patentable, and for inventions for which patents may be difficult to
enforce, we rely on trade-secret protection and confidentiality agreements. To
this end, it is our practice to require employees, consultants, advisors and
other contractors, as appropriate, to enter into confidentiality agreements that
prohibit the disclosure of confidential information and, where applicable,
require disclosure and assignment to us of the ideas, developments, discoveries
and inventions important to our business.
We own
patents, patent applications and know-how associated with mechanical
prostate-imaging systems. These patents and patent applications relate to
real-time mechanical imaging of the prostate (patent expires in 2021), a method
and device for mechanical imaging of the prostate (patent expires in 2012), a
method and device for elasticity imaging (patent expires in 2013), an apparatus
for measuring mechanical parameters of the prostate and for imaging the prostate
(patent expires in 2012), a device for palpation and mechanical imaging of the
prostate (patent expires in 2012), and a method for using a transrectal probe to
mechanically image the prostate gland (patent expires in 2012). Together, our
mechanical imaging technology is protected by seven U.S. patents, seven
foreign patents (six foreign patents expire in 2017 and one foreign patent
expires in 2022), four foreign patent applications and, along with the Artann
patent applications discussed below, is the basis for the imaging technology
used in our ProUroScan System. We own similar patents, patent applications and
know-how associated with breast imaging. However, we do not intend to pursue any
such applications within our near-term business plan. Under the Artann License
Agreement, we agreed to grant Artann a non-exclusive, fully paid license to
make, use or sell any imaging system for the diagnosis or treatment of disorders
of the human breast.
Additionally,
Artann has one U.S. patent and three U.S. patent applications (filed in May
2005, June 2005 and June 2008) that are licensed to us under the Artann License
Agreement. The U.S. patent, which will expire in 2024, is a design
patent relating to a calibration chamber for a prostate mechanical imaging
probe. The U.S. patent applications relate to a method and device for
real-time mechanical imaging of a prostate, a method and dual-array transducer
probe for real-time mechanical imaging of a prostate and a design for a prostate
mechanical imaging probe.
Third-Party
Reimbursement
In the
U.S., health care providers that use the ProUroScan System will generally rely
on third-party payors, including private payors and governmental payors such as
Medicare and Medicaid, to cover and reimburse all or part of the cost of using
the ProUroScan System. Consequently, sales of the ProUroScan System depend in
part on the availability of coverage and reimbursement from third-party payors.
The manner in which reimbursement is sought and obtained varies based upon the
type of payor involved and the setting in which the procedure is furnished. In
general, third-party payors will provide coverage and reimbursement for
medically reasonable and necessary procedures and tests. Most payors, however,
will not pay separately for capital equipment, such as the ProUroScan System.
Instead, payment for the cost of using the capital equipment is considered to be
covered as part of payments received for performing the procedure. In
determining payment rates, third-party payors increasingly are scrutinizing the
amount charged for medical procedures.
Medicare and Medicaid
In order
for Medicare to cover procedures using the ProUroScan System as screening, the
Secretary of Health and Human Services (the “Secretary”) would need to add the
scan to the list of appropriate procedures for prostate cancer screening or the
procedure would need to be appropriately recommended by the United States
Preventative Services Task Force (“USPSTF”) and added through the national
coverage determination (“NCD”) process.
We
anticipate that the ProUroScan System may be covered by Medicare as a diagnostic
test for patients who have clinical signs or symptoms of disease. We anticipate
that the first generation of the ProUroScan System will be used to image the
prostate and to maintain historical records for future tracking for men who have
an abnormal DRE or other signs or symptoms of disease. Thus, providers who
perform prostate imaging using the first generation ProUroScan System likely
will seek Medicare coverage as a diagnostic, rather than a screening test,
presuming that the patient presents with a sign or symptom of disease. Even as a
diagnostic test, however, CMS or its contractors could determine that procedures
using the ProUroScan System are not medically necessary and therefore decide not
to cover them.
Regardless
of how they are covered, we anticipate that procedures using the ProUroScan
System will be reimbursed either based upon the value of their unique billing
and procedure code or as part of an office visit. Until a unique billing and
procedure code is established, we expect that providers will be able to bill for
the procedure using a miscellaneous CPT code. Claims submitted under a
miscellaneous code are processed manually and the provider must include
additional information to be used by the payor in determining the medical
appropriateness of the procedure. The lack of a unique, permanent CPT code
could slow market uptake of the ProUroScan System.
In order
to apply for a new, unique code, an application must be submitted to the AMA’s
CPT Editorial Panel. The process of obtaining a new CPT code typically
takes one or two years. Once a new CPT code is created, the AMA’s Relative
Value Scale Update Committee (“RUC”) recommends relative value units (“RVUs”)
for it. CMS then takes these recommendations into account when establishing the
Medicare Physician Fee Schedule values. The amount of reimbursement the provider
receives generally depends on the RVUs assigned to the procedure multiplied by a
conversion factor. Most private payors also base their payment rates based on
the RVUs adopted by CMS. There is a risk that the reimbursement rate that
results from this process could be insufficient, hampering our ability to market
and sell the ProUroScan System.
Initially,
we anticipate using a “patient pay model” for physicians to receive payment for
performing the ProUroScan System procedure. Under a patient pay model, in the
absence of coverage from their health insurance, patients pay for the scan out
of their own funds. Medicare beneficiaries would sign an Advanced Beneficiary
Notice (“ABN”) that would allow the provider to collect from the patient. Only
one in four biopsies performed based on an abnormal PSA reading reveal prostate
cancer, and only 50 percent of suspicious lesions found by DRE presented
cancer on prostate biopsy. Given these statistics, in cases where patients have
abnormal DRE or PSA test results or when a test result may not be clear, there
is a high incentive to seek additional information so that patients can make an
informed and reasonable decision for themselves and their family. We believe
that a sufficient number of patients will be willing to pay for the ProUroScan
System procedure out of their personal funds to support the launch of our
product in advance of receiving favorable coverage decisions from third-party
insurers. The concept of a patient pay model has been used successfully for a
few other procedures (e.g., computer-aided detection (“CAD”) for
mammography), and we expect this to be our approach for generating revenues
during at least the early phases of product rollout. As described above,
providers also will be able to bill under a miscellaneous CPT code until a
unique CPT code is created for the ProUroScan System
procedure.
Commercial Insurers
Many
private payors look to Medicare as a guideline in setting their coverage
policies and payment amounts. Unlike the Medicare program, however, private
payors have no statutory impediment to covering screening tests. They do tend to
seek guidance from USPSTF recommendations, however. The current coverage
policies of these private payors may differ from the Medicare program, and the
payment rates they make may be higher, lower or the same as the Medicare
program. If CMS or other agencies decrease or limit reimbursement payments for
physicians, this may affect coverage and reimbursement determinations by many
private payors. Additionally, some private payors do not follow the Medicare
guidelines, and those payors may reimburse only a portion of the costs
associated with the use of our products, or not at all.
Competition
Although
we expect competition to intensify in the prostate imaging and prostate disease
diagnostic market, we are not aware of any competitive product currently being
sold based on the same technology platform with comparable real-time color
images or other product features that the ProUroScan System provides. In
addition, we do not expect to market the ProUroScan System as a general
screening tool, and therefore will not be positioning the system to compete
directly with currently available screening tests, including the DRE and PSA
tests. The ProUroScan System will be positioned as an “adjunctive” tool
following an abnormal DRE to create an image and document abnormalities of the
prostate detected by a DRE.
Another
test that uses inferred data to identify prostate cancer, yet to be approved in
the United States, is the PCA3 Marker (the “PCA3”). The PCA3 is a
non-coding ribonucleic acid (“RNA”) believed to be a more accurate marker of
prostate cancer than currently used diagnostics tests. The PCA3 marker was
licensed in 2000 by DiagnoCure Inc. of Quebec, Canada. In 2003, DiagnoCure
granted a worldwide license to Gen-Probe, based in San Diego, CA, for the
development and licensing of a second generation PCA3-based test using their
proprietary platform. In 2006, Gen-Probe made the test available in analyte
specific reagent format to U.S. laboratories and launched a full CE-marked
PCA3 test in Europe. Although this test has not been approved in the United
States, it potentially represents a significant advance in the development of
more sophisticated and sensitive detection methods for identifying early stage
prostate cancer. Gene fusion is another discovery that may lead to a test that
potentially will be used to diagnose prostate cancer more accurately than
current tests as well as predict prognosis. Gen-Probe has licensed this
technology as well.
In
contrast to the DRE, PSA and PCA3 tests, the ProUroScan System creates a visual
and physical record of the prostate gland. We will seek expanded labeling claims
on future generations of the ProUroScan System so that it can also be used to
conduct ongoing monitoring and surveillance of the status of the abnormalities
found by either a DRE or with the ProUroScan System. We believe that the current
generation of the ProUroScan System will have several features that are
complementary to a traditional DRE examination, such as:
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it
is designed to produce a real-time color image of the prostate;
and
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it
is designed to enable physicians to electronically store the images in
patient files.
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Aside
from large-scale imaging modalities such as magnetic resonance imaging, computed
tomography and nuclear medicine, which due to their cost and limited
availability will not be direct competitors of the ProUroScan System, the only
imaging system in common use for prostates is the transrectal ultrasound
(“TRUS”). TRUS is employed by urologists following the referral of a patient
that has had a positive result from a DRE or PSA test, primarily to guide the
placement of prostate biopsy needles. We believe that the ProUroScan System will
be easier to operate and require less training than TRUS. We also believe it
will be less costly to acquire and maintain in a traditional medical office
setting.
Subject
to FDA clearance or approval, we believe that future uses of the ProUroScan
System will include providing a permanent record of the prostate that can be
used to identify changes over time. Nevertheless, technology is rapidly changing
in the prostate imaging and the prostate disease diagnostic market, and other
technology could come to market potentially displacing the ProUroScan
System.
Government
Regulation
The
ProUroScan System is subject to the Federal Food, Drug, and Cosmetic Act
(“FDCA”) as implemented and enforced by the FDA and by comparable agencies in
various states and various foreign countries. To ensure that medical products
distributed domestically and internationally are safe and effective for their
intended use, FDA and comparable authorities in other countries have imposed
regulations that govern, among other things, the following activities that we or
our third-party manufacturers and suppliers perform or will
perform:
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product
design and development;
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premarket
clearance or approval;
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advertising
and promotion;
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product
marketing, sales and distribution;
and
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post-market
surveillance reporting death or serious injuries and medical device
reporting.
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Pervasive
and Continuing Regulation
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After a
device is placed on the market, numerous regulatory requirements apply. These
include:
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product
listing and establishment registration, which helps facilitate FDA
inspections and other regulatory
action;
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QSR,
which requires manufacturers, including third-party manufacturers, to
follow stringent design, testing, control, documentation and other quality
assurance procedures during all aspects of the manufacturing
process;
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labeling
regulations and FDA prohibitions against the promotion of products for
uncleared, unapproved or off-label use or
indication;
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clearance
of product modifications that could significantly affect safety or
efficacy or that would constitute a major change in intended use of our
cleared devices;
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approval
of product modifications that affect the safety or effectiveness of our
approved devices;
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medical
device reporting regulations, which require that manufacturers comply with
FDA requirements to report if their device may have caused or contributed
to a death or serious injury, or has malfunctioned in a way that would
likely cause or contribute to a death or serious injury if the malfunction
of the device or a similar device were to
recur;
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post-approval
restrictions or conditions, including post-approval study
commitments;
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post-market
surveillance regulations, which apply when necessary to protect the public
health or to provide additional safety and effectiveness data for the
device; and
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the
FDA’s recall authority, whereby it can ask, or under certain conditions
order, device manufacturers to recall from the market a product that is in
violation of governing laws and
regulations.
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Advertising
and promotion of medical devices, in addition to being regulated by the FDA, are
also regulated by the Federal Trade Commission and by state regulatory and
enforcement authorities. Recently, promotional activities for FDA-regulated
products of other companies have been the subject of enforcement action brought
under healthcare reimbursement laws and consumer protection statutes. In
addition, under the federal Lanham Act and similar state laws, competitors and
others can initiate litigation relating to advertising claims. In addition, we
are required to meet regulatory requirements in countries outside the U.S.,
which can change rapidly with relatively short notice. If the FDA determines
that our promotional materials or training constitutes promotion of an
unapproved or uncleared use, it could request that we modify our training or
promotional materials or subject us to regulatory or enforcement actions,
including the issuance of an untitled letter, a warning letter, injunction,
seizure, civil fine or criminal penalties. It is also possible that other
federal, state or foreign enforcement authorities might take action if they
consider our promotional or training materials to constitute promotion of an
unapproved use, which could result in significant fines or penalties under other
statutory authorities, such as laws prohibiting false claims for reimbursement.
In that event, our reputation could be damaged and adoption of the products
would be impaired.
Furthermore,
our products could be subject to voluntary recall if we or the FDA determine,
for any reason, that our products pose a risk of injury or are otherwise
defective. Moreover, the FDA can order a mandatory recall if there is a
reasonable probability that our device would cause serious adverse health
consequences or death.
The FDA
has broad post-market and regulatory enforcement powers. Our facilities and the
manufacturing facilities of our subcontractors will be subject to unannounced
inspections by the FDA to determine our level of compliance with the QSR and
other regulations. Failure by us or by our third-party manufacturers and
suppliers to comply with applicable regulatory requirements can result in
enforcement action by the FDA or other regulatory authorities, which may result
in sanctions including, but not limited to:
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warning
letters or untitled letters;
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fines
and civil penalties;
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unanticipated
expenditures to address or defend such
actions;
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delays
in clearing or approving, or refusal to clear or approve, our
products;
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withdrawal
or suspension of approval of our products or those of our third-party
suppliers by the FDA or other regulatory
bodies;
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product
recall or seizure;
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orders
for physician notification or device repair, replacement or
refund;
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interruption
of production;
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operating
restrictions;
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Regulation of the ProUroScan
System
We are
implementing a regulatory strategy to obtain FDA clearance of the ProUroScan
System for a basic imaging and documentation claim and for the ProUroScan System
to serve as an adjunct to a DRE. The current status of the FDA market
clearance process is described above under the caption “ProUroCare System
Status.”
The
approval process for future claims will depend on the exact nature of those
claims, and may require more extensive clinical studies and possibly the
submission of a PMA.
Once we
obtain FDA approval for the ProUroScan System, or obtain FDA clearance or
approval for future products, the manufacturing, sale and performance of our
products will be subject to the ongoing FDA regulation and inspection processes
as described above.
Fraud and Abuse Laws
Because
of the significant federal funding involved in Medicare and Medicaid, Congress
and the states have enacted, and actively enforce, a number of laws whose
purpose is to eliminate fraud and abuse in federal health care programs. Once we
commercialize the ProUroScan System, our business is subject to compliance with
these laws.
Anti-Kickback Statutes and Federal
False Claims Act
The
federal healthcare programs Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving or providing
remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual, or the furnishing or arranging for a good or service,
for which payment may be made under a federal healthcare program such as
Medicare or Medicaid. The definition of “remuneration” has been broadly
interpreted to include anything of value, including for example gifts,
discounts, the furnishing of free supplies, equipment or services, credit
arrangements, payments of cash and waivers of payments. Several courts have
interpreted the statute’s intent requirement to mean that if any one purpose of
an arrangement involving remuneration is to induce referrals of federal
healthcare covered business, the statute has been violated. Penalties for
violations include criminal penalties and civil sanctions such as fines,
imprisonment and possible exclusion from Medicare, Medicaid and other federal
healthcare programs. In addition, some kickback allegations have been claimed to
violate the Federal False Claims Act, discussed in more detail
below.
The
Anti-Kickback Statute is broad and prohibits many arrangements and practices
that are lawful in businesses outside of the healthcare industry. Recognizing
that the Anti-Kickback Statute is broad and may technically prohibit many
innocuous or beneficial arrangements, Congress authorized the Office of
Inspector General of the U.S. Department of Health and Human Services, or
OIG, to issue a series of regulations, known as “safe harbors.” These safe
harbors, issued by the OIG beginning in July 1991, set forth provisions
that, if all their applicable requirements are met, will assure healthcare
providers and other parties that they will not be prosecuted under the
Anti-Kickback Statute. The failure of a transaction or arrangement to fit
precisely within one or more safe harbors does not necessarily mean that it is
illegal or that prosecution will be pursued. However, conduct and business
arrangements that do not fully satisfy each applicable safe harbor may result in
increased scrutiny by government enforcement authorities such as the
OIG.
Many
states have adopted laws similar to the Anti-Kickback Statute. Some of these
state prohibitions apply to referral of patients for healthcare items or
services reimbursed by any source, not only the Medicare and Medicaid
programs.
Government
officials have focused their enforcement efforts on marketing of healthcare
services and products, among other activities, and recently have brought cases
against companies, and certain sales, marketing and executive personnel, for
allegedly offering unlawful inducements to potential or existing customers in an
attempt to procure their business.
Another
development affecting the healthcare industry is the increased use of the
Federal Civil False Claims Act (the “False Claims Act”) and, in particular,
actions brought pursuant to the False Claims Act’s “whistleblower” or “
qui tam
” provisions. The
False Claims Act imposes liability on any person or entity who, among other
things, knowingly presents, or causes to be presented, a false or fraudulent
claim for payment by a federal healthcare program. The qui tam provisions of the
False Claims Act allow a private individual to bring actions on behalf of the
federal government alleging that the defendant has submitted a false claim to
the federal government and to share in any monetary recovery. In recent years,
the number of suits brought against healthcare providers by private individuals
has increased dramatically. In addition, various states have enacted false claim
laws analogous to the False Claims Act, although many of these state laws apply
where a claim is submitted to any third-party payor and not merely a federal
healthcare program.
When an
entity is determined to have violated the False Claims Act, it may be required
to pay up to three times the actual damages sustained by the government, plus
civil penalties of $5,500 to $11,000 for each separate false claim. There are
many potential bases for liability under the False Claims Act. Liability arises,
primarily, when an entity knowingly submits, or causes another to submit, a
false claim for reimbursement to the federal government. The False Claims Act
has been used to assert liability on the basis of inadequate care, kickbacks and
other improper referrals, and improper use of Medicare numbers when detailing
the provider of services, in addition to the more predictable allegations as to
misrepresentations with respect to the services rendered. In addition, companies
have been prosecuted under the False Claims Act in connection with alleged
off-label promotion of products. Our future activities relating to the reporting
of wholesale or estimated retail prices for our products, the reporting of
discount and rebate information and other information affecting federal, state
and third-party reimbursement of our products, and the sale and marketing of our
products, may be subject to scrutiny under these laws. We are unable to predict
whether we would be subject to actions under the False Claims Act or a similar
state law, or the impact of such actions. However, the costs of defending such
claims, as well as any sanctions imposed, could significantly affect our
financial performance.
HIPAA and Other Fraud and Privacy
Regulations
Among
other things, the Health Insurance Portability and Accountability Act of 1996,
or HIPAA, created two new federal crimes: healthcare fraud and false statements
relating to healthcare matters. The HIPAA health care fraud statute prohibits,
among other things, knowingly and willfully executing, or attempting to execute,
a scheme to defraud any healthcare benefit program, including private payors. A
violation of this statute is a felony and may result in fines, imprisonment
and/or exclusion from government-sponsored programs. The HIPAA false statements
statute prohibits, among other things, knowingly and willfully falsifying,
concealing or covering up a material fact or making any materially false,
fictitious or fraudulent statement or representation in connection with the
delivery of or payment for healthcare benefits, items or services. A violation
of this statute is a felony and may result in fines and/or
imprisonment.
In
addition to creating the two new federal healthcare crimes, regulations
implementing HIPAA also establish uniform standards governing the conduct of
certain electronic healthcare transactions and protecting the security and
privacy of individually identifiable health information maintained or
transmitted by healthcare providers, health plans and healthcare clearinghouses,
which are referred to as “covered entities.” Three standards have been
promulgated under HIPAA’s regulations: the Standards for Privacy of Individually
Identifiable Health Information, which restrict the use and disclosure of
certain individually identifiable health information, the Standards for
Electronic Transactions, which establish standards for common healthcare
transactions, such as claims information, plan eligibility, payment information
and the use of electronic signatures, and the Security Standards, which require
covered entities to implement and maintain certain security measures to
safeguard certain electronic health information. Although we are not a covered
entity and therefore not directly subject to these standards, we expect that our
customers generally will be covered entities and may ask us to contractually
comply with certain aspects of these standards, particularly because we expect
that the ProUroScan System will store patient information and scan results. The
government intended this legislation to reduce administrative expenses and
burdens for the healthcare industry; however, our compliance with certain
provisions of these standards entails significant costs for us.
In
addition to federal regulations issued under HIPAA, some states have enacted
privacy and security statutes or regulations that, in some cases, are more
stringent than those issued under HIPAA. In those cases, it may be necessary to
modify our planned operations and procedures to comply with the more stringent
state laws. If we fail to comply with applicable state laws and regulations, we
could be subject to additional sanctions.
Employees
We
currently have two full-time employees, and expect to conduct much of our
research and development, market research, clinical and regulatory function, and
other business operations through the use of a variety of consultants and
medical-device development contractors. We have found that using consultants and
contractors to perform these functions during our development stages has allowed
us to engage specialized talent and capabilities as needed by the business while
providing the flexibility to engage them as our financial resources have
permitted. As we prepare for market, we anticipate hiring employees
in the areas of marketing, sales and sales training, quality assurance,
engineering, software development and administration during the 2010 and early
2011. Some or all of these functions may be performed by contracted individuals
or consultants as management deems most effective. We are conducting our
research and development activities related to our acquired technologies and
proposed products on a contract basis with Artann and Logic.
Properties
Our
executive offices are located at 6440 Flying Cloud Drive, Suite 101, Eden
Prairie, Minnesota 55344. Our executive offices consist of approximately 1,000
square feet of office space, which we rent on a month-to-month
basis. Our rental cost for this office space is $1,000 per month,
which we believe is at market for similar office space in Minneapolis,
Minnesota. We do not own any real property.
Directors,
Executive Officers and Affiliates
The
persons listed in the table below are directors, executive officers and/or
affiliates of the Company, and the address for each person is c/o ProUroCare
Medical Inc., 6440 Flying Cloud Dr., Suite 101, Eden Prairie, MN 55344. There
are no family relationships among our executive officers or
directors.
|
Name
|
|
|
|
|
|
Richard
C. Carlson
|
|
58
|
|
Chief
Executive Officer and Acting Chairman of the Board
|
|
Michael
Chambers
|
|
55
|
|
Director
|
|
James
L. Davis
|
|
65
|
|
Director
|
|
David
F. Koenig
|
|
69
|
|
Director
|
|
Robert
J. Rudelius
|
|
54
|
|
Director
|
|
Scott
E Smith
|
|
54
|
|
Director
|
|
Richard
B. Thon
|
|
54
|
|
Chief
Financial Officer
|
Richard C. Carlson
, Chief
Executive Officer, Director since 2006 and Acting Chairman of the Board since
2007. Mr. Carlson was hired as our Vice President of Marketing and
Sales in January 2005, and was promoted to Chief Executive Officer in November
2006. Prior to joining the Company, Mr. Carlson held several
positions with SurModics, Inc., a company that provides surface modification
solutions for medical device and biomedical applications, from 1998 to 2004,
including Vice President of Marketing and Sales and Vice President of Strategic
Planning.
Mr.
Carlson’s extensive experience marketing urology products with American Medical
Systems and Boston Scientific is invaluable in developing market strategies for
the Company’s products.
Michael Chambers
, JD, Ph.D.
Elected Director on March 1, 2010. Dr. Chambers currently serves as
President and CEO of Swift Biotechnology, a company he co-founded in January
2010. Swift is commercializing early diagnostics for gynecological cancers
through technology invented at the Mitchell Cancer Institute. From
1999 through 2005, Dr. Chambers served as President and CEO of InnoRx
Pharmaceuticals, a privately-held company specializing in drugs and drug
delivery systems for ophthalmic diseases that he helped establish. He is also
"of Counsel" to the law firm of Cabaniss Johnston, based in Birmingham,
Alabama. Dr. Chambers is a member of the Nominating and Governance
Committee.
Dr.
Chambers experience as an attorney, angel investor and medical products
entrepreneur helps the Board address key issues it faces in intellectual
property matters and global expansion opportunities.
James L. Davis
. Elected
Director on March 1, 2010. Mr. Davis is the President of Davis &
Associates, Inc. which he founded more than 30 years ago. Davis & Associates
represents the leading edge lighting and controls manufacturers, providing
lighting and controls solutions for customers in the upper
Midwest. Mr. Davis is a member of the Compensation
Committee.
Mr. Davis
brings to the Board extensive experience as a successful independent business
owner and an active investor in entrepreneurial companies. He has served as
Director on both private and public company Boards over the last 20
years.
David F. Koenig
, Director
since 2004. Mr. Koenig served as a director of our predecessor
company, ProUroCare Inc. (“PUC”), from 1999 until April 2004, when he became a
director of the Company upon the merger of PUC with an acquisition subsidiary of
the Company (the “Merger”). From 1996 to 2005, Mr. Koenig was the
Executive Vice President and Chief Operating Officer of Solar Plastics, Inc., a
manufacturer of custom rotationally molded plastic parts. Mr. Koenig
is Chairman of the Compensation Committee.
Mr.
Koenig has valuable experience in raising funds with both private and
institutional investors, in commercial banking relationships and deal
structuring and in strategic business planning. All of these functions are of
particular importance to the Company at its current stage.
Robert J. Rudelius
, Director
since 2007. Since 2003, Mr. Rudelius has been the Managing Director
and CEO of Noble Ventures, LLC, a company he founded, providing advising and
consulting services to early-stage companies in the information technology,
renewable energy and loyalty marketing fields. Mr. Rudelius is also
the Managing Director and CEO of Noble Logistics, LLC, a holding company he
founded in 2002 to create, acquire and grow a variety of businesses in the
freight management, logistics and information technology
industries. Mr. Rudelius is the Chairman of the Nominating and
Governance Committee and is a member of the Audit Committee.
Mr.
Rudelius' experience launching several new ventures combined with 25 years of
experience leading information technology companies and consulting
on IT/systems matters for global companies provides a valued
perspective to the Board.
Scott E Smith
, Director since
2006. Mr. Smith currently provides consulting to best-in-class companies to help
them grow rapidly and profitably. He was previously employed by F-2 Intelligence
Group (“F2”), a company engaged in providing critical insights to multinational
corporations and private equity clients on a broad range of strategic issues.
From 2004 to 2008, Mr. Smith served as F2’s Regional Director of Sales for
Private Equity, where he advised private equity firms on market and competitive
intelligence issues. Prior to joining F2, Mr. Smith was employed by Arthur
Andersen for 23 years and served the last 10 years as an audit
partner. Mr. Smith also serves on the board of directors and chairs
the audit committee of Table Trac, Inc. Mr. Smith is a Certified
Public Accountant and a Certified Management Accountant. Mr. Smith is Chairman
of the Audit Committee and a member of the Compensation Committee.
Mr.
Smith’s expertise gained through 23 years of experience in public accounting
(including 10 years as an audit partner at Arthur Andersen) is invaluable to the
Company. Mr. Smith provides leadership and guidance on the Company’s
accounting and financial reporting issues.
Richard B. Thon
, Chief
Financial Officer. Mr. Thon has been our Chief Financial Officer
since 2004.
There are
no family relationships among our executive officers or directors.
The
number of seats on the Board of Directors has been fixed by the Board of
Directors at seven. The Company’s Board of Directors is engaged in
the process of identifying, evaluating and recruiting a highly qualified
individual to fill the vacant director seat.
Director
Compensation Information
During
2009, each of our non-employee directors received an annual payment of $10,000
for services to the Company. The chairpersons of our Compensation, Audit and
Nominating and Governance committees received an additional annual payment of
$2,500 and each committee member received an annual payment of $1,000 per
committee. In addition, we granted to all non-employee directors a one-time
non-qualified stock option upon election or appointment to the Board of
Directors to purchase 3,000 shares of our common stock at fair market value that
vested ratably over two years of service. We also granted immediately
vesting options to purchase 1,000 shares of our common stock at fair market
value to each director upon their annual re-election to the
Board.
On March
3, 2009, the Company granted non-qualified stock options to Mr. Koenig (30,000
options), Mr. Smith (20,000 options) and Mr. Rudelius (20,000
options). The options are fully vested and are exercisable for a
period of seven years at an exercise price of $0.85 per share. On
September 29, 2009, the Company issued non-qualified stock options to Mr. Koenig
(50,000 options), Mr. Smith (30,000 options) and Mr. Rudelius (30,000
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 $2.0 million or more of
incremental financing after the date of grant, including financing received upon
the exercise of existing warrants.
Effective
January 1, 2010, in addition to the annual payment of $10,000 for services to
each of our non-employee directors, the chairpersons of our Compensation and
Nominating and Governance Committees will receive $750 per committee meeting up
to a maximum of $3,000 per year. Non-chair committee members of those
committees will receive $500 per meeting, up to an annual maximum of
$2,000. The chairperson of the Audit Committee will receive $750 per
committee meeting, up to a maximum of $6,000 per year, while other members of
the Audit Committee will receive $500 per meeting up to a maximum of $4,000 per
year. In addition, non-employee directors will receive non-qualified
stock options upon election or appointment to the Board of Directors, and
annually thereafter, to purchase a number of shares equal to $25,000 divided by
the then current stock price. The initial grant will vest ratably
over two years of service, while subsequent annual grants will vest
immediately.
Directors
are reimbursed for travel and other out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors and its
committees.
The table
below sets forth director compensation earned during 2009:
|
Name
|
|
Fees
Earned
or
Paid in
Cash
($)
|
|
|
|
|
|
|
|
|
|
|
|
David
Koenig(1)
|
|
$
|
7,250
|
|
|
$
|
7,250
|
|
|
$
|
81,900
|
|
|
$
|
96,400
|
|
|
Scott
Smith(2)
|
|
$
|
12,500
|
|
|
$
|
0
|
|
|
$
|
50,900
|
|
|
$
|
63,400
|
|
|
Robert
Rudelius(3)
|
|
$
|
13,500
|
|
|
$
|
0
|
|
|
$
|
50,900
|
|
|
$
|
64,400
|
|
|
|
(1)
|
Chairman
of the Compensation Committee.
|
|
|
(2)
|
Chairman
of the Audit Committee.
|
|
|
(3)
|
Chairman
of the Nominating and Governance
Committee.
|
|
|
(4)
|
On
September 29, 2009, we issued a total of 4,834 shares of our common stock
to Mr. Koenig in lieu of $7,250 cash as payment of directors’ fees earned
in 2009, based on the average of the closing bid and asked price on that
date as quoted by the OTCBB. Not included in the 2009
compensation are 27,366 shares of common stock issued to our directors in
lieu of cash as payment for $20,251 of directors’ fees earned in
2008.
|
|
|
(5)
|
The
amount in the Option Awards column represents the aggregate grant date
fair value computed in accordance with FASB ASC Topic 718 for stock
options granted during the fiscal years ended December 31, 2009 as
determined using the Black-Scholes pricing model. See Notes 1(i) and
14(j) to the Consolidated Financial Statements for the fiscal year ended
December 31, 2009 included in this prospectus for the material terms
of stock option grants. As of December 31, 2009, Mr. Koenig
held 53,000 stock options and Mr. Smith and Mr. Rudelius each held 55,000
options.
|
Executive
Compensation Tables
The
following table sets forth the compensation earned for services rendered in all
capacities by our Chief Executive Officer and Chief Financial Officer. There
were no other executive officers or other individuals who earned more than
$100,000 during 2009. The individuals named in the table will be hereinafter
referred to as the “Named Executive Officers.”
Summary
Compensation Table
|
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
Compen-
sation
($)
(4)
|
|
|
|
|
|
Richard
Carlson(1)
|
|
2009
|
|
$
|
150,000
|
|
|
$
|
20,000
|
|
|
$
|
249,700
|
|
|
$
|
2,107
|
|
|
$
|
421,807
|
|
|
Chief
Executive Officer
|
|
2008
|
|
$
|
150,000
|
|
|
$
|
—
|
|
|
$
|
58,900
|
|
|
$
|
2,103
|
|
|
$
|
231,003
|
|
|
and
Acting Chairman of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Thon(2)
|
|
2009
|
|
$
|
133,015
|
|
|
$
|
20,000
|
|
|
$
|
103,200
|
|
|
$
|
8,185
|
|
|
$
|
264,400
|
|
|
Chief
Financial Officer
|
|
2008
|
|
$
|
136,375
|
|
|
$
|
—
|
|
|
$
|
29,150
|
|
|
$
|
4,825
|
|
|
$
|
170,350
|
|
|
(1)
|
All
compensation Mr. Carlson earned is related to his duties as an
officer. See “Executive Compensation—Employment Agreements” for the
terms of Mr. Carlson’s current employment arrangements with
us.
|
|
(2)
|
See
“Executive Compensation—Employment Agreements” for the terms of Mr. Thon’s
current employment arrangements with
us.
|
|
(3)
|
The
amount in the Option Awards column represents the aggregate grant date
fair value computed in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 for
stock options granted during the fiscal years ended December 31, 2009 and
2008, as determined using the Black-Scholes pricing model. See
Notes 1(f) and 7(b) to the Consolidated Financial Statements for the
fiscal year ended December 31, 2008 included in Part II, Item 8 of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2008
and Notes 1(i) and 15(j) to the Consolidated Financial Statements for the
fiscal year ended December 31, 2009 included in this prospectus for the
material terms of stock option
grants.
|
|
(4)
|
Other
compensation represents insurance premiums paid by us with respect to term
life insurance and long-term care polices for the benefit of the
executive. There is no cash surrender value associated with the
policies.
|
No stock
options or stock-appreciation rights were exercised by our Named Executive
Officers during fiscal 2009, and no stock appreciation rights were outstanding
at the end of fiscal 2009. The table below sets forth outstanding but
unexercised options of our Named Executive Officers as of December 31,
2009.
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(1)
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(1)
|
|
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
|
|
|
|
|
Richard
Carlson
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
5.00
|
|
February
1, 2017
|
|
|
|
|
30,000
|
|
|
|
40,000
|
(2)
|
|
|
—
|
|
|
$
|
1.00
|
|
July
11, 2015
|
|
|
|
|
90,000
|
|
|
|
10,000
|
(3)
|
|
|
—
|
|
|
$
|
0.85
|
|
March
3, 2016
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
(4)
|
|
$
|
1.50
|
|
September
29, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Thon
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
(5)
|
|
$
|
7.50
|
|
March 1,
2011
|
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
11.33
|
|
April 18,
2012
|
|
|
|
|
18,333
|
|
|
|
16,667
|
(6)
|
|
|
—
|
|
|
$
|
1.00
|
|
July
11, 2015
|
|
|
|
|
45,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.85
|
|
March
3, 2016
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,000
|
(4)
|
|
$
|
1.50
|
|
September
29,
2016
|
|
(1)
|
See
Notes 1(i) and 14(j) to the Consolidated Financial Statements for the
fiscal year ended December 31, 2009 included in Part II, Item 8 in
this Annual Report on Form 10-K for the material terms of stock option
grants.
|
|
(2)
|
20,000
shares will vest on July 1 of each of 2010 and
2011.
|
|
(3)
|
Vested
January 1, 2010.
|
|
(4)
|
Equity
Incentive Plan awards will vest upon the latter of (i) the Company
securing FDA market clearance of its ProUroScan System and (ii) the date
that the Company closes on an aggregate of $2.0 million or more of
incremental equity financing after the date of
grant.
|
|
(5)
|
Equity
Incentive Plan Award that will vest upon the Company securing FDA market
clearance of its ProUroScan System.
|
|
(6)
|
8,333
shares will vest on July 1, 2010 and 8,334 shares on July 1,
2011.
|
Employment
Agreements and Other Executive Compensation Matters
On
July 16, 2008, we entered into an employment agreement with Mr. Carlson,
our Chief Executive Officer. The agreement provided for a minimum annual salary
of $150,000, a cash incentive bonus potential of up to 40 percent of Mr.
Carlson’s base pay, and eligibility to participate in an annual grant of options
to purchase shares of common stock, as determined by our board of directors. Mr.
Carlson’s agreement expired on December 31, 2009.
On
July 21, 2007, we entered into an employment agreement with our Chief
Financial Officer, Richard Thon. The agreement provided for a minimum annual
salary of $140,000, a cash incentive bonus potential of up to 30 percent of
Mr. Thon’s base pay and eligibility to participate in an annual grant of options
to purchase shares of common stock, as determined by our Board of Directors. Mr.
Thon’s agreement expired on June 30, 2009.
Our
executive officers are also eligible to receive awards under our Stock
Plans. The plans permit the Company to grant incentive and nonqualified
options, stock appreciation rights, stock awards, restricted stock awards,
performance shares and cash awards to Company employees and independent
contractors. The exercise price for all options granted under the plans
shall be determined by the Board. The term of each stock option and period of
exercisability will also be set by the Board, but will not exceed a period of
ten years and one day from grant date. The agreements also include provisions
for anti-dilution of options.
Common
Stock Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information regarding beneficial ownership of
our common stock as of June 11, 2010, by (i) each person known by us to be the
beneficial owner of more than five percent of the outstanding common stock, (ii)
each director of the Company, (iii) each executive officer of the Company and
(iv) all executive officers and directors as a group.
The
number of shares beneficially owned is determined under rules promulgated by the
SEC and the information is not necessarily indicative of beneficial ownership
for any other purpose. The definition of beneficial ownership for proxy
statement purposes includes shares over which a person has sole or shared voting
power or dispositive power, whether or not a person has any economic interest in
the shares. The definition also includes shares that a person has a right to
acquire currently or within 60 days of June 11, 2010. Including those
shares in the tables does not, however, constitute an admission that the named
stockholder is a direct or indirect beneficial owner of those shares.
Unless otherwise indicated, each person or entity named in the table has sole
voting power and investment power (or shares that power with that person’s
spouse) with respect to all shares of common stock listed as owned by that
person or entity. Unless otherwise indicated, the address of each of the
following persons is 6440 Flying Cloud Drive, Suite 101, Eden Prairie, MN
55344.
|
Name
|
|
Shares
Beneficially
Owned
|
|
|
Percent
of Class
|
|
|
Richard
C. Carlson
(1)
|
|
|
160,850
|
|
|
|
1.2
|
|
|
Michael
Chambers
(2)
|
|
|
198,941
|
|
|
|
1.5
|
|
|
James
L. Davis
(3)
|
|
|
3,093,995
|
|
|
|
21.9
|
|
|
David
F. Koenig
(4)
|
|
|
107,363
|
|
|
|
*
|
|
|
Robert
J. Rudelius
(5)
|
|
|
164,815
|
|
|
|
1.3
|
|
|
Scott
E Smith
(6)
|
|
|
211,067
|
|
|
|
1.6
|
|
|
Richard
B. Thon
(7)
|
|
|
74,666
|
|
|
|
*
|
|
|
All
directors and officers as a group (7 total)
(8)
|
|
|
4,011,697
|
|
|
|
27.4
|
|
|
Armen
Sarvazyan
(9)(10)
|
|
|
1,077,485
|
|
|
|
8.3
|
|
|
Phillips
W. Smith Family Trust
(11)(12)
|
|
|
683,522
|
|
|
|
5.3
|
|
*Less
than one percent.
|
(1)
|
Includes
direct holdings of 850 shares of common stock and currently exercisable
options to purchase 160,000 shares of common
stock.
|
|
(2)
|
Includes
direct holdings of 113,000 shares of common stock, currently exercisable
options to purchase 2,165 shares of common stock and currently exercisable
warrants to purchase 83,776 shares of common
stock.
|
|
(3)
|
Includes
the following directly held shares and immediately exercisable warrants
and convertible notes: 1,739,210 shares of common stock, 133,775 shares of
stock issuable pursuant to loan guarantees within 60 days, currently
exercisable options to purchase 2,165 shares of common stock and warrants
to purchase 972,203 shares of common stock. Shares beneficially
owned also include the following shares and immediately exercisable
warrants held by Davis & Associates Inc., 401K PSP, of which
Mr. Davis has sole voting power: 74,964 shares of common stock and
warrants to purchase 91,014 shares of common stock. Shares
beneficially owned also include the following shares and immediately
exercisable warrants held by Davis & Associates Inc., of which
Mr. Davis has sole voting power: 37,482 shares of common stock and
warrants to purchase 43,182 shares of common
stock.
|
|
(4)
|
Includes
direct holdings of 75,916 shares of common stock held directly and
currently exercisable options to purchase 3,000 shares of common stock.
Also includes 1,875 shares held by Clinical Network Management Corp. and
26,572 shares held by Clinical Network, Inc. with respect to each of which
Mr. Koenig is an officer and minority
owner.
|
|
(5)
|
Includes
direct holdings of 64,317 shares of common stock, warrants to purchase
33,986 shares of common stock and currently exercisable options to
purchase 25,000 shares of common stock. Also includes 24,756 shares
of common stock and currently exercisable warrants to purchase 16,756
share of common stock held by Nobel Ventures, of which Mr. Rudelius is an
officer and the managing director.
|
|
(6)
|
Includes
direct holdings of 126,592 shares of common stock, warrants to purchase
59,475 shares of common stock and currently exercisable options to
purchase 25,000 shares of common
stock.
|
|
(7)
|
Includes
currently exercisable directly held options to purchase 66,333 shares of
common stock.
|
|
(8)
|
Includes
Messrs. Carlson, Chambers, Davis, Koenig, Rudelius, Smith and
Thon.
|
|
(9)
|
The
address of Dr. Sarvazyan is 1753 Linvale-Harbourton Rd., Lambertville, NJ
08530.
|
|
(10)
|
Includes
direct holdings of 937,099 shares of common stock. Also includes
122,386 shares of common stock and currently exercisable warrants to
purchase 18,000 shares of common stock held by Artann Laboratories Inc.,
of which Dr. Sarvazyan is an officer and minority
owner.
|
|
(11)
|
The
address of the Phillips W. Smith Family Trust is 5636 E. Mockingbird Lane,
Paradise Valley, AZ 85253.
|
|
(12)
|
Shares
beneficially owned include 613,199 directly held shares and immediately
exercisable warrants to purchase 70,323
shares.
|
Corporate
Governance
From
time-to-time, as part of our normal corporate governance process, we evaluate
the size and composition of our Board of Directors relative to our business
operations. Based on such a review, we have recently begun discussions
with board candidates, with a view toward adding one to three new directors to
our Board; however, this determination was in no way related to or based on our
decision to proceed with the Offer.
Director
Independence
Each of
Messrs. Chambers, Koenig, Rudelius and Smith qualifies as an “independent
director,” as such term is defined in Section 5000(a)(19) of the NASDAQ listing
rules. As an executive officer of the Company, Mr. Carlson does not
qualify as an “independent director.” Our Board has determined that
due to his beneficial ownership of our securities, Mr. Davis does not qualify as
independent.
Certain
Relationships and Related Transactions
Upon the
January 7, 2009 effective date of the Company’s 2009 public offering,
convertible debentures and accrued interest in the amount of $239,222 were
automatically converted into 79,741 shares of our common stock for each of James
Davis and William Reiling.
Upon the
January 12, 2009 closing of the 2009 public offering, the following convertible
notes held by related parties were automatically converted into Units, each
consisting of one share of our common stock and one five-year warrant to
purchase common stock at $1.30 per share:
|
Related Party
|
|
Amount of Convertible Debt and
Accrued Interest Converted
|
|
|
Units Received upon
Conversion
|
|
|
James
Davis
|
|
$
|
393,557
|
|
|
|
652,182
|
|
|
William
Reiling
|
|
$
|
52,474
|
|
|
|
74,964
|
|
|
Robert
Rudelius
|
|
$
|
31,318
|
|
|
|
44,742
|
|
|
Scott
Smith
|
|
$
|
36,732
|
|
|
|
52,475
|
|
On
January 15, 2009, the Company repaid an outstanding $37,500 loan along with
accrued interest thereon to Mr. Reiling.
On
February 6, 2009, convertible debentures (and the accrued interest thereon) in
the amount of $98,114 held by Mr. Davis automatically converted into 140,163
shares of our common stock.
On March
19, 2009, pursuant to the guaranties received relating to the Company’s renewal
of its $1,200,000 Crown Bank promissory note, the Company issued an aggregate
66,667 shares of its common stock as consideration to each of Mr. Davis and Mr.
Reiling, and agreed to issue a further 11,111 shares to each per month for each
month the notes remain outstanding after August 31, 2009. On June 25, 2010, the
Company issued 66,666 shares of its common stock that had been accrued pursuant
to this agreement to each of Mr. Davis and Mr. Reiling. On June 28, 2010,
the Company renewed $900,000 of the original Crown Bank promissory note along
with another $100,000 Crown Bank promissory note formerly guaranteed by another
individual. In connection with the Crown renewals, and pursuant to loan
guarantor compensation letter agreements dated June 28, 2010, Mr. Davis and Mr.
Reiling each agreed to provide guarantees for both Crown Bank promissory notes
under the same stock compensation formula as was provided for their previous
guarantees of the Crown Debt. Under the terms of the letter agreement, the
Company agreed to accrue for issuance 10,000 shares of common stock per person
per month for each month the $900,000 note remains outstanding and 1,111 shares
of common stock per person per month for each month the $100,000 note remains
outstanding, with a minimum compensation period of six months.
On March
19, 2009, a $37,500 convertible promissory note and a $150,000 convertible
promissory note due to Mr. Davis were refinanced and combined with other loans
and advances on behalf of the Company from Mr. Davis in a $281,000 convertible
promissory note. On May 26, 2009, Mr. Davis exercised his conversion
rights under the promissory note and the note was converted into 510,909 shares
of the Company’s common stock.
On April
13, 2009, the Company issued an aggregate of 27,366 shares of its common stock
to Mr. Koenig, Mr. Rudelius and Mr. Smith as payment of $20,251 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. 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 Company’s
assets. Mr. Davis intends to pay for the exercise of Warrants by
cancelling this note.
On March
1, 2010, Mr. Koenig entered into a consulting agreement with the Company.
Pursuant to the terms of the consulting agreement, Mr. Koenig will be paid
$4,000 per month for the 12 months following the date of the
agreement.
On June
11, 2010, the Company closed on a private placement of $885,000 of unsecured
promissory notes (the “2010 Private Placement”). Three directors
participated in the 2010 Private Placement: Mr. Davis purchased
$182,000 of the notes, Mr. Koenig purchased $65,000 of the notes and Mr.
Rudelius purchased $26,000 of the notes. During the first 30 days of the
note term, each note will bear interest payable in warrants to purchase shares
of the Company’s common stock. For every $13,000 original principal amount
of notes, warrant interest will accrue at a rate of 333.333 shares of common
stock per day, up to a maximum of 10,000 warrants per $13,000 of original
principal amount of Notes. The warrants have an exercise price of $1.30
per share, a three-year term and are immediately exercisable. The Company
may elect to redeem the warrants at any time after the last sales price of the
Company’s common stock equals or exceeds $4.00 for 10 consecutive trading
days. Following the initial 30 days of the note term, each note will bear
interest at a 6% annual rate, payable in cash at maturity. The notes will mature
on December 1, 2010. The Company may prepay, in whole or in part, the
unpaid principal of the notes at any time prior to the maturity date. By
their terms, cancellation of the principal and cash interest accrued on the
notes may be used to pay for the exercise price of any warrants held by the
holder of the note.
Although
Mr. Koenig holds no Warrants as of the date hereof, Mr. Koenig and Mr. Davis
intend to enter into an exchange transaction, whereby Mr. Koenig will exchange
the 50,000 common stock warrants issued to him under the 2010 Private Placement
for Warrants currently held by Mr. Davis. Mr. Koenig intends to exercise
such 50,000 Warrants in this Offering.
On July
1, 2010, the Company issued an aggregate of 22,762 shares of its common stock to
the independent directors as payment of $36,416 directors’ fees accrued through
June 30, 2010, in lieu of cash.
Financial
Information Regarding the Company
The
following is a summary of selected statement of operations data and balance
sheet data for each period indicated. The selected financial data presented
below for the years ended December 31, 2009 and December 31, 2008 are derived
from our audited consolidated financial statements and related notes. The
selected consolidated financial data presented below for the three months ended
March 31, 2010 and 2009, and the summary balance sheet information for March 31,
2010, compared with December 31, 2009 and 2008 are derived from our unaudited
consolidated financial statements and related notes.
The
selected consolidated financial data presented below should be read in
conjunction with our audited consolidated financial statements and the notes
thereto for the fiscal years ended December 31, 2009 and 2008 and the period
from August 17, 1999 (inception) to December 31, 2009, our unaudited
consolidated financial statements and the notes thereto for the quarter ended
March 31, 2010 and 2009 and the period from August 17, 2999 (inception) to March
31, 2010, and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” which disclosures are included in this Offer
Letter/Prospectus beginning on page F-12, page F-2 and page 60,
respectively.
The pro
forma consolidated financial information presented below assumes that all
5,750,536 Warrants are tendered for early exercise in the Offering, resulting in
net proceeds to the Company of $7,405,697 after estimated offering expenses of
$70,000. It also assumes the cost of the 2010 Replacement Warrants to be
$8,683,309, as determined using the Black-Scholes pricing model as of June 11,
2010.
|
|
|
Three months
ended
March 31,
2010
|
|
|
Year ended
December 31,
2009
|
|
|
Year ended
December 31,
2008
|
|
|
Period from
August 17,1999
(inception) to
March 31,
2010
|
|
|
Consolidated
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
84,154
|
|
|
$
|
2,239,590
|
|
|
$
|
597,755
|
|
|
$
|
7,779,051
|
|
|
General
and administrative
|
|
|
485,150
|
|
|
|
1,711,075
|
|
|
|
2,026,677
|
|
|
|
12,027,398
|
|
|
Total
operating expenses
|
|
|
569,304
|
|
|
|
3,950,665
|
|
|
|
2,624,432
|
|
|
|
19,806,449
|
|
|
Operating
loss
|
|
|
(569,304
|
)
|
|
|
(3,950,665
|
)
|
|
|
(2,624,432
|
)
|
|
|
(19,806,449
|
)
|
|
Incentive
for early warrant exercise
|
|
|
—
|
|
|
|
(1,356,864
|
|
|
|
—
|
|
|
|
(1,356,864
|
)
|
|
Interest
expense, net
|
|
|
(86,961
|
)
|
|
|
(1,220,553
|
)
|
|
|
(1,909,500
|
)
|
|
|
(6,451,686
|
)
|
|
Debt
extinguishment expense
|
|
|
(915,426
|
)
|
|
|
(415,982
|
)
|
|
|
(123,785
|
)
|
|
|
(1,836,569
|
)
|
|
Net
loss
|
|
$
|
(1,571,691
|
)
|
|
$
|
(6,944,064
|
)
|
|
$
|
(4,657,717
|
)
|
|
$
|
(29,451,568
|
)
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(2.65
|
)
|
|
$
|
(14,07
|
)
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
11,617,324
|
|
|
|
9,574,914
|
|
|
|
1,759,607
|
|
|
|
2,093,391
|
|
|
Ratio
of earnings to fixed charges
(1)
|
|
|
(644
|
)%
|
|
|
(324
|
)%
|
|
|
(137
|
)%
|
|
|
|
|
|
Deficiency
of earnings to cover fixed charges
|
|
$
|
(656,265
|
)
|
|
$
|
(5,171,218
|
)
|
|
$
|
(4,533,932
|
)
|
|
|
|
|
|
|
|
As of
March 31,
2010
|
|
|
As of
December 31,
2009
|
|
|
As of
December 31,
2008
|
|
|
Consolidated
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
538,635
|
|
|
$
|
1,000,874
|
|
|
$
|
3,900
|
|
|
Total
assets
|
|
|
675,778
|
|
|
|
1,087,927
|
|
|
|
1,076,554
|
|
|
Total
liabilities
|
|
|
3,020,016
|
|
|
|
5,418,065
|
|
|
|
8,334,417
|
|
|
Shareholders’
deficit
|
|
|
(2,344,238
|
)
|
|
|
(4,330,138
|
)
|
|
|
(7,257,863
|
)
|
|
Book
value per share
|
|
|
(0.18
|
)
|
|
|
(0.38
|
)
|
|
|
(4.01
|
)
|
|
|
|
As
of
March
31,
2010
|
|
|
Consolidated
Statement of Operations Data, Pro Forma
|
|
|
|
|
Operating
expense
|
|
$
|
569,304
|
|
|
Operating
loss
|
|
|
(569,304
|
)
|
|
Incentive
for early warrant exercise
|
|
|
(8,683,309
|
|
|
Net
Loss
|
|
|
(10,255,000
|
)
|
|
Ratio
of earnings to fixed charges
(1)
|
|
|
(644
|
)%
|
|
Deficiency
of earnings to cover fixed charges
|
|
$
|
(656,265
|
)
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data, Pro Forma
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,944,332
|
|
|
Total
assets
|
|
|
8,081,475
|
|
|
Total
liabilities
|
|
|
3,020,016
|
|
|
Shareholders’
equity
|
|
|
5,061,459
|
|
|
Book
value per share
|
|
|
0.27
|
|
(1) Fixed
charges exclude the cost of stock and warrants issued incurred in refinancing
certain debt that were expensed as debt extinguishment expense and the cost of
warrants issued in the 2009 and 2010 early warrant exercise programs.
Amounts so excluded were $915,426, $1,772,846 and $123,785 for the three months
ended March 31, 2010 and the years ended December 31, 2009 and 2008,
respectively. The amount so excluded from the March 31, 2010 pro forma
disclosure was $9,598,735.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of our
financial condition and results of operations should be read in conjunction with
our consolidated financial statements, and notes thereto, included in this Offer
Letter/Prospectus. This discussion should not be construed to imply that the
results discussed herein will necessarily continue into the future, or that any
conclusion reached herein will necessarily be indicative of actual operating
results in the future.
Results
of Operations
Three months ended March 31,
2010 compared to the three months ended March 31, 2009:
Operating Expenses/Operating
Loss
. Our operating expenses (and our operating loss) for the three
months ended March 31, 2010 were $569,304, an increase of $43,787, or eight
percent, compared to $525,517 last year. This increase resulted from
consulting fees for new regulatory, reimbursement, finance and manufacturing
activities totaling $124,000 and from $24,000 of new public relations
efforts. Offsetting these new expenses were reduced compensation and
benefits costs during the three months ended March 31, 2010 of $32,000, or 26
percent, compared to last year as a result of a $40,000 bonus awarded during the
three months ended March 31, 2009 following the completion of our 2009 public
offering and reduced stock-based compensation of $80,000, or 54 percent,
compared to last year, as a result of a grant of immediately vesting stock
options to directors and officers valued at $139,400 last year.
Net Interest Expense
.
Net interest expense for the three months ended March 31, 2010 was $86,961, a
decrease of 92 percent compared to $1,047,502 last year. Included in the
expense for the three months ended March 31, 2009 was the approximately $980,000
write-off of unamortized original issue discount and debt issuance costs related
to our 2006, 2007 and 2008 private debt placements and the 2008 unit put
arrangement, upon the closing of our 2009 public offering and the subsequent
automatic conversion of approximately $3.3 million of debt and accrued interest
into equity. Interest expense excluding the write-off of original issue
discount debt issuance cost increased 34 percent to approximately $ 87,000 for
the three months ended March 31, 2010 compared to approximately $65,000 last
year resulting from increased debt and debt guarantees that carry stock-based
consideration provisions.
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 refinancing transactions. Our debt extinguishment
expense for the three months ended March 31, 2010 was $915,426, an increase of
450 percent, compared to $166,348 last year. The increase is
primarily due to the conversion of a $600,000 loan from the Phillips W. Smith
Family Trust (the “Smith Trust”) and $97,546 of accrued interest thereon into
381,173 equity units, with each unit consisting of one share of the Company’s
common stock and one warrant to purchase one share of Company’s common
stock. We recognized debt extinguishment expense of $870,981 in this
conversion, representing the excess fair value of the securities issued over the
carrying value of the debt and interest at the time of the
conversion.
Year
ended December 31, 2009 compared to the year ended December 31,
2008
:
Net Loss
. Our net loss
for fiscal 2009 increased 49 percent to $6,944,000 compared to $4,658,000 for
fiscal 2008. Operating expenses comprised of research and development
expenses and general and administrative expenses, as described below, increased
by 51 percent to $3,951,000 in 2009 compared to $2,624,000 in 2008. Also
contributing to the increased net loss was a $1,357,000 incentive, in the form
of Replacement Warrants, given to warrant holders for the early exercise of
their existing warrants.
Research and development.
Research and development expense for fiscal 2009 increased 275 percent to
$2,240,000 compared to $598,000 for fiscal 2008. The majority of our research
and development expense was conducted under contracts with Artann. The
November 18, 2009 submission of the FDA 510(k) application triggered a cash
milestone payment of $250,000, and an accrual of the issuance of 769,231 shares
of common stock valued on the submission date at approximately $1,565,000.
In addition, we expensed $235,000 for Artann’s development retainer.
During 2009 we also incurred approximately $137,000 of regulatory and clinical
consulting fees and contracted engineering fees of approximately $34,000. In
2008, research and development expense consisted primarily of a $250,000
milestone payment due to Artann upon the initiation of FDA clinical studies and
the expensing of the $300,000 purchase price of the Profile
Assets.
General and administrative
expenses.
General and administrative expenses for 2009 decreased by
16 percent, or $316,000, to $1,711,000 compared to $2,027,000 for
2008.
Our only
employees are our two executive officers, whose base salaries have not increased
since 2006. Cash-based compensation expenses (salary, bonus, benefits and
related payroll taxes) totaled $359,000 in 2009, including a total of $40,000 in
bonuses. In 2008, we incurred $331,000 of compensation expense, which
included no bonus expense. Stock options granted to our directors, officers and
consultants in 2009 were valued at $481,000. Stock-based compensation
expense in 2008 was $59,000.
We incur
costs related to being a public reporting company, including fees for securities
attorneys and our independent registered public accounting firm, proxy services,
transfer agent services, investor relations and directors and officer’s
(“D&O”) insurance costs. In 2009, we increased our investor relations
activity and expanded our D&O insurance coverage following our 2009 Public
Offering. Consequently, public reporting company costs totaled $325,000 in
2009, representing an increase of $141,000 over 2008.
In 2009,
as we worked to complete clinical trials, submit the FDA 510(k) application and
began preparations for market entry, we incurred new fees for reimbursement
consulting, marketing, public relations and financial consulting services
totaling $212,000.
In 2008,
we incurred a $600,000 up-front cash license fee and a $500,000 license fee paid
in our common stock pursuant to our license agreement with Artann, which were
expensed as general and administrative expense.
Interest and other expense.
Interest expense for 2009 was $1,221,000, a decrease of $689,000, or 36
percent, compared to $1,910,000 in 2008. Our interest expense consists of
the interest charged by lenders on amounts we have borrowed plus the
amortization of the cost of consideration we have provided to lenders and loan
guarantors. Interest charged by lenders totaled $193,000 in 2009, a 57
percent reduction from the $453,000 n 2008. The majority of the decrease
was due to the automatic conversion of $2,933,000 of convertible debt in January
2009 upon the completion of our 2009 Public Offering. The cost of
consideration provided to lenders and loan guarantors, in the form of stock,
warrants or beneficial conversion features of convertible debt, is generally
recorded as original issue discount and amortized over the term of the
associated debt. In 2009, $1,028,000 of such consideration was amortized,
a decrease of $430,000, or 29 percent from the $1,458,000 recorded in
2008.
Debt
extinguishment expense for 2009 was $416,000, an increase of $292,000, or 236
percent, compared to $124,000 in 2008. Debt extinguishment expense is
incurred when the cost to refinance existing loans, including changes in
interest rates and the cost of consideration provided to lenders and loan
guarantors, in the form of stock, warrants or beneficial conversion features of
convertible debt, is significant enough that we deem it to be a retirement of
existing debt and creation of a new loan. The debt extinguishment expense
recognized in 2009 related to the refinancing of our Crown Bank loan and loans
from Mr. Davis. The debt extinguishment expense recognized in 2008 related
to the refinancing of several loans with individual investors.
Pursuant
to our 2009 warrant exchange offer, we issued 1,244,829 2009 Replacement
Warrants. The $1,357,000 fair market value of the 2009 Replacement
Warrants, determined using the Black-Scholes pricing model, was expensed as an
incentive for early warrant exercise in 2009.
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.
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 1,000 square feet of
office space on a month-to-month basis at a cost of approximately $1,000 per
month. Other expenses incurred include executive officer compensation, travel,
insurance, telephone, supplies and other miscellaneous
expenses.
Balance
Sheet Changes
During
the three months ended March 31, 2010, the following transactions resulted in
material changes to our balance sheet:
On March
15, 2010, the Company issued 769,231 shares of common stock to Artann pursuant
to a development agreement. The $1,565,385 value of the shares had been
recorded as an accrued development fee as of December 31, 2009.
On March
26, 2010, the Company converted its $600,000 loan from the Smith Trust and
$97,546 of accrued interest thereon into 381,173 shares of the Company’s common
stock and 381,173 warrants to purchase the Company’s common stock. As a
result, notes payable and accrued expenses were reduced
accordingly.
As of
March 31, 2010, all of our notes payable were scheduled to mature within one
year. Amounts classified as long-term as of December 31, 2009 were
therefore reclassified to short-tem as of March 31, 2010.
Liquidity
and Capital Resources
Assets;
Property Acquisitions and Dispositions
Our
primary assets are our intellectual property rights, including patents, patent
applications and our license and commercialization and development agreements
with Artann, which are the foundation for our proposed product offerings. These
assets secure $1.0 million of senior bank notes and $643,000 of
subordinated notes, as a result, are not available to secure additional senior
debt financing.
Sources
and Uses of Cash
Net cash
used in operating activities was $759,000 during the three months ended March
31, 2010 compared to $1.6 million in 2009. During the three months ended
March 31, 2009, we made cash payments to Artann of $600,000 for licensing fees
and a total of $500,000 for milestone achievements pursuant to our licensing and
development agreements. In addition to operating expenses, other uses of
cash included payments for accounts payable and prepayment of the production of
probe sensors to be used in future clinical work.
Net cash
provided by financing activities was $300,000 during the three months ended
March 31, 2010, resulting from the exercise of warrants by certain warrant
holders. Net cash provided by financing activities was $1.8 million
during the first three months of 2009, resulting from the $2.3 million net
proceeds from our 2009 public offering, offset by our retirement of a $400,000
bank debt in March 2009.
Net cash
used in operating activities was $3.1 million in 2009 compared to $1.1 million
in 2008. The increase in cash used was primarily the result of payments to
Artann of $600,000 for licensing fees and a total of $500,000 for milestone
achievements pursuant to our licensing and development agreements. We also paid
$205,000 to Artann for development work performed under the development
agreement. In addition to increased operating expenses, other uses of cash
included payments for accounts payable, accrued compensation and other accrued
expenses.
Net cash
provided by financing activities was $4.1 million in 2009 compared to $700,000
in 2008. Proceeds from the 2009 Public Offering less underwriter’s
commissions and other payments for expenses of the offering were $2.3 million,
while net proceeds from warrant exercises was $1.7 million. In addition,
we borrowed a total of $200,025 pursuant to two bank loans and $543,000 pursuant
to two loans from investors. Offsetting this was our retirement of a
$400,000 bank debt in March 2009. During 2008, we received net proceeds
from our private convertible debt placements with individual investors of
$1,197,000. These debt proceeds were offset by repayments of notes payable
and loans from directors totaling $410,000 and payments made for debt issuance
and deferred offering costs totaling $88,000.
Recent
Financing Activity
On June
11, 2010, we closed on the sale of $885,000 of unsecured promissory notes (the
“Notes”) in a private placement. Net cash proceeds to the Company were
$880,000, after deducting approximately $5,000 expenses of the offering.
During the first 30 days of the Note term, each Note will bear interest payable
in warrants to purchase shares of the Company’s common stock (the “Interest
Warrants”). For every $13,000 original principal amount of Notes, Interest
Warrants will accrue at a rate of 333.333 shares of common stock per day, up to
a maximum of 10,000 Interest Warrants per $13,000 of original principal amount
of Notes. The Warrants have an exercise price of $1.30 per share, a
three-year term and are immediately exercisable. The Company may elect to
redeem the Warrants at any time after the last sales price of the Company’s
common stock equals or exceeds $4.00 for 10 consecutive trading days. The
Company must provide 30 days prior written notice of its decision to redeem the
Warrants, at $0.01 per Warrant, during which time holders may choose to exercise
the Warrants according to their terms rather than submitting them for
redemption. Following the initial 30 days of the Note term, each Note will
bear interest at a 6% annual rate, payable in cash at maturity. The Notes
will mature on December 1, 2010. The Company may prepay, in whole or in
part, the unpaid principal of the Notes at any time prior to the maturity
date.
On June
28, 2010, we renewed a total of $1,000,000 of our secured debt with Crown
Bank. Of this, $100,000 matures on November 30, 2010 and $900,000 matures
on March 28, 2011.
Cash
Requirements
Our goal
is to begin our commercial launch of the ProUroScan system in 2010. The
timing of the market launch is dependent upon the timing of FDA market clearance
of our ProUroScan and the amount of funding that is available to fund
manufacturing and market scale-up activities. Prior to notification of
market clearance, we have taken steps to conserve our cash by spending only on
expenses essential to obtaining FDA clearance and very limited preliminary
commercialization activities. The cash requirements outlined below assume
that FDA clearance is obtained during the third quarter of 2010 enabling a pilot
market launch in the fourth quarter, of which there can be no
assurance.
We expect
that our cash needs for our operating expenses (including payments due to Artann
explained below) will be approximately $2.3 million through the remainder of
2010. Of this amount, we anticipate that on-going general and
administrative expenses, including the cost of existing personnel, rent, patent
filing and maintenance, legal, audit and other costs of being a public company,
will be approximately $700,000. We estimate that our cost of contracting
for certain product engineering and development work to reduce the cost of the
ProUroScan system and make certain enhancements will cost approximately
$240,000. We expect to initiate sales and marketing programs
in advance of obtaining a corporate distribution partner that will cost
approximately $225,000. Placing systems and performing additional patient
studies at certain key institutions will cost approximately $225,000. We
expect to add personnel in the areas of sales and marketing, engineering and
quality control during the remainder of 2010, which we estimate to cost
approximately $175,000.
Pursuant
to the terms of the Artann development agreement, upon receipt of FDA regulatory
clearance we are required to make a cash payment of $750,000 and provide up to a
$700,000 equity payment to Artann. The equity payment, originally set at
$1,000,000, has been subject to a $100,000 reduction per month since April 23,
2010, and will continue to be subject to monthly $100,000 reductions until FDA
clearance is received.
We
estimate that a fourth quarter market launch will require approximately $250,000
to fund inventory and accounts receivable by the end of 2010. We also
anticipate purchasing approximately $70,000 of tooling, molds and other capital
for production, computer equipment, software and general office furniture and
equipment during the remainder of the year.
Under the
terms of our secured promissory notes with Crown Bank, we are required to repay
$100,000 in November, 2010. The remaining $900,000 principal balance
matures in March, 2011. We anticipate that we will be able to renew a
significant portion of that note, but will have to repay a portion. Under
the terms of our revolving note with James Davis, if our cash position allows we
expect to repay up to $200,000 of the principal amount of the note, which would
be eligible to be re-borrowed if needed. We also have another $100,000
bank loan that matures in January, 2011 and a $300,000 promissory note with an
investor that matures in March, 2011.
In total,
assuming financing permits, we expect our cash requirements for operating
expenses, working capital, capital expenditures and payments toward debt and
vendor obligations during the remainder of 2010 to be approximately $3.1
million. Of this, the $750,000 Artann success fee is contingent on FDA
clearance, and at least another $1.0 million is subject to reduction or
postponement based on availability of funding.
Current
Financing Plans
As of
June 11, 2010, we had $910,000 of cash on hand. In addition, on that date
we had 5,750,536 redeemable warrants outstanding, each with an exercise price of
$1.30 per share. These warrants are the subject of this Offer
Letter/Prospectus. Of these, we currently have the right to redeem
4,505,707 warrants. Upon our exercise of our right to redeem the warrants,
holders of the warrants will have a period of 30 days to exercise their
warrants. We could realize up to approximately $5.9 million depending on the
number of shares actually exercised. We may call these warrants in 2010 to meet
our financing needs outlined above. In addition, we will gain the ability
to redeem the remaining 1,244,829 warrants if the last sale price of our common
stock were to equal or exceed $4.00 per share for a period of 10 consecutive
trading days. If we were to subsequently exercise our redemption right on
these warrants, we could realize up to an additional $1.6 million depending on
the number of shares actually exercised pursuant to such redemption. There
can be no assurance that we will be able to redeem the warrants, or how much
would be realized if such redemption were made.
We plan
to identify a distribution partner during 2010 or early 2011 to help market our
products. We expect such a distribution partner may provide financial
support in the form of licensing fees, loans, equity investment or a combination
of these. In addition to financial support, a successful collaboration
with such a partner would allow us to gain access to downstream marketing,
manufacturing and sales support. There can be no assurance that a
distribution partner can be successfully identified and engaged during 2010 or
early 2011, if at all.
In
addition to these actions, we may pursue additional private funding in 2010 and
2011 to finance additional product development and operations pursuant to a
commercial market launch. The amounts of such additional funding will
depend upon the amount of funding we receive from exercise of the outstanding
warrants, including the Warrants that are the subject of this Offer
Letter/Prospectus. The additional private funding may be in the form of
convertible debt, equity securities, private debt or debt guarantees for which
stock-based consideration is paid, the exercise of outstanding warrants pursuant
to a warrant call or a combination of these. If any of these funding
events should occur, existing shareholders will likely experience dilution in
their ownership interest. If additional funds are raised by the issuance
of debt or certain equity instruments, we may become subject to certain
operational limitations, and such securities may have rights senior to those of
our existing holders of common stock.
If our
funding from warrants or other private funding initiatives is delayed or proves
insufficient to allow an aggressive ramp-up toward market launch, or if FDA
clearance of the ProUroScan system is delayed, we will be forced to delay
commercialization activities accordingly. If adequate funds are not
available through these initiatives on a timely basis, or are not available on
acceptable terms, we may be unable to fund expansion and may be forced to
scale-back or delay our market entry. 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.
Off-Balance
Sheet Arrangements
None.
Going
Concern
We have
incurred operating losses, accumulated deficit and negative cash flows from
operations since inception. As of March 31, 2010, we had an accumulated deficit
of approximately $29.5 million. These factors, among others, raise
substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements included in this Offer Letter/Prospectus do
not include any adjustments related to recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern.
Critical
Accounting Policies
Our
critical accounting policies are policies which have a high impact on the
reporting of our financial condition and results, and require significant
judgments and estimates. Our critical accounting policies relate to (a) the
valuation of stock-based compensation awarded to employees, directors, loan
guarantors and consultants and (b) the accounting for debt with beneficial
conversion features.
Valuation
of Stock-Based Compensation
Since
inception, we have measured and recognized compensation expense for all
share-based payment awards made to employees and directors including employee
stock options based on fair value. Our determination of fair value of
share-based payment awards is based on the date of grant using an option-pricing
model which incorporates a number of highly complex and subjective variables.
These variables include, but are not limited to, the expected volatility of our
stock price and estimates regarding projected employee stock option exercise
behaviors and forfeitures. We recognize the expense related to the fair value of
the award straight-line over the vesting period.
Debt
with Beneficial Conversion Features
The
beneficial conversion features of the promissory notes were valued using the
Black-Scholes pricing model. The resulting original issue discount is amortized
over the life of the promissory notes using the straight-line method, which
approximates the interest method.
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
Offer Letter/Prospectus contains statements about our expectations, beliefs,
plans, objectives, assumptions or future events or performance. Such statements
are not historical facts and may be forward-looking. These statements are often,
but not always, made through the use of words or phrases such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,”
“intend” and similar words or phrases. Accordingly, these statements involve
estimates, assumptions and uncertainties that could cause actual results to
differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed in this
Offer Letter/Prospectus.
Because
the factors discussed in this Offer Letter/Prospectus could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance on
any such forward-looking statements. These statements are subject to risks and
uncertainties, known and unknown, which could cause actual results and
developments to differ materially from those expressed or implied in such
statements. Such risks and uncertainties relate to, among other
factors:
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·
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general
economic or industry conditions, nationally and in the physician, urology
and medical device communities in which we intend to do
business;
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·
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our
ability to raise capital to fund our 2010 and 2011 working capital needs
and introduce our products into the
marketplace;
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·
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our
ability to complete the development of our existing and proposed products
on a timely basis or at all;
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·
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legislation
or regulatory requirements, including our securing of all 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;
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·
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competition
from larger and more well established medical device companies and other
competitors;
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·
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the
development of products that may be superior to the products offered by
us;
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·
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securing
and protecting our intellectual property and assets, and enforcing
breaches of the same;
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·
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clinical
results not anticipated by management of the
Company;
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·
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the
quality or composition of our products and the strength and reliability of
our contract vendors and partners;
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·
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changes
in accounting principles, policies or
guidelines;
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·
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financial
or political instability;
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·
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acts
of war or terrorism; and
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·
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other
economic, competitive, governmental, regulatory and technical factors
affecting our operations, proposed products and
prices.
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These and
other risks are detailed in this prospectus under the discussion entitled “Risk
Factors,” as well as in our reports filed with the SEC from time to time under
the Securities Act and the Exchange Act. You are encouraged to read these
filings as they are made.
Further,
any forward-looking statement speaks only as of the date on which it is made,
and, except as required under applicable law, we undertake no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which factors will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
USE
OF PROCEEDS
This
Offer Letter/Prospectus relates to our Public Warrants, 2009 Replacement
Warrants and 2010 Replacement Warrants and the shares of our common stock
underlying such warrants. We will not receive any proceeds as a result of
the issuance of the 2010 Replacement Warrants, except that we will receive the
$1.30 per share exercise price upon the exercise of any Warrants that are
tendered in response to the Offer.
We expect
to use the proceeds received from the exercise of the Warrants, if any, to
obtain market clearance of the ProUroScan System, fund manufacturing and market
scale-up activities, expand our intellectual property rights, form a scientific
advisory panel and conduct clinical studies, reduce amounts outstanding on
certain liabilities including an existing line of credit with a director, and
for other general corporate purposes. The allocation of proceeds toward
any of these purposes will depend upon the amount of net proceeds
received.
DETERMINATION
OF OFFERING PRICE
2010
Replacement Warrants and Underlying Common Stock
The
offering price of the shares of common stock issuable upon the exercise of 2010
Replacement Warrants is determined by reference to the exercise prices of such
warrants, which is $1.30 per share of our common stock. Our Board of
Directors established the exercise price for the 2010 Replacement Warrants based
on its estimation of those warrant terms that would encourage Warrant holders to
participate in each Offer. The exercise price for the 2010 Replacement
Warrants was arbitrarily determined by our Board and does not have any
relationship to our assets, projected future earnings, book value or any other
objective financial statement criteria of value.
2009
Replacement Warrants and Underlying Common Stock
The
offering price of the shares of common stock issuable upon the exercise of the
2009 Replacement Warrants was determined by reference to the exercise prices of
such warrants, which is $1.30 per share of our common stock. Our Board of
Directors established the exercise price for the 2009 Replacement Warrants at
the commencement of the 2009 early exercise program based on its estimation of
those warrant terms that would encourage Warrant holders to participate in the
2009 exchange offer. The exercise price for the 2009 Replacement Warrants
was arbitrarily determined by our Board and did not have any relationship to our
assets, projected future earnings, book value or any other objective financial
statement criteria of value at such time.
Public
Warrants and Underlying Common Stock
The
purchase price of the shares of common stock issuable upon the exercise of the
Public Warrants is determined by reference to the exercise price of the Public
Warrants. The exercise price of the 1,752,760 Public Warrants is $1.30 per
share. The exercise price of the Public Warrants was determined by us and
our underwriter at the commencement of the public offering in which the Public
Warrants were issued.
The
difference between the purchase price per share of the common stock issuable
under the Warrants and the 2010 Replacement Warrants, and the pro forma net
tangible book value per share of our common stock after this offering
constitutes the dilution to purchasers in this offering. Net tangible book value
per share is determined by dividing our tangible book value, which is our
tangible assets less total liabilities, by the number of outstanding share of
our common stock. The information below assumes all of the Warrants are
exercised.
At March
31, 2010, our net tangible book value was a deficiency of $2,351,103, or
approximately $(0.18) per share of common stock. After giving effect to the sale
of 8,748,125 shares of common stock offered by this prospectus, and 2,752,947
shares of common stock issuable upon exercise of the Private Warrants by holders
accepting this Offer, our pro forma net tangible book value at March 31, 2010
would have been $12,540,291, or $0.51 per share, representing an immediate
increase in net tangible book value of $0.79 per share to the existing
stockholders and an immediate dilution of $0.79 per share, or 61% to purchasers
in this offering.
The
following table illustrates the dilution to the purchasers in this offering on a
per-share basis as if the offering had occurred on March 31, 2010:
|
Offering
price of the shares of Common Stock
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|
|
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$
|
1.30
|
|
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Net
tangible book value before this offering
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$
|
(0.18
|
)
|
|
|
|
|
|
Increase
attributable to purchasers in this offering
(1)
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|
$
|
0.79
|
|
|
|
|
|
|
Pro
forma net tangible book value after this offering
|
|
|
|
|
|
$
|
0.51
|
|
|
Dilution
to purchasers in this offering
|
|
|
|
|
|
$
|
0.79
|
|
(1)
Although the shares underlying the Private Warrants are not offered pursuant to
this Offer Letter/Prospectus, the proceeds from the exercise of the Private
Warrants are included in this total, because such exercise has been assumed as a
prerequisite to the exercise of the 2010 Replacement Warrants.
PLAN
OF DISTRIBUTION
2010
Replacement Warrants
The 2010
Replacement Warrants are being offered to holders of our Warrants pursuant to
the terms of the Offer set forth in the section entitled “The
Offer.”
The Company is offering 5,750,536
shares of Company common stock, par value $0.00001 per share, which are issuable
upon exercise of the 2010 Replacement Warrants. Pursuant to the terms of the
2010 Replacement Warrants, shares of our common stock will be issued to those
2010 Replacement Warrant holders who exercise their 2010 Replacement Warrants
and provide payment of the exercise price of $1.30 per share through their
brokers to our warrant agent, Interwest Transfer Company, Inc., 1981 Murray
Holladay Road, Suite 100, Salt Lake City, Utah 84117. We do not know if or when
the 2010 Replacement Warrants will be exercised. We also do not know
whether any of the shares of common stock acquired upon exercise will be
sold.
Public
Warrants
The Company is offering 1,752,760
shares of Company common stock, par value $0.00001 per share, which are issuable
upon exercise of the Public Warrants during or after the Offer Period. Pursuant
to the terms of the Public Warrants, shares of our common stock will be issued
to those Public Warrant holders who exercise their Public Warrants and provide
payment of the exercise price of $1.30 per share through their brokers to our
warrant agent, Interwest Transfer Company, Inc., 1981 Murray Holladay Road,
Suite 100, Salt Lake City, Utah 84117. We do not know if or
when the Public Warrants will be exercised. We also do not know whether
any of the shares of common stock acquired upon exercise will be
sold.
2009
Replacement Warrants
The Company is offering 1,244,829
shares of Company common stock, par value $0.00001 per share, which are issuable
upon exercise of the 2009 Replacement Warrants during or after the Offer Period.
Pursuant to the terms of the 2009 Replacement Warrants, shares of our common
stock will be issued to those 2009 Replacement Warrant holders who exercise
their 2009 Replacement Warrants and provide payment of the exercise price of
$1.30 per share through their brokers to our warrant agent, Interwest Transfer
Company, Inc., 1981 Murray Holladay Road, Suite 100, Salt Lake City, Utah
84117. We do not know if or when the 2009 Replacement Warrants will be
exercised. We also do not know whether any of the shares of common stock
acquired upon exercise will be sold.
Private
Warrants
This Offer Letter/Prospectus does not
apply to the shares of Company common stock which are issuable upon exercise of
the Private Warrants. The Company may issue such common stock only if exemptions
from the registration requirements of any applicable federal or state securities
laws are available. This Offer Letter/Prospectus is not an offer to sell or the
solicitation of an offer to buy Company common stock issuable upon exercise of
the Private Warrants.
DESCRIPTION
OF SECURITIES TO BE REGISTERED
General
Our
Amended and Restated Articles of Incorporation authorize us to issue up to
50,000,000 shares of common stock having a par value of $0.00001 per share. As
of June 28, 2010, we had 13,045,375 shares of common stock issued and
outstanding, with an aggregate of 7,494,444 shares of common stock issuable upon
exercise of currently exercisable options, warrants and convertible notes. The
transfer agent and registrar for our common stock is Interwest Transfer Company,
Inc., of Salt Lake City, Utah.
Common
Stock
Holders
of our common stock are entitled to one vote for each share on all matters to be
voted on by our stockholders. Holders of our common stock do not have any
cumulative voting rights. Common stockholders are entitled to share ratably in
any dividends that may be declared from time to time on the common stock by our
board of directors from funds legally available therefor. Holders of common
stock do not have any preemptive right to purchase shares of common stock. There
are no conversion rights or sinking-fund provisions for or applicable to our
common stock.
2010
Replacement Warrants
Each
Warrant Holder who tenders Warrants for early exercise pursuant to the terms of
the Offer will receive, in addition to the shares of common stock purchased upon
exercise, one 2010 Replacement Warrant to purchase the same number of shares of
our common stock at a price of $1.30 per share, subject to adjustment as
discussed below, at any time after the closing of this offering. The 2010
Replacement Warrants will expire at 5:00 p.m., Minneapolis, Minnesota time,
three years from the date of issuance, or earlier upon redemption.
We may
elect to redeem the outstanding 2010 Replacement Warrants at a price of $0.01
per 2010 Replacement Warrant at any time after the last sales price of our
common stock equals or exceeds $4.00 for ten consecutive trading
days.
If the
foregoing condition is satisfied and we call the 2010 Replacement Warrants for
redemption, we must provide a minimum of 30 days’ prior written notice, and each
2010 Replacement Warrant holder shall then be entitled to exercise his or her
2010 Replacement Warrant prior to the date scheduled for
redemption.
The 2010
Replacement Warrants will be issued in registered form under a warrant
agreement, as amended, between Interwest Transfer Company, Inc., as warrant
agent, and us. You should review a copy of the warrant agreement, which has been
filed as an exhibit to the registration statement of which this prospectus is a
part, for a complete description of the terms and conditions applicable to the
2010 Replacement Warrants.
The
exercise price and number of shares of common stock issuable on exercise of the
2010 Replacement Warrants may be adjusted in certain circumstances including in
the event of a stock dividend, or our recapitalization, reorganization, merger
or consolidation.
The 2010
Replacement Warrants may be exercised upon surrender of the 2010 Replacement
Warrant certificate on or prior to the expiration date at the offices of the
warrant agent, with the exercise form on the reverse side of the 2010
Replacement Warrant certificate completed and executed as indicated, accompanied
by full payment of the exercise price, by certified check payable to us (or a
party otherwise agreed to by us), for the number of 2010 Replacement Warrants
being exercised. The 2010 Replacement Warrant holders do not have the rights or
privileges of holders of common stock and any voting rights until they exercise
their 2010 Replacement Warrants and receive shares of common stock. After the
issuance of shares of common stock upon exercise of the 2010 Replacement
Warrants, each holder will be entitled to one vote for each share held on record
on all matters to be voted on by stockholders.
No 2010
Replacement Warrants will be exercisable and we will not be obligated to issue
shares of common stock unless at the time a holder seeks to exercise such 2010
Replacement Warrant, a prospectus relating to the common stock issuable upon
exercise of the 2010 Replacement Warrants is current and the common stock has
been registered or qualified or deemed to be exempt under the securities laws of
the state of residence of the holder of the 2010 Replacement Warrants. In
addition, holders of the 2010 Replacement Warrants are not entitled to net cash
settlement and the 2010 Replacement Warrants may only be settled by delivery of
shares of our common stock and not cash. Under the terms of the warrant
agreement, we have agreed to use our best efforts to meet these conditions and
to maintain a current prospectus relating to the common stock issuable upon
exercise of the 2010 Replacement Warrants until the expiration of the 2010
Replacement Warrants. However, we cannot assure you that we will be able to do
so and, if we do not maintain a current prospectus relating to the common stock
issuable upon exercise of the 2010 Replacement Warrants, holders will be unable
to exercise their 2010 Replacement Warrants and we will not be required to
settle any such 2010 Replacement Warrant exercise. If the prospectus relating to
the common stock issuable upon the exercise of the 2010 Replacement Warrants is
not current or if the common stock is not qualified or exempt from qualification
in the jurisdictions in which the holders of the 2010 Replacement Warrants
reside, the 2010 Replacement Warrants may have no value, the market for the 2010
Replacement Warrants may be limited and the 2010 Replacement Warrants may expire
worthless. We have agreed, however, to extend the exercise period of the 2010
Replacement Warrants if the prospectus relating to the common stock issuable
upon the exercise of the 2010 Replacement Warrants is not current at the
expiration date. The 2010 Replacement Warrant holders will have a 30 day period
to exercise the 2010 Replacement Warrants upon effectiveness of a registration
statement relating to the common stock issuable upon the exercise of the 2010
Replacement Warrants.
No
fractional shares will be issued upon exercise of the 2010 Replacement Warrants.
If, upon exercise of the 2010 Replacement Warrants, a holder would be entitled
to receive a fractional interest in a share, we will, upon exercise, round up to
the nearest whole number the number of shares of common stock to be issued to
the 2010 Replacement Warrant holder.
ABOUT
THIS PROSPECTUS
This
prospectus is not an offer or solicitation in respect to these securities in any
jurisdiction in which such offer or solicitation would be unlawful. This
prospectus is part of a registration statement that we filed with the SEC.
The registration statement that contains this Offer Letter/Prospectus (including
the exhibits to the registration statement) contains additional information
about our company and the securities offered under this Offer
Letter/Prospectus. That registration statement can be read at the SEC web
site or at the SEC’s offices mentioned under the section “Where You Can Find
More Information.”
You
should rely only on the information provided in this Offer Letter/Prospectus,
the documents filed as exhibits to the registration statement that contains this
Offer Letter/Prospectus, or any supplement or amendment to this Offer
Letter/Prospectus. We have not authorized anyone else to provide you with
different information or additional information. You should not assume
that the information in this Offer Letter/Prospectus, the documents filed as
exhibits to the registration statement that contains this Offer
Letter/Prospectus, or any supplement or amendment to this Offer
Letter/Prospectus, is accurate at any date other than the date indicated on the
cover page of such documents. We will amend our offering materials, including
this Offer Letter/Prospectus, to the extent required by applicable securities
laws to disclose any material changes to information previously published, sent
or given to Warrant holders.
WHERE
YOU CAN FIND MORE INFORMATION
Before you decide whether to invest in
our common stock, you should read this prospectus and the information we
otherwise file with the SEC. We are a reporting company and file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy these reports, proxy statements and other information
at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549
or at the SEC’s other public reference facilities. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the public reference
rooms. You can request copies of these documents by writing to the SEC and
paying a fee for the copying costs. Our SEC filings are also available at the
SEC’s website at http://www.sec.gov.
LEGAL
MATTERS
Legal matters in connection with the
validity of the shares offered by this prospectus will be passed upon by Dorsey
& Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated
financial statements as of December 31, 2009 included herein have been included
in reliance on the report of Baker Tilly Virchow Krause, LLP, an independent
registered public accounting firm, which is included herein and given on the
authority of said firm as experts in auditing and accounting.
We have
had no changes in our independent registered public accounting firm through the
date of this Offer Letter/Prospectus or during our preceding two fiscal years,
nor have we had any disagreements with our independent registered public
accounting firm on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure during such
time.
PROUROCARE
MEDICAL INC.
INDEX
TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following unaudited consolidated
financial statements and the notes thereto for the quarter ended March 31, 2010
and 2009 and the period from August 17, 2999 (inception) to March 31, 2010, and
the audited consolidated financial statements and the notes thereto for the
fiscal years ended December 31, 2009 and 2008 and the period from August 17,
1999 (inception) to December 31, 2009, have been excerpted from the Quarterly
Report of ProUroCare Medical Inc. on Form 10-Q for the quarter ended March 31,
2010, filed with the SEC on May 14, 2010, and the Annual Report of ProUroCare
Medical Inc. on Form 10-K for the year ended December 31, 2009, filed with the
SEC on March 31, 2010, respectively. Unless stated to the contrary or the
context otherwise requires, references to “we,” “us,” “our,” the “Company” and
“ProUroCare” within this section refer to ProUroCare Medical Inc.
Index
|
Unaudited Financial
Statements
:
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2010 and December 31, 2009
|
|
F-2
|
|
|
|
|
|
Consolidated
Statements of Operations for the three months ended March 31,
2010
|
|
|
|
and
2009 and the period from August 17, 1999 (inception) to March 31,
2010
|
|
F-3
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31,
2010
|
|
|
|
and
2009 and the period from August 17, 1999 (inception) to March 31,
2010
|
|
F-4
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
|
|
|
|
|
Audited Financial
Statements
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-12
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2009
|
|
F-13
|
|
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31,
2009
|
|
|
|
and
2008 and the period from August 17, 1999 (inception) to December 31,
2009
|
|
F-14
|
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity (Deficit) from August 17,
1999
|
|
|
|
(inception)
to December 31, 2009
|
|
F-15
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended March 31, 2009
and
|
|
|
|
2008
and the period from August 17, 1999 (inception) to December 31,
2009
|
|
F-23
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-26
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated Balance Sheets
|
|
|
March 31,
2010
(Unaudited)
|
|
|
December 31,
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
538,635
|
|
|
$
|
1,000,874
|
|
|
Other
current assets
|
|
|
128,946
|
|
|
|
58,200
|
|
|
Total
current assets
|
|
|
667,581
|
|
|
|
1,059,074
|
|
|
Equipment
and furniture, net
|
|
|
1,332
|
|
|
|
1,470
|
|
|
Debt
issuance costs, net
|
|
|
6,865
|
|
|
|
27,383
|
|
|
|
|
$
|
675,778
|
|
|
$
|
1,087,927
|
|
|
Liabilities
and Shareholders’ Deficit
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Notes
payable, bank
|
|
|
1,400,025
|
|
|
|
1,300,000
|
|
|
Notes
payable
|
|
|
300,000
|
|
|
|
624,865
|
|
|
Notes
payable - related party
|
|
|
243,000
|
|
|
|
—
|
|
|
Accounts
payable
|
|
|
830,315
|
|
|
|
985,560
|
|
|
Accrued
license and development fees
|
|
|
15,000
|
|
|
|
1,595,385
|
|
|
Accrued
expenses
|
|
|
231,676
|
|
|
|
269,230
|
|
|
Total
current liabilities
|
|
|
3,020,016
|
|
|
|
4,775,040
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies:
|
|
|
|
|
|
|
|
|
|
Long-term
note payable, bank
|
|
|
—
|
|
|
|
100,025
|
|
|
Long-term
note payable
|
|
|
—
|
|
|
|
300,000
|
|
|
Long-term
note payable - related party
|
|
|
—
|
|
|
|
243,000
|
|
|
Total
liabilities
|
|
|
3,020,016
|
|
|
|
5,418,065
|
|
|
Shareholders’
deficit:
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.00001 par. Authorized
|
|
|
|
|
|
|
|
|
|
50,000,000
shares; issued and outstanding
|
|
|
|
|
|
|
|
|
|
12,895,477
and 11,326,283 shares on March 31, 2010
|
|
|
|
|
|
|
|
|
|
and
December 31, 2009, respectively
|
|
|
129
|
|
|
|
113
|
|
|
Additional
paid-in capital
|
|
|
27,107,201
|
|
|
|
23,549,626
|
|
|
Deficit
accumulated during development stage
|
|
|
(29,451,568
|
)
|
|
|
(27,879,877
|
)
|
|
Total
shareholders’ deficit
|
|
|
(2,344,238
|
)
|
|
|
(4,330,138
|
)
|
|
|
|
$
|
675,778
|
|
|
$
|
1,087,927
|
|
See
accompanying notes to consolidated financial statements.
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
|
|
|
Three Months Ended
March 31
|
|
|
Period from
August 17,1999
(Inception) to
March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
84,154
|
|
|
$
|
100,000
|
|
|
$
|
7,779,051
|
|
|
General
and administrative
|
|
|
485,150
|
|
|
|
425,517
|
|
|
|
12,027,398
|
|
|
Total
operating expenses
|
|
|
569,304
|
|
|
|
525,517
|
|
|
|
19,806,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(569,304
|
)
|
|
|
(525,517
|
)
|
|
|
(19,806,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
for early warrant exercise
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,313,309
|
)
|
|
Incentive
for early warrant exercise - related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,555
|
)
|
|
Interest
income
|
|
|
1,295
|
|
|
|
21
|
|
|
|
19,748
|
|
|
Interest
expense
|
|
|
(68,228
|
)
|
|
|
(763,234
|
)
|
|
|
(4,792,183
|
)
|
|
Interest
expense - related parties
|
|
|
(20,028
|
)
|
|
|
(284,289
|
)
|
|
|
(1,679,251
|
)
|
|
Debt
extinguishment expense
|
|
|
(882,092
|
)
|
|
|
(45,940
|
)
|
|
|
(1,380,373
|
)
|
|
Debt
extinguishment expense - related parties
|
|
|
(33,334
|
)
|
|
|
(120,408
|
)
|
|
|
(456,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,571,691
|
)
|
|
$
|
(1,739,367
|
)
|
|
$
|
(29,451,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(14.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
11,617,324
|
|
|
|
8,072,096
|
|
|
|
2,093,391
|
|
See
accompanying notes to consolidated financial statements.
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
Three Months Ended
March 31
|
|
|
Period from August
17,
1999 (Inception)
to
|
|
|
|
|
2010
|
|
|
2009
|
|
|
March 31, 2010
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,571,691
|
)
|
|
$
|
(1,739,367
|
)
|
|
$
|
(29,451,568
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
138
|
|
|
|
16
|
|
|
|
21,121
|
|
|
Gain
on sale of furniture and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,200
|
)
|
|
Stock-based
compensation
|
|
|
68,585
|
|
|
|
148,706
|
|
|
|
2,313,805
|
|
|
Common
stock issued for services rendered
|
|
|
—
|
|
|
|
—
|
|
|
|
222,046
|
|
|
Common
stock issued to related parties for interest
|
|
|
—
|
|
|
|
—
|
|
|
|
1,322
|
|
|
Common
stock issued for debt guarantees
|
|
|
—
|
|
|
|
—
|
|
|
|
106,667
|
|
|
Common
stock issued for debt issuance cost
|
|
|
—
|
|
|
|
—
|
|
|
|
6,667
|
|
|
Common
stock issued for debt extinguishment
|
|
|
11,111
|
|
|
|
33,333
|
|
|
|
44,444
|
|
|
Units
issued for debt extinguishment
|
|
|
870,981
|
|
|
|
—
|
|
|
|
870,981
|
|
|
Notes
payable issued for intangibles expensed as research and
development
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
|
Warrants
issued for services
|
|
|
—
|
|
|
|
—
|
|
|
|
567,036
|
|
|
Warrants
issued for debt guarantees
|
|
|
—
|
|
|
|
—
|
|
|
|
355,197
|
|
|
Warrants
issued for debt extinguishment
|
|
|
—
|
|
|
|
607
|
|
|
|
360,007
|
|
|
Warrants
issued for debt extinguishment-related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
26,828
|
|
|
Warrants
issued for debt issuance cost
|
|
|
—
|
|
|
|
—
|
|
|
|
12,834
|
|
|
Warrants
issued for early warrant exercise incentive
|
|
|
—
|
|
|
|
—
|
|
|
|
1,356,864
|
|
|
Amortization
of note payable-original issue discount
|
|
|
—
|
|
|
|
—
|
|
|
|
152,247
|
|
|
Amortization
of note payable-related parties original issue discount
|
|
|
—
|
|
|
|
2,720
|
|
|
|
142,964
|
|
|
Amortization
of convertible debt-original issue discount
|
|
|
—
|
|
|
|
507,902
|
|
|
|
1,146,587
|
|
|
Amortization
of convertible debt-related parties original issue
discount
|
|
|
—
|
|
|
|
325,709
|
|
|
|
1,194,132
|
|
|
Amortization
of debt issuance costs
|
|
|
77,843
|
|
|
|
269,200
|
|
|
|
2,226,737
|
|
|
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
|
|
|
(70,746
|
)
|
|
|
7,778
|
|
|
|
(71,629
|
)
|
|
Accounts
payable
|
|
|
(155,245
|
)
|
|
|
(147,776
|
)
|
|
|
722,580
|
|
|
Accrued
development expense
|
|
|
(15,000
|
)
|
|
|
(827,835
|
)
|
|
|
2,080,385
|
|
|
Accrued
expenses
|
|
|
24,889
|
|
|
|
(174,957
|
)
|
|
|
876,326
|
|
|
Net
cash used in operating activities
|
|
|
(759,135
|
)
|
|
|
(1,593,964
|
)
|
|
|
(12,228,313
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment and furniture
|
|
|
—
|
|
|
|
(561
|
)
|
|
|
(22,453
|
)
|
|
Deposit
into a restricted cash account
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,214
|
)
|
|
Withdrawal
from a restricted cash account
|
|
|
—
|
|
|
|
—
|
|
|
|
44,214
|
|
|
Net
cash used in investing activities
|
|
|
—
|
|
|
|
(561
|
)
|
|
|
(22,453
|
)
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (continued)
(Unaudited)
|
|
|
Three Months Ended
March 31
|
|
|
Period from August
17, 1999 (Inception)
to
|
|
|
|
|
2010
|
|
|
2009
|
|
|
March
31,
2010
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
of note payable, bank
|
|
|
—
|
|
|
|
—
|
|
|
|
600,000
|
|
|
Payments
of note payable, bank
|
|
|
—
|
|
|
|
(400,000
|
)
|
|
|
(900,000
|
)
|
|
Proceeds
of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
340,500
|
|
|
Payments
of notes payable
|
|
|
(24,865
|
)
|
|
|
(73,642
|
)
|
|
|
(1,486,288
|
)
|
|
Proceeds
of notes payable - related parties
|
|
|
—
|
|
|
|
67,638
|
|
|
|
653,738
|
|
|
Payments
of notes payable - related parties
|
|
|
—
|
|
|
|
(34,000
|
)
|
|
|
(282,800
|
)
|
|
Proceeds
from long-term notes payable and bank debt
|
|
|
—
|
|
|
|
—
|
|
|
|
4,207,362
|
|
|
Proceeds
from long-term notes payable, related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
1,363,500
|
|
|
Payments
on long-term bank debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(600,000
|
)
|
|
Proceeds
from warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
104,500
|
|
|
Proceeds
from exercise of warrants
|
|
|
321,761
|
|
|
|
—
|
|
|
|
2,035,357
|
|
|
Payments
for debt issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(766,227
|
)
|
|
Payment
for rescission of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(100,000
|
)
|
|
Payments
for offering expenses
|
|
|
—
|
|
|
|
(363,662
|
)
|
|
|
(513,823
|
)
|
|
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
|
|
|
296,896
|
|
|
|
1,809,934
|
|
|
|
12,789,401
|
|
|
Net
increase (decrease) in cash
|
|
|
(462,239
|
)
|
|
|
215,409
|
|
|
|
538,635
|
|
|
Cash,
beginning of the period
|
|
|
1,000,874
|
|
|
|
48,114
|
|
|
|
—
|
|
|
Cash,
end of the period
|
|
$
|
538,635
|
|
|
$
|
263,523
|
|
|
$
|
538,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
21,269
|
|
|
$
|
53,550
|
|
|
$
|
860,321
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
offering costs included in accounts payable
|
|
|
—
|
|
|
|
(200,508
|
)
|
|
|
509,947
|
|
|
Deferred
offering costs included in accrued expenses
|
|
|
46,214
|
|
|
|
(70,000
|
)
|
|
|
46,214
|
|
|
Debt
issuance costs included in accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
114,156
|
|
|
Warrants
issued pursuant to notes payable
|
|
|
—
|
|
|
|
(3,327
|
)
|
|
|
467,191
|
|
|
Warrants
issued for debt issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
298,021
|
|
|
Prepaid
expenses financed by note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
246,871
|
|
|
Convertible
debt issued in lieu of cash for accrued expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
31,413
|
|
|
Common
stock issued in lieu of cash for accrued expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
259,053
|
|
|
Common
stock issued in lieu of cash for accrued development cost
|
|
|
1,565,385
|
|
|
|
500,000
|
|
|
|
2,065,385
|
|
|
Common
stock issued for debt issuance cost
|
|
|
—
|
|
|
|
66,667
|
|
|
|
301,230
|
|
|
Common
stock issued for accrued debt extinguishment
|
|
|
22,222
|
|
|
|
—
|
|
|
|
22,222
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (continued)
(Unaudited)
|
|
|
Three Months Ended
|
|
|
Period from August
|
|
|
|
|
March 31
|
|
|
17, 1999 (Inception) to
|
|
|
|
|
2010
|
|
|
2009
|
|
|
March
31,
2010
|
|
|
Warrants issued
in lieu of cash for accrued expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
1,250
|
|
|
Conversion
of notes payable, related parties into convertible
debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
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
|
|
|
—
|
|
|
|
1,638,750
|
|
|
|
1,638,750
|
|
|
Conversion
of convertible debt-related parties to units
|
|
|
—
|
|
|
|
1,323,334
|
|
|
|
1,323,334
|
|
|
Conversion
of convertible debt-related parties to common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
281,000
|
|
|
Conversion
of notes payable to units
|
|
|
600,000
|
|
|
|
—
|
|
|
|
600,000
|
|
|
Conversion
of accrued expenses to units
|
|
|
97,546
|
|
|
|
331,261
|
|
|
|
428,807
|
|
|
Note
payable-related party tendered for warrant exercise
|
|
|
—
|
|
|
|
—
|
|
|
|
26,000
|
|
|
Warrant
exercise cost paid in lieu of cash for services
rendered-related party
|
|
|
—
|
|
|
|
—
|
|
|
|
11,250
|
|
See accompanying notes to consolidated
financial statements.
ProUroCare
Medical Inc.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
March
31, 2010 and 2009 and the period from
August
17, 1999 (Inception) to March 31, 2010
(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 Company’s 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 Company’s shareholders approved a one-for-ten reverse
split of the Company’s common stock without a corresponding reduction in the
number of authorized shares of the Company’s capital stock (the “Reverse
Split”). The Reverse Split became effective on February 14, 2008. The exercise
price and the number of shares of common stock issuable under the Company's
outstanding convertible debentures, options and warrants were proportionately
adjusted to reflect the Reverse Split for all periods presented.
On
January 12, 2009, the Company closed a public offering of 3,050,000 units at
$1.00 per unit (the “2009 Public Offering”). Each unit sold (the “2009 Units”)
consisted of one share of common stock and one redeemable warrant to purchase
one share of common stock at an exercise price of $1.30 per share.
|
(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 months ended March 31, 2010 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010 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, 2009.
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 months ended March 31, 2010 and 2009 and the period from August 17,
1999 (Inception) to March 31, 2010 due to the Company’s net losses. 8,249,721
and 8,747,442 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 months ended March 31, 2010 and 2009, respectively.
|
|
(d)
|
Stock-Based
Compensation
|
The
Company’s policy is to grant stock options at fair value at the date of grant
and to record stock-based employee compensation expense at fair value. The
Company recognizes the expense related to the fair value of the award on a
straight-line basis over the vesting period. From time to time, the Company
issues options to consultants. The fair value of options issued to non-employees
(typically consultants) is measured on the earlier of the date the performance
is complete or the date the consultant is committed to perform. In the event
that the measurement date occurs after an interim reporting date, the options
are measured at their then-current fair value at each interim reporting date.
The fair value of options so determined is expensed on a straight-line basis
over the associated performance period.
The
Company uses the Black-Scholes 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 Company’s employee and consultant
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, the existing models may not necessarily provide
a reliable single measure of the fair value of the Company’s stock
options.
Stock-based
compensation expense related to stock options was $68,585, $148,706 and
$2,191,230 for the three months ended March 31, 2010 and 2009 and the period
from August 17, 1999 (Inception) to March 31, 2010, respectively, or $0.01,
$0.02 and $1.05 on a per share basis. The Company estimates the amount of future
stock-based compensation expense related to currently outstanding options to be
approximately $264,000, $45,000 and $5,000 for the years ending December 31,
2010, 2011 and 2012, respectively.
In
determining the compensation expense of the options granted during the three
months ended March 31, 2010 and 2009, the fair value of each option grant has
been estimated on the date of grant using the Black-Scholes pricing model and
the weighted-average assumptions used in these calculations are summarized as
follows:
|
|
|
Three Months Ended March 31
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Risk-free
Interest Rate
|
|
|
1.82
|
%
|
|
|
2.98
|
%
|
|
Expected
Life of Options Granted
|
|
4.02 years
|
|
|
3.85 years
|
|
|
Expected
Volatility
|
|
|
131.2
|
%
|
|
|
130.6
|
%
|
|
Expected
Dividend Yield
|
|
|
0
|
|
|
|
0
|
|
The
expected life of the options is determined using a simplified method, computed
as the average of the option vesting periods and the contractual term of the
option. For performance-based options that vest upon the occurrence
of an event, the Company uses an estimate of when the event will occur as the
vesting period used in the Black-Scholes calculation for each option
grant. Expected volatility is based on a simple average of weekly
price data since the date of the Merger. 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.
The
Company’s 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.
Excluding
warrants issued as a component of units issued upon the conversion of a loan
into equity securities (see Note 4), no warrants were granted during the three
months ended March 31, 2010. Excluding warrants issued as a component
of the units sold in the 2009 Public Offering, no warrants were granted during
the three months ended March 31, 2009. Stock-based consideration
related to warrants issued to non-employees for goods and services received was
$122,575 for the period from August 17, 1999 (Inception) to March 31, 2010 or
$0.06 on a per share basis.
The
Company’s loans have been made pursuant to loan arrangements or guarantees that
include the provision of compensation to the lenders or guarantors in the form
of Company common stock. The value of the common stock compensation
is recorded as debt issuance cost and amortized over the term of the
loans.
Debt
issuance costs are summarized as follows:
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
Debt
issuance costs, gross
|
|
$
|
227,654
|
|
|
$
|
203,662
|
|
|
Less
amortization
|
|
|
(220,789
|
)
|
|
|
(176,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs, net
|
|
$
|
6,865
|
|
|
$
|
27,383
|
|
Amortization
expense related to debt issuance costs was $77,843, $269,200 and $2,226,737 for
the three months ended March 31, 2010 and 2009 and the period from August 17,
1999 (Inception) to March 31, 2010, respectively.
The
Company has incurred operating losses, accumulated deficit and negative cash
flows from operations since inception. As of March 31, 2010, the Company had an
accumulated deficit of approximately $29,452,000. These factors, among others,
raise substantial doubt about the Company’s 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 the Company be unable to continue as a going
concern.
Note
2. Accrued Expenses.
Accrued
expenses are summarized as follows:
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
Accrued
interest payable in cash
|
|
$
|
58,371
|
|
|
$
|
137,340
|
|
|
Accrued
interest payable in common stock
|
|
|
47,906
|
|
|
|
20,014
|
|
|
Accrued
debt extinguishment payable in common stock
|
|
|
77,778
|
|
|
|
66,666
|
|
|
Accrued
audit fees
|
|
|
18,000
|
|
|
|
14,000
|
|
|
Accrued
directors’ fees
|
|
|
16,666
|
|
|
|
—
|
|
|
Uninvoiced
expenses
|
|
|
12,955
|
|
|
|
22,210
|
|
|
Other
|
|
|
—
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
231,676
|
|
|
$
|
269,230
|
|
Note
3. Notes Payable – Bank.
On March
26, 2010, the maturity dates of the Company’s $1.3 million of Crown Bank
promissory notes were extended to April 28, 2010 with no changes to other
existing note terms. On April 26, 2010, the maturity dates of the Crown Bank
loans were further extended to June 28, 2010, with principal reductions of
$50,000 due on each of April 28, 2010 and May 28, 2010.
Note
4. Notes Payable.
On March
26, 2010, the Company converted its $600,000 loan from an individual lender and
$97,546 of accrued interest thereon into 381,173 equity units, with each unit
consisting of one share of the Company’s common stock and one warrant to
purchase one share of Company’s common stock. The immediately exercisable
warrants had a three-year term, an exercise price of $1.83 per share and a
cashless exercise provision. The lender immediately elected to exercise the
warrants, and the Company issued 102,154 shares of stock to the lender pursuant
to the cashless exercise. The Company recognized debt extinguishment expense of
$870,981 during the three months ended March 31, 2010, representing the excess
fair value of the securities issued over the carrying value of the debt and
interest. Upon loan conversion to equity, the Company issued to the individual
lender 66,666 shares of common stock as consideration pursuant to the original
terms of the loan.
Note
5. Shareholders’ Equity.
Between
February 3, 2010 and March 2, 2010, holders of 249,970 warrants to purchase the
Company’s common stock exercised their warrants resulting in proceeds to the
Company of $321,761.
On March
15, 2010, the Company issued 769,231 shares of common stock to Artann
Laboratories Inc. (Artann) pursuant to a development agreement. The $1,565,385
value of the shares was recorded as research and development expense during the
year ended December 31, 2009.
On March
26, 2010, the Company converted its $600,000 loan from an individual lender and
$97,546 of accrued interest thereon into 381,173 shares of the Company’s common
stock and 381,173 warrants to purchase the Company’s common stock (see Note
4).
On March
1, 2010, the Company issued non-qualified options to purchase 10,374 shares of
the Company’s common stock to each of two directors upon their election to the
Board of Directors. The options were valued at $1.97 per share, and will vest
over a two-year period. The options are exercisable for a seven-year period at
$2.41 per share.
Note
6. Income Taxes.
The
Company applies the policy of classifying interest in interest expense and
penalties in general and administrative expense. The Company had recorded no
accrued interest or penalties.
The
Company had no significant unrecognized tax benefits as of March 31, 2010 and
December 31, 2009 and, likewise, no significant unrecognized tax benefits that,
if recognized, would affect the effective tax rate. The Company had no positions
for which it deemed that it is reasonably possible that the total amounts of the
unrecognized tax benefit will significantly increase or decrease. Any interest
or penalties are expensed as general and administrative expense as
incurred.
The
Company has generated net operating loss carryforwards of approximately $8.3
million which, if not used, will begin to expire in 2021. Federal and state tax
laws impose significant restrictions on the utilization of net operating loss
carryforwards in the event of a change in ownership of the Company that
constitutes an “ownership change,” as defined by Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”). The Company has analyzed its
equity ownership changes and believes that such an ownership change occurred
upon the completion of its 2009 public offering. The Company’s use of its net
operating loss carryforwards of approximately $5.3 million and built-in loss
incurred prior to the closing of the 2009 public offering will be limited as a
result of this change; however, the amount of limitation will not be known until
a full Section 382 study is completed.
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
The
Company considers its directors, executives and beneficial shareholders of more
than five percent of its common stock to be related parties. During the three
months ended March 31, 2010, the following significant transactions were made
between the Company and those parties that were related parties at the time of
each transaction:
Pursuant
to the guaranties received relating to the Company’s March 19, 2009 renewal of
its $1,200,000 Crown Bank promissory note, the Company accrued for issuance
33,333 shares of common stock during the three months ended March 31, 2010 as
consideration to each of James Davis and William Reiling, both five percent
shareholders at the time of the note renewal. The 66,666 shares accrued were
valued at $33,333 based on the fair market value on the date of the guarantees
received and recorded as debt extinguishment expense.
On March
1, 2010, the Company’s Board of Directors awarded $12,000 to director David
Koenig in recognition of his years of service as corporate secretary. In
addition, Mr. Koenig was engaged by the Board as a paid consultant to the
Company to assist management with corporate financing. In this role, Mr. Koenig
will be paid $4,000 per month for up to 12 months.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Shareholders, Audit Committee and Board of Directors
ProUroCare
Medical Inc.
Eden
Prairie, MN
We have
audited the accompanying consolidated balance sheets of ProUroCare Medical Inc.
(a development stage company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years then ended and the period from August 17, 1999 (inception)
to December 31, 2009. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of its internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ProUroCare Medical Inc. as
of December 31, 2009 and 2008 and the results of their operations and their cash
flows for the years then ended and the period from August 17, 1999 (inception)
to December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3
to the consolidated financial statements, the Company has recurring operating
losses, negative cash flows from operations and requires additional working
capital to support future operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Baker
Tilly Virchow Krause, LLP
Minneapolis,
Minnesota
March 31,
2010
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Balance Sheets
|
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,000,874
|
|
|
$
|
3,900
|
|
|
Restricted
cash
|
|
|
—
|
|
|
|
44,214
|
|
|
Other
current assets
|
|
|
58,200
|
|
|
|
31,634
|
|
|
Total
current assets
|
|
|
1,059,074
|
|
|
|
79,748
|
|
|
Equipment
and furniture, net
|
|
|
1,470
|
|
|
|
—
|
|
|
Deferred
offering expenses
|
|
|
—
|
|
|
|
729,924
|
|
|
Debt
issuance costs, net
|
|
|
27,383
|
|
|
|
266,882
|
|
|
|
|
$
|
1,087,927
|
|
|
$
|
1,076,554
|
|
|
Liabilities
and Shareholders’ Deficit
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Notes
payable, bank
|
|
|
1,300,000
|
|
|
|
1,600,000
|
|
|
Notes
payable
|
|
|
624,865
|
|
|
|
668,425
|
|
|
Convertible
debt, net of original issue discount
|
|
|
—
|
|
|
|
1,386,963
|
|
|
Convertible
debt related parties, net of original issue
discount
|
|
|
—
|
|
|
|
826,434
|
|
|
Accounts
payable
|
|
|
985,560
|
|
|
|
1,203,549
|
|
|
Accrued
license and development fees
|
|
|
1,595,385
|
|
|
|
1,327,835
|
|
|
Accrued
expenses
|
|
|
269,230
|
|
|
|
937,253
|
|
|
Total
current liabilities
|
|
|
4,775,040
|
|
|
|
7,950,459
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 8):
|
|
|
|
|
|
|
|
|
|
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
|
|
|
5,418,065
|
|
|
|
8,334,417
|
|
|
Shareholders’
deficit:
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.00001 par. Authorized 50,000,000 shares; issued and
outstanding 11,326,283 and 1,811,429 shares on December 31, 2009 and 2008,
respectively
|
|
|
113
|
|
|
|
18
|
|
|
Additional
paid-in capital
|
|
|
23,549,626
|
|
|
|
13,677,932
|
|
|
Deficit
accumulated during development stage
|
|
|
(27,879,877
|
)
|
|
|
(20,935,813
|
)
|
|
Total
shareholders’ deficit
|
|
|
(4,330,138
|
)
|
|
|
(7,257,863
|
)
|
|
|
|
$
|
1,087,927
|
|
|
$
|
1,076,554
|
|
See
accompanying notes to consolidated financial statements.
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
August 17,
|
|
|
|
|
|
|
|
|
|
|
1999
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
(inception) to
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
2,239,590
|
|
|
$
|
597,755
|
|
|
$
|
7,694,897
|
|
|
General
and administrative
|
|
|
1,711,075
|
|
|
|
2,026,677
|
|
|
|
11,542,248
|
|
|
Total
operating expenses
|
|
|
3,950,665
|
|
|
|
2,624,432
|
|
|
|
19,237,145
|
|
|
Operating
loss
|
|
|
(3,950,665
|
)
|
|
|
(2,624,432
|
)
|
|
|
(19,237,145
|
)
|
|
Incentive
for early warrant exercise
|
|
|
(1,313,309
|
)
|
|
|
—
|
|
|
|
(1,313,309
|
)
|
|
Incentive
for early warrant exercise - related parties
|
|
|
(43,555
|
)
|
|
|
—
|
|
|
|
(43,555
|
)
|
|
Interest
income
|
|
|
158
|
|
|
|
537
|
|
|
|
18,453
|
|
|
Interest
expense
|
|
|
(909,481
|
)
|
|
|
(1,001,551
|
)
|
|
|
(4,723,955
|
)
|
|
Interest
expense - related parties
|
|
|
(311,230
|
)
|
|
|
(908,486
|
)
|
|
|
(1,659,223
|
)
|
|
Debt
extinguishment expense
|
|
|
(68,162
|
)
|
|
|
(75,571
|
)
|
|
|
(498,281
|
)
|
|
Debt
extinguishment expense - related parties
|
|
|
(347,820
|
)
|
|
|
(48,214
|
)
|
|
|
(422,862
|
)
|
|
Net
loss
|
|
$
|
(6,944,064
|
)
|
|
$
|
(4,657,717
|
)
|
|
$
|
(27,879,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.73
|
)
|
|
$
|
(2.65
|
)
|
|
$
|
(14.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
9,574,914
|
|
|
|
1,759,607
|
|
|
|
1,867,169
|
|
See
accompanying notes to consolidated financial statements.
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
during the
|
|
|
Total
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
development
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stage
|
|
|
equity
(deficit)
|
|
|
Balance
at inception, August 17, 1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period from inception to December 31, 1999
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Balance,
December 31, 1999
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net
loss for the year ended December 31, 2000
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance,
December 31, 2000
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance
of common stock to founders at $33.33 per share on March 1,
2001
|
|
|
1.0
|
|
|
|
—
|
|
|
|
20
|
|
|
|
—
|
|
|
|
20
|
|
|
Cancellation
of founders’ shares, March 6, 2001
|
|
|
(1.0
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
|
Recapitalization
and transfer of common stock to Clinical Network, Inc. July 6,
2001
|
|
|
300,000
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Issuance
of common stock to CS Medical Technologies, LLC as consideration for
technology license agreement on July 6, 2001, valued at $1.58 per
share
|
|
|
300,000
|
|
|
|
3
|
|
|
|
474,997
|
|
|
|
—
|
|
|
|
475,000
|
|
|
Net
loss for the year ended December 31, 2001
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(612,533
|
)
|
|
|
(612,533
|
)
|
|
Balance,
December 31, 2001
|
|
|
600,000
|
|
|
|
6
|
|
|
|
474,994
|
|
|
|
(612,533
|
)
|
|
|
(137,533
|
)
|
|
Issuance
of common stock valued at $4.29 per share to Profile LLC for technology
license, January 14, 2002
|
|
|
400,000
|
|
|
|
4
|
|
|
|
1,713,596
|
|
|
|
—
|
|
|
|
1,713,600
|
|
|
Issuance
of common stock at $23.33 per share for services rendered, November 14,
2002
|
|
|
4,421
|
|
|
|
—
|
|
|
|
103,166
|
|
|
|
—
|
|
|
|
103,166
|
|
|
Issuance
of common stock for cash at $23.33 per share on November 22, 2002, net of
costs of $193,386
|
|
|
45,335
|
|
|
|
1
|
|
|
|
864,418
|
|
|
|
—
|
|
|
|
864,419
|
|
|
Options
to purchase 90,000 shares issued to officers and directors, valued at
$4.60 per share, granted March 19, 2002; portion vested in
2002
|
|
|
—
|
|
|
|
—
|
|
|
|
124,583
|
|
|
|
—
|
|
|
|
124,583
|
|
|
Options
to purchase 6,000 shares issued to consultants for services rendered,
valued at $4.60 per share, granted March 19, 2002; portion vested in
2002
|
|
|
—
|
|
|
|
—
|
|
|
|
18,400
|
|
|
|
—
|
|
|
|
18,400
|
|
|
Warrant
for 3,000 shares valued at $4.60 per share, issued to a director on April
19, 2002; portion vested in 2002
|
|
|
—
|
|
|
|
—
|
|
|
|
4,025
|
|
|
|
—
|
|
|
|
4,025
|
|
|
Warrant
for 150 shares valued at $3.33 per share issued for services rendered,
November 11, 2002
|
|
|
—
|
|
|
|
—
|
|
|
|
490
|
|
|
|
—
|
|
|
|
490
|
|
|
Net
loss for the year ended December 31, 2002
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,613,003
|
)
|
|
|
(3,613,003
|
)
|
|
Balance,
December 31, 2002
|
|
|
1,049,756
|
|
|
|
11
|
|
|
|
3,303,672
|
|
|
|
(4,225,536
|
)
|
|
|
(921,853
|
)
|
|
Stock
issued in lieu of cash for accounts payable, valued at $23.33 per share,
February 25, 2003
|
|
|
545
|
|
|
|
—
|
|
|
|
12,705
|
|
|
|
—
|
|
|
|
12,705
|
|
|
Warrants
for 19,286 shares valued at $3.00 per share, issued to bank line of credit
guarantors, March 1, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
57,858
|
|
|
|
—
|
|
|
|
57,858
|
|
|
Warrant
for 2,143 shares valued at $3.00 per share, issued to director as a bank
line of credit guarantor, March 1, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
6,429
|
|
|
|
—
|
|
|
|
6,429
|
|
|
Warrant
for 9,215 shares issued for services rendered, valued at $20.30 per share,
June 30, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
187,060
|
|
|
|
—
|
|
|
|
187,060
|
|
|
Warrants
for 22,501 shares valued at $3.60 per share, issued to bank line of credit
guarantors, August 5, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
81,003
|
|
|
|
—
|
|
|
|
81,003
|
|
|
Warrant
for 2,143 shares valued at $3.60 per share, issued to director as a bank
line of credit guarantor, August 5, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
7,714
|
|
|
|
—
|
|
|
|
7,714
|
|
|
Warrants
for 6,429 shares valued at $3.40 per share, issued to bank line of credit
guarantors, September 11, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
21,858
|
|
|
|
—
|
|
|
|
21,858
|
|
|
Warrant
for 11,789 shares valued at $3.50 per share, issued to bank line of credit
guarantor, December 22, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
41,250
|
|
|
|
—
|
|
|
|
41,250
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
during the
|
|
|
Total
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
development
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stage
|
|
|
equity
(deficit)
|
|
|
Options
to purchase 90,000 shares issued to officers and directors, valued at
$4.60 per share, granted March 19, 2002; portion vested in
2003
|
|
|
—
|
|
|
|
—
|
|
|
|
133,400
|
|
|
|
—
|
|
|
|
133,400
|
|
|
Options
to purchase 6,000 shares issued to consultants for services rendered,
valued at $4.60 per share, granted March 19, 2002; portion vested in
2003
|
|
|
—
|
|
|
|
—
|
|
|
|
6,900
|
|
|
|
—
|
|
|
|
6,900
|
|
|
Warrant
for 3,000 shares valued at $4.60 per share, issued to a director on April
19, 2002; portion vested in 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
6,900
|
|
|
|
—
|
|
|
|
6,900
|
|
|
Net
loss for the year ended December 31, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,632,457
|
)
|
|
|
(1,632,457
|
)
|
|
Balance,
December 31, 2003
|
|
|
1,050,301
|
|
|
|
11
|
|
|
|
3,866,749
|
|
|
|
(5,857,993
|
)
|
|
|
(1,991,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase 3,000 shares issued to a consultant valued at $6.70 per share,
granted February 1, 2004, portion vested in 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
10,100
|
|
|
|
—
|
|
|
|
10,100
|
|
|
Options
to purchase 45,000 shares issued to officer valued at $6.70 per share,
granted February 1, 2004; portion vested in 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
84,173
|
|
|
|
—
|
|
|
|
84,173
|
|
|
Repurchase
of 90,000 shares pursuant to the exercise of dissenters' rights at time of
merger, April 5, 2004 in connection with $750,000 note
payable
|
|
|
(90,000
|
)
|
|
|
(1
|
)
|
|
|
(749,999
|
)
|
|
|
—
|
|
|
|
(750,000
|
)
|
|
Issuance
of shares to shareholders of Global Internet Communications, Inc. pursuant
to merger April 5, 2004
|
|
|
209,700
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Issuance
of common stock for cash at $20.00 per share during 2004, net of costs of
$139,493
|
|
|
220,500
|
|
|
|
2
|
|
|
|
4,270,505
|
|
|
|
—
|
|
|
|
4,270,507
|
|
|
Cost
associated with Global Internet Communications, Inc. reverse merger
effective April 5, 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
(162,556
|
)
|
|
|
—
|
|
|
|
(162,556
|
)
|
|
Effect
of anti-dilution and price-protection provisions of warrants issued to
loan guarantors in 2003, triggered by April 5, 2004 closing of private
placement; shares subject to warrants increased by 37,501; exercise price
reduced from $23.33 to $16.67 per share (see Note 14(g))
|
|
|
—
|
|
|
|
—
|
|
|
|
320,974
|
|
|
|
—
|
|
|
|
320,974
|
|
|
Issuance
of common stock valued at $20.00 per share for accrued expenses in lieu of
cash, May 21, 2004
|
|
|
3,861
|
|
|
|
—
|
|
|
|
77,225
|
|
|
|
—
|
|
|
|
77,225
|
|
|
Warrants
for 10,000 shares issued for services rendered valued at $11.50 per share
on July 19, 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
114,914
|
|
|
|
—
|
|
|
|
114,914
|
|
|
Options
to purchase 20,000 shares issued to officer valued at $15.00 per share,
granted July 21, 2004; portion vested in 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
41,670
|
|
|
|
—
|
|
|
|
41,670
|
|
|
Issuance
of common stock valued at $20.00 per share for accrued interest in lieu of
cash, October 12, 2004
|
|
|
4,444
|
|
|
|
—
|
|
|
|
88,882
|
|
|
|
—
|
|
|
|
88,882
|
|
|
Warrants
for 20,000 shares issued for services rendered valued at $8.30 per share
on December 2, 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
166,172
|
|
|
|
—
|
|
|
|
166,172
|
|
|
Options
to purchase 90,000 shares issued to officers and directors, valued at
$4.60 per share, granted March 19, 2002; portion vested in
2004
|
|
|
—
|
|
|
|
—
|
|
|
|
82,452
|
|
|
|
—
|
|
|
|
82,452
|
|
|
Warrant
for 3,000 shares valued at $4.60 per share, issued to a director on April
19, 2002; portion vested in 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
1,150
|
|
|
|
—
|
|
|
|
1,150
|
|
|
Net
loss for the year ended December 31, 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,318,896
|
)
|
|
|
(2,318,896
|
)
|
|
Balance,
December 31, 2004
|
|
|
1,398,806
|
|
|
|
14
|
|
|
|
8,212,409
|
|
|
|
(8,176,889
|
)
|
|
|
35,534
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
during the
|
|
|
Total
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
development
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stage
|
|
|
equity
(deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase 90,000 shares issued to officers and directors, valued at
$4.60 per share, granted March 19, 2002; portion vested in
2005
|
|
|
—
|
|
|
|
—
|
|
|
|
5,734
|
|
|
|
—
|
|
|
|
5,734
|
|
|
Options
to purchase 45,000 shares issued to officer valued at $6.70 per share,
granted February 1, 2004; portion vested in 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
111,108
|
|
|
|
—
|
|
|
|
111,108
|
|
|
Options
to purchase 20,000 shares issued to officer valued at $15.00 per share,
granted July 21, 2004; portion vested in 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
100,008
|
|
|
|
—
|
|
|
|
100,008
|
|
|
Options
to purchase 15,000 shares issued to officer valued at $16.20 per share,
granted January 3, 2005; portion vested in 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
74,256
|
|
|
|
—
|
|
|
|
74,256
|
|
|
Options
to purchase 15,000 shares issued to officer valued at $6.70 per share,
granted September 6, 2005; portion vested in 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
6,625
|
|
|
|
—
|
|
|
|
6,625
|
|
|
Issuance
of common stock for services rendered at $10.20 per share on May 13,
2005
|
|
|
5,000
|
|
|
|
—
|
|
|
|
51,000
|
|
|
|
—
|
|
|
|
51,000
|
|
|
Issuance
of common stock for cash at $7.60 per share on June 15,
2005
|
|
|
6,579
|
|
|
|
—
|
|
|
|
50,001
|
|
|
|
—
|
|
|
|
50,001
|
|
|
Issuance
of common stock for deferred offering costs at $7.10 per share on
September 1, 2005
|
|
|
2,500
|
|
|
|
—
|
|
|
|
17,750
|
|
|
|
—
|
|
|
|
17,750
|
|
|
Issuance
of common stock in lieu of cash for accrued expenses at $8.90 per share on
December 31, 2005
|
|
|
4,541
|
|
|
|
—
|
|
|
|
40,418
|
|
|
|
—
|
|
|
|
40,418
|
|
|
Warrants
for 2,500 shares valued at $6.30 per share, issued to bank loan guarantor,
September 14, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
15,750
|
|
|
|
—
|
|
|
|
15,750
|
|
|
Warrants
for 2,500 shares valued at $5.30 per share, issued in connection with
notes payable on September 21, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
13,250
|
|
|
|
—
|
|
|
|
13,250
|
|
|
Warrants
for 20,000 shares valued at $4.80 per share, issued to bank loan
guarantors, October 19, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
106,000
|
|
|
|
—
|
|
|
|
106,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended December 31, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,028,056
|
)
|
|
|
(2,028,056
|
)
|
|
Balance,
December 31, 2005
|
|
|
1,417,426
|
|
|
|
14
|
|
|
|
8,804,309
|
|
|
|
(10,204,945
|
)
|
|
|
(1,400,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase 45,000 shares issued to officer valued at $6.70 per share,
granted February 1, 2004; portion vested in 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
101,008
|
|
|
|
—
|
|
|
|
101,008
|
|
|
Options
to purchase 20,000 shares issued to officer valued at $15.00 per share,
granted July 21, 2004; portion vested in 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
100,008
|
|
|
|
—
|
|
|
|
100,008
|
|
|
Options
to purchase 15,000 shares issued to officer valued at $16.20 per share,
granted January 3, 2005; portion vested in 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
81,006
|
|
|
|
—
|
|
|
|
81,006
|
|
|
Options
to purchase 15,000 shares issued to officer valued at $6.70 per share,
granted September 6, 2005; portion vested in 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
8,834
|
|
|
|
—
|
|
|
|
8,834
|
|
|
Options
to purchase 17,500 shares issued to officers and an employee valued at
$5.60 per share, granted March 1, 2006; portion vested in
2006
|
|
|
—
|
|
|
|
—
|
|
|
|
48,215
|
|
|
|
—
|
|
|
|
48,215
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
during the
|
|
|
Total
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
development
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stage
|
|
|
equity
(deficit)
|
|
|
Options
to purchase 3,000 shares issued to a director valued at $5.90 per share,
granted May 30, 2006; portion vested in 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
5,163
|
|
|
|
—
|
|
|
|
5,163
|
|
|
Original
issue discount on convertible debt issued on February 16,
2006
|
|
|
—
|
|
|
|
—
|
|
|
|
400,000
|
|
|
|
—
|
|
|
|
400,000
|
|
|
Warrants
for 5,000 shares valued at $4.60 per share, issued in connection with
notes payable on January 25, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
23,000
|
|
|
|
—
|
|
|
|
23,000
|
|
|
Issuance
of common stock for deferred offering costs at $9.10 per share on February
22, 2006
|
|
|
2,500
|
|
|
|
—
|
|
|
|
22,750
|
|
|
|
—
|
|
|
|
22,750
|
|
|
Original
issue discount on convertible debt issued on February 29,
2006
|
|
|
—
|
|
|
|
—
|
|
|
|
333,334
|
|
|
|
—
|
|
|
|
333,334
|
|
|
Issuance
of common stock for services rendered at $6.40 per share on April 21,
2006
|
|
|
7,000
|
|
|
|
—
|
|
|
|
44,800
|
|
|
|
—
|
|
|
|
44,800
|
|
|
Warrants
for 3,750 shares valued at $6.80 per share, issued in connection with
notes payable on June 1, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
25,500
|
|
|
|
—
|
|
|
|
25,500
|
|
|
Warrants
for 375 shares valued at $5.40 per share, issued in connection with notes
payable on July 21, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
2,025
|
|
|
|
—
|
|
|
|
2,025
|
|
|
Warrants
for 500 shares valued at $4.60 per share, issued in connection with notes
payable on August 30, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
2,300
|
|
|
|
—
|
|
|
|
2,300
|
|
|
Issuance
of common stock for cash at $4.30 per share on September 7,
2006
|
|
|
11,628
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
Issuance
of common stock for services rendered at $6.30 per share on September 8,
2006
|
|
|
1,415
|
|
|
|
—
|
|
|
|
8,938
|
|
|
|
—
|
|
|
|
8,938
|
|
|
Warrants
for 5,000 shares valued at $4.50 per share, issued in connection with
notes payable on November 30, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
22,500
|
|
|
|
—
|
|
|
|
22,500
|
|
|
Warrants
for 5,171 shares valued at $5.40 per share, accrued for issuance in
connection with a note payable as of December 31, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
27,922
|
|
|
|
—
|
|
|
|
27,922
|
|
|
Net
loss for the year ended December 31, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,959,853
|
)
|
|
|
(2,959,853
|
)
|
|
Balance,
December 31, 2006
|
|
|
1,439,969
|
|
|
|
14
|
|
|
|
10,111,612
|
|
|
|
(13,164,798
|
)
|
|
|
(3,053,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase 45,000 shares issued to officer valued at $6.70 per share,
granted February 1, 2004; portion vested in 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
16,811
|
|
|
|
—
|
|
|
|
16,811
|
|
|
Options
to purchase 20,000 shares issued to officer valued at $15.00 per share,
granted July 21, 2004; portion vested in 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
58,314
|
|
|
|
—
|
|
|
|
58,314
|
|
|
Warrants
for 5,000 shares valued at $4.50 per share, issued in connection with debt
extinguishment on January 3, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
22,500
|
|
|
|
—
|
|
|
|
22,500
|
|
|
Options
to purchase 15,000 shares issued to officer valued at $16.20 per share,
granted January 3, 2005; portion vested in 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
81,007
|
|
|
|
—
|
|
|
|
81,007
|
|
|
Options
to purchase 17,500 shares issued to officers and an employee valued at
$5.60 per share, granted March 1, 2006; portion vested in
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
33,245
|
|
|
|
—
|
|
|
|
33,245
|
|
|
Issuance
of investment units consisting of common stock and warrants for 62,500
shares issued for cash at $4.00 per share on January 18, January 23,
February 28 and May 1, 2007, net of costs of $52,388
|
|
|
125,000
|
|
|
|
2
|
|
|
|
447,610
|
|
|
|
—
|
|
|
|
447,612
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
during the
|
|
|
Total
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
development
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stage
|
|
|
equity
(deficit)
|
|
|
Options
to purchase 20,000 shares issued to officer valued at $3.40 per share,
granted February 1, 2007; portion vested in 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
32,857
|
|
|
|
—
|
|
|
|
32,857
|
|
|
Warrants
for 5,000 shares valued at $3.60 per share, issued in connection with debt
extinguishment on February 1, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
18,000
|
|
|
|
—
|
|
|
|
18,000
|
|
|
Issuance
of common stock in lieu of cash for a loan from a director at $4.10 per
share on February 9, 2007
|
|
|
1,707
|
|
|
|
—
|
|
|
|
7,000
|
|
|
|
—
|
|
|
|
7,000
|
|
|
Modification
of warrant term of warrant to purchase 30,000 shares pursuant to
separation agreement of employee dated March 15, 2007, valued at $3.20 per
share
|
|
|
—
|
|
|
|
—
|
|
|
|
96,000
|
|
|
|
—
|
|
|
|
96,000
|
|
|
Issuance
of common stock in lieu of cash for accrued expenses at $4.00 per share on
March 21, 2007
|
|
|
12,478
|
|
|
|
—
|
|
|
|
49,911
|
|
|
|
—
|
|
|
|
49,911
|
|
|
Warrants
for 6,240 shares issued pursuant to amendment of convertible debt valued
at $4.30 per share on March 21, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
26,829
|
|
|
|
—
|
|
|
|
26,829
|
|
|
Issuance
of common stock for accounts payable $5.00 per share on April 2,
2007
|
|
|
4,141
|
|
|
|
—
|
|
|
|
20,704
|
|
|
|
—
|
|
|
|
20,704
|
|
|
Warrants
for 20,000 shares issued for services rendered valued at $3.60 per share
on April 16, 2007
|
|
|
|
|
|
|
|
|
|
|
72,000
|
|
|
|
—
|
|
|
|
72,000
|
|
|
Modification
of option term to purchase 45,000 shares pursuant to separation agreement
of officer dated May 11, 2007, valued at $2.30 per share
|
|
|
—
|
|
|
|
—
|
|
|
|
103,500
|
|
|
|
—
|
|
|
|
103,500
|
|
|
Modification
of option term to purchase 45,000 shares pursuant to separation agreement
of officer dated May 11, 2007, valued at $2.60 per share
|
|
|
—
|
|
|
|
—
|
|
|
|
117,000
|
|
|
|
—
|
|
|
|
117,000
|
|
|
Options
to purchase 3,000 shares issued to a director valued at $5.90 per share,
granted May 30, 2006; portion vested in 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
8,850
|
|
|
|
—
|
|
|
|
8,850
|
|
|
Options
to purchase 3,000 shares issued to a director valued at $2.40 per share,
granted June 14, 2007; portion vested in 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
1,800
|
|
|
|
—
|
|
|
|
1,800
|
|
|
Issuance
of common stock in lieu of cash for director's fees at $3.00 per share on
September 10, 2007
|
|
|
20,694
|
|
|
|
—
|
|
|
|
62,082
|
|
|
|
—
|
|
|
|
62,082
|
|
|
Issuance
of common stock in lieu of cash for loans from directors at $3.00 per
share on September 10, 2007
|
|
|
1,100
|
|
|
|
—
|
|
|
|
3,300
|
|
|
|
—
|
|
|
|
3,300
|
|
|
Issuance
of common stock as debt issuance cost at $2.00 per share on November 7,
2007
|
|
|
33,333
|
|
|
|
—
|
|
|
|
66,666
|
|
|
|
—
|
|
|
|
66,666
|
|
|
Warrants
for 6,050 shares valued at $2.80 per share, issued in connection with
notes payable on December 27, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
16,940
|
|
|
|
—
|
|
|
|
16,940
|
|
|
Warrants
for 5,800 shares valued at $1.70 per share, issued in connection with
notes payable on December 27, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
9,860
|
|
|
|
—
|
|
|
|
9,860
|
|
|
Warrants
for 700 shares valued at $2.20 per share, issued in connection with notes
payable on December 27, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
1,540
|
|
|
|
—
|
|
|
|
1,540
|
|
|
Original
issue discount on convertible debt issued on December 27,
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
595,666
|
|
|
|
—
|
|
|
|
595,666
|
|
|
Original
issue discount attributable to warrants for 240,000 shares issued on
December 27, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
88,576
|
|
|
|
—
|
|
|
|
88,576
|
|
|
Issuance
of common stock as compensation for loan guarantees at $1.00 per share on
December 28, 2007
|
|
|
88,889
|
|
|
|
1
|
|
|
|
88,888
|
|
|
|
—
|
|
|
|
88,889
|
|
|
Warrants
for 15,400 shares valued at $4.00 per share, accrued for issuance in
addition to interest on a note payable as of December 31,
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
61,600
|
|
|
|
—
|
|
|
|
61,600
|
|
|
Warrants
for 51,010 shares valued at $3.60 per share, accrued for issuance in
connection with debt extinguishment as of December 31,
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
183,637
|
|
|
|
—
|
|
|
|
183,637
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
during the
|
|
|
Total
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
development
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stage
|
|
|
equity
(deficit)
|
|
|
Warrants
for 15,221 shares valued at $5.40 per share, accrued for issuance in
connection with debt extinguishment as of December 31,
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
82,191
|
|
|
|
—
|
|
|
|
82,191
|
|
|
Net
loss for the year ended December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,113,298
|
)
|
|
|
(3,113,298
|
)
|
|
Balance,
December 31, 2007
|
|
|
1,727,311
|
|
|
|
17
|
|
|
|
12,586,496
|
|
|
|
(16,278,096
|
)
|
|
|
(3,691,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
issue discount on convertible debt issued between Jan 4, 2008 and July 30,
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
350,873
|
|
|
|
—
|
|
|
|
350,873
|
|
|
Warrants
for 160,000 shares valued at $0.47 to $1.10 per share issued in connection
with convertible debt between Jan 4, 2008 and July 30,
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
65,160
|
|
|
|
—
|
|
|
|
65,160
|
|
|
Warrants
for 14,500 shares valued at $1.00 per share issued to former employee
pursuant to a termination agreement on January 4, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
14,500
|
|
|
|
—
|
|
|
|
14,500
|
|
|
Warrants
for 52,357 shares valued at $3.60 per share, connection with debt
extinguishment on January 16, 2008; portion expensed in
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
4,848
|
|
|
|
—
|
|
|
|
4,848
|
|
|
Rounding
of common stock due to reverse stock split on February 14,
2008
|
|
|
39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Warrants
for 75,000 shares valued at $0.92 per share, issued in connection with
notes payable on April 3, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
42,768
|
|
|
|
—
|
|
|
|
42,768
|
|
|
Options
to purchase 20,000 shares issued to officers valued at $0.79 per share,
granted July 11, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
15,800
|
|
|
|
—
|
|
|
|
15,800
|
|
|
Cancellation
of an officer's options to purchase 20,000 shares valued at $0.27 per
share on July 11, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,400
|
)
|
|
|
—
|
|
|
|
(5,400
|
)
|
|
Cancellation
of an officer's options to purchase 15,000 shares valued at $0.31 per
share on July 11, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,650
|
)
|
|
|
—
|
|
|
|
(4,650
|
)
|
|
Options
to purchase 3,000 shares issued to directors valued at $0.71 per share,
granted July 11, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
2,130
|
|
|
|
—
|
|
|
|
2,130
|
|
|
Issuance
of common stock valued at $1.00 per share in lieu of cash for directors'
fees on July 11, 2008
|
|
|
59,634
|
|
|
|
1
|
|
|
|
59,633
|
|
|
|
—
|
|
|
|
59,634
|
|
|
Extension
of note payable modified with a conversion feature added and recorded as
debt extinguishment on September 12, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
48,214
|
|
|
|
—
|
|
|
|
48,214
|
|
|
Original
issue discount on convertible debt issued between September 16, 2008 and
December 11, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
145,743
|
|
|
|
—
|
|
|
|
145,743
|
|
|
Warrants
for 95,500 shares valued at $0.89 to $1.31 per share issued in connection
with convertible debt between September 16, 2008 and December 11,
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
75,819
|
|
|
|
—
|
|
|
|
75,819
|
|
|
Original
issue discount attributable to warrants for 100,000 shares valued at $0.47
per share, issued on September 25, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
46,604
|
|
|
|
—
|
|
|
|
46,604
|
|
|
Warrants
for 31,817 shares valued at $5.40 per share, issued on September 30, 2008
in connection with debt extinguishment expensed and accrued from previous
years; portion expensed in 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
61,700
|
|
|
|
—
|
|
|
|
61,700
|
|
|
Warrants
for 3,000 shares valued at $1.32 per share, issued in connection with debt
extinguishment on October 24, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
3,960
|
|
|
|
—
|
|
|
|
3,960
|
|
|
Issuance
of common stock as compensation for loan guarantees at $1.00 per share on
October 31, 2008
|
|
|
17,778
|
|
|
|
—
|
|
|
|
17,778
|
|
|
|
—
|
|
|
|
17,778
|
|
|
Warrants
for 44,445 shares valued at $0.77 per share issued as compensation for
loan guarantees on October 31, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
34,223
|
|
|
|
—
|
|
|
|
34,223
|
|
|
Issuance
of common stock valued at $1.00 per share for debt issuance cost on
October 31, 2008
|
|
|
6,667
|
|
|
|
—
|
|
|
|
6,667
|
|
|
|
—
|
|
|
|
6,667
|
|
|
Warrants
for 16,667 shares valued at $0.77 per share issued as debt issuance costs
on October 31, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
12,834
|
|
|
|
—
|
|
|
|
12,834
|
|
|
Warrants
for 3,836 shares valued at $1.32 per share, accrued for issuance in
connection with debt extinguishment as of December 31,
2006
|
|
|
—
|
|
|
|
—
|
|
|
|
5,063
|
|
|
|
—
|
|
|
|
5,063
|
|
|
Options
to purchase 17,500 shares issued to officers and an employee valued at
$5.60 per share, granted March 1, 2006; portion vested in
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
9,663
|
|
|
|
—
|
|
|
|
9,663
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
during the
|
|
|
Total
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
development
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stage
|
|
|
equity
(deficit)
|
|
|
Options
to purchase 3,000 shares issued to a director valued at $5.90 per share,
granted May 30, 2006; portion vested in 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
3,687
|
|
|
|
—
|
|
|
|
3,687
|
|
|
Options
to purchase 3,000 shares issued to a director valued at $2.40 per share,
granted June 14, 2007; portion vested in 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
3,600
|
|
|
|
—
|
|
|
|
3,600
|
|
|
Options
to purchase 5,000 shares issued to officer valued at $3.40 per share,
granted February 1, 2007; portion vested in 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
8,869
|
|
|
|
—
|
|
|
|
8,869
|
|
|
Options
to purchase 15,000 shares issued to officer valued at $16.20 per share,
granted January 3, 2005; portion vested in 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
6,731
|
|
|
|
—
|
|
|
|
6,731
|
|
|
Options
to purchase 85,000 shares issued to officers valued at $0.85 per share,
granted July 11, 2008; portion expensed in 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
12,042
|
|
|
|
—
|
|
|
|
12,042
|
|
|
Reversal
of expense associated with performance-based option of an officer that did
not vest
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,727
|
)
|
|
|
—
|
|
|
|
(7,727
|
)
|
|
Warrants
for 12,576 shares valued at $4.00 per share, accrued for issuance in
addition to interest on a note payable; portion expensed in
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
50,304
|
|
|
|
—
|
|
|
|
50,304
|
|
|
Net
loss for the year ended December 31, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,657,717
|
)
|
|
|
(4,657,717
|
)
|
|
Balance,
December 31, 2008
|
|
|
1,811,429
|
|
|
|
18
|
|
|
|
13,677,932
|
|
|
|
(20,935,813
|
)
|
|
|
(7,257,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in conversion of convertible debt at $0.70 per share upon
the January 7, 2009 effective date of the 2009 Public
Offering
|
|
|
2,743,535
|
|
|
|
28
|
|
|
|
1,920,446
|
|
|
|
—
|
|
|
|
1,920,474
|
|
|
Issuance
of common stock in conversion of convertible debt at $0.50 per share upon
the January 7, 2009 effective date of the 2009 Public
Offering
|
|
|
314,846
|
|
|
|
3
|
|
|
|
157,405
|
|
|
|
—
|
|
|
|
157,408
|
|
|
Adjustment
to original issue discount on 2007 and 2008 prive placement debt offerings
based on final 2009 Public Offering closing price
|
|
|
—
|
|
|
|
—
|
|
|
|
47,046
|
|
|
|
—
|
|
|
|
47,046
|
|
|
Issuance
of common stock pursuant to the January 12, 2009 closing of the 2009
Public Offering at $1.00 per share net of closing costs of
$1,259,558
|
|
|
3,050,000
|
|
|
|
31
|
|
|
|
1,790,441
|
|
|
|
—
|
|
|
|
1,790,472
|
|
|
Underwriter's
warrants to acquire 305,000 Units issued upon close of 2009 Public
Offering
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
|
Issuance
of common stock in conversion of convertible debt at $3.00 per share upon
the January 12, 2009 closing date of the 2009 Public
Offering
|
|
|
292,384
|
|
|
|
3
|
|
|
|
877,146
|
|
|
|
—
|
|
|
|
877,149
|
|
|
Warrants
for 459 shares valued at $1.32 per share, issued on January 13, 2009 in
addition to interest on a note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
607
|
|
|
|
—
|
|
|
|
607
|
|
|
Issuance
of common stock valued at $1.10 per share for contracted development costs
on January 15, 2009
|
|
|
454,546
|
|
|
|
5
|
|
|
|
499,995
|
|
|
|
|
|
|
|
500,000
|
|
|
Issuance
of common stock in conversion of convertible debt at $0.70 per share on
January 20, 2009
|
|
|
42,143
|
|
|
|
—
|
|
|
|
29,500
|
|
|
|
—
|
|
|
|
29,500
|
|
|
Warrants
for 680 shares valued at $4.00 per share, issued on January 20, 2009 in
addition to interest on a note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
2,720
|
|
|
|
—
|
|
|
|
2,720
|
|
|
Issuance
of common stock in conversion of convertible debt at $0.70 per share on
February 6, 2009
|
|
|
441,165
|
|
|
|
4
|
|
|
|
308,809
|
|
|
|
—
|
|
|
|
308,813
|
|
|
Adjustment
to original issue discount on convertible debt issued in put offering
based on final conversion price
|
|
|
—
|
|
|
|
—
|
|
|
|
81,059
|
|
|
|
—
|
|
|
|
81,059
|
|
|
Issuance
of common stock to guarantors of bank debt and a lender on March 19, 2009,
valued at $0.50 per share
|
|
|
200,001
|
|
|
|
2
|
|
|
|
99,998
|
|
|
|
—
|
|
|
|
100,000
|
|
|
To
record original issue discount on debt upon retirement of related note
payable
|
|
|
—
|
|
|
|
—
|
|
|
|
103,396
|
|
|
|
—
|
|
|
|
103,396
|
|
|
Original
issue discount on convertible debt issued March 19, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
123,000
|
|
|
|
—
|
|
|
|
123,000
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Shareholders’ Equity (Deficit) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
during the
|
|
|
Total
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
development
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stage
|
|
|
equity
(deficit)
|
|
|
Issuance
of common stock valued at $0.74 per share in lieu of cash for directors'
fees on April 3, 2009
|
|
|
27,366
|
|
|
|
—
|
|
|
|
20,251
|
|
|
|
—
|
|
|
|
20,251
|
|
|
Issuance
of common stock in conversion of convertible debt at $0.55 per share on
May 26, 2009
|
|
|
510,909
|
|
|
|
5
|
|
|
|
280,995
|
|
|
|
—
|
|
|
|
281,000
|
|
|
Issuance
of common stock to guarantor of bank debt on June 16, 2009, valued at
$0.82 per share
|
|
|
6,667
|
|
|
|
—
|
|
|
|
5,467
|
|
|
|
—
|
|
|
|
5,467
|
|
|
Issuance
of common stock as consideration to lender on September 21, 2009, valued
at $1.43 per share
|
|
|
19,833
|
|
|
|
—
|
|
|
|
28,262
|
|
|
|
—
|
|
|
|
28,262
|
|
|
Issuance
of common stock as consideration to lender on September 23, 2009, valued
at $1.35 per share
|
|
|
20,000
|
|
|
|
—
|
|
|
|
27,000
|
|
|
|
—
|
|
|
|
27,000
|
|
|
Issuance
of common stock to guarantor of bank debt on September 23, 2009, valued at
$1.35 per share
|
|
|
6,667
|
|
|
|
—
|
|
|
|
9,000
|
|
|
|
—
|
|
|
|
9,000
|
|
|
Issuance
of common stock valued at $1.50 per share in lieu of cash for directors'
fees on September 29, 2009
|
|
|
4,834
|
|
|
|
—
|
|
|
|
7,250
|
|
|
|
—
|
|
|
|
7,250
|
|
|
Warrants
for 30,000 shares valued at $0.88 per share, issued on September 30, 2009
for services rendered
|
|
|
—
|
|
|
|
—
|
|
|
|
26,400
|
|
|
|
—
|
|
|
|
26,400
|
|
|
Issuance
of common stock pursuant to closing of early warrant exercise offering on
November 6, 2009, net of offering expenses of $171,865; $1.30 per share
exercise price
|
|
|
1,244,829
|
|
|
|
13
|
|
|
|
1,446,400
|
|
|
|
—
|
|
|
|
1,446,413
|
|
|
Issuance
of replacement warrants pursuant to closing of early warrant exercise
offering
|
|
|
—
|
|
|
|
—
|
|
|
|
1,356,864
|
|
|
|
—
|
|
|
|
1,356,864
|
|
|
Issuance
of common stock valued at $1.43 per share for interest on note payableon
November 6, 2009
|
|
|
925
|
|
|
|
—
|
|
|
|
1,322
|
|
|
|
—
|
|
|
|
1,322
|
|
|
Issuance
of common stock pursuant to options exercised during November,
2009
|
|
|
22,229
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance
of common stock pursuant to warrants exercised during December,
2009
|
|
|
101,975
|
|
|
|
1
|
|
|
|
132,567
|
|
|
|
—
|
|
|
|
132,568
|
|
|
Issuance
of common stock valued at $0.74 per share on December 3, 2009 for services
rendered
|
|
|
10,000
|
|
|
|
—
|
|
|
|
7,425
|
|
|
|
—
|
|
|
|
7,425
|
|
|
Options
to purchase 3,000 shares issued to a director valued at $2.40 per share,
granted June 14, 2007; portion vested in 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
1,800
|
|
|
|
—
|
|
|
|
1,800
|
|
|
Options
to purchase 17,500 shares issued to officers and an employee valued at
$5.60 per share, granted March 1, 2006; portion vested in
2009
|
|
|
—
|
|
|
|
—
|
|
|
|
2,823
|
|
|
|
—
|
|
|
|
2,823
|
|
|
Options
to purchase 85,000 shares issued to officers valued at $0.85 per share,
granted July 11, 2008; portion expensed in 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
24,083
|
|
|
|
—
|
|
|
|
24,083
|
|
|
Options
to purchase 215,000 shares issued to officers and directors, valued at
$0.68 per share, granted March 3, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
146,400
|
|
|
|
—
|
|
|
|
146,400
|
|
|
Options
to purchase 6,500 shares issued to a consultant valued at $0.87 per share,
granted July 23, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
5,655
|
|
|
|
—
|
|
|
|
5,655
|
|
|
Options
to purchase 100,000 shares issued to a consultant granted July 23, 2009;
50,000 shares valued at $0.97 per share, 50,000 shares valued at $2.14 per
share in 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
64,792
|
|
|
|
—
|
|
|
|
64,792
|
|
|
Options
to purchase 3,000 shares issued to directors valued at $1.00 per share,
granted August 11, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
3,000
|
|
|
Options
to purchase 320,000 shares issued to officers and directors, valued at
$1.21 per share, granted September 29, 2009; portion vested in
2009
|
|
|
—
|
|
|
|
—
|
|
|
|
232,320
|
|
|
|
—
|
|
|
|
232,320
|
|
|
Net
loss for the year ended December 31, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,944,064
|
)
|
|
|
(6,944,064
|
)
|
|
Balance,
December 31, 2009
|
|
|
11,326,283
|
|
|
$
|
113
|
|
|
$
|
23,549,626
|
|
|
$
|
(27,879,877
|
)
|
|
$
|
(4,330,138
|
)
|
(A
Development Stage Company)
Consolidated
Statements of Cash Flows
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Period from August
17, 1999 (inception) to
|
|
|
|
|
2009
|
|
|
2008
|
|
|
December
31,
2009
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,944,064
|
)
|
|
$
|
(4,657,717
|
)
|
|
$
|
(27,879,877
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
186
|
|
|
|
605
|
|
|
|
20,983
|
|
|
Gain
on sale of furniture and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,200
|
)
|
|
Stock-based
compensation
|
|
|
480,873
|
|
|
|
59,245
|
|
|
|
2,245,220
|
|
|
Common
stock issued for services rendered
|
|
|
14,675
|
|
|
|
50,467
|
|
|
|
222,046
|
|
|
Common
stock issued to related parties for interest
|
|
|
1,322
|
|
|
|
—
|
|
|
|
1,322
|
|
|
Common
stock issued for debt guarantees
|
|
|
—
|
|
|
|
17,778
|
|
|
|
106,667
|
|
|
Common
stock issued for debt issuance cost
|
|
|
—
|
|
|
|
6,667
|
|
|
|
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
|
|
|
—
|
|
|
|
34,223
|
|
|
|
355,197
|
|
|
Warrants
issued for debt extinguishment
|
|
|
607
|
|
|
|
75,571
|
|
|
|
360,007
|
|
|
Warrants
issued for debt extinguishment-related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
26,828
|
|
|
Warrants
issued for debt issuance cost
|
|
|
—
|
|
|
|
12,834
|
|
|
|
12,834
|
|
|
Warrants
issued for early warrant exercise incentive
|
|
|
1,356,864
|
|
|
|
—
|
|
|
|
1,356,864
|
|
|
Amortization
of note payable-original issue discount
|
|
|
—
|
|
|
|
—
|
|
|
|
152,247
|
|
|
Amortization
of note payable-related parties original issue discount
|
|
|
2,720
|
|
|
|
50,304
|
|
|
|
142,964
|
|
|
Amortization
of convertible debt-original issue discount
|
|
|
507,902
|
|
|
|
428,430
|
|
|
|
1,146,587
|
|
|
Amortization
of convertible debt-related parties original issue
discount
|
|
|
444,328
|
|
|
|
505,217
|
|
|
|
1,194,132
|
|
|
Amortization
of debt issuance costs
|
|
|
443,161
|
|
|
|
421,564
|
|
|
|
2,148,894
|
|
|
Bargain
conversion option added to note payable-related parties for debt
extinguishment
|
|
|
—
|
|
|
|
48,214
|
|
|
|
48,214
|
|
|
Write-off
debt issuance cost for debt extinguishment
|
|
|
—
|
|
|
|
—
|
|
|
|
42,797
|
|
|
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
|
|
|
54,779
|
|
|
|
44,603
|
|
|
|
(883
|
)
|
|
Accounts
payable
|
|
|
(52,009
|
)
|
|
|
199,379
|
|
|
|
877,825
|
|
|
Accrued
development expense
|
|
|
767,550
|
|
|
|
1,327,835
|
|
|
|
2,095,385
|
|
|
Accrued
expenses
|
|
|
(288,359
|
)
|
|
|
129,808
|
|
|
|
851,437
|
|
|
Net
cash used in operating activities
|
|
|
(3,149,732
|
)
|
|
|
(1,094,973
|
)
|
|
|
(11,469,178
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment and furniture
|
|
|
(1,656
|
)
|
|
|
—
|
|
|
|
(22,453
|
)
|
|
Deposit
into a restricted cash account
|
|
|
—
|
|
|
|
(214
|
)
|
|
|
(44,214
|
)
|
|
Withdrawal
from a restricted cash account
|
|
|
44,214
|
|
|
|
—
|
|
|
|
44,214
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
42,558
|
|
|
|
(214
|
)
|
|
|
(22,453
|
)
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (Continued)
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Period from August
17, 1999 (inception) to
|
|
|
|
|
2009
|
|
|
2008
|
|
|
December
31,
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
|
|
|
(90,905
|
)
|
|
|
(333,222
|
)
|
|
|
(1,461,423
|
)
|
|
Proceeds
of notes payable - related parties
|
|
|
93,638
|
|
|
|
112,500
|
|
|
|
653,738
|
|
|
Payments
of notes payable - related parties
|
|
|
(79,500
|
)
|
|
|
(76,450
|
)
|
|
|
(282,800
|
)
|
|
Proceeds
from long-term notes payable and bank debt
|
|
|
400,025
|
|
|
|
923,337
|
|
|
|
4,207,362
|
|
|
Proceeds
from long-term notes payable, related parties
|
|
|
243,000
|
|
|
|
254,500
|
|
|
|
1,363,500
|
|
|
Payments
on long-term bank debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(600,000
|
)
|
|
Proceeds
from warrants
|
|
|
—
|
|
|
|
54,500
|
|
|
|
104,500
|
|
|
Proceeds
from exercise of warrants
|
|
|
1,713,596
|
|
|
|
—
|
|
|
|
1,713,596
|
|
|
Payments
for debt issuance costs
|
|
|
(92,790
|
)
|
|
|
(148,211
|
)
|
|
|
(766,227
|
)
|
|
Payment
for rescission of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(100,000
|
)
|
|
Payments
for offering expenses
|
|
|
(396,516
|
)
|
|
|
(88,480
|
)
|
|
|
(513,823
|
)
|
|
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
|
|
|
4,104,148
|
|
|
|
698,474
|
|
|
|
12,492,505
|
|
|
Net
increase (decrease) in cash
|
|
|
996,974
|
|
|
|
(396,713
|
)
|
|
|
1,000,874
|
|
|
Cash,
beginning of the period
|
|
|
3,900
|
|
|
|
400,613
|
|
|
|
—
|
|
|
Cash,
end of the period
|
|
$
|
1,000,874
|
|
|
$
|
3,900
|
|
|
$
|
1,000,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
122,643
|
|
|
$
|
123,073
|
|
|
$
|
839,052
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
offering costs included in accounts payable
|
|
|
(61,497
|
)
|
|
|
461,456
|
|
|
|
509,947
|
|
|
Deferred
offering costs included in accrued expenses
|
|
|
(70,000
|
)
|
|
|
47,350
|
|
|
|
—
|
|
|
Debt
issuance costs included in accounts payable
|
|
|
—
|
|
|
|
58,339
|
|
|
|
114,156
|
|
|
Warrants
issued pursuant to notes payable
|
|
|
3,327
|
|
|
|
139,677
|
|
|
|
467,191
|
|
|
Warrants
issued for debt issuance costs
|
|
|
—
|
|
|
|
55,409
|
|
|
|
298,021
|
|
|
Prepaid
expenses financed by note payable
|
|
|
81,345
|
|
|
|
54,504
|
|
|
|
246,871
|
|
|
Convertible
debt issued in lieu of cash for accrued expenses
|
|
|
—
|
|
|
|
31,413
|
|
|
|
31,413
|
|
|
Common
stock issued in lieu of cash for accrued expenses
|
|
|
20,250
|
|
|
|
9,167
|
|
|
|
259,053
|
|
|
Common
stock issued in lieu of cash for accrued development cost
|
|
|
500,000
|
|
|
|
—
|
|
|
|
500,000
|
|
|
Common
stock issued for debt issuance cost
|
|
|
136,396
|
|
|
|
6,667
|
|
|
|
301,230
|
|
|
Warrants
issued in lieu of cash for accrued expenses
|
|
|
—
|
|
|
|
1,250
|
|
|
|
1,250
|
|
|
Conversion
of notes payable, related parties into convertible
debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (Continued)
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Period from August
17, 1999 (inception) to
|
|
|
|
|
2009
|
|
|
2008
|
|
|
December 31, 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
|
|
|
Note
payable-related party tendered for warrant exercise
|
|
|
26,000
|
|
|
|
—
|
|
|
|
26,000
|
|
|
Warrant
exercise cost paid in lieu of cash for services
rendered-related party
|
|
|
11,250
|
|
|
|
—
|
|
|
|
11,250
|
|
See
accompanying notes to consolidated financial statements.
ProUroCare
Medical Inc.
A
Development Stage Company
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008 and the period from
August
17, 1999 (inception) to December 31, 2009
(1) Description
of Business and Summary of Significant Accounting Policies
|
|
(a)
|
Description
of Business, Development Stage Activities and Basis of
Presentation
|
ProUroCare
Medical Inc. (“ProUroCare,” the “Company,” “we” or “us”) is engaged in the
business of developing for market innovative products for the detection and
characterization of male urological prostate disease. The primary
focus of the Company is currently the ProUroScan
TM
prostate imaging system, designed for use as an aid to the physician in
visualizing and documenting tissue abnormalities in the prostate that have been
previously detected by a digital rectal exam. The Company’s
developmental activities, conducted by its wholly owned operating subsidiary
ProUroCare Inc. (“PUC”), have included the acquisition of several technology
licenses, the purchase of intellectual property, the development of a strategic
business plan and a senior management team, product development and fund raising
activities.
PUC had
no activities from its incorporation in August 1999 until July 2001, when it
acquired a license to certain microwave technology from CS Medical Technologies,
LLC (“CS Medical”). In January 2002, PUC acquired a license to
certain prostate imaging technology from Profile, LLC (“Profile”).
Pursuant
to a merger agreement effective April 5, 2004 (the “Merger”), PUC became a
wholly owned operating subsidiary of Global Internet Communications, Inc.
(“Global”), which changed its name to ProUroCare Medical Inc. on April 26,
2004. In connection with the Merger, the Company completed a private
placement of 220,500 shares, as adjusted for the Reverse Split (as defined
below), of common stock (the “2004 Private Placement”) pursuant to Rule 506
under the Securities Act of 1933, as amended (the “Securities
Act”).
On
December 27, 2007, the Company’s shareholders approved a one-for-ten reverse
split of the Company’s common stock without a corresponding reduction in the
number of authorized shares of the Company capital stock (the “Reverse
Split”). The Reverse Split became effective on February 14,
2008. The exercise price and the number of shares of common stock
issuable under the Company's outstanding convertible debentures, options and
warrants were proportionately adjusted to reflect the Reverse Split for all
periods presented.
Between
December 27, 2007 and December 11, 2008, the Company closed on a total of $2.0
million of private placements of investment units (the “2007 and 2008 Private
Placements”) and $315,000 of private placements of convertible debentures in a
unit put arrangement (the “2008 Unit Put Arrangement”) each consisting of
convertible debentures and warrants (see Notes 2 and 14(e)). Upon the
closing of the Company’s 2009 Public Offering (as defined below), the
convertible debentures issued in these private placements were automatically
converted into equity (see Note 2).
On
January 12, 2009, the Company closed a public offering of 3,050,000 units at
$1.00 per unit (the “2009 Public Offering”). Each unit sold (the
“2009 Units”) consisted of one share of common stock and one redeemable warrant
to purchase one share of common stock at an exercise price of $1.30 per
share. Upon the January 7, 2009 effective date of the 2009 Public
Offering, $1.9 million of convertible promissory notes issued in
private placements during 2007 and 2008 along with $177,882 of interest accrued
thereon automatically converted into 3,058,381 units identical to the 2009 Units
(see Note 14(e)).
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, PUC. Significant
inter-company accounts and transactions have been eliminated in
consolidation.
|
|
(b)
|
Restatement
of Share Data
|
All share
data has been restated to give effect to the Reverse Split.
At the
effective time of the Merger, all 350,100 shares of common stock of PUC that
were outstanding immediately prior to the Merger and held by PUC shareholders
were cancelled, with one share of ProUroCare common stock issued to
Global. Simultaneously, the non-dissenting shareholders of PUC
received an aggregate of 960,300 shares of common stock of Global in exchange
for their aggregate of 320,100 shares of PUC. The share data in this
paragraph has been restated to give effect to the Reverse Split, as noted
above.
All share
data has been restated to give effect to the Merger under which each PUC share
was converted into three shares of Global.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting periods. The Company’s significant estimates include the determination
of the fair value of its common stock and stock-based compensation awarded to
employees, directors, loan guarantors and consultants and the accounting for
debt with beneficial conversion features. Actual results could differ from those
estimates.
Valuation of Stock-Based
Compensation.
Since inception, the Company has measured and
recognized compensation expense for all share-based payment awards made to
employees and directors including employee stock options based on fair
values. The Company’s determination of fair value of share-based
payment awards is based on the date of grant using an option-pricing model which
incorporates a number of highly complex and subjective
variables. These variables include, but are not limited to, the
Company’s expected stock price volatility and estimates regarding projected
employee stock option exercise behaviors and forfeitures. The Company
recognizes the expense related to the fair value of the award straight-line over
the vesting period.
Debt with Beneficial Conversion
Features
. The beneficial conversion features of convertible
promissory notes were valued using the Black-Scholes pricing model, which is
considered the Company’s equivalent to the fair value of the conversion. The
resulting original issue discount is amortized over the life of the promissory
notes (generally no more that 24 months) using the straight-line method, which
approximates the interest method.
|
|
(d)
|
Net
Loss Per Common Share
|
Basic and
diluted loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding for the reporting
period. These calculations reflect the effects of the Reverse Split
(see Note 1(a)). Dilutive common-equivalent shares have not been
included in the computation of diluted net loss per share because their
inclusion would be antidilutive. Antidilutive common equivalent
shares issuable based on future exercise of stock options or warrants could
potentially dilute basic loss per common share in subsequent
years. All options and warrants outstanding were antidilutive for the
years ended December 31, 2009 and 2008 and the period from August 17, 1999
(inception) to December 31, 2009 due to the Company’s net
losses. 8,532,058 and 1,603,994 shares of common stock issuable under
our stock options, warrants, convertible debt and contingent shares and warrants
issuable under agreements with loan guarantors were excluded from the
computation of diluted net loss per common share for the years ended December
31, 2009 and 2008, respectively. Also excluded were the undetermined
number of shares issuable pursuant to the convertible notes and warrants issued
in connection with our 2007 and 2008 Private Placements, the 2008 Unit Put
Arrangement and certain convertible notes, whose terms of conversion were based
on the price of the equity securities offered in the 2009 Public Offering, as
described and defined in Note 2. The number of such shares was
determined on the January 7, 2009 effective date of the 2009 Public Offering to
be 6,937,177 shares as of December 31, 2008.
Due to
common stock issuances during 2009, certain persons who were beneficial owners
of greater than five percent of the Company’s outstanding common stock and
therefore deemed to be related parties as of December 31, 2008 ceased to be
related as of December 31, 2009. Certain comparative figures have
been reclassified to conform to the financial statement presentation adopted in
the current year, including the reclassification of transactions with former
related parties.
The
Company maintains its cash in financial institutions. The balances,
at times, may exceed federally insured limits.
|
|
(g)
|
Equipment
and Furniture
|
Equipment
and furniture are stated at cost and depreciated using the straight-line method
over the estimated useful lives ranging from three to seven years. Maintenance,
repairs, and minor renewals are expensed as incurred.
The costs
associated with acquisition of licenses for technology are recognized at the
fair value of stock and cash used as consideration. Costs of
acquiring technology which has no alternative future uses are expensed
immediately as research and development expense.
|
|
(i)
|
Stock-Based
Compensation
|
The
Company’s policy is to grant stock options at fair value at the date of grant
and to record the expense at fair value as determined using the Black-Scholes
pricing model. Stock-based employee and non-employee compensation
cost related to stock options was $480,873, $44,745 and $2,122,645 for the years
ended December 31, 2009 and 2008, and the period from August 17, 1999
(inception) to December 31, 2009, respectively. The Company estimates
the amount of future stock-based compensation expense related to currently
outstanding options to be approximately $270,000 and $12,000 for the years
ending December 31, 2010 and 2011, respectively. Shares issued upon
the exercise of stock options are newly issued from the Company’s authorized
shares.
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 Company’s employee and consultant stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, the existing models may not necessarily provide
a reliable single measure of the fair value of the Company’s employee stock
options.
In
determining the compensation cost of the options granted for the years ended
December 31, 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:
|
|
|
For the years ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Risk-free
Interest Rate
|
|
|
1.73
|
%
|
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Life of Options Granted
|
|
3.6
years
|
|
|
4.3
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Volatility
|
|
|
134.6
|
%
|
|
|
131.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Dividend Yield
|
|
|
0
|
|
|
|
0
|
|
The
expected life of the options is determined using a simplified method, computed
as the average of the option vesting periods and the contractual term of the
option. For performance based options that vest upon the occurrence
of an event, the Company uses an estimate of when the event will occur as the
vesting period used in the Black-Scholes calculation for each option
grant. Expected volatility is based on a simple average of weekly
price data since the date of the Merger. 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.
The
Company has elected to utilize the fair-value method of accounting for warrants
issued to non-employees as consideration for goods or services received,
including warrants issued to lenders and guarantors of Company debt (see Notes
14(f) and 14(g)). Stock-based employee and non-employee compensation
cost related to stock warrants was $0, $14,500 and $122,575 for the years ended
December 31, 2009 and 2008, and the period from August 17, 1999 (inception) to
December 31, 2009, respectively. The weighted-average fair value of
the warrants granted during the years ended December 31, 2009 and 2008 was $0.95
and $1.37, respectively, and such warrants are immediately vested and
exercisable on the date of grant.
The fair
value of stock warrants is the estimated present value at grant date using the
Black-Scholes pricing model with the following weighted average
assumptions:
|
|
|
For the years ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Risk-free
Interest Rate
|
|
|
1.18
|
%
|
|
|
3.23
|
%
|
|
Expected
Life of Warrants Issued
1
|
|
2.1
years
|
|
|
5.0
years
|
|
|
Expected
Volatility
|
|
135.2
|
%
|
|
129.5
|
%
|
|
Expected
Dividend Yield
|
|
|
0
|
|
|
|
0
|
|
1
The
contractual term of the warrants.
The
expected volatility is based on weekly price data since the date of the Merger
on April 5, 2004. Based on the lack of history to calculate a
forfeiture rate, the Company has not adjusted the calculated value of the
warrants. The risk-free rates for the expected terms of the stock
warrants are based on the U.S. Treasury yield curve in effect at the time of
grant.
|
|
(k)
|
Financial
Instruments
|
The
carrying amount for all financial instruments approximates fair value. The
carrying amounts for cash, notes payable, accounts payable and accrued
liabilities approximate fair value because of the short maturity of these
instruments. The carrying amounts for long-term debt, and other obligations
approximates fair value as the interest rates and terms are substantially
similar to rates and terms which could be obtained currently for similar
instruments.
|
|
(l)
|
Research
and Development
|
Expenditures
for research and product development costs, including certain upfront license
fees for technologies under development, are expensed as incurred.
The
Company has issued common stock and warrants as consideration to various
individual lenders and loan guarantors of its bank debt (see Note
14(g)). The fair value of the equity consideration along with loan
initiation fees is recorded on the balance sheet as debt issuance
cost. Debt issuance costs are amortized over the term of the related
debt as interest expense using the straight-line method, which approximates the
interest method.
|
|
(n)
|
Deferred
Offering Costs
|
The
legal, accounting, printing and certain other expenses directly related to the
2009 Public Offering that became effective on January 7, 2009 were recorded as a
deferred offering cost asset as of December 31, 2008. The deferred
offering costs were recorded as a cost of the offering and a reduction of
additional paid-in capital upon its closing on January 12, 2009.
Pursuant
to the October 15, 2007 renewal of its promissory notes with Crown Bank, the
Company agreed to deposit with Crown Bank four months worth of future interest
payments due under the notes. The funds on deposit were
not available to the Company for any purpose other than for debt service on the
Crown Bank promissory notes. On March 19, 2009, pursuant to a further
renewal of a Crown Bank promissory note, this restriction was
removed.
The
Company utilizes the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the
financial statement and income tax reporting bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance to the extent that
realization is not assured.
|
|
(q)
|
Purchased
Intangible Assets
|
On April
3, 2008, the Company purchased certain patents, patent applications and know-how
from Profile (the “Profile Assets”) pursuant to an asset purchase
agreement. The purchase of the Profile Assets effectively terminated
the license agreement. The technology encompassed by the Profile
Assets provides the basis for the ProUroScan System, the Company’s initial
product currently in the final stages of development. The purchase
price of the Profile Assets was $300,000, of which $150,000 was paid in cash and
$150,000 was financed under a promissory note from Profile. The
promissory note was fully paid in 2008. As this intangible asset was
purchased for a particular research and development project and has no
alternative future uses, the entire $300,000 purchase price was expensed as
research and development expense for the year ended December 31,
2008.
The
Company evaluates events occurring after the date of the financial statements
for events requiring recording or disclosure in the financial statements.
Any required events have been disclosed in Note 16.
|
(2)
|
2009
Public Offering; Automatic Conversion of Convertible
Debt.
|
On
January 7, 2009, the 2009 Public Offering was declared effective by the SEC, and
on January 12, 2009 the 2009 Public Offering was closed. In the
offering, the Company sold 3,050,000 of 2009 Units at $1.00 per unit resulting
in net cash received of $1,790,472, after offering costs of
$1,259,528.
The
completion of the 2009 Public Offering triggered automatic conversion provisions
of several outstanding convertible debt instruments:
|
|
·
|
Upon
the January 7, 2009 effective date
of the 2009 Public
Offering, $733,334 of convertible debentures originally issued as
consideration to guarantors of its bank debt, along with $143,815 interest
accrued thereon, converted into 292,384 shares of the Company’s common
stock. Unamortized original issue discount relating to the
convertible debentures totaling $33,796 was expensed as interest expense
upon the conversion.
|
|
|
·
|
Upon
the January 12, 2009 closing of the 2009 Public Offering, the $1,757,500
aggregate amount of promissory notes issued in the 2007 and 2008 Private
Placement, along with $162,959 of interest accrued thereon, automatically
converted into 2,743,535 units identical to the 2009 Units (based on 70
percent of the offering price, or $0.70 per share). In
addition, a $142,500 promissory note issued as part of the 2007 Private
placement to James Davis, a greater than ten percent shareholder of the
Company, on December 27, 2007, along with $14,923 of interest accrued
thereon, automatically converted into 314,846 units identical to the 2009
Units (based on 50 percent of the offering price, or $0.50 per
share). The closing of the 2009 Public Offering resolved a
contingent conversion feature of the promissory
notes. Consequently, the valuation of the beneficial conversion
feature of the promissory notes was recalculated, resulting in the
recording of a $47,046 increase in the original issue
discount. Unamortized original issue discount relating to the
warrants and the beneficial conversion feature of these notes (including
the adjustment resulting from the new valuation) totaling $434,215 and
unamortized debt issuance cost of $207,575 was expensed as interest
expense upon the conversion.
|
|
|
·
|
On
February 6, 2009 (30 days after the effective date of the 2009 Public
Offering), the $299,250 outstanding promissory notes issued pursuant to
the Company’s 2008 Unit Put Arrangement, along with the $9,563 interest
accrued thereon, automatically converted into 441,165 shares of the
Company’s common stock. The notes and accrued interest
converted at 70 percent of the 2009 Public Offering price, or $0.70 per
share. The closing of the 2009 Public Offering resolved a
contingent conversion feature of the promissory
notes. Consequently, the valuation of the beneficial conversion
feature of the promissory notes was recalculated, resulting in the
recording of an $81,059 increase in the original issue
discount. Unamortized original issue discount relating to the
warrants and the beneficial conversion feature of the notes (including the
adjustment resulting from the new valuation) totaling $209,879 and
unamortized debt issuance cost of $44,686 was expensed as interest expense
upon the conversion.
|
|
(3)
|
Going
Concern; Management’s Plan to Fund Working Capital
Needs
|
The
Company incurred net losses of $6,944,064, $4,657,717 and $27,879,877 and
negative cash flows from operating activities of $3,149,732, $1,094,973, and
$11,469,178 for the years ended December 31, 2009 and 2008 and for the
period from August 17, 1999 (inception) to December 31, 2009, respectively. The
Company has completed the development of its first product and recently
submitted a 510(k) premarket notification application to the FDA for a basic
imaging and documentation labeling claim. Assuming that FDA clearance
is obtained on a timely basis, the Company expects to increase its expenditures
as it establishes the production and marketing capabilities through both
contracted and internal resources. The Company’s business plan is
dependent upon its ability to obtain sufficient capital to fund its transition
from product development to production and marketing its products.
As of
March 26, 2010, the Company had approximately $575,000 cash on hand and current
liabilities of approximately $2.9 million, including $1.3 million of secured
debt due on April 28, 2010. However, the Company does not currently
have sufficient funds to make a significant commercial launch into the urology
market. Management believes that during the remainder of 2010 the Company will
need approximately $4 million of working capital to fund planned
operations.
As of
March 26, 2010, we have 5,760,436 outstanding redeemable
warrants. These warrants have an exercise price of $1.30 per
share. Of these, we currently have the right to redeem 4,515,607
Public and Private Warrants. We may redeem 1,244,829 Replacement
Warrants once the last sale price of our common stock equals or exceeds $4.00
per share for a period of 10 consecutive trading days. Upon our
exercise of our right to redeem the warrants, holders of the warrants will have
a period of 30 days to exercise their warrants. If all holders of the
Public and Private Warrants exercise their warrants, we could realize up to
approximately $5.9 million depending on the number of shares actually exercised
pursuant to such redemption. If all holders of the Replacement
Warrants exercise their warrants, we could realize up to an additional $1.6
million, depending on the number of shares actually exercised pursuant to such
redemption. There can be no assurance that we will be able to redeem
the warrants, or how much would be realized if such redemption were
made.
The
Company also plans to identify a distribution partner to market our products
during 2010. The Company expects such a distribution partner to
provide significant financial support in the form of licensing fees, loans,
equity investment or a combination of these. In addition to financial
support, a successful collaboration with such a partner would allow us to gain
access to downstream marketing, manufacturing, and sales
support. There can be no assurance that a distribution partner can be
successfully identified and engaged during 2010, or at all.
The
Company intends to negotiate with the lenders and loan guarantors and expects to
extend the majority of the loans that come due in 2010. Amounts that
are not able to be refinanced would be repaid from the proceeds of warrant
exercises. The Company continues to work with other short term
creditors and expect to make satisfactory arrangements to pay amounts due from
the proceeds of the warrant exercises.
If an
insufficient number of warrants are exercised, or if adequate financial support
from a distribution partner is not received, the Company will likely pursue one
or more additional rounds of funding in 2010. If additional funds are raised by
the issuance of convertible debt or equity securities, or by the exercise of
outstanding warrants, then existing shareholders will experience dilution in
their ownership interest. If additional funds are raised by the issuance of debt
or certain equity instruments, the Company may become subject to certain
operational limitations, and such securities may have rights senior to those of
our existing holders of common stock.
If
adequate funds are not available through these initiatives on a timely basis, or
are not available on acceptable terms, The Company may be unable to fund
expansion and may be forced to delay market entry. Ultimately, if no
additional financing is obtained beyond what has been secured to date, the
Company likely would be forced to cease operations. There can be no assurance
the Company will be successful in raising such funds.
|
(4)
|
Equipment
and Furniture
|
Equipment
and furniture consisted of the following at December 31:
|
|
|
2009
|
|
|
2008
|
|
|
Computer
equipment
|
|
$
|
4,473
|
|
|
$
|
11,563
|
|
|
Furniture
|
|
|
4,279
|
|
|
|
4,279
|
|
|
|
|
|
8,752
|
|
|
|
15,842
|
|
|
Less
accumulated depreciation
|
|
|
(7,282
|
)
|
|
|
(15,842
|
)
|
|
|
|
$
|
1,470
|
|
|
$
|
0
|
|
Depreciation
expense was $186, $605 and $20,983 for the years ended December 31, 2009 and
2008 and the period from August 17, 1999 (inception) to December 31, 2009,
respectively.
The costs
related to the Company’s $2.2 million Crown Bank promissory notes issued in
January and February 2006 were recorded as debt issuance cost, and were
amortized over the approximately two-year term of the notes using the
straight-line method until October 14, 2007. At that time, $600,000
of the notes was retired, and approximately $42,800 of debt issuance cost
related to that portion of the notes was expensed as debt extinguishment
expense. The debt issuance cost associated with the remaining Crown
Bank notes were amortized as interest expense until December 28, 2007, when the
notes were modified to extend the maturity date of the notes to February 28,
2009. It was determined that the modification was not a substantial
modification of the terms of the notes, as the present value of the cash flows
under the new convertible promissory note was less than 10 percent different
from the present value of the cash flows under the original
note. Accordingly, the debt issuance cost from the old debt was
carried forward. The remaining $36,370 of unamortized debt issuance
cost, together with $12,000 of bank fees associated with the extension, was
amortized over the new term of the notes as interest expense.
On
October 15, 2007, the Company borrowed $600,000 pursuant to a promissory note
issued an individual investor that matured on February 28, 2009. In
consideration for this loan, on November 7, 2007 the Company agreed to issue
33,333 shares of its common stock to the lender. The $66,666 value of
this consideration was recorded as debt issuance cost and was amortized over the
term of the loan. On March 19, 2009, the note was renewed to mature
on March 28, 2010. As consideration to the lender for renewing the
loan, the Company issued 66,667 shares of its common stock, representing the
first six months compensation, and will accrue for issuance 11,111 shares per
month for each additional month the note remains outstanding after December 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 recorded as debt
issuance cost and expensed as debt extinguishment expense. Additional
accruals of stock to be issued if the promissory notes remain outstanding after
August 31, 2009 were expensed each month as debt extinguishment
expense. During the year ended December 31, 2009, 44,444 shares were
accrued for issuance pursuant to this loan guarantee compensation arrangement,
resulting in additional debt extinguishment expense of $22,222.
Direct
costs of the 2007 and 2008 Private Placements and 2008 Unit Put Arrangement
offerings totaling $586,201, including underwriting fees, legal and accounting
expenses and printing costs, were recorded as a debt issuance cost
asset. Also included in this debt issuance cost was the issuance of
warrants to acquire 32,500 shares of our common stock valued at $42,575 related
to the origination of the unit put financing facility. The debt
issuance costs were amortized over the term of the related
debt. Unamortized debt issuance cost was expensed upon the automatic
conversion of the convertible debt following the closing of the 2009 Public
Offering.
On March
19, 2009, pursuant to guaranties received relating to the Company’s renewal of
its $1.2 million Crown Bank promissory note, the Company issued an aggregate of
133,334 shares of its common stock to the guarantors representing the first six
months’ consideration for providing their guarantee (see Note
11). 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. For each month the promissory note remains
outstanding after August 31, 2009, the Company is accruing for issuance to the
guarantors 22,222 shares of its common stock. A total of 88,888
shares valued at $44,444 were accrued for issuance and recorded as interest
expense during the year ended December 31, 2009.
On June
16, 2009, pursuant to a guarantee received relating to a $100,000 Crown Bank
promissory note, the Company issued 6,667 shares of its common stock to the
guarantor representing the first six months’ consideration for providing his
guarantee (see Note 11). 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 was amortized on a straight-line basis
over a six month period ending December 31, 2009.
On
September 21, 2009, the Company issued 19,833 shares to James Davis representing
six months’ consideration for providing a $243,000 loan (see Note
10). The $28,262 value of the shares was recorded as debt issuance
cost and is being amortized as interest expense over a six-month
period.
On
September 23, 2009, the Company issued 6,667 shares to a guarantor as
consideration for providing a guarantee of a $100,025 bank loan (see Note
11). The $9,000 value of the shares was recorded as debt issuance
cost and is being amortized as interest expense over a six-month
period.
On
September 23, 2009, the Company issued 20,000 shares to an individual lender as
consideration for providing a $300,000 loan (see Note 10). The
$27,000 value of the shares was recorded as debt issuance cost and is being
amortized as interest expense over a six-month period.
Debt
issuance costs are summarized as follows:
|
|
|
For the years ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Debt
issuance costs, gross
|
|
$
|
203,662
|
|
|
$
|
701,238
|
|
|
Less
amortization
|
|
|
(176,279
|
)
|
|
|
(434,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs, net
|
|
$
|
27,383
|
|
|
$
|
266,882
|
|
Amortization
expense related to debt issuance costs was $443,161, $421,564, and $2,148,894
for the years ended December 31, 2009 and 2008 and the period from August 17,
1999 (inception) to December 31, 2009, respectively.
Accrued
expenses consisted of the following at December 31:
|
|
|
2009
|
|
|
2008
|
|
|
Accrued
interest
|
|
$
|
148,129
|
|
|
$
|
169,985
|
|
|
Accrued
stock to be issued for loan guarantees – related parties
|
|
|
44,444
|
|
|
|
–
|
|
|
Accrued
stock to be issued for loan consideration
|
|
|
22,222
|
|
|
|
–
|
|
|
Consulting
fees
|
|
|
11,500
|
|
|
|
15,000
|
|
|
Legal
fees
|
|
|
19,710
|
|
|
|
–
|
|
|
Audit
fees
|
|
|
14,000
|
|
|
|
47,000
|
|
|
Accrued
interest-related party
|
|
|
9,225
|
|
|
|
263,522
|
|
|
Accrued
compensation, benefits, and related taxes
|
|
|
–
|
|
|
|
350,836
|
|
|
Public
offering costs
|
|
|
–
|
|
|
|
70,000
|
|
|
Directors’
fees
|
|
|
–
|
|
|
|
20,249
|
|
|
Other
|
|
|
–
|
|
|
|
661
|
|
|
|
|
$
|
269,230
|
|
|
$
|
937,253
|
|
|
(7)
|
Agreements
with Artann Laboratories Inc.
|
The
Company has developed its ProUroScan System under contracts with Artann
Laboratories, Inc. (“Artann”), a scientific technology company based in
Trenton, New Jersey, that is focused on early stage technology
development.
Artann
2008 License Agreement
On July
25, 2008, the Company entered into two agreements with Artann. Under
the first agreement, the “License Agreement,” Artann granted to the Company an
exclusive, worldwide, sublicensable license to certain patent applications,
trade secrets and technology to make, use and market certain mechanical imaging
products in the diagnosis or treatment of urologic disorders of the prostate,
kidney or liver field of use. Artann also agreed to transfer
possession of five fully functional prostate imaging systems to the Company and
grant the Company full access to all relevant documentation
thereto. The License Agreement became effective on December 23,
2008. As consideration, the Company agreed to pay, on the effective
date of the agreement, an upfront cash license fee of $600,000 and shares of the
Company’s common stock valued at $500,000. The total $1,100,000
license fee was recorded as a general and administrative expense in the year
ended December 31, 2008. In addition, the Company agreed to pay
Artann a royalty equal to four percent of the first $30 million of net
cumulative sales of licensed products, three percent of the next $70 million of
net cumulative sales and two percent of net cumulative sales over $100
million. Further, the Company will pay Artann a technology royalty of
one percent of net sales on prostate imaging system products through December
31, 2016. The combined royalties are subject to a minimum annual
royalty equal to $50,000 per year for each of the first two years after
clearance from the Food and Drug Administration (“FDA”) for commercial sale and
$100,000 per year for each year thereafter until termination or expiration of
the License Agreement. The Company also agreed to grant Artann a
non-exclusive fully paid up, sublicensable, royalty-free and worldwide license
for Artann to make, use or sell any mechanical imaging system for the diagnosis
or treatment of disorders of the female human breast. The License
Agreement will terminate upon the expiration of all royalty obligations, by
failure of either party to cure a breach of the agreement within a 60-day cure
period, if the Company fails to make a payment to Artann and such failure is not
cured within a 30-day cure period or should one of the parties become insolvent,
go into liquidation or receivership or otherwise lose legal control of its
business.
Artann
2008 Development Agreement
Under the
second Artann agreement, the “Development and Commercialization Agreement,” the
parties are collaborating to develop, commercialize and market prostate
mechanical imaging systems. During 2008 and 2009, Artann completed
all pre-clinical activities and testing on the prostate imaging system,
conducted clinical trials and filed an FDA 510(k) submission. In the
future, Artann will provide hardware and software development, refinement and
debugging services. For the services provided, the Company made cash
milestone payments to Artann of $250,000 upon initiation of an FDA approved
clinical study and $250,000 upon Artann’s November 18, 2009 completion of the
FDA study and submission of the 510(k) approval application on the prostate
imaging system. The Company also accrued for issuance to Artann
769,231 shares of common stock of the Company valued at $1,565,385 following the
510(k) submission, which was recorded as research and development expense in the
year ended December 31, 2009. Further, as a success bonus, the
Company will make a $750,000 cash payment and issue to Artann shares of its
common stock having a value of $1 million upon receiving FDA clearance allowing
the prostate imaging system to be commercially sold in the United
States. The success bonus will be reduced by ten percent for each
month that FDA clearance is delayed beyond March 23, 2009. The
Company also agreed to pay a monthly retainer fee for technical advice and
training by Artann personnel of $30,000 per month for each of the first six
months following the effective date of the Development and Commercialization
Agreement and $15,000 per month for the next 12 months. During the
years ended December 31, 2009 and 2008, retainer fees of $235,000 and $50,000
were recorded as research and development expense,
respectively. On March 15, 2010, the Company issued the 769,231
shares of common stock that had been accrued for issuance as of December 31,
2009 (see Note 16).
Additionally,
Artann will facilitate the transfer of commercial production to a
third-party. Qualified Artann personnel shall provide manufacture and
scale-up services to the Company or a third-party manufacturer designated by the
Company to facilitate the commercial manufacture of the prostate imaging systems
at a cost of $1,200 per day per individual for such services.
The
initial term of the Development and Commercialization Agreement is for three
years and may thereafter be renewed for additional one year terms upon mutual
agreement of the parties. The Development and Commercialization
Agreement may also terminate if the Company fails to make a payment to Artann
and such failure is not cured within a 60-day cure period or should one of the
parties become insolvent, go into liquidation or receivership or otherwise lose
legal control of its business.
Accrued
License and Development Fees
Accrued
license and development fees consisted of the following amounts due to Artann
under the License Agreement and the Development and Commercialization Agreement
as of December 31:
|
|
|
2009
|
|
|
2008
|
|
|
Accrued
stock payment for development milestone
|
|
$
|
1,565,385
|
|
|
$
|
-
|
|
|
Contracted
development fees
|
|
|
30,000
|
|
|
|
-
|
|
|
Upfront
license fee payable in cash
|
|
|
-
|
|
|
$
|
600,000
|
|
|
Upfront
license fee payable in equity
|
|
|
-
|
|
|
|
500,000
|
|
|
First
milestone cash payment due under the Development and Commercialization
Agreement
|
|
|
-
|
|
|
|
250,000
|
|
|
Less:
Advances
|
|
|
-
|
|
|
|
(22,165
|
)
|
|
Accrued
license and development fees
|
|
$
|
1,595,385
|
|
|
$
|
1,327,835
|
|
|
(8)
|
Commitments
and Contingencies
|
The
Company rents a small amount of office space on a month-to-month basis at a cost
of approximately $1,100 per month, which is the market price for similar office
space in Minneapolis, Minnesota. Rent expense for the years ended December 31,
2009 and 2008, and the period from August 17, 1999 (inception) to December 31,
2009 was $10,668, $23,062 and $266,874, respectively.
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 alleged that the
Company 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. On December 7, 2009, the Company entered into a settlement
agreement with RPI concerning litigation originally filed by RPI against the
Company on July 15, 2009. In the settlement agreement, the Company
agreed to pay to RPI a total of $117,000 in installments as follows: $10,000
upon signing, $6,000 per month from December 2009 through October 2010, and
$41,000 in November 2010. The Company executed an affidavit for
judgment by confession to secure the above payments. The Company has
20 days to cure any failure to make the required payments. As the
full amount due to RPI was recorded in prior years, no additional provision was
recorded and previously recorded minimum royalty expenses of $20,000 were
reversed during the year ended December 31, 2009.
The
Company has generated net operating loss carryforwards of approximately $6.7
million which, if not used, will begin to expire in 2021. Federal and
state tax laws impose significant restrictions on the utilization of net
operating loss carryforwards in the event of a change in ownership of the
Company that constitutes an “ownership change,” as defined by Section 382 of the
Code. The Company has analyzed its equity ownership changes and
believes that such an ownership change has occurred. The Company’s
use of its net operating loss carryforwards and built-in loss will be limited as
a result of this change; however, the amount of limitation will not be known
until a full Section 382 study can be completed.
The
Company has recorded a full valuation allowance against its deferred tax assets
and deferred tax liability due to the uncertainty of realizing the related
benefits and costs as follows:
|
|
|
2009
|
|
|
2008
|
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
2,559,000
|
|
|
$
|
1,916,000
|
|
|
Capitalized
start up costs
|
|
|
3,570,000
|
|
|
|
2,921,000
|
|
|
Expenses
paid with options and warrants
|
|
|
722,000
|
|
|
|
724,000
|
|
|
Capitalized
licenses
|
|
|
804,000
|
|
|
|
893,000
|
|
|
Accrued
expenses to be paid in stock
|
|
|
625,000
|
|
|
|
0
|
|
|
Other
|
|
|
0
|
|
|
|
164,000
|
|
|
Deferred
tax liability
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of convertible debentures
|
|
|
0
|
|
|
|
(212,000
|
)
|
|
Less:
valuation allowance
|
|
|
(8,280,000
|
)
|
|
|
(6,406,000
|
)
|
|
Net
deferred tax assets
|
|
$
|
0
|
|
|
$
|
0
|
|
The
change in the valuation allowance was $1,874,000, $1,336,000 and $8,280,000 for
the years ended December 31, 2009 and 2008 and the period from August 17, 1999
(inception) to December 31, 2009, respectively. The Company has
reviewed its issuances of convertible debt, and has recognized a deferred tax
liability for the temporary difference between the book basis and tax basis
resulting from beneficial conversion features of the debt
instruments. The effect of recognizing the deferred tax liability was
charged to equity. During the year ended December 31, 2009, all of
the Company’s convertible debt was retired or converted, and the deferred tax
liability was reversed. The remaining deferred tax liability at
December 31, 2008 was $212,000, which was offset against the deferred tax
valuation.
Reconciliation
between the federal statutory rate and the effective tax rates for the years
ended December 31, 2009 and 2008 and the period from August 17, 1999 (inception)
to December 31, 2009 is as follows:
|
|
|
2009
|
|
|
2008
|
|
|
Period from
August 17,
1999
(inception) to
December 31,
2009
|
|
|
Federal
statutory tax rate
|
|
|
(34.0
|
)
%
|
|
|
(34.0
|
)
%
|
|
|
(34.0
|
)
%
|
|
State
taxes, net of federal benefit
|
|
|
(4.5
|
)
|
|
|
(4.5
|
)
|
|
|
(4.5
|
)
|
|
Employee
incentive stock options
|
|
|
1.0
|
|
|
|
0.3
|
|
|
|
1.7
|
|
|
Expired
warrants and options
|
|
|
1.3
|
|
|
|
4.5
|
|
|
|
1.4
|
|
|
Replacement
warrants issued as an incentive to early exercise warrants
|
|
|
7.5
|
|
|
|
–
|
|
|
|
1.9
|
|
|
Capitalized
license fees
|
|
|
–
|
|
|
|
–
|
|
|
|
0.7
|
|
|
Beneficial
conversion feature of convertible debt
|
|
|
5.1
|
|
|
|
7.0
|
|
|
|
3.1
|
|
|
Change
in valuation allowance
|
|
|
23.6
|
|
|
|
26.7
|
|
|
|
29.7
|
|
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
Company has adopted the policy of classifying interest in interest expense and
penalties in general and administrative expense.
The
Company had no significant unrecognized tax benefits as of December 31, 2009 or
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.
The tax
years that remain subject to examination by major tax jurisdictions currently
are:
Federal
2006 - 2008
State of
Minnesota 2006 - 2008
On
October 31, 2007, the Company issued a promissory note for $600,000 in favor of
an individual lender effective as of October 15, 2007. On March 11,
2008, the promissory note was amended to make the interest accrued pursuant to
the promissory note payable on the maturity date, rather than payable
monthly. On March 19, 2009, the Company again amended the promissory
note with the lender. Under the terms of the amendment, the note’s
maturity date was extended to March 28, 2010 and the interest rate was changed
to 1.0 percent over the prime rate, but never less than 6.00 percent (6.00
percent and 6.50 percent at December 31, 2009 and 2008, respectively), and has a
subordinated security interest in all of the Company’s assets. As
consideration to the lender for making this loan and amendments thereto, the
Company issued shares of its common stock and warrants to acquire shares of its
common stock (see Note 14(g)). On March 26, 2010, the note was
retired pursuant to an equity conversion (see Note 16).
Between
May 1, 2009 and September 16, 2009, James Davis 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 Company’s obligation to Mr. Davis for these
amounts. In lieu of cash interest the Company is accruing 1,618
shares of its common stock for issuance to Mr. Davis for each month or portion
thereof that the principal amount of the Davis Note is
outstanding. As of December 31, 2009, 6,474 shares of common stock
were accrued for issuance and $9,225 of interest expense was
recorded. All of the accrued shares will be issued upon repayment of
the Davis Note. The Davis Note matures on March 28, 2011, and
provides Mr. Davis with a subordinated security interest in the Company’s
assets.
On June
1, 2009, the Company borrowed $81,345 pursuant to an unsecured insurance policy
financing agreement. The financing agreement is payable in 10 monthly
installments of $8,058 per month and bear interest at 6.48 percent.
On
September 1, 2009, the Company received an advance of $26,000 from a director.
On November 6, 2009, the advance was applied to the director’s exercise of
warrants. In lieu of cash interest, the Company issued 925 shares of its common
stock to the director and recorded $1,323 of interest expense.
On
September 23, 2009, the Company borrowed $300,000 from an individual lender
pursuant to a secured promissory note. In lieu of cash, the Company
is accruing 1,998 shares of its common stock for issuance to the investor for
each month or portion thereof that the principal amount of the loan remains
outstanding. As of December 31, 2009, 7,992 shares of common stock
were accrued for issuance and $10,789 of interest expense was
recorded. All accrued shares will be issued upon repayment of the
loan. The promissory note matures on March 28, 2011 and provides the
lender with a subordinated security interest in the Company’s
assets.
The
Company has provided equity consideration to the individual
lenders. See Note 14(g) for more information regarding the equity
consideration issued. See Note 15 for information regarding related
party transactions and loans.
The
following summarizes notes payable balances at December 31, 2009 and 2008, and
the related activity during the year ended December 31, 2009:
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
2009 Activity
|
|
Short
term notes payable:
|
|
|
|
|
|
|
|
|
Note
payable dated October 15, 2007
|
|
$
|
600,000
|
|
|
$
|
600,000
|
|
Amended
to extend maturity date to March 28, 2010
|
|
Note
payable dated July 31, 2007
|
|
|
—
|
|
|
|
34,000
|
|
Paid
in full
|
|
Note
payable dated June 1, 2006
|
|
|
—
|
|
|
|
9,350
|
|
Paid
in full
|
|
Insurance
policy financing
|
|
|
24,865
|
|
|
|
25,075
|
|
2008
balance paid in full; 2009 balance per description
above
|
|
Total
notes payable-short term
|
|
$
|
624,865
|
|
|
$
|
668,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term notes payable:
|
|
|
|
|
|
|
|
|
|
|
Long
term note payable
|
|
|
|
|
|
|
|
|
|
|
Note
payable dated September 23, 2009
|
|
$
|
300,000
|
|
|
$
|
—
|
|
2009
balance per description above
|
|
Long-term
note payable – related party
|
|
|
|
|
|
|
|
|
|
|
Note
payable dated September 21, 2009
|
|
$
|
243,000
|
|
|
$
|
—
|
|
2009
balance per description
above
|
|
(11)
|
Notes
Payable - Bank
|
On March
19, 2009, the Company renewed its $1.2 million 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 (6.0 percent and 6.5 percent at December 31, 2009 and 2008,
respectively). No other note terms were changed. The note
remains collateralized by all Company assets and guaranteed by two individual
guarantors. On March 26, 2010, the maturity date of the promissory
note was extended to mature on April 28, 2010.
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 (6.0 percent at December 31, 2009).
On
September 23, 2009, the Company borrowed $100,025 from Central Bank pursuant to
an unsecured 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 (6.0 percent at December 31, 2009). The
promissory note was guaranteed by an individual guarantor, whose guaranty was
collateralized by Company assets. On March 26, 2010, the maturity
date of the promissory note was extended to mature on April 28,
2010.
The
Company has provided shares of its common stock as consideration to the
guarantors of its bank debt (see Note 14(g).
The
following summarizes bank notes payable balances at December 31, 2009 and 2008,
and the related activity during the year ended December 31, 2009:
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
2009 Activity
|
|
Short
term note payable – bank:
|
|
|
|
|
|
|
|
|
Crown
Bank note
|
|
$
|
1,200,000
|
|
|
$
|
1,200,000
|
|
Amended
to extend maturity date to March 28, 2010
|
|
Crown
Bank note
|
|
|
—
|
|
|
|
400,000
|
|
Paid
in full
|
|
Crown
Bank note
|
|
|
100,000
|
|
|
|
—
|
|
2009
balance per description above
|
|
Total
notes payable bank-short term
|
|
$
|
1,300,000
|
|
|
$
|
1,600,000
|
|
|
|
Long
term note payable – bank:
|
|
|
|
|
|
|
|
|
|
|
Central
Bank note
|
|
$
|
100,025
|
|
|
$
|
—
|
|
2009
balance per description above
|
On April
3, 2008, the Company borrowed $37,500 pursuant to a convertible promissory note
issued in favor of James Davis. On September 25, 2008, the Company
borrowed an additional $150,000 pursuant to another convertible promissory note
issued in favor of Mr. Davis. As Mr. Davis’s ability to exercise the
conversion feature of the $150,000 note was contingent upon an event outside of
his control, the note’s 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 both the $150,000 debt (and $7,291 of interest accrued
thereon) and the $37,500 note (and $3,646 of accrued interest thereon), along
with 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
Company’s common stock.
The
following summarizes convertible notes payable balances at December 31, 2009 and
2008, and the related activity during the year ended December 31,
2009:
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
2009 Activity
|
|
Short-term
convertible debt:
|
|
|
|
|
|
|
|
|
10%
unsecured convertible debentures
|
|
$
|
—
|
|
|
$
|
333,334
|
|
Fully
converted (see Note 2)
|
|
10%
convertible promissory notes issued pursuant to 2007 and 2008 Private
Placements
|
|
|
—
|
|
|
|
1,268,250
|
|
Fully
converted (see Note 2)
|
|
Convertible
promissory note dated April 3, 2008
|
|
$
|
—
|
|
|
$
|
37,500
|
|
Repaid
$8,000 in cash, fully converted the remaining
$29,500
|
|
Less:
original issue discount
|
|
|
—
|
|
|
|
(252,121
|
)
|
Remaining
original issue discount expensed upon debt conversion
|
|
Total
notes payable bank-short term
|
|
$
|
—
|
|
|
$
|
1,386,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
convertible debt – related party:
|
|
|
|
|
|
|
|
|
|
|
10%
unsecured convertible debentures
|
|
$
|
—
|
|
|
$
|
400,000
|
|
Fully
converted (see Note 2)
|
|
10%
convertible promissory notes issued pursuant to 2007 and 2008 Private
Placements
|
|
|
—
|
|
|
|
465,500
|
|
Fully
converted (see Note 2)
|
|
Convertible
promissory note dated April 3, 2008
|
|
|
—
|
|
|
|
37,500
|
|
Fully
converted
|
|
Convertible
promissory note dated April 3, 2008
|
|
|
—
|
|
|
|
37,500
|
|
Refinanced
on March 19, 2009 (see above)
|
|
Less:
original issue discount
|
|
|
—
|
|
|
|
(114,066
|
)
|
Remaining
original issue discount expensed upon debt conversion
|
|
Total
notes payable bank-short term
|
|
$
|
—
|
|
|
$
|
826,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
convertible debt:
|
|
|
|
|
|
|
|
|
|
|
10%
convertible promissory notes issued pursuant to the 2008 Unit Put
arrangement
|
|
$
|
—
|
|
|
$
|
204,250
|
|
Fully
converted (see Note 2)
|
|
10%
convertible promissory notes issued pursuant to 2008 Private
Placements
|
|
|
—
|
|
|
|
166,250
|
|
Fully
converted (see Note 2)
|
|
Less:
original issue discount
|
|
|
—
|
|
|
|
(149,301
|
)
|
Remaining
original issue discount expensed upon debt conversion
|
|
|
|
$
|
—
|
|
|
$
|
221,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
convertible debt – related parties:
|
|
|
|
|
|
|
|
|
|
|
10%
convertible promissory notes issued pursuant to the 2008 Unit Put
arrangement
|
|
$
|
—
|
|
|
$
|
95,000
|
|
Fully
converted (see Note 2)
|
|
Promissory
note dated September 25, 2008
|
|
|
—
|
|
|
|
150,000
|
|
Refinanced
on March 19, 2009 (see above)
|
|
Less:
original issue discount
|
|
|
—
|
|
|
|
(82,241
|
)
|
Remaining
original issue discount expensed upon debt conversion
|
|
|
|
$
|
—
|
|
|
$
|
162,759
|
|
|
|
(13)
|
Future
Maturities of Long term Debt
|
Future
maturities of long-term notes for the years succeeding December 31, 2009 are as
follows:
|
Year
|
|
Notes
Payable
|
|
|
Notes
Payable-
Bank
|
|
|
Total
|
|
|
2010
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
2011
|
|
|
543,000
|
|
|
|
100,025
|
|
|
|
643,025
|
|
|
Total
|
|
$
|
543,000
|
|
|
$
|
100,025
|
|
|
$
|
643,025
|
|
|
(14)
|
Shareholders’
Equity (Deficit)
|
|
|
(a)
|
Common
stock issued related to formation and licensing
activities
|
The
Company issued 300,000 shares to Clinical Network Inc. in July 2001. In
connection with the Company’s license agreements with CS Medical and Profile,
the Company issued 300,000 and 400,000 shares of common stock in 2001 and 2002,
respectively.
|
|
(b)
|
Common
Stock and Warrants issued related to 2002 Private
Placement
|
In
connection with a private placement to accredited investors, the Company issued
45,335 shares of common stock in 2002. In addition, the Company
issued warrants to purchase 4,535 shares of common stock to three individuals
related to services rendered in connection with the private
placement. These warrants expired unexercised.
|
|
(c)
|
Common
Stock and Warrants issued related to Merger and 2004 Private
Placement
|
Merger
Agreement
Prior to
the April 5, 2004 Merger (see Note 1(a)), Profile had notified the Company of a
possible breach of its license agreement with the Company, and had also
dissented from the Merger proposal as the registered holder of securities
beneficially owned by certain shareholders holding, in the aggregate, 30,847
(pre-merger) shares of PUC’s common stock. Effective on April 4,
2004, the parties reached an agreement pursuant to which Profile waived any
existing defaults under the Profile license agreement, and the Company agreed to
purchase 30,000 of the 30,847 (pre-conversion) shares with respect to which
dissenters’ rights were exercised for an aggregate purchase of
$750,000. Of that amount, $100,000 was paid upon the initial closing
of the private placement (described below) and the balance of $650,000 was paid
pursuant to the delivery of a promissory note, which was paid in full in October
2004. The remaining 847 (pre-conversion) shares with respect to which
dissenters’ rights were originally exercised withdrew their dissents and
participated in the Merger.
At the
effective time of the Merger all 350,100 (pre-conversion) shares of common stock
of PUC that were outstanding immediately prior to the Merger and held by PUC
shareholders were cancelled, with one share of PUC common stock issued to
Global. Simultaneously, the former shareholders of PUC common stock
received an aggregate of 960,300 shares of common stock of Global, representing
approximately 82.1 percent of Global’s common stock outstanding immediately
after the Merger.
Global
was a non-operating public shell company at the time of the
Merger. Accordingly, the Merger transaction was recorded as a
recapitalization rather than a business combination. The assets and
liabilities resulting from the reverse acquisition were the former PUC assets
and liabilities (at historical cost) plus a $13,500 accrued Global liability
(assumed at historical cost). There were no other assets or
liabilities on Global’s books at the time of the Merger. The Company
recorded costs associated with the Merger totaling $162,556 during
2004.
2004 Private Placement of
Common Stock.
In
connection with the Merger, the Company completed a private placement offering
of 220,500 shares of common stock pursuant to Rule 506 promulgated under the
Securities Act. The initial closing occurred on April 5, 2004, at which time the
Company issued 198,000 shares at $20.00 per share, aggregating to gross proceeds
of $3.96 million. Subsequent to April 5, 2004, the Company issued an
additional 22,500 shares at $20.00 per share, aggregating to gross proceeds of
$450,000. Costs associated with the private placement (including the
subsequent registration costs) were $139,493.
As part
of the private placement, the Company engaged a consultant to provide
financial-advisory services. Under terms of the arrangement, the
consultant was paid $27,000 and was issued a warrant for 30,000 shares of common
stock upon the first closing of the private placement. The warrant had a
three-year term and was exercisable at $20.00 per share.
|
|
(d)
|
Private
sales of Common Stock
|
|
|
·
|
On
June 15, 2005, the Company sold 6,579 shares of its common stock to an
accredited investor in a non-public offering. The per share selling
price of $7.60 was based on the last selling price prior to this sale as
reported on the Over-the-Counter Bulletin Board. Net proceeds
received from this placement were
$50,000.
|
|
|
·
|
On
September 7, 2006, the Company sold 5,814 shares of its common stock to
Scott Smith, a director of the Company, and 5,814 shares of our common
stock to an investor. The per share selling price of $4.30 was based
on the last selling price prior to this sale as reported on the
Over-the-Counter Bulletin Board. Net proceeds received from these
investments were $50,000.
|
|
|
·
|
During
the year ended December 31, 2007, the Company sold 125,000 of the
Company’s Investment Units at a price of $4.00 per unit, with total gross
proceeds of $500,000. The Investment Units were sold in tranches of
31,250 Units each to four investors on January 18, January 23, February 28
and May 1, 2007. Each Investment Unit consists of one share of the
Company’s common stock and a 3-year warrant (immediately exercisable) to
acquire 0.5 shares of the Company’s common stock for $2.50 ($5.00 per
share). Costs of this sale totaled
$52,388.
|
|
|
·
|
On
February 12, 2007, the Company sold 1,707 shares of its common stock to
Scott Smith, a director of the Company. The per share selling price
of $4.10 was based on the last selling price prior to this sale as
reported on the Over-the-Counter Bulletin Board. The subscription
price was paid by the conversion of a $7,000 loan to the Company from Mr.
Smith.
|
|
|
·
|
On
March 21, 2007, the Company and the four guarantors of the Company’s Crown
Bank promissory notes (see Note 11) agreed to amend the related debenture
agreements. Pursuant to the revised debenture agreements, among
other things, the Company issued a total of 12,478 shares of its
Investment Units to the four guarantors in lieu of $49,911 of accrued
interest. The 6,240 warrants were valued at $26,829 using the
Black-Scholes method and were recorded as debt extinguishment
expense.
|
|
|
·
|
On
September 10, 2007, the Company sold a total of 1,100 shares of its common
stock to Mr. Carlson and Mr. Smith. The per share selling price of
$3.00 was based on the last selling price prior to this sale as reported
on the Over-the-Counter Bulletin Board. The subscription price was
paid by the conversion of a $3,300 of loans to the Company from Mr.
Carlson and Mr. Smith.
|
|
|
(e)
|
Common
stock and warrants issued pursuant to the 2007 and 2008 Private
Placements, the 2008 Unit Put Arrangement and the 2009 Public
Offering
|
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·
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Between December 27, 2007 and
July 30, 2008, the Company closed on the sale of an aggregate $1,850,000
of units under its 2007 and 2008 Private Placements (see Note 1(a)), and
converted $150,000 of existing loans from James Davis into similar
units. At the closings, the Company issued warrants to purchase a
total of 400,000 shares of common stock to the investors.
The exercise price of the
warrants was set upon the January 7, 2009 effective date of the 2009
Public Offering at $0.50 per share (based on 50 percent of the offering
price). All of these warrants became exercisable upon the January
12, 2009 closing of the 2009 Public Offering and will remain exercisable
until December 31, 2012.
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The $153,735 relative fair value of the
aggregate 400,000 warrants issued were recorded as an original issue discount as
defined in Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 470 against the convertible debt liability, and were
amortized as interest expense over the term of the convertible debentures.
The unamortized original issue discount relating to the warrants was
expensed as interest expense upon the January 12, 2009 closing of the 2009
Public Offering.
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·
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On
September 16, 2008, pursuant to the Company’s 2008 Unit Put
Arrangement (see Note 1(a)), the Company issued warrants, exercisable
until December 31, 2012 at an exercise price of $1.00 per share, to
purchase an aggregate 32,500 shares of our common stock (the “Origination
Warrants”). Of these, 31,500 Origination Warrants became exercisable
when the Company exercised its put options and closed on $315,000 of the
2008 Unit Put Arrangement, while 1,000 Origination Warrants were forfeited
when an investor failed to meet a $10,000 unit put obligation. The
Origination Warrants, valued at $42,575 using the Black-Scholes pricing
model, were recorded as a debt issuance cost asset and amortized as
interest expense over the term of the 2008 Unit Put Arrangement (see Note
5).
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Each unit
issued in the 2008 Unit Put Arrangement included a warrant that will remain
exercisable until December 31, 2012 at an exercise price of $1.00 per share (a
“Unit Put Warrant”). The purchase price of the warrant portion of each unit was
$500.
Between
September 16, 2008 and December 11, 2008, the Company exercised $315,000 of its
put options under the Unit Purchase Agreement and issued 63,000 Unit Put
Warrants. The $17,493 relative fair value of the Unit Put Warrants was
recorded as an original issue discount as defined in ASC Topic 470 against the
convertible debt liability, and was amortized as interest expense over the term
of the convertible debentures. On February 6, 2009, the $299,250
outstanding promissory notes issued pursuant to the Company’s 2008 Unit Put
Arrangement, along with the $9,563 interest accrued thereon, automatically
converted into 441,165 shares of the Company’s common stock. The
unamortized original issue discount was expensed as interest cost upon this
conversion.
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·
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On January 7, 2009, the 2009
Public Offering was declared effective by the United States Securities and
Exchange Commission, and January 12, 2009 the 2009 Public Offering was
closed. In the offering, the Company sold 3,050,000 units at $1.00
per unit, with each unit consisting of one share of common stock and one
redeemable warrant to purchase one share of common stock at an exercise
price of $1.30 per share resulting in net cash of $1,790,472, after costs
of $1,259,528.
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·
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As
additional compensation pursuant to the 2009 Public Offering, the Company
sold to the underwriter, Feltl & Company, for nominal consideration, a
warrant (the “Underwriter’s Warrant”) to purchase up to
305,000 units. The Underwriter’s Warrant is not exercisable until
January 7, 2010 and thereafter is exercisable at $1.20 per unit for a
period of four years.
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·
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On
the January 7, 2009 effective date of the 2009 Public Offering, the
$1,757,500 aggregate amount of notes from the 2007 and 2008 Private
Placements, along with $162,974 of interest accrued thereon, automatically
converted into 2,743,535 units identical to those sold in the 2009 Public
Offering (based on 70 percent of the offering price, or $0.70 per
share). On the same date, the $142,500 of Davis Note, along with
$14,908 of interest accrued thereon, automatically converted into 314,846
units identical to those sold in the 2009 Public Offering (based on 50
percent of the offering price, or $0.50 per
share).
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·
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The
exercise price of the Davis Warrants and the warrants from the 2007 and
2008 Private Placements was set upon the January 7, 2009 effective date of
the 2009 Public Offering at $0.50 per share (based on 50 percent of the
offering price. All of these warrants became exercisable upon the
January 12, 2009 closing of the 2009 Public Offering and will remain
exercisable until December 31, 2012 Unamortized original issue
discount relating to the warrants and the beneficial conversion feature of
the notes totaling $387,169 and unamortized debt issuance cost of $207,575
was expensed as interest expense upon the
conversion.
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(f)
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Common
Stock and Warrants issued for services and
liabilities
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In
March 2002, the Company granted a warrant to purchase 3,000 shares of
common stock to a former director that was exercisable at $11.33 per
share. This warrant expired unexercised. An aggregate of $12,075 of
stock-based compensation expense related to this warrant was recognized in
the period from August 17, 1999 (inception) to December 31,
2009.
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·
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In
November 2002, the Company granted a warrant to purchase 150 shares of
common stock at an exercise price of $23.33 per share to a consultant, for
services rendered. This warrant expired unexercised. An
aggregate of $490 of stock-based compensation expense related to this
warrant was recognized in the period from August 17, 1999 (inception) to
December 31, 2009.
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In
February 2003, the Company issued 545 common shares to a consultant, in
lieu of $12,705 cash for accounts
payable.
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In
June 2003, under the terms of an agreement with a supplier, the Company
issued a warrant to purchase 9,215 shares of common stock at an exercise
price of $3.33 per share. This warrant expired unexercised.
The value of $187,060 related to this warrant was recognized as research
and development expense in the year ended December 31,
2003.
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·
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In
May 2004, a vendor was issued 3,861 shares of the Company’s common stock
as payment for product development work valued at
$77,225.
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·
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In
July 2004, the Company entered into a research and development agreement
for the development of the ProUroScan System. Under this agreement,
warrants for the purchase of 10,000 shares of the Company’s common stock
upon the execution of the agreement and warrants for the purchase of
20,000 shares of the Company’s common stock in December 2004. The warrants
were fully vested, five-year warrants at a per share exercise price of
$20.00 per share value. The total value of these warrants computed
using the Black-Scholes pricing model was $281,086. The value of the
warrants was recorded as research and development expense in the year
ended December 31, 2004.
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·
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In
October 2004, another vendor was issued 4,444 shares of the Company’s
common stock in lieu of $88,882 cash for accounts
payable.
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·
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On
April 11, 2005, the Company entered into a placement agency agreement with
an investment firm to raise working capital for the Company.
Pursuant to the agreement, on May 13, 2005 the Company issued 5,000 shares
of the Company’s common stock to the placement agent. The 5,000
shares were valued at $51,000 using the stock price on the date of grant
and were recorded as general and administrative expense during the year
ended December 31, 2005.
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·
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On
December 30, 2005, the Company issued 4,541 shares of common stock to our
current and former directors in satisfaction of accrued director’s fees in
the amount of $40,418.
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·
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On
April 21, 2006, the Company issued 7,000 shares of its common stock to its
former Vice-President of Engineering, upon his resignation, pursuant to
his employment agreement. The shares were valued at $44,800 based on
the average closing share price during the five days before and after the
issuance date, and were recorded as compensation expense during the year
ended December 31, 2006.
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·
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On
September 8, 2006, the Company issued 1,415 shares of its common stock to
a vendor, as payment for product development work valued at
$8,938.
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·
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On
April 2, 2007, the Company issued 4,141 shares of its common stock to a
vendor, as payment for product development work valued at
$20,704.
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On
April 16, 2007, the Company issued to Artann five-year warrants
(immediately exercisable) to acquire 20,000 shares of its common stock at
$4.10 per share pursuant to an agreement with Artann. The warrants
were valued at $72,000 by the Black-Scholes pricing model and recorded as
research and development expense during the year ended December 31,
2007.
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·
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On
September 10, 2007, the Company issued a total of 20,694 shares of its
common stock to its directors and former directors as payment for $62,082
of accrued directors’ fees.
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On
January 4, 2008, pursuant to a final separation agreement with a former
employee of the Company, the Company issued to the former employee
five-year warrants (immediately exercisable) to acquire up to 14,500
shares of the Company’s common stock at an exercise price of $5.00 per
share, and amended a previously issued warrant to acquire up to 30,000
shares of the Company’s common stock to provide for cashless exercise
thereof. The warrants, valued at $14,500 using the Black-Scholes
pricing model, were recorded as compensation expense during the year ended
December 31, 2008.
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·
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On
July 11, 2008, the Company’s directors received 21,667 of shares of the
Company’s common stock in lieu of cash for $21,667 of unpaid director’s
fees accrued through June 30, 2008. The shares were valued at $1.00
per share and expensed during the period of
service.
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·
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On
July 11, 2008, the Company issued a total of 37,967 shares of the
Company’s common stock to its directors in recognition of extraordinary
amount of time and effort they spent on the Company’s restructuring and
refocusing efforts since January 2007. The shares were valued at
$1.00 per share and expensed on the date of
issuance.
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·
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On
January 15, 2009, the Company issued 454,546 shares of common stock to
Artann in satisfaction of a $500,000 liability pursuant to its license
agreement with Artann.
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·
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On
April 13, 2009, the Company issued an aggregate of 27,366 shares to its
independent directors as payment of $20,250 directors’ fees accrued
through December 31, 2008, in lieu of
cash.
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·
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On
July 23, 2009, the Company issued a two-year warrant to purchase 30,000
shares of our common stock at an exercise price of $1.25 per share to its
public relations firm as consideration for services provided to the
Company. The warrant, valued at $26,400 using the Black-Scholes
pricing model, was recorded as general and administrative
expense.
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·
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On
September 29, 2009, the Company issued 4,834 shares to a director as
payment of $7,250 directors’ fees, in lieu of
cash.
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On
December 3, 2009, the Company issued 10,000 shares of its common stock to
a web-site designer for services provided valued at
$7,425.
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(g)
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Common
Stock and Warrants issued pursuant to loans and loan
guarantees
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Each
warrant listed below was valued using the Black-Scholes pricing model; however,
the recorded value of warrants issued to lenders and guarantors of Company debt
is limited to the corresponding amount loaned or guaranteed.
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·
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During
the year ended December 31, 2003, the Company issued warrants to purchase
a total of 64,287 shares of common stock at $23.33 per share to nine
individuals, including 4,286 shares to a Company director in exchange for
their guaranteeing a bank line of credit. An aggregate of $216,112
of debt issuance cost related to these warrants was recorded and amortized
over the life of the bank line of credit. Upon the closing of the
Company’s 2004 private placement and Merger on April 5, 2004, certain
exercise price protections and anti-dilution provisions of these warrants
became effective. Under the terms of these provisions, the holders
of these warrants became eligible to purchase a total of 101,788 shares at
$16.67 per share. The additional warrants and revaluation of the
existing warrants were valued at $320,974 using the Black Scholes pricing
model, and were recorded as interest expense at the time of
issuance. The warrants expired
unexercised.
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·
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In
September 2005, the Company engaged a consultant to assist with the
introduction of strategic investors to the Company. Under this
agreement, on September 1, 2005 and February 22, 2006, the Company issued
a total of 5,000 shares of common stock valued at $40,500 on the grant
dates to the consultant. Upon the closing of the Company’s Crown
Bank notes on February 16, 2006, the $43,000 aggregate value of the shares
and initial retainer were recorded as debt issuance cost and were
amortized over the term of the
notes.
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·
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On
September 14, 2005, in connection with a commercial guaranty of a $100,000
bank loan, the Company issued two five-year warrants (immediately
exercisable) to an individual investor to acquire a total of 5,000 shares
of the Company’s common stock at $5.00 per share. The warrants,
valued at $29,000 using the Black-Scholes pricing model, were recorded as
debt issuance costs and expensed over the term of the loan as interest
expense. The Company recorded $29,000 of expense related to the
value of the warrants during the period from August 17, 1999 (inception)
to December 31, 2009.
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·
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On
September 21, 2005, in connection with $100,000 loan from an individual
investor, the Company issued two five-year warrants (immediately
exercisable) to the lender to acquire a total of 5,000 shares of the
Company’s common stock at $5.00 per share. The gross proceeds of
$100,000 were allocated between the promissory note and the common stock
warrants based on the relative fair values of the securities at the time
of issuance. The warrants, valued at $26,500 using the Black-Scholes
pricing model, were recorded as original issue discount as defined in ASC
Topic 470 expensed on a straight-line basis over the term of the
promissory note as interest expense. The Company recorded $26,500 of
expense related to the value of the warrants during the period from August
17, 1999 (inception) to December 31,
2009.
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·
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On
October 19, 2005, in connection with commercial guaranties of a $300,000
loan from a bank, the Company issued five-year warrants (immediately
exercisable) to two investors to acquire up to 7,500 shares (15,000 shares
in total) of the Company’s common stock at $5.00 per share. The
warrants, valued at $79,500 using the Black-Scholes pricing model, were
recorded as debt issuance costs and expensed over the term of the loan as
interest expense. The Company recorded $79,500 of expense related to
the value of the warrants during the period from August 17, 1999
(inception) to December 31, 2009.
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·
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On
January 25, 2006, in connection with a $23,000 loan, the Company issued a
five-year warrant (immediately exercisable) to a partnership to acquire
5,000 shares of Company common stock at $5.00 per share. The gross
proceeds of $23,000 were allocated between the promissory note and the
common stock warrant based on the relative fair values of the securities
at the time of issuance. The fair value of the warrant estimated at
grant date using the Black-Scholes pricing model exceeded the amount of
the loan. Accordingly, the warrant was valued at $23,000 and
recorded as original issue discount as defined in ASC Topic 470 and
expensed as interest expense over the term of the
loan.
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·
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On
June 1, 2006, the Company borrowed $75,000 from an individual investor,
and in connection therewith issued to the investor a promissory note to
mature on August 30, 2006. Under the terms of the loan agreement,
the Company issued a five-year warrant (immediately exercisable)
to the investor
to acquire 3,750 shares of Company common stock at $5.00 per share.
The fair value of the warrant at the grant date was estimated using the
Black-Scholes pricing model to be $25,500 and was recorded as original
issue discount as defined in ASC Topic 470 and subsequently expensed as
interest expense over the 90-day term of the
loan.
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On August
24, 2006 the promissory note was amended to mature on October 29, 2006 and the
Company agreed to issue a five-year warrant to the investor to acquire 41.7
shares of the Company’s common stock at $5.00 per share for each day the
promissory note was outstanding after August 30, 2006 upon repayment of the
promissory note. These warrants were valued at $5.40 per share using the
Black-Scholes pricing model. In connection with amendments to the
promissory note, the Company issued to the investor 31,817 warrants accrued
between August 30, 2006 and October 1, 2008 along with a warrant to acquire
3,000 shares of its common stock and agreed to continue to accrue 41.7 warrants
per day to be issued upon the Company’s repayment of the promissory note.
The warrants issued and accrued on and after October 1, 2008 were five-year
warrants with an exercise price of $1.50 per share, and were valued at $1.32 per
share using the Black-Scholes pricing model.
The
present value of the cash flows under both amendments was greater than 10
percent different from the present value of the cash flows under the original
agreement, indicating that a substantial modification of debt terms had
occurred. Accordingly, the warrants issued and the accrual of warrants to
be issued pursuant to the amended note were recorded as debt extinguishment
expense. The total debt extinguishment expense recorded for the 459,
15,262 and 36,112 warrants accrued for issuance during the years ended December
31, 2009 and 2008, and the period from August 17, 1999 (inception) to December
31, 2009 was $607, $70,723 and $181,443, respectively. On January 12,
2009, the Company repaid the promissory note and issued 4,295 warrants related
to this note.
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·
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On
July 21, 2006, in connection with a $7,500 loan from an individual
investor, the Company issued a five-year warrant (immediately
exercisable)
to the investor
to acquire 375 shares of Company common stock at $5.00 per share.
The gross proceeds of $7,500 were allocated between the promissory note
and the common stock warrant based on the relative fair values of the
securities at the time of issuance. The warrant, valued at $2,025
using the Black-Scholes pricing model, was recorded as original issue
discount as defined in ASC Topic 470 and was expensed as interest expense
during the year ended December 31,
2006.
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·
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On
August 30, 2006, in connection with a $10,000 loan from an individual
investor, the Company issued a five-year warrant (immediately exercisable)
to the investor to acquire 500 shares of Company common stock at $5.00 per
share. The gross proceeds of $10,000 were allocated between the promissory
note and the common stock warrant based on the relative fair values of the
securities at the time of issuance. The warrant, valued at $2,300
using the Black-Scholes pricing model, was recorded as original issue
discount as defined in ASC Topic 470 and was expensed as interest expense
during the year ended December 31,
2006.
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·
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On
November 30, 2006, the Company borrowed $100,000 from a partnership, and
in connection therewith issued to the partners a promissory note to mature
on January 2, 2007. Pursuant to the terms of the promissory note,
the Company issued five-year warrants (immediately exercisable) to the
partners to acquire 5,000 shares of Company common stock at $5.00 per
share. In addition, pursuant to the terms of the promissory note,
the Company issued an additional five-year warrant (immediately
exercisable) to the partners to acquire 5,000 shares of Company common
stock at $5.00 per share, when the loan was not repaid on January 2,
2007. The first warrant, valued at $22,500 using the Black-Scholes
pricing model, was recorded as original issue discount as defined in ASC
Topic 470 and was expensed as interest expense over the term of the
promissory note. The second warrant, also valued at $22,500, was
expensed immediately as interest expense. The Company recorded
interest expense of $45,000 related to the warrants issued pursuant to the
original agreement during the period from August 17, 1999 (inception) to
December 31, 2009.
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On each
of March 20, 2007 and August 8, 2007, the Company amended the promissory note
with the partnership, resulting in an extension of its due dates, the issuance
of a third warrant to acquire 5,000 shares of Company common stock at $5.00 per
share on February 1, 2007 and an agreement to issue to the partners five-year
warrants to acquire 167 shares at $5.00 per share for each day the principal
remained unpaid on and after March 1, 2007. The present value of the cash
flows under the modifications was greater than 10 percent different from the
present value of the cash flows under the existing agreement, indicating that a
substantial modification of debt terms had occurred. Accordingly, the
accrual of warrants to be issued and the warrants issued on February 1, 2007
pursuant to the promissory note were recorded as debt extinguishment
expense. The Company expensed as debt extinguishment cost $0, $4,848 and
$206,485 related to the accrual of 0,1,347 and 52,357 warrants to be issued of
warrants pursuant to the amended terms of the promissory note during the years
ended December 31, 2009 and 2008, and the period from August 17, 1999
(inception) to December 31, 2009, respectively. On January 16, 2008, the
Company repaid the outstanding principal amount of the note and issued the
52,357 accrued warrants.
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·
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On
March 14, 2007, upon the termination of employment of an employee, and in
consideration for an agreement to defer payment of accrued salaries until
the Company is able to make such payments, the Company agreed to extend by
three years the expiration date of 30,000 warrants beneficially held by
the employee. The modification of the warrant resulted in the
recording of an immediate incremental compensation expense totaling
$96,000, computed as the increase in the fair value of the warrant as
determined using the Black-Scholes pricing model over the fair value so
determined immediately before the
modification.
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·
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On
July 31, 2007, the Company borrowed $100,000 for short-term working
capital needs pursuant to a promissory note issued to an individual
investor. During the years ended December 31, 2009 and 2008, and the
period from August 17, 1999 (inception) to December 31, 2009, the Company
accrued for issuance warrants to acquire 680, 12,576 and 28,656 shares of
the Company’s common stock, respectively, and recorded interest expense of
$2,720, $50,304 and $114,624, respectively, related thereto. On
January 20, 2009, the Company repaid the promissory note and issued 28,656
warrants related to this note.
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·
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On
August 29, October 31, and November 30, 2007, the Company borrowed for
working capital needs $50,000, $100,000 and $25,000, respectively, from
James Davis. On December 27, 2007 these notes were converted into
the units sold by the Company in its 2007 Private Placement (see Note
14(e)). Pursuant to the terms of the promissory note the Company issued to
Mr. Davis 12,550 warrants that were valued at $28,340 using the
Black-Scholes pricing model, which were expensed as interest expense
during the period from August 17, 1999 (inception) to December 31,
2009.
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·
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On
October 15, 2007, the Company borrowed $600,000 pursuant to a promissory
note issued to an individual investor. In consideration for this
loan, on November 7, 2007 the Company agreed to issue 33,333 shares of its
common stock to the investor. The $66,666 value of this
consideration was recorded as debt issuance cost and was amortized over
the term of the loan using the straight-line method, which approximates
the interest method. The Company recorded $7,836, $48,473 and
$66,667 of interest expense related to the amortization of this debt
issuance cost during the years ended December 31, 2009 and 2008, and the
period from August 17, 1999 (inception) to December 31, 2009,
respectively. On October 31, 2008, pursuant to the terms of the loan
when the loan remained unpaid on that date, the Company issued to the
investor 6,667 shares of its common stock and a five-year immediately
exercisable warrant to acquire 16,667 shares of its common stock at an
exercise price of $2.00. The $6,667 value of the shares issued and
the $12,834 value of the warrants was recorded as interest expense during
the year ended December 31, 2008.
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On March
19, 2009, the note was renewed to mature on March 28, 2010. As
consideration to the lender for renewing the loan, the Company issued 66,667
shares of its common stock, representing the first six months compensation, and
is accruing for issuance 11,111 shares per month for each additional month the
note remains 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 recorded as debt extinguishment expense. Additional accruals of stock
to be issued if the promissory notes remain outstanding after August 31, 2009
were expensed each month as debt extinguishment expense. During the year
ended December 31, 2009, 44,444 shares were accrued for issuance pursuant to
this loan guarantee compensation arrangement, resulting in additional debt
extinguishment expense of $22,222.
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·
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On
January 7, 2009, upon the effective date of the 2009 Public Offering, the
Company issued 292,384 shares of common stock to holders of $733,334 of
convertible debentures pursuant to the automatic conversion of the
debentures and $143,815 interest accrued
thereon.
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·
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On December 28, 2007, pursuant to
the terms of guarantees of its
$1.2 million Crown Bank promissory
note,
the Company issued to
the three guarantors an aggregate of 88,889 shares of the Company’s common
stock. The $88,889 value of the shares was immediately expensed as
interest.
On October 31, 2008, pursuant to the terms of the
guarantees when the Crown bank loan remained unpaid, the Company issued to
the three guarantors an aggregate amount of 17,778 shares of our common
stock and five-year immediately exercisable warrants to acquire an
aggregate of 44,445 shares of our common stock at an exercise price of
$2.00 per share. The $17,778 value of the shares issued and the
$34,223 value of the warrants was recorded as interest expense during the
year ended December 31, 2008.
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On March
19, 2009, pursuant to guaranties received relating to the Company’s renewal of
the Crown Bank promissory note, the Company issued an aggregate of 133,334
shares of its common stock to the guarantors representing the first six months’
consideration for providing their guarantee (see Note 11). 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. For each
month the promissory note remains outstanding after August 31, 2009, the Company
is accruing for issuance to the guarantors 22,222 shares of its common
stock. A total of 88,888 shares were accrued for issuance as of December
31, 2009. The $44,444 value of the shares was recorded as interest
expense.
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·
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On
April 3, 2008, as consideration to James Davis, William Reiling and
another investor for providing certain loans to the Company, the Company
issued five-year warrants (immediately exercisable) to purchase a total of
75,000 shares of the Company’s common stock at $1.50 per share. The
gross proceeds were allocated between the note and the warrants based on
the relative fair value at the time of issuance. The relative fair
value of warrants was recorded as original issue discount on the related
convertible promissory notes and was expensed as interest expense over the
term of the notes. During the year ended December 31, 2008, original
issue discounts of $42,768 were expensed as interest expense. On
January 22, 2009, $29,500 of the convertible promissory notes was
converted into 42,143 shares of the Company’s common
stock.
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·
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On
September 25, 2008, the Company borrowed $150,000 pursuant to a
convertible promissory note issued in favor of James Davis. As
consideration for providing the loan, the Company issued an immediately
exercisable, five-year warrant to purchase 100,000 shares of the Company’s
common stock at $1.50 per share to Mr. Davis. The $46,604 relative
fair value of the warrant was recorded as original issue discount and
expensed as interest expense over the term of the promissory note.
During the year ended December 31, 2008, original issue discount of $8,280
was expensed as interest expense. On March 19, 2009, Mr. Davis
agreed to refinance the $150,000 debt interest and a $37,500 note along
with accrued interest and additional amounts loaned to the Company.
Pursuant to the refinancing and the other arrangements, the Company issued
a $281,000 unsecured convertible promissory note to Mr. Davis. On
May 26, 2009, Mr. Davis exercised his conversion rights under the
promissory note, and the note was converted into 510,909 shares of the
Company’s common stock (see Notes 12 and
15).
|
|
|
·
|
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 11). The Company will accrue for issuance 1,111 shares of
its common stock as further consideration 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. The value of the shares was recorded as debt
issuance cost.
|
|
|
·
|
On
September 21, 2009, the Company issued 19,833 shares valued at $28,262 to
Mr. Davis as six months worth of consideration for providing a $243,000
loan (see Notes 10 and 15). The value of the shares was recorded as
debt issuance cost and is being amortized over six months. The
Company will accrue for issuance 2,700 shares of its common stock as
further consideration 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 value
of the shares was recorded as debt issuance
cost.
|
|
|
·
|
On
September 23, 2009, the Company issued 6,667 shares valued at $9,000 to a
guarantor as six months worth of consideration for providing a guarantee
of a $100,025 bank loan (see Note 11). The value of the shares was
recorded as debt issuance cost and is being amortized over six
months. The Company will accrue for issuance 1,111 shares of its
common stock as further consideration 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 value of the shares was recorded as debt issuance
cost.
|
|
|
·
|
On
September 23, 2009, the Company issued 20,000 shares valued at $27,000 to
an individual lender as six months worth of consideration for providing a
$300,000 loan (see Note 10). The value of the shares was recorded as
debt issuance cost and is being amortized over six months. The
Company will accrue for issuance 3,333 shares of its common stock as
further consideration 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 value
of the shares was recorded as debt issuance
cost.
|
|
|
·
|
On
November 6, 2009, the Company issued 925 shares of its common stock valued
at $1,322 to Scott Smith, a director, as consideration for providing a
$26,000 loan.
|
|
|
On
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”). On
November 6, 2009, Warrants to purchase 1,244,829 shares of common stock
were tendered resulting in gross proceeds to the Company of $1,618,278,
including the cancellation of a $26,000 loan from a director and $11,250
of directors’ fees owed to another director in lieu of cash payments for
the exercise of a portion the Warrants they
exercised.
|
|
|
The
$1,356,864 fair value of the Replacement Warrants as determined using the
Black-Scholes pricing model was expensed with an offsetting entry to
additional paid-in capital. The $1,618,278 purchase price of the
stock issued pursuant to the Warrant exercise, less the $171,865 expenses
of the offering was recorded as capital stock and additional paid-in
capital.
|
|
|
In
December 2009, the Company issued 101,975 shares of common stock to
certain warrant holders upon their exercise of warrants. The Company
realized proceeds of $132,568 from these warrant
exercises.
|
Warrant
activity was as follows for the years ended December 31:
|
|
|
Warrants
|
|
|
Weighted-Average Exercise
Price
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Outstanding,
January 1
|
|
|
1,074,014
|
|
|
|
639,504
|
|
|
$
|
3.05
|
|
|
$
|
6.61
|
|
|
Granted
|
|
|
7,689,349
|
|
|
|
538,297
|
|
|
|
1.30
|
|
|
|
1.38
|
|
|
Exercised
|
|
|
(1,346,804
|
)
|
|
|
-
|
|
|
|
1.30
|
|
|
|
-
|
|
|
Expired
|
|
|
(30,000
|
)
|
|
|
(103,787
|
)
|
|
|
20.00
|
|
|
|
16.37
|
|
|
Outstanding,
December 31
|
|
|
7,386,559
|
|
|
|
1,074,014
|
|
|
$
|
1.47
|
|
|
$
|
3.05
|
|
The fair
value of stock warrants is the estimated present value at grant date using the
Black-Scholes pricing model (see Note 1(j)). The weighted-average fair
value of the warrants granted during the years ended December 31, 2009 and 2008
was $1.30 and $1.37, respectively. The expense related to warrants issued to
lenders and debt guarantors was $3,327, $262,305 and $1,100,511 for the years
ended December 31, 2009 and 2008, and the period from August 17, 1999
(inception) to December 31, 2009, respectively (excluding warrants issued in
connection with the 2007 and 2008 Private Placements and the 2008 Unit Put
Arrangement). Stock-based compensation cost related to warrants issued to
the Company’s consultants and suppliers was $26,400, $14,500 and $677,536 for
the years ended December 31, 2009 and 2008, and the period from August 17, 1999
(inception) to December 31, 2009, respectively. Stock-based compensation
cost related to warrants issued to directors (in lieu of stock options) was $0,
$0 and $12,075 for the years ended December 31, 2009 and 2008, and the period
from August 17, 1999 (inception) to December 31, 2009,
respectively.
Stock
Option Plans
In April
2002, the Company’s Board passed a resolution adopting the ProUroCare Medical
Inc. 2002 Stock Plan (the “2002 Plan”), reserving 150,000 shares of the
Company’s common stock for issuance.
In July
2004, the Board passed a resolution adopting the ProUroCare Medical Inc. 2004
Stock Option Plan (the “2004 Plan”), which was approved by the Company’s
shareholders in July 2005. The Company has reserved 150,000 shares of
common stock for issuance under the 2004 Plan.
In
February 2009, the Board passed a resolution adopting the ProUroCare Medical
Inc. 2009 Stock Option Plan (the “2009 Plan”), which was approved by the
Company’s shareholders in August 2009. The Company has reserved 1,200,000
shares of common stock for issuance under the 2009 Plan.
The plans
permit the Company to grant incentive and nonqualified options, stock
appreciation rights, stock awards, restricted stock awards, performance shares
and cash awards to Company employees and independent contractors. The
exercise price for all options granted under the plans shall be determined by
the Board. The term of each stock option and period of exercisability will also
be set by the Board, but will not exceed a period of ten years and one day from
grant date. The agreements also include provisions for anti-dilution of
options.
Stock
Option Grants
Each of
the options granted below were valued using the Black-Scholes pricing model (see
Note 1(i)) and are being expensed over the vesting period as general and
administrative expense.
|
|
·
|
In
March 2002, the Company granted an aggregate of 90,000 employee stock
options to officers and directors that were exercisable at $11.33 per
share. The officers’ options vested ratably over a 36-month period
through December 2004, while the directors’ options vested ratably over a
24-month period through April 2004. An aggregate $342,782 of
stock-based compensation expense related to these options was recognized
in the period from August 17, 1999 (inception) to December 31,
2009.
|
In
October 2003, an officer resigned from the Company and 15,000 of his unvested
options were forfeited and in October 2004 his remaining 21,000 options
expired. In February 2004, a director resigned from the Board, and 375 of
his unvested options were forfeited, and in October 2005 his remaining 2,625
options expired. Effective May 1, 2007, Maurice Taylor, the Company’s
former Chairman and Chief Executive Officer, retired from the Company.
Pursuant to a May 11, 2007 agreement to defer payment of his unpaid salary, the
Company extended the date through which Mr. Taylor may exercise 45,000 options
(including options gifted to his children) following his separation to April 1,
2012. The Company recorded stock-based compensation expense of $103,500
related to the extension of the exercise date in the year ended December 31,
2007.
|
|
·
|
In
April 2002, the Company issued a nonqualified stock option to a consultant
to acquire 3,000 shares of common stock at $11.33 per share. This option
expired unexercised. At the same time, the Company also issued a
nonqualified stock option to another consultant to acquire 3,000 shares of
common stock at $11.33 per share. This option vested ratably over a
two-year period through April 2004. An aggregate of $27,600 of
stock-based compensation expense related to these options was recognized
in the period from August 17, 1999 (inception) to December 31,
2009.
|
|
|
·
|
In
February 2004, the Company issued 45,000 employee stock options to Michael
Grossman, our former President and Chief Operating Officer. These
options were valued at $6.70 per share, vested ratably over a three-year
period and are exercisable at $20.00 per share. The Company
expensed, $16,811 and $303,000 related to these options during the year
ended December 31, 2007 and the period from August 17, 1999 (inception) to
December 31, 2009, respectively. Pursuant to a May 11, 2007
separation agreement, the Company extended the date through which Mr.
Grossman may exercise 45,000 options (including options gifted to his
children) following his separation until February 1, 2012. The
Company recorded stock-based compensation expense of $117,000 related to
the extension of the exercise date in the year ended December 31,
2007.
|
|
|
·
|
In
February 2004, the Company issued 3,000 nonqualified stock options to a
consultant in consideration of services rendered. The options were
valued at $6.70 per share, and vested as to 1,500 shares upon issuance and
as to the remaining 1,500 shares on January 1, 2005. These options
are exercisable at $20.00 per share through February 2014. The
Company expensed $20,200 related to these options during the period from
August 17, 1999 (inception) to December 31,
2009.
|
|
|
·
|
In
July 2004, the Company issued 20,000 employee stock options to Mr. Thon in
connection with his employment agreement. These options were valued
at $15.00 per share, vested ratably over a three-year period, and are
exercisable at $25.00 per share through July 2014. The Company
expensed $58,314 and $300,000 related to these options during the year
ended December 31, 2007 and the period from August 17, 1999 (inception) to
December 31, 2009, respectively. On July 11, 2008, in connection
with the issuance of new options to Mr. Thon (see below), these options
were cancelled.
|
|
|
·
|
In
January 2005, the Company issued 15,000 stock options to Mr. Carlson, who
at the time was the Company’s Vice President of Marketing and Sales.
The options were valued at $16.20 per share, vest ratably over a
three-year period, and are exercisable at $23.50 per share through January
2015. The Company expensed $0, $6,729, and $243,000 related to these
options during the years ended December 31, 2009 and 2008 and the period
from August 17, 1999 (inception) to December 31, 2009, respectively.
On July 11, 2008, in connection with the issuance of new options to Mr.
Carlson (see below), these options were
cancelled.
|
|
|
·
|
In
September 2005, the Company issued 15,000 stock options exercisable at
$6.00 per share to an employee. The options were valued at $5.30 per
share and expired unexercised. The Company expensed $15,460 related
to these options during the period from August 17, 1999 (inception) to
December 31, 2009.
|
|
|
·
|
On
March 1, 2006, the Company issued to five of its employees five-year stock
options to acquire a total of up to 20,000 shares of common stock at $7.50
per share. The options, valued at $5.60 per share, vest upon the
Company securing FDA approval of its ProUroScan
TM
system. 10,000 of these options were awarded to employees who
subsequently left the Company and have been forfeited. The remaining
options are being expensed over the vesting period (estimated by the
Company as forty-one months) as general and administrative expense.
The Company expensed $2,823, $9,663 and $94,007 related to these options
during the years ended December 31, 2009 and 2008, and the period from
August 17, 1999 (inception) to December 31, 2009,
respectively.
|
|
|
·
|
On
May 30, 2006, the Company issued 3,000 nonqualified stock options to Mr.
Smith, a director, upon his appointment to the Board. The options
were valued at $5.90 per share, and vested over a two year period.
These options are exercisable at $7.00 per share through May 2013.
The Company expensed $0, $3,688 and $17,700 related to these options
during the years ended December 31, 2009 and 2008, and the period from
August 17, 1999 (inception) to December 31, 2009,
respectively.
|
|
|
·
|
On
February 1, 2007, the Company granted to Mr. Carlson, a seven-year option
to acquire up to 20,000 shares of the Company’s common stock at a price of
$5.00 per share. The options were valued at $3.40 per share using
the Black-Scholes pricing model and will be expensed over the vesting
period as general and administrative expense.
The options vested
as follows:
|
|
|
(a)
|
5,000
shares vested immediately.
|
|
|
(b)
|
5,000
shares vest upon the Company’s closing on new equity financing
arrangements aggregating to $3,000,000 or more after February 1, 2007 and
prior to December 31, 2007. This objective was not met, and these
options did not vest and were
forfeited.
|
|
|
(c)
|
5,000
shares vest if the Company records gross product revenues of $1,000,000 or
more in the Company’s 2008 fiscal year. This objective was not met,
and these options did not vest and were
forfeited.
|
|
|
(d)
|
5,000
shares vested on December 31, 2008.
|
The
Company expensed $0, $1,143, and $34,000 related to these options during the
year ended December 31, 2009 and 2008, and the period from August 17, 1999
(inception) to December 31, 2009, respectively.
|
|
·
|
On
June 14, 2007, the Company issued 3,000 nonqualified stock options to Mr.
Rudelius, upon his appointment to the Board. The options were valued
at $2.40 per share, and vest ratably over a 24-month period through June
14, 2009. These options are exercisable at $2.90 per share through
May 2014. The Company expensed $1,800, $3,600 and $7,200 related to
these options during the year ended December 31, 2009 and 2008
,
and the period from
August 17, 1999 (inception) to December 31, 2009,
respectively.
|
|
|
·
|
On
July 11, 2008, the Company issued incentive stock options to acquire
70,000 shares of its common stock to Mr. Carlson. The options are
exercisable for a period of seven years at an exercise price of $1.00 per
share. Of the options, 10,000 shares vest immediately and 20,000
shares will vest on July 1 of each of 2009, 2010 and 2011. At the
same time, Mr. Carlson agreed to cancel existing, fully-vested stock
options to acquire 15,000 shares of common stock at an exercise price of
$23.50 per share. The Company accounts for options that are
cancelled and reissued simultaneously as a modification of the terms of
the original option. Accordingly, the incremental compensation cost
of the fully vested portion of the newly issued options, valued at $0.79
per share using the Black-Scholes pricing model, over the $0.31 per share
value of the cancelled options on the cancellation date were expensed
immediately as general and administrative expense. The value of the
unvested portion will be recorded as general and administrative expense
over the three-year vesting period. The Company expensed $17,000,
$11,750 and $28,750 related to these options during the year ended
December 31, 2009 and 2008, and the period from August 31, 1999
(inception) to December 31, 2009,
respectively.
|
|
|
·
|
On
July 11, 2008, the Company issued incentive stock options to acquire
35,000 shares of its common stock to Mr. Thon. The options are
exercisable for a period of seven years at an exercise price of $1.00 per
share. Of the options, 10,000 shares vest immediately and 8,333
shares will vest on July 1 of each of 2009, 2010 and 2011. At the
same time, Mr. Thon agreed to cancel existing, fully-vested stock options
to acquire 20,000 shares of common stock at an exercise price of $25.00
per share. The Company accounts for options that are cancelled and
reissued simultaneously as a modification of the terms of the original
option. Accordingly, the incremental compensation cost of the fully
vested portion of the newly issued options, valued at $0.79 per share
using the Black-Scholes pricing model, over the $0.27 per share value of
the cancelled options on the cancellation date were expensed immediately
as general and administrative expense. The value of the unvested
portion will be recorded as general and administrative expense over the
three-year vesting period. The Company expensed $7,083, $6,042 and
$13,125 related to these options during the year ended December 31, 2009
and 2008, and the period from August 31, 1999 (inception) to December 31,
2009, respectively.
|
|
|
·
|
On
August 11, 2008, the Company issued 1,000 non-qualified stock options
(immediately exercisable) to each of its three outside directors, Mr.
Koenig, Mr. Smith and Mr. Rudelius, pursuant to its standard annual option
award program, upon their re-election to the Company’s Board. The
options are exercisable for a period of seven years at an exercise price
of $0.90 per share, and were valued at $0.71 per share. The Company
expensed $2,130 related to these option during the year ended December 31,
2008.
|
|
|
·
|
On
March 3, 2009, the Company granted non-qualified stock options to acquire
an aggregate of 70,000 shares of its common stock to its non-employee
directors, and incentive options to acquire 45,000 shares of its common
stock to Richard Thon, our Chief Financial Officer (the “CFO”). The
options are fully vested and are exercisable for a period of seven years
at an exercise price of $0.85 per share. The 115,000 options were
valued at $0.68 per share using the Black-Scholes pricing model and
$78,200 was immediately expensed as general and administrative
expense.
|
Also on
March 3, 2009, the Company granted an incentive stock option to acquire an
aggregate of 100,000 shares of its common stock to Richard Carlson, our Chief
Executive Officer (the “CEO”). Of the options, 90,000 shares vest
immediately and 10,000 shares will vest on January 2, 2010. At the same
time, Mr. Carlson agreed to cancel existing, unvested stock options to acquire
5,000 shares of common stock at an exercise price of $7.50 per share. The
options that were cancelled and simultaneously reissued were treated as a
modification of the terms of the original option. Accordingly, the
incremental compensation cost of the fully vested portion of the newly issued
options valued at $0.68 per share using the Black-Scholes pricing model over the
$0.07 per share value of the cancelled options on the cancellation date was
expensed immediately as general and administrative expense. A total of
$68,200 was recorded as compensation expense related to this option grant during
the year ended December 31, 2009
|
|
·
|
On
July 23, 2009, the Company granted a non-qualified stock option to acquire
an aggregate of 6,500 shares of its common stock to a consultant pursuant
to a consulting arrangement. The options are fully vested and are
exercisable for a period of five years at an exercise price of $1.21 per
share. The options were valued at $0.87 per share using the
Black-Scholes pricing model and $5,655 was immediately expensed as general
and administrative expense.
|
|
|
·
|
On
July 23, 2009, the Company granted a non-qualified stock option to acquire
an aggregate of 100,000 shares of its common stock to a consultant
pursuant to a consulting arrangement. The options expire seven years
from the date of issuance and have an exercise price of $1.21 per
share. Options to purchase 50,000 shares vested immediately, and
were valued at $0.97 per share using the Black-Scholes pricing
model. 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 consultant’s 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
December 31, 2009 as determined using the Black Scholes pricing model was
$2.14 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 $64,792 during the
year ended December 31, 2009.
|
|
|
·
|
On
August 11, 2009, the Company issued 1,000 non-qualified stock options
(immediately exercisable) to each of its non-employee directors pursuant
to its standard annual option award program, upon their re-election to the
Board. The options are fully vested and exercisable for a period of
seven years at an exercise price of $1.25 per share. The options
were valued at $1.00 per share using the Black-Scholes pricing model and
$3,000 was immediately expensed as general and administrative
expense.
|
|
|
·
|
On
September 29, 2009, the Company issued non-qualified stock options to each
of its non-employee directors, Mr. Koenig (50,000 options), Mr. Smith
(30,000 options) and Mr. Rudelius (30,000 options). On the same
date, the Company issued incentive stock options to its executive
officers, Mr. Carlson (150,000 options) and Mr. Thon (60,000
options). The options expire seven years from the date of issuance,
are exercisable at $1.50 per share and vest upon the latter of the date
that the Company is cleared by the FDA to sell its ProUroScan System in
the United States or the date that the Company closes on an aggregate of
$2 million or more of incremental financing after the date of grant,
including financing received upon the exercise of existing warrants.
The options were valued at $1.21 per share using the Black-Scholes pricing
model and are being expensed over the estimated vesting period as general
and administrative expense. The Company expensed $232,320 during the
year ended December 31, 2009 related to these
options.
|
|
|
·
|
On
November 23, 2009, Mr. Koenig exercised 32,000 of his non-qualified
options in a cashless exercise that resulted in a net issuance of 22,229
shares of common stock.
|
|
|
(k)
|
Stock
options summary
|
Stock
option activity was as follows for the years ended December 31:
|
|
|
Options
|
|
|
Weighted-Average Exercise
Price
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Outstanding,
January 1
|
|
|
233,000
|
|
|
|
175,500
|
|
|
$
|
7.73
|
|
|
$
|
15.16
|
|
|
Granted
|
|
|
644,500
|
|
|
|
108,000
|
|
|
|
1.23
|
|
|
|
1.00
|
|
|
Exercised
|
|
|
(32,000
|
)
|
|
|
–
|
|
|
|
0.86
|
|
|
|
–
|
|
|
Forfeited/Expired
|
|
|
(5,000
|
)
|
|
|
(50,500
|
)
|
|
|
7.50
|
|
|
|
19.16
|
|
|
Outstanding,
December 31
|
|
|
840,500
|
|
|
|
233,000
|
|
|
$
|
3.01
|
|
|
$
|
7.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31
|
|
|
398,833
|
|
|
|
132,250
|
|
|
$
|
4.73
|
|
|
$
|
12.20
|
|
The
following table summarizes information about stock options outstanding as of
December 31, 2009:
|
|
|
Options Vested or Expected to Vest
|
|
|
Options Exercisable
|
|
|
Range of Exercise Prices
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$0.85-$1.25
|
|
|
400,500
|
|
|
$
|
0.99
|
|
|
|
6.08
|
|
|
|
283,833
|
|
|
|
0.95
|
|
|
$1.50
|
|
|
320,000
|
|
|
$
|
1.50
|
|
|
|
6.75
|
|
|
|
-
|
|
|
|
-
|
|
|
$2.90
|
|
|
3,000
|
|
|
$
|
2.90
|
|
|
|
4.45
|
|
|
|
3,000
|
|
|
|
2.90
|
|
|
$5.00-$7.50
|
|
|
18,000
|
|
|
$
|
6.03
|
|
|
|
5.04
|
|
|
|
13,000
|
|
|
|
5.46
|
|
|
$11.33
|
|
|
51,000
|
|
|
$
|
11.33
|
|
|
|
2.26
|
|
|
|
51,000
|
|
|
$
|
11.33
|
|
|
$20.00
|
|
|
48,000
|
|
|
$
|
20.00
|
|
|
|
2.21
|
|
|
|
48,000
|
|
|
$
|
20.00
|
|
|
|
|
|
840,500
|
|
|
$
|
3.01
|
|
|
|
5.85
|
|
|
|
398,833
|
|
|
$
|
4.73
|
|
The
aggregate intrinsic value of the options outstanding and exercisable at December
31, 2009 was $925,835 and $439,835, respectively. The average fair value
of each option granted during the years ended December 31, 2009 and 2008, and
the period from August 17, 1999 (inception) to December 31, 2009, as determined
using the Black-Scholes pricing model (see Note 1(i)) was $0.99, $0.84 and
$2.34, respectively. The stock-based employee and non-employee
compensation cost related to stock options was $480,873, $44,745 and $2,122,645,
or $0.05, $0.03 and $1.14 per share, for the years ended December 31, 2009 and
2008, and the period from August 17, 1999 (inception) to December 31, 2009,
respectively. The total intrinsic value of the 32,000 options exercised
during the year ended December 31, 2009 was $62,910. The options were
exercised pursuant to cashless exercise provisions of the options and no cash
was received by the Company.
The
Company considers its directors, executives and beneficial shareholders of more
than five percent of its common stock to be related parties. During the
years ended December 31, 2009 and 2008, the following significant transactions
were made between the Company and those parties that were related parties at the
time of each transaction:
From
March 1, 2007 to January 31, 2009, the Company rented executive offices within
the offices of a former Company director, Mr. Alex Nazarenko. Our rental
cost for these offices was approximately $2,129 per month, which is the market
price for similar office space in Minneapolis, Minnesota.
On
February 28, 2008, director Robert Rudelius acquired $10,000 of the units sold
in the 2008 Private Placement.
On
April 3, 2008, in connection with the Company’s purchase of the Profile
Assets, the Company borrowed an aggregate of $112,500 pursuant to three
promissory notes each in the amount of $37,500. The promissory notes were issued
in favor of James Davis, William Reiling and the Phillips W. Smith Family Trust
(the “Smith Trust”), then each greater than five percent shareholders. On
September 12, 2008, these three promissory notes were amended to extend
their due dates to the earlier of seven days following the close of an
underwritten public offering or December 31, 2008, and to give the holders
an option to convert their notes into shares of our common stock at a conversion
price equal to 70 percent of the price of the Units sold in such
offering.
On
September 16, 2008, Mr. Davis agreed to purchase $100,000 of the puts
pursuant to the 2008 Unit Put Arrangement. On September 24, 2008, the
Company closed on $50,000 of Mr. Davis’ put commitment, and issued a
$47,500 convertible note and a warrant to acquire 10,000 shares of our common
stock at an exercise price of $1.00 per share. On October 28, 2008, the
Company closed on the remaining $50,000 of Mr. Davis’ put commitment, and
issued a $47,500 convertible note and a warrant to acquire 10,000 shares of our
common stock at an exercise price of $1.00 per share.
On
September 25, 2008, the Company borrowed $150,000 pursuant to a promissory
note issued in favor of Mr. Davis and used the proceeds to retire the $150,000
principal amount of the Profile Note (see Note 12(d)). As consideration for
providing the loan, the Company issued an immediately exercisable, five-year
warrant to purchase 100,000 shares of our common stock at $1.50 per share to
Mr. Davis.
On
January 15, 2009, the Company repaid an outstanding $37,500 loan along with
accrued interest thereon to Mr. Reiling.
On March 19, 2009, pursuant to the
guaranties received relating to the Company’s renewal of its $1,200,000 Crown
Bank promissory note, the Company issued an aggregate 133,334 shares of its
common stock
as consideration to 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.
On March
19, 2009, a $37,500 convertible promissory note and a $150,000 convertible
promissory note due to Mr. Davis were refinanced and combined with other loans
and advances on behalf of the Company from Mr. Davis into a $281,000 convertible
promissory note. On May 26, 2009, Mr. Davis exercised his conversion
rights under the promissory note and the note was converted into 510,909 shares
of the Company’s common stock (see Note 12).
On April
13, 2009, the Company issued an aggregate of 27,366 shares of its common stock
to its non-employee directors as payment of $20,250 directors’ fees accrued
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 Company’s
assets.
In total,
amounts expensed for related party interest and related party debt
extinguishment costs were $311,230 and $347,820, respectively, during the
year ended December 31, 2009, $908,486 and $48,214, respectively, during
the year ended December 31, 2008, and $1,659,223 and $422,862,
respectively, during the period from August 17, 1999 (inception) to December 31,
2009.
|
|
Between
February 3, 2010 and March 2, 2010, holders of 249,970 warrants to
purchase the Company’s common stock exercised their warrants resulting in
proceeds to the Company of
$321,761.
|
On March
15, 2010, the Company issued 769,231 shares of common stock to Artann pursuant
to the Development and Commercialization Agreement (see Note 7). The
$1,565,230 value of the shares was recorded as research and development expense
during the year ended December 31, 2009.
On March
26, 2010, the Company converted its $600,000 loan from an individual lender and
$97,546 of accrued interest thereon into 381,173 shares of the Company’s common
stock and 381,173 warrants to purchase the Company’s common stock. The
immediately exercisable warrants had a three-year term, an exercise price of
$1.83 per share and a cashless exercise provision. The lender immediately
elected to exercise the warrants, and the Company issued 102,154 shares of stock
to the lender pursuant to the cashless exercise. The Company will recognize debt
extinguishment expense of $870,981 in March 2010, representing the excess fair
value of the securities issued over the carrying value of the debt and interest.
Upon the termination of the loan upon conversion to equity, the company issued
to the individual lender 66,666 shares of common stock as consideration pursuant
to the original terms of the loan (see Notes 10 and 14(g)).
On March
26, 2010, the maturity dates of the Company’s $1.3 million of Crown Bank
promissory notes were extended to April 28, 2010 with no changes to other
existing note terms (see Note 11).
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