UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended September 30, 2010
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ____ to ____
Commission
File Number 000-51774
ProUroCare Medical
Inc.
(Exact
name of registrant as specified in its charter)
Nevada
|
20-1212923
|
(State
or other jurisdiction
of
incorporation or organization)
|
(IRS
Employer
Identification
No.)
|
6440
Flying Cloud Drive, Suite 101
Eden
Prairie, MN 55344
(Address
of principal executive offices and Zip Code)
(952)
476-9093
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES
x
NO
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). YES
o
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). YES
o
NO
x
The
registrant has 15,248,028 shares of common stock and 529,855 Units outstanding
as of November 12, 2010.
ProUroCare
Medical Inc.
Form
10-Q for the
Quarter
Ended September 30, 2010
Table
of Contents
|
Page
No.
|
|
|
PART
I - FINANCIAL INFORMATION
|
1
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
1
|
|
|
|
|
Consolidated
Balance Sheets
|
1
|
|
|
|
|
Consolidated
Statements of Operations
|
2
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
3
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
15
|
|
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
22
|
|
|
|
PART
II - OTHER INFORMATION
|
23
|
|
|
ITEM
1A.
|
RISK
FACTORS
|
23
|
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
23
|
|
|
|
ITEM
6.
|
EXHIBITS
|
24
|
|
|
|
SIGNATURES
|
25
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Balance Sheets
|
|
September
30,
2010
(Unaudited)
|
|
|
December
31,
2009
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
1,127,694
|
|
|
$
|
1,000,874
|
|
Other
current assets
|
|
|
179,223
|
|
|
|
58,200
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,306,917
|
|
|
|
1,059,074
|
|
|
|
|
|
|
|
|
|
|
Equipment
and furniture, net
|
|
|
15,370
|
|
|
|
1,470
|
|
Debt
issuance costs, net
|
|
|
129,856
|
|
|
|
27,383
|
|
|
|
$
|
1,452,143
|
|
|
$
|
1,087,927
|
|
Liabilities
and Shareholders’ Deficit
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable, bank
|
|
|
1,100,025
|
|
|
|
1,300,000
|
|
Notes
payable
|
|
|
425,392
|
|
|
|
624,865
|
|
Accounts
payable
|
|
|
873,954
|
|
|
|
985,560
|
|
Accrued
license and development fees
|
|
|
—
|
|
|
|
1,595,385
|
|
Accrued
expenses
|
|
|
251,524
|
|
|
|
269,230
|
|
Total
current liabilities
|
|
|
2,650,895
|
|
|
|
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
|
|
|
2,650,895
|
|
|
|
5,418,065
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
deficit:
|
|
|
|
|
|
|
|
|
Common
stock, $0.00001 par. Authorized
|
|
|
|
|
|
|
|
|
50,000,000
shares; issued and outstanding
|
|
|
|
|
|
|
|
|
15,766,966
and 11,326,283 shares on September 30,
|
|
|
|
|
|
|
|
|
2010
and December 31, 2009, respectively
|
|
|
158
|
|
|
|
113
|
|
Additional
paid-in capital
|
|
|
32,230,170
|
|
|
|
23,549,626
|
|
Deficit
accumulated during development stage
|
|
|
(33,429,080
|
)
|
|
|
(27,879,877
|
)
|
Total
shareholders’ deficit
|
|
|
(1,198,752
|
)
|
|
|
(4,330,138
|
)
|
|
|
$
|
1,452,143
|
|
|
$
|
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
September
30
|
|
|
Nine
Months Ended
September
30
|
|
|
Period
from
August
17, 1999
(Inception)
to
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
11,839
|
|
|
$
|
132,744
|
|
|
$
|
170,925
|
|
|
$
|
341,625
|
|
|
$
|
7,865,822
|
|
General
and administrative
|
|
|
629,612
|
|
|
|
358,886
|
|
|
|
1,568,989
|
|
|
|
1,070,513
|
|
|
|
13,111,237
|
|
Total
operating expenses
|
|
|
641,451
|
|
|
|
491,630
|
|
|
|
1,739,914
|
|
|
|
1,412,138
|
|
|
|
20,977,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(641,451
|
)
|
|
|
(491,630
|
)
|
|
|
(1,739,914
|
)
|
|
|
(1,412,138
|
)
|
|
|
(20,977,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
for early warrant exercise
|
|
|
(686,313
|
)
|
|
|
—
|
|
|
|
(686,313
|
)
|
|
|
—
|
|
|
|
(1,999,622
|
)
|
Incentive
for early warrant exercise - related parties
|
|
|
(683,926
|
)
|
|
|
—
|
|
|
|
(683,926
|
)
|
|
|
—
|
|
|
|
(727,481
|
)
|
Interest
income
|
|
|
1,284
|
|
|
|
—
|
|
|
|
3,319
|
|
|
|
21
|
|
|
|
21,772
|
|
Interest
expense
|
|
|
(229,681
|
)
|
|
|
(47,921
|
)
|
|
|
(748,235
|
)
|
|
|
(852,104
|
)
|
|
|
(5,472,190
|
)
|
Interest
expense - related parties
|
|
|
(214,262
|
)
|
|
|
(2,766
|
)
|
|
|
(646,826
|
)
|
|
|
(287,055
|
)
|
|
|
(2,306,049
|
)
|
Debt
extinguishment expense
|
|
|
—
|
|
|
|
(5,556
|
)
|
|
|
(887,092
|
)
|
|
|
(51,496
|
)
|
|
|
(1,385,373
|
)
|
Debt
extinguishment expense - related parties
|
|
|
(126,882
|
)
|
|
|
(36,161
|
)
|
|
|
(160,216
|
)
|
|
|
(314,488
|
)
|
|
|
(583,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,581,231
|
)
|
|
$
|
(584,034
|
)
|
|
$
|
(5,549,203
|
)
|
|
$
|
(2,917,260
|
)
|
|
$
|
(33,429,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(12.84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
13,890,120
|
|
|
|
9,899,013
|
|
|
|
12,814,096
|
|
|
|
9,188,409
|
|
|
|
2,602,893
|
|
________________________________
See
accompanying notes to consolidated financial statements.
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine
Months Ended
September
30
|
|
|
Period
from
August
17, 1999
(Inception)
to
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,549,203
|
)
|
|
$
|
(2,917,260
|
)
|
|
$
|
(33,429,080
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
414
|
|
|
|
109
|
|
|
|
21,397
|
|
Gain
on sale of furniture and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,200
|
)
|
Stock-based
compensation
|
|
|
271,231
|
|
|
|
192,122
|
|
|
|
2,516,451
|
|
Common
stock issued for services rendered
|
|
|
36,416
|
|
|
|
7,250
|
|
|
|
258,462
|
|
Common
stock issued to related parties for interest
|
|
|
16,145
|
|
|
|
—
|
|
|
|
17,467
|
|
Common
stock issued for debt guarantees
|
|
|
—
|
|
|
|
—
|
|
|
|
106,667
|
|
Common
stock issued for debt issuance cost
|
|
|
—
|
|
|
|
—
|
|
|
|
6,667
|
|
Common
stock issued for debt extinguishment
|
|
|
—
|
|
|
|
33,333
|
|
|
|
33,333
|
|
Units
issued for debt extinguishment
|
|
|
870,981
|
|
|
|
—
|
|
|
|
870,981
|
|
Units
issued for interest expense
|
|
|
8,700
|
|
|
|
—
|
|
|
|
8,700
|
|
Notes
payable issued for intangibles expensed
|
|
|
|
|
|
|
|
|
|
|
|
|
as
research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
Warrants
issued for services
|
|
|
—
|
|
|
|
26,400
|
|
|
|
567,036
|
|
Warrants
issued for debt guarantees
|
|
|
—
|
|
|
|
—
|
|
|
|
355,197
|
|
Warrants
issued for 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 interest
|
|
|
710,862
|
|
|
|
—
|
|
|
|
710,862
|
|
Warrants
issued for interest-related parties
|
|
|
317,100
|
|
|
|
—
|
|
|
|
317,100
|
|
Warrants
issued for early warrant exercise incentive
|
|
|
1,370,239
|
|
|
|
—
|
|
|
|
2,727,103
|
|
Amortization
of note payable-original issue discount
|
|
|
—
|
|
|
|
—
|
|
|
|
152,247
|
|
Amortization
of note payable-related parties original
|
|
|
|
|
|
|
|
|
|
|
|
|
issue
discount
|
|
|
—
|
|
|
|
2,720
|
|
|
|
142,964
|
|
Amortization
of convertible debt-original issue discount
|
|
|
—
|
|
|
|
507,902
|
|
|
|
1,146,587
|
|
Amortization
of convertible debt-related parties original
|
|
|
|
|
|
|
|
|
|
|
|
|
issue
discount
|
|
|
—
|
|
|
|
444,328
|
|
|
|
1,194,132
|
|
Amortization
of debt issuance costs
|
|
|
395,128
|
|
|
|
354,678
|
|
|
|
2,544,022
|
|
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
|
|
|
(121,156
|
)
|
|
|
27,310
|
|
|
|
(122,039
|
)
|
Accounts
payable
|
|
|
(192,524
|
)
|
|
|
(60,926
|
)
|
|
|
685,301
|
|
Accrued
development expense
|
|
|
(30,000
|
)
|
|
|
(827,835
|
)
|
|
|
2,065,385
|
|
Accrued
expenses
|
|
|
112,926
|
|
|
|
(105,523
|
)
|
|
|
964,363
|
|
Net
cash used in operating activities
|
|
|
(1,782,741
|
)
|
|
|
(2,314,785
|
)
|
|
|
(13,251,919
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment and furniture
|
|
|
(14,314
|
)
|
|
|
(561
|
)
|
|
|
(36,767
|
)
|
Deposit
into a restricted cash account
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,214
|
)
|
Withdrawal
from a restricted cash account
|
|
|
—
|
|
|
|
44,214
|
|
|
|
44,214
|
|
Net
cash provided by (used in) investing activities
|
|
|
(14,314
|
)
|
|
|
43,653
|
|
|
|
(36,767
|
)
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (continued)
(Unaudited)
|
|
Nine
Months Ended
September
30
|
|
|
Period
from
August
17, 1999
(Inception)
to
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
of note payable, bank
|
|
|
—
|
|
|
|
100,000
|
|
|
|
600,000
|
|
Payments
of note payable, bank
|
|
|
(300,000
|
)
|
|
|
(400,000
|
)
|
|
|
(1,200,000
|
)
|
Proceeds
of notes payable
|
|
|
563,345
|
|
|
|
—
|
|
|
|
903,845
|
|
Payments
of notes payable
|
|
|
(56,836
|
)
|
|
|
(111,938
|
)
|
|
|
(1,518,259
|
)
|
Proceeds
of notes payable - related parties
|
|
|
403,000
|
|
|
|
93,638
|
|
|
|
1,056,738
|
|
Payments
of notes payable - related parties
|
|
|
—
|
|
|
|
(34,000
|
)
|
|
|
(282,800
|
)
|
Proceeds
from long-term notes payable and bank debt
|
|
|
—
|
|
|
|
400,025
|
|
|
|
4,207,362
|
|
Proceeds
from long-term notes payable, related parties
|
|
|
—
|
|
|
|
243,000
|
|
|
|
1,363,500
|
|
Payments
on long-term bank debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(600,000
|
)
|
Proceeds
from warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
104,500
|
|
Proceeds
from exercise of warrants
|
|
|
602,438
|
|
|
|
—
|
|
|
|
2,316,034
|
|
Payments
for debt issuance costs
|
|
|
—
|
|
|
|
(600
|
)
|
|
|
(766,227
|
)
|
Payment
for rescission of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(100,000
|
)
|
Payments
for offering expenses
|
|
|
(163,072
|
)
|
|
|
(366,618
|
)
|
|
|
(676,895
|
)
|
Cost
of reverse merger
|
|
|
—
|
|
|
|
—
|
|
|
|
(162,556
|
)
|
Net
proceeds from issuance of common stock
|
|
|
875,000
|
|
|
|
2,613,600
|
|
|
|
9,171,138
|
|
Net
cash provided by financing activities
|
|
|
1,923,875
|
|
|
|
2,537,107
|
|
|
|
14,416,380
|
|
Net
increase in cash
|
|
|
126,820
|
|
|
|
265,975
|
|
|
|
1,127,694
|
|
Cash,
beginning of the period
|
|
|
1,000,874
|
|
|
|
3,900
|
|
|
|
—
|
|
Cash,
end of the period
|
|
$
|
1,127,694
|
|
|
$
|
269,875
|
|
|
$
|
1,127,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
63,672
|
|
|
$
|
100,779
|
|
|
$
|
902,724
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering
costs included in accounts payable
|
|
|
80,918
|
|
|
|
(162,926
|
)
|
|
|
590,865
|
|
Offering
costs credit included in accrued expenses
|
|
|
(7,896
|
)
|
|
|
(70,000
|
)
|
|
|
(7,896
|
)
|
Deferred
offering costs offset against gross proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
of
offering
|
|
|
—
|
|
|
|
823,078
|
|
|
|
823,078
|
|
Debt
issuance costs included in accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
114,156
|
|
Warrants
issued pursuant to notes payable
|
|
|
—
|
|
|
|
3,327
|
|
|
|
467,191
|
|
Warrants
issued for debt issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
298,021
|
|
Warrants
issued in lieu of cash for accrued expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
1,250
|
|
Warrant
exercise cost paid in lieu of cash for services
|
|
|
|
|
|
|
|
|
|
|
|
|
rendered-related
party
|
|
|
—
|
|
|
|
—
|
|
|
|
11,250
|
|
Prepaid
expenses financed by note payable
|
|
|
—
|
|
|
|
81,345
|
|
|
|
246,871
|
|
Issuance
of note payable for redemption of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
650,000
|
|
Notes
payable-related party tendered for warrant exercise
|
|
|
646,000
|
|
|
|
—
|
|
|
|
672,000
|
|
Notes
payable tendered for warrant exercise
|
|
|
405,982
|
|
|
|
—
|
|
|
|
405,982
|
|
ProUroCare
Medical Inc.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (continued)
(Unaudited)
|
|
Nine
Months Ended
September
30
|
|
|
Period
from
August
17, 1999
(Inception)
to
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Conversion
of notes payable to units
|
|
|
600,000
|
|
|
|
—
|
|
|
|
600,000
|
|
Conversion
of accounts payable to note payable
|
|
|
—
|
|
|
|
12,293
|
|
|
|
253,906
|
|
Conversion
of accrued expenses to note payable
|
|
|
—
|
|
|
|
13,569
|
|
|
|
13,569
|
|
Convertible
debt issued in lieu of cash for
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
31,413
|
|
Convertible
debt issued as debt issuance costs related to
|
|
|
|
|
|
|
|
|
|
|
|
|
guarantee
of long-term debt (recorded as a
|
|
|
|
|
|
|
|
|
|
|
|
|
beneficial
conversion in additional paid-in capital)
|
|
|
|
|
|
|
|
|
|
|
|
|
applied
to accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
733,334
|
|
Conversion
of convertible debt to units
|
|
|
—
|
|
|
|
1,638,750
|
|
|
|
1,638,750
|
|
Conversion
of accrued expenses to units
|
|
|
88,846
|
|
|
|
331,261
|
|
|
|
420,107
|
|
Conversion
of convertible debt-related parties to units
|
|
|
—
|
|
|
|
1,323,334
|
|
|
|
1,323,334
|
|
Conversion
of convertible debt-related parties to
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock
|
|
|
—
|
|
|
|
281,000
|
|
|
|
281,000
|
|
Conversion
of notes payable, related parties into
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
Common
stock issued in lieu of cash for
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
expenses
|
|
|
66,666
|
|
|
|
20,250
|
|
|
|
325,719
|
|
Common
stock issued in lieu of cash for
|
|
|
|
|
|
|
|
|
|
|
|
|
accounts
payable
|
|
|
—
|
|
|
|
—
|
|
|
|
122,291
|
|
Common
stock issued in lieu of cash for
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
development cost
|
|
|
1,565,385
|
|
|
|
500,000
|
|
|
|
2,065,385
|
|
Common
stock issued in lieu of cash for
|
|
|
|
|
|
|
|
|
|
|
|
|
notes
payable-related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
10,300
|
|
Common
stock issued for debt issuance cost
|
|
|
—
|
|
|
|
153,064
|
|
|
|
301,230
|
|
Common
stock issued pursuant to notes payable
|
|
|
497,601
|
|
|
|
—
|
|
|
|
497,601
|
|
Deposits
applied to note payable and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
142,696
|
|
Deposits
applied to accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
45,782
|
|
Assumption
of liabilities in the Profile, LLC transaction
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
Proceeds
from sale of furniture and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
2,200
|
|
Deposits
applied to accrued expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
1,076
|
|
__________________________
See
accompanying notes to consolidated financial statements.
ProUroCare
Medical Inc.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
September
30, 2010 and 2009 and the period from
August
17, 1999 (Inception) to September 30, 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 its prostate
mechanical imaging (“PMI”) system, known as the ProUroScan System, designed for
use as an aid to the physician in documenting abnormalities in the prostate that
have been previously detected by a digital rectal exam. The Company’s
developmental activities, conducted by its wholly-owned operating subsidiary
ProUroCare Inc. (“PUC”) and in conjunction with its development partner, Artann
Laboratories, Inc. (“Artann”), have included acquiring several technology
licenses, purchasing intellectual property, entering into product development
agreements, conducting clinical studies and making application to the Food and
Drug Administration (“FDA”) for market clearance of the PMI system where it is
currently under review.
(b)
|
Basis
of Presentation
|
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(“GAAP”) and pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”) for interim financial
information. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with GAAP have been omitted pursuant to such rules and regulations, although the
Company believes that the disclosures made are adequate to make the information
not misleading. Operating results for the three and nine months ended
September 30, 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 and nine months ended September 30,
2010 and 2009 and the period from August 17, 1999 (Inception) to September 30,
2010 due to the Company’s net losses. 8,989,966 and 8,686,033 shares
of common stock issuable under stock options and warrants were excluded from the
computation of diluted net loss per common share for both the three and nine
months ended September 30, 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 was $208,328, $271,231 and $2,516,451 for the three and
nine months ended September 30, 2010 and the period from August 17, 1999
(Inception) to September 30, 2010, respectively, or $0.02, $0.02 and $0.97 on a
per share basis. Stock-based compensation expense was $ 33,889 and
$192,122 for the three and nine months ended September 30, 2009,
respectively. The Company estimates the amount of future stock-based
compensation expense related to currently outstanding options to be
approximately $319,000 $20,000 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 nine
months ended September 30, 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 September 30
|
|
Nine
Months Ended September 30
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Risk-free
Interest Rate
|
0.95%
|
|
1.80%
|
|
1.07%
|
|
1.73%
|
Expected
Life of Options Granted
|
3.3
years
|
|
3.6
years
|
|
3.4
years
|
|
3.6
years
|
Expected
Volatility
|
128.1%
|
|
134.0%
|
|
128.5%
|
|
134.6%
|
Expected
Dividend Yield
|
n/a
|
|
0
|
|
0
|
|
0
|
The
expected life of the options is determined using a simplified method, computed
as the average of the option vesting periods and the contractual term of the
option. For performance-based options that vest upon the occurrence
of an event, the Company uses an estimate of when the event will occur as the
vesting period used in the Black-Scholes calculation for each option
grant. Expected volatility is based on weekly price data since April
5, 2004. 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.
No
warrants were issued to non-employees as consideration for goods or services
during the three and nine months ended September 30,
2010. Stock-based consideration related to warrants issued to
non-employees for goods and services received was $26,400, $26,400 and $566,546
for the three and nine months ended September 30, 2009 and the period from
August 17, 1999 (inception) to September 30, 2010, respectively, or less than
$0.01, less than $0.01 and $0.26 on a per share basis,
respectively.
The fair
value of stock warrants is the estimated present value at grant date using the
Black-Scholes pricing model with the following weighted average
assumptions:
|
Three
Months Ended September 30
|
|
Nine
Months Ended September 30
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Risk-free
Interest Rate
|
1.24%
|
|
1.08%
|
|
1.24%
|
|
1.08%
|
Expected
Life of Warrants Granted (1)
|
3.0
years
|
|
2.0
years
|
|
3.0
years
|
|
2.0
years
|
Expected
Volatility
|
129.5%
|
|
135.2%
|
|
129.5%
|
|
135.2%
|
Expected
Dividend Yield
|
0
|
|
0
|
|
0
|
|
0
|
1
Based on the contractual term of the
warrants.
Warrants
issued to lenders and loan guarantors who provide financing or loan guarantees
to the Company are recorded at their fair value as debt issuance cost assets on
the date the loans are made and expensed as interest expense over the term of
the debt. Warrants issued as an inducement to existing warrant
holders to exercise their warrants early are valued at their fair value on the
exercise date and immediately expensed as incentive for early warrant
exercise.
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 the Company’s 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:
|
|
September
30,
2010
|
|
|
December
31,
2009
|
|
Debt
issuance costs, gross
|
|
$
|
330,388
|
|
|
$
|
203,662
|
|
Less
amortization
|
|
|
(200,532
|
)
|
|
|
(176,279
|
)
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs, net
|
|
$
|
129,856
|
|
|
$
|
27,383
|
|
Amortization
expense related to debt issuance costs was $151,272, $395,128 and $2,544,022 for
the three and nine months ended September 30, 2010 and the period from August
17, 1999 (inception) to September 30, 2010,
respectively. Amortization expense related to debt issuance costs was
$45,149 and $354,678 for the three and nine months ended September 30,
2009.
The
Company has incurred operating losses, accumulated deficit and negative cash
flows from operations since inception. As of September 30, 2010, the
Company had an accumulated deficit of approximately $33.4
million. 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:
|
|
September
30,
2010
|
|
|
December
31,
2009
|
|
Accrued
interest payable in cash
|
|
|
79,003
|
|
|
|
137,340
|
|
Accrued
loan guarantee consideration and interest payable in common
stock
|
|
|
77,062
|
|
|
|
20,014
|
|
Accrued
audit fees
|
|
|
40,500
|
|
|
|
14,000
|
|
Uninvoiced
expenses
|
|
|
37,709
|
|
|
|
22,210
|
|
Accrued
directors’ fees
|
|
|
17,250
|
|
|
|
--
|
|
Accrued
debt extinguishment payable in common stock
|
|
|
--
|
|
|
|
66,666
|
|
Other
|
|
|
--
|
|
|
|
9,000
|
|
|
|
$
|
251,524
|
|
|
$
|
269,230
|
|
Note
3. Notes Payable – Bank.
The
maturity dates of the Company’s $1.3 million of Crown Bank promissory notes were
extended on March 26, 2010 and April 28, 2010 with no changes to other existing
note terms. Principal reductions of $50,000 were made on each of
April 28, 2010 and May 28, 2010. On June 28, 2010, the maturity date
of the $100,000 Crown Bank promissory note was further extended to November 28,
2010 and the remaining $1.1 million Crown Bank promissory note was revised to be
a $900,000 note that matures on March 28, 2011, following a $200,000 principal
reduction payment made by the Company on July 6, 2010.
Pursuant
to guarantees received relating to the Company’s extensions of the Crown Bank
promissory notes on March 26 and April 28 of 2010, the Company agreed to
continue to provide 23,333 shares of its common stock per month to the
guarantors through June 28, 2010. It was determined that the
modifications to the maturity dates of the notes were not substantial
modifications of the terms of the notes, as the present value of the cash flows
under the new convertible promissory notes was less than 10 percent different
from the present value of the cash flows under the original notes. The $136,500
value of the shares was expensed as interest expense during the three months
ended September 30, 2010.
Pursuant
to guarantees received relating to the Company’s
June 28, 2010 renewal of
the Crown Bank promissory notes, the Company agreed to continue to provide
22,222 shares of its common stock per month to the guarantors through November
28, 2010 and 20,000 shares of its common stock per month from November 28, 2010
through March 28, 2011, with a minimum of nine months of consideration to be
paid. It was determined that the modifications to the maturity dates
of the notes were substantial modification
s
of the terms of the notes,
as the present value of the cash flows under the new convertible promissory
notes was greater than 10 percent different from the present value of the cash
flows under the original notes. The shares, valued at $1.93 per share on the
loan renewal date, will be recorded as debt extinguishment expense over the term
of the loan.
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 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 recognized debt
extinguishment expense of $870,981 during the nine months ended September 30,
2010, representing the excess fair value of the securities issued over the
carrying value of the debt and interest. Upon loan conversion to
equity, the Company issued to the individual lender 66,666 shares of common
stock as consideration pursuant to the original terms of the loan.
On June
11, 2010, the Company closed on the sale of $885,000 of unsecured promissory
notes (the “June 2010 Notes”) in a private placement. During the
first 30 days of each June 2010 Note’s term, they bore interest payable in
warrants to purchase shares of the Company’s common stock. For every
$13,000 original principal amount of June 2010 Notes, warrant interest accrued
at a rate of 333.333 shares of common stock per day, up to a maximum of 10,000
warrants per $13,000 of original principal amount of June 2010 Notes (see Note
5(c)). Following the initial 30 days of each June 2010 Note’s term,
the interest rate was 6% annually, payable in cash at
maturity. During the three months and nine months ended September 30,
2010, $3,993 of cash interest expense on the June 2010 Notes was
recorded. On August 2, 2010, holders of $808,982 of the June 2010
Notes tendered their notes as payment of the exercise price of warrants pursuant
to the Company’s 2010 Replacement Warrant Offer (see Note 5(d)). The remaining
$76,018 of June 2010 Notes will mature on December 1, 2010. The
Company may prepay, in whole or in part, the unpaid principal of the June 2010
Notes at any time prior to the maturity date.
On August
2, 2010, a $243,000 promissory note held by James Davis, a director and greater
than 10 percent shareholder of the Company, was tendered as payment of the
exercise price of warrants pursuant to the Company’s 2010 Replacement Warrant
Offer (see Note 5(d)).
Note
5. Shareholders’ Equity (Deficit).
Between
February 3, 2010 and May 12, 2010, holders of 259,870 warrants to purchase the
Company’s common stock exercised their warrants resulting in proceeds to the
Company of $334,631.
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 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).
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.
Between
May 28, 2010 and June 25, 2010, the 139,998 shares of the Company’s common stock
were issued in payment of consideration to loan guarantors.
On July
1, 2010, the Company issued 22,762 shares of stock in lieu of cash to pay
$36,416 of accrued directors’ fees.
On July
12, 2010, the Company issued 44,444 shares of its common stock valued at $70,556
to each of Mr. Davis and Mr. Reiling in consideration for their guarantees of
the Company’s Crown Bank loan through June 28, 2010. Also on July 12,
2010, the Company issued 65,555 shares of its common stock valued at $1.93 per
share to each of Mr. Davis and Mr. Reiling, representing the nine months minimum
consideration for their guarantees of the Company’s Crown Bank loan pursuant to
loan guarantee agreements dated June 28, 2010 (see Note 3). The share
value is recorded as a debt issuance cost asset and amortized as debt
extinguishment expense over the term of the guarantees. Finally, also
on July 12, 2010, the Company issued 31,302 shares of its common stock to Mr.
Davis representing accrued loan consideration and interest due on a $243,000
loan from Mr. Davis to the Company pursuant to a loan agreement dated September
21, 2009.
(b)
|
Seaside
88, LP Securities Purchase
Agreement
|
On
September 28, 2010, the Company entered into a $3.125 million Securities
Purchase Agreement (the “SPA”) with Seaside 88, LP
(“Seaside”). Concurrent with the execution of the SPA, the Company
closed on an $875,000 first tranche of the funding, selling 1,400,000
unregistered shares of its common stock to Seaside at $0.625 per
share. Under the terms of the SPA, the remaining $2.250 million
funding is to be provided in six tranches:
·
|
$750,000
within 30 days following FDA clearance of the Company’s PMI system,
currently in FDA review.
|
·
|
$1.5
million provided in five subsequent closings of $300,000 in 30-day
increments following the previous
closing.
|
At each
of the future closings, the Company will sell unregistered shares of its common
stock to Seaside at a cost that is 50 percent of the stock’s volume weighted
average selling price (“VWASP”) during the 10 trading days preceding each
closing date, subject to a floor VWASP of $2.50 per share below which the
parties are not obligated to close.
The SPA
provides that Seaside will purchase only the number of shares that will cause
its beneficial ownership to remain below 9.9% of the Company’s outstanding
shares. Seaside has indicated their willingness to propose an
alternative investment vehicle to provide the financing, as they have in other
transactions, should a subsequent closing otherwise cause Seaside to exceed this
ownership level. After the first closing, Seaside holds approximately
8.9% of ProUroCare’s outstanding stock.
At the
closing, the Company paid $25,000 to Seaside as a legal expense, which is
recorded a reduction to additional paid-in capital. On September 30,
2010, the Company issued 20,000 shares of common stock, and warrants to acquire
140,000 shares of the Company’s common stock to the placement agent as a fee for
the transaction. The five-year, immediately exercisable warrants have
an exercise price of $0.75 per share. Under its agreement with the
placement agent, the Company is obligated to issue additional warrants upon
future closings under the Seaside financing arrangement in an amount that is 10%
of the number of shares sold to Seaside 88, at an exercise price that is 120% of
the price paid by Seaside.
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.
On July
1, 2010, the Company issued 22,762 shares of stock in lieu of cash to pay
$36,416 of accrued directors’ fees.
On June
11, 2010, the Company closed an $885,000 private offering of June 2010 Notes
(see Note 4). The June 2010 Notes bore interest payable in warrants
to purchase shares of the Company’s common stock during the first 30 days of
each June 2010 Notes term. For every $13,000 original principal
amount of June 2010 Notes, warrant interest accrued at a rate of 333.333 shares
of common stock per day, up to a maximum of 10,000 warrants per $13,000 of
original principal amount of June 2010 Notes. On July 11, 2010, the
Company issued 680,770 warrants in payment of the interest pursuant to the terms
of the June 2010 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. The warrants were valued at $1.51 per share using the
Black-Scholes pricing model on June 11, 2010 (the measurement
date). The Company recorded $376,920 and $1,027,962 as interest
expense related to the warrants issued during the three and nine months ended
September 30, 2010, respectively.
On July
2, 2010, the Company commenced a tender offer to holders of certain outstanding
warrants to provide additional consideration for the exercise of such warrants
(the “2010 Warrant Tender Offer”). The warrants subject to the tender
offer were 1,752,760 publicly traded warrants and 2,752,947 unregistered
warrants to purchase common stock, all of which were issued on January 12, 2009
and will expire on January 7, 2014. Also subject to the tender offer
were 1,244,829 publicly traded warrants to purchase common stock that were
issued on November 11, 2009 and will expire on November 11, 2012.
The
Company offered to holders of the subject warrants the opportunity to exercise
their existing warrants and receive, in addition to the shares of common stock
purchased upon exercise, new, three-year replacement warrants. The
replacement warrants have an exercise price of $1.30 per share and will be
redeemable at the Company’s discretion at any time after the last sales price of
its common stock equals or exceeds $4.00 for ten consecutive trading
days. The Company must provide 30 days’ prior written notice of a
decision to redeem either the existing or replacement
warrants. Warrants not exercised during this 30-day period will be
redeemed at $0.01 per warrant.
On August
2, 2010, the Company closed the 2010 Warrant Tender Offer. A total of 1,007,529
warrants were tendered by warrant holders and accepted by the Company pursuant
to the 2010 Warrant Tender Offer. All tendered warrants were retired effective
as of the expiration of the offer period. The Company issued 1,007,529 shares of
common stock and 1,007,529 replacement warrants. Holders of
809,217 warrants paid for their warrant exercise by the cancellation of
$1,051,982 of amounts due them pursuant to promissory notes from the Company
(see Note 4). Warrants to purchase 198,312 shares of common stock
were exercised for cash, resulting in gross proceeds to the Company of
approximately $257,741. The 1,007,529 replacement warrants issued,
valued at $1,370,239, were recorded as incentive for early warrant exercise
expense in other expenses on the consolidated statement of operations during the
three and nine months ended September 30, 2010. The fair value of the
warrants was estimated on the date the 2010 Warrant Tender Offer closed using
the Black-Scholes pricing model, calculated using the following
assumptions: a risk-free rate of 0.85%, a three year expected life,
expected volatility of 128.3% and no expected dividends. The
incentive for early warrant exercise was recorded as other expense rather than
as an operating expense, as the Company does not consider this to be a normal
part of its operations.
The
Company 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 September 30, 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 $8.2
million which, if not used, will begin to expire in 2021. Federal and
state tax laws impose significant restrictions on the utilization of net
operating loss carryforwards in the event of a change in ownership of the
Company that constitutes an “ownership change,” as defined by Section 382 of the
Internal Revenue Code of 1986, as amended (the “Code”). The Company
has analyzed its equity ownership changes and believes that such an ownership
change occurred upon the completion of its 2009 public offering. The
Company’s use of its net operating loss carryforwards of approximately $5.3
million and built-in loss incurred prior to the closing of the 2009 public
offering will be limited as a result of this change; however, the amount of
limitation will not be known until a full Section 382 study 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
2007 - 2009
State of
Minnesota 2007 - 2009
The
Company considers its directors, executives and beneficial shareholders of more
than five percent of its common stock to be related parties. During
the nine months ended September 30, 2010, the following significant transactions
were made between the Company and those parties that were related parties at the
time of each transaction:
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.
On June
11, 2010, the Company sold to Mr. Koenig, Mr. Davis, Director Robert Rudelius
and William Reiling, a more than five percent shareholder, a total of $403,000
of June 2010 Notes (see Note 4). Pursuant to the terms of the June
2010 Notes, on July 11, 2010 the Company issued as interest an aggregate 310,000
warrants to acquire its common stock (see Note 5(d)) to Mr. Koenig, Mr. Davis,
Mr. Rudelius and Mr. Reiling.
On July
1, 2010, the Company issued 22,762 shares of stock in lieu of cash to pay
$36,416 of accrued directors’ fees.
Pursuant
to the guaranties received relating to the Company’s March 19, 2009 renewal
of its $1,200,000 Crown Bank promissory note, on June 25, 2010 the Company
issued 66,666 shares of common stock as consideration to each of James
Davis and William Reiling, both five percent shareholders at the time of the
note renewal. The aggregate 133,333 shares issued were valued at
$66,666 based on the fair market value on the date of the guarantees
received.
Pursuant
to a September 21, 2009 $243,000 loan from Mr. Davis to the Company, on July 12,
2010 the Company issued 31,302 shares of common stock as consideration and
interest. The shares were valued at $44,605 based on the fair market
value on the date of the loan.
On July
12, 2010, the Company issued 109,999 shares of its common stock to each of Mr.
Davis and Mr. Reiling pursuant to loan guarantee arrangements concerning the
Company’s Crown Bank notes (see Note 5(a)). The aggregate 219,998
shares issued were valued at $393,498 based on the fair market value on the
dates of the loan guarantees.
On August
2, 2010, Mr. Koenig, Mr. Davis, Mr. Rudelius and Mr. Reiling, used a total of
$646,000 of notes payable to exercise an aggregate 496,923 warrants pursuant to
the Company’s 2010 Warrant Tender Offer (see Note 5(e)).
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The
accompanying Management’s Discussion and Analysis of Financial Condition and
Results of Operation should be read in conjunction with our unaudited
consolidated financial statements, and notes thereto, filed with our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2010.
Disclosure
Regarding Forward-Looking Statements
Certain
statements contained in this Quarterly Report on Form 10-Q may be deemed to be
forward-looking statements as defined by the Private Securities Litigation
Reform Act of 1995, and the Company intends that such forward-looking statements
be subject to the safe-harbor created thereby. Such forward-looking statements
relate to, among other things: general economic or industry conditions,
nationally and in the physician, urology and medical device communities in which
we intend to do business; our ability to raise capital to fund our 2010 and 2011
working capital needs and launch our products into the marketplace; our ability
to pursue additional development of our existing and proposed products on a
timely basis or at all; legislation or regulatory requirements, including our
securing of all U.S. Food and Drug Administration (“FDA”) and other regulatory
approvals on a timely basis, or at all, prior to being able to market and sell
our products in the United States; competition from larger and more well
established medical device companies and other competitors; the development of
products that may be superior to the products offered by us; securing and
protecting our intellectual property and assets, and enforcing breaches of the
same; the quality or composition of our products and the strength and
reliability of our contract vendors and partners; changes in accounting
principles, policies or guidelines; financial or political instability; acts of
war or terrorism; and other economic, competitive, governmental, regulatory and
technical factors affecting our operations, proposed products and prices. We
caution that these statements are qualified by important factors that could
cause actual results to differ materially from those reflected by the
forward-looking statements contained herein.
Overview
ProUroCare
Medical Inc. (“ProUroCare,” the “Company,” “we” or “us,” which terms include
reference to our wholly owned subsidiary, ProUroCare Inc. (“PUC”)) is an
emerging medical device company that is in the process of obtaining FDA
clearance for its first product, an innovative prostate imaging system known as
the ProUroScan™ System. The ProUroScan System is an imaging system
designed for use as an aid to the physician in documenting abnormalities in the
prostate that have been previously detected by a digital rectal exam (“DRE”). As
an adjunct to DRE, the ProUroScan System will be used following an abnormal DRE
to generate a real-time image of the prostate. The final composite
image is saved as a permanent electronic record and can be conveniently
retrieved to view previous test results.
We own
patents and exclusively license patents and patent applications and know-how
related to the creation in real-time of two- and three-dimensional images of
soft tissue using special software to process data acquired by probes that
incorporate arrays of sensitive mechanical force sensors. The
ProUroScan System is our first embodiment of this technology, to be used to
image the prostate. We believe that this technology can be applied to
other soft tissue organs in the future.
The
ProUroScan System was developed over the past several years under agreements
with our development partner, Artann Laboratories, Inc. (“Artann”), a scientific
technology company focused on early-stage technology
development. During 2008 and 2009, our research and development
activities conducted through Artann were primarily directed toward completion of
the final configuration of the ProUroScan System and conducting clinical trials
for submission of a 510(k) application to the FDA. By agreement,
Artann is responsible for submission of the 510(k) and all follow-on activities
required to obtain FDA clearance in the United States.
The
ProUroScan System is not currently marketed or sold and has not yet been cleared
for marketing by the FDA. Our goal is to have the ProUroScan System regulated by
the FDA as a Class II device. A Class II device is one in which
general and specific controls exist to ensure that the device is safe and
effective. In a 510(k) application, applicants must demonstrate that
the proposed device is substantially equivalent to an existing approved product,
or “predicate device.” Products that employ new or novel
technologies, and for which through the 510(k) review process are found to have
no comparable predicate device, may be cleared for marketing under Section
513(f) of the Food, Drug and Cosmetic Act (“FDCA”). This path,
referred to as a “
de
novo”
application, is intended to allow new or novel technology devices
to be cleared for marketing when an appropriate predicate device does not
exist.
In
November 2009, a 510(k) application for market clearance was filed with the FDA
that incorporated a basic imaging and documentation claim. From that
submission, the FDA questioned whether the ProUroScan System was 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.
The
de novo
submission also
recommended that the classification regulation state that a “mechanical imaging
system” device consists of a trans-rectal probe with pressure sensor arrays and
a motion tracking system that provides real time images of the
prostate. These proprietary components are unique to the ProUroScan
system. Once cleared, the ProUroScan can serve as a predicate for
future filings and expanded indications for use.
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.
We expect
to market the system in cooperation with a yet-to-be-determined medical device
company that has an established worldwide presence in the urology
market. We are actively engaged in discussions with several such
companies and intend to identify the final marketing partner in early
2011. As we move into production and begin marketing our products, we
expect to add internal resources in the areas of sales and marketing,
engineering and quality control.
During
this pre-revenue stage, in addition to work performed by Artann, we have
conducted our development and clinical activities primarily through the use of
contracted resources that specialize in developing regulatory strategies,
managing the clinical trial process and counseling on FDA matters. We
have found that using consultants and contractors to perform these functions
during our development stage has allowed us to engage specialized talent and
capabilities as needed by the business while providing the flexibility to engage
them as our financial resources have permitted. For manufacturing, we
have identified a highly qualified company, Logic (Minneapolis, MN), to produce
the first commercial ProUroScan Systems.
An
important initiative for the remainder of 2010 and early 2011 will be to produce
and place clinical ProUroScan Systems in the facilities of physicians on our
physician advisory council. We believe that the insights gained from
the participation of these influential physicians will prove invaluable to our
success. We have identified the key opinion leaders who will expand
our base of clinical reference while evaluating physician training and
in-service programs.
In
addition to the research and development work, we incur ongoing expenses that
are directly related to being a public company, including professional audit and
legal fees, public and investor relations, financial printing, press releases
and transfer agent fees. We also incur costs associated with the
prosecution and maintenance of our intellectual property. We
currently rent approximately 1,000 square feet of office space on a
month-to-month basis at a cost of $1,000 per month. Other expenses incurred
include executive officer compensation, travel, insurance, telephone, supplies
and other miscellaneous expenses.
Results
of Operations
The
following discussion of the financial condition and results of operations should
be read in conjunction with the financial statements included herewith. This
discussion should not be construed to imply that the results discussed herein
will necessarily continue into the future, or that any conclusion reached herein
will necessarily be indicative of actual operating results in the
future.
Three
months ended September 30, 2010 compared to the three months ended September 30,
2009:
Operating
Expenses/Operating Loss
.
Our operating
expenses (and our operating loss) for the three months ended September 30, 2010
were $641,451, an increase of $149,821, or 31 percent, compared to $491,630 last
year. This increase resulted from the recognition of $208,000 of
compensation expenses related to options issued to our directors and a
consultant, compared to the issuance of options and warrants to consultants
valued at approximately $60,000 during the prior year period. In
addition, consulting fees were incurred for new regulatory, finance and
manufacturing activities totaled $132,000 during the three months ended
September 30, 2010. These increased expenses were offset by reductions of
approximately $135,000 in regulatory consulting and technology development
costs, as a result of the work that was done in 2009 leading up to our 510(k)
FDA submission in the fourth quarter of that year.
Incentive
for Early Warrant Exercise.
On August 2, 2010, the Company closed its
tender offer to holders of certain outstanding warrants which provided
additional consideration for the exercise of such warrants (the “2010 Warrant
Tender Offer”). The Company offered to holders of the subject
warrants the opportunity to exercise their existing warrants and receive, in
addition to the shares of common stock purchased upon exercise, new, three-year
replacement warrants. A total of 1,007,529 warrants were tendered by
warrant holders and accepted by the Company pursuant to the 2010 Warrant Tender
Offer. The replacement warrants, valued at $1,370,239, were recorded
as incentive for early warrant exercise expense during the three months ended
September 30, 2010.
Net
Interest Expense
.
Net interest
expense for the three months ended September 30, 2010 was $442,659, an increase
of $391,972 compared to $50,687 last year. The increased interest
expense resulted primarily from the recording of the Black-Scholes pricing model
valuation of warrants accrued for issuance pursuant to our June 11, 2010 private
placement of $885,000 debt. Under the debt terms, 249,616 warrants
valued at $377,000 were accrued during the three months ended September 30,
2010. See Notes 4 and 5(d) to our unaudited consolidated financial
statements included in this Quarterly Report on Form 10-Q for a more complete
description of the debt and warrants.
Debt
Extinguishment Expense
. Our debt extinguishment expense arises
primarily from bank fees and the issuance of stock or warrants pursuant to the
provisions of short-term loans from lenders in certain refinancing transactions.
Our debt extinguishment expense for the three months ended September 30, 2010
was $126,882, an increase of 204 percent, compared to $41,717 last
year. The expense incurred during the three months ended September
30, 2010 was related to the value of stock issued as consideration to guarantors
of our $1.0 million secured bank loan that was refinanced in June,
2010.
Nine months ended September 30,
2010 compared to the nine months ended September 30, 2009:
Operating
Expenses/Operating Loss
.
Our operating
expenses (and our operating loss) for the nine months ended September 30, 2010
were $1,739,914, an increase of $327,776, or 23 percent, compared to $1,412,138
last year. This increase resulted from consulting fees for new
regulatory, reimbursement, finance and manufacturing activities totaling
$337,000 and a $79,000 increase in the value of options that vested compared to
those vesting during the nine months ended September 30, 2009. Also
contributing to the increased operating loss was a $37,000 increase in the
amount spent to expand and maintain our patent rights and a $35,000 increase in
directors’ fees following an increase in the size of our Board in March 2010 and
a revised director compensation program. Offsetting these new and
increased expenses was a reduction of approximately $163,000 in regulatory
consulting and technology development costs, reflecting the work that was done
in 2009 leading up to out 510(k) FDA submission in the fourth quarter of that
year.
Incentive
for Early Warrant Exercise.
On August 2, 2010, the Company closed its
tender offer to holders of certain outstanding warrants which provided
additional consideration for the exercise of such warrants (the “2010 Warrant
Tender Offer”). The Company offered to holders of the subject
warrants the opportunity to exercise their existing warrants and receive, in
addition to the shares of common stock purchased upon exercise, new, three-year
replacement warrants. A total of 1,007,529 warrants were tendered by
warrant holders and accepted by the Company pursuant to the 2010 Warrant Tender
Offer. The replacement warrants, valued at $1,370,239, were recorded
as incentive for early warrant exercise expense during the nine months ended
September 30, 2010.
Net
Interest Expense
.
Net interest
expense for the nine months ended September 30, 2010 was $1,391,742, an increase
of 22 percent compared to $1,139,138 last year. Included in the
interest expense for the nine months ended September 30, 2010 was the recording
of the Black-Scholes pricing model valuation of warrants accrued for issuance
pursuant to our June 11, 2010 private placement of $885,000
debt. Under the debt terms, a total of 680,770 warrants valued at
$1,028,000 were issued on July 11, 2010. See “
Liquidity and Capital
Resources-
Recent
Financing Activity
” below for a more complete description of the debt and
warrants. Also included in the current year period was $264,000 of
interest expense to be paid in our common stock to lenders and loan guarantors
as consideration for providing the loans and guarantees. Other
interest expense decreased from $147,000 to $103,000 from 2009 to 2010,
reflecting the retirement of a $600,000 promissory note in March of 2010, the
retirement of a total of $300,000 of bank loans in May and July of 2010 and the
retirement of another $243,000 loan in August of 2010. Included in the expense
for the nine months ended September 30, 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.
Debt
Extinguishment Expense
. Our debt extinguishment expense arises
primarily from the issuance of stock or warrants issued pursuant to the
provision of guaranties of loans in certain refinancing
transactions. Our debt extinguishment expense for the nine months
ended September 30, 2010 was $1,047,308, an increase of 186 percent, compared to
$365,984 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. The remaining debt
extinguishment expense incurred in both 2009 and 2010 related to the expensing
of stock issued as consideration to debt guarantors following the renewals of
our secured bank debt and a $281,000 loan from an individual
lender.
Balance
Sheet Changes
During
the nine months ended September 30, 2010, the following transactions resulted in
material changes to our balance sheet:
On March
15, 2010, we issued 769,231 shares of common stock to Artann pursuant to a
development agreement. The $1,565,385 value of the shares had been
recorded as an accrued development fee as of December 31, 2009.
On March
26, 2010, we converted our $600,000 loan from the Smith Trust and $97,546 of
accrued interest thereon into 381,173 shares of our common stock and 381,173
warrants to purchase our common stock. As a result, notes payable and
accrued expenses were reduced accordingly.
During
April and May, 2010 we repaid $100,000 of our Crown Bank promissory
notes.
On June
11, 2010, we closed on the sale of $885,000 of unsecured promissory notes in a
private placement. During the first 30 days of the note term, each
note bore interest payable in warrants to purchase shares of our common
stock.
On July
7, 2010, we repaid $200,000 of our Crown Bank promissory notes.
On August
2, 2010, we completed our “2010 Warrant Tender Offer.” See “
Recent Financing Activity
,”
below.
On
September 28, 2010, we closed on the first tranche of $3.125 million
financing. See “
Recent Financing Activity
,”
below.
As of
September 30, 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-term as of September 30, 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 $900,000 of senior bank notes and $400,000 of subordinated notes,
and as a result, are not available to secure additional senior debt
financing.
Recent
Financing Activity
On July
2, 2010, the Company commenced a tender offer to holders of certain outstanding
warrants to provide additional consideration for the exercise of such warrants
(the “2010 Warrant Tender Offer”). The Company offered to holders of
the subject warrants the opportunity to exercise their existing warrants and
receive, in addition to the shares of common stock purchased upon exercise, new,
three-year replacement warrants. The replacement warrants have an
exercise price of $1.30 per share and will be redeemable at the Company’s
discretion at any time after the last sales price of its common stock equals or
exceeds $4.00 for ten consecutive trading days.
On August
2, 2010, we closed the 2010 Warrant Tender Offer, and a total of approximately
1.0 million warrants were tendered by warrant holders and accepted by us. All
tendered warrants were retired effective as of the expiration of the Offer
Period. Holders of approximately 809,000 warrants paid for their
warrant exercise by the cancellation of $1.1 million of amounts due them
pursuant to promissory notes from ProUroCare. Warrants to purchase
approximately 192,000 shares of common stock were exercised for cash, resulting
in gross proceeds to the Company of approximately $258,000.
On
September 28, 2010, the Company entered into a $3.125 million Securities
Purchase Agreement (the “SPA”) with Seaside 88, LP
(“Seaside”). Concurrent with the execution of the SPA, the Company
closed on an $875,000 first tranche of the funding, selling 1,400,000
unregistered shares of its common stock to Seaside at $0.625 per
share. Under the terms of the SPA, the remaining $2.250 million
funding is to be provided in six tranches:
·
|
$750,000
within 30 days following FDA clearance of the Company’s ProUroScan System,
currently in FDA review.
|
·
|
$1.5
million provided in five subsequent closings of $300,000 in 30-day
increments following the previous
closing.
|
At each
of the future closings, the Company will sell unregistered shares of its common
stock to Seaside at a cost that is 50 percent of the stock’s volume weighted
average selling price (“VWASP”) during the 10 trading days preceding each
closing date, subject to a floor VWASP of $2.50 per share below which the
parties are not obligated to close.
The SPA
provides that Seaside will purchase only the number of shares that will cause
its beneficial ownership to remain below 9.9% of the Company’s outstanding
shares. Seaside has indicated their willingness to propose an
alternative investment vehicle to provide the financing, as they have in other
transactions, should a subsequent closing otherwise cause Seaside to exceed this
ownership level. After the first closing, Seaside holds approximately
8.9% of our outstanding stock.
Sources
and Uses of Cash
Net cash
used in operating activities was $1.8 million during the nine months ended
September 30, 2010 compared to $2.3 million in 2009. In addition to
operating expenses, other uses of cash during the nine months ended September
30, 2010 included payments that reduced accounts payable by $193,000 and an
$86,000 prepayment of the production of probe sensors to be used in future
clinical work. Uses of cash during the nine months ended September
30, 2009 included payments to Artann totaling $1.1 million for licensing fees
and milestone achievements pursuant to our licensing and development
agreements.
Net cash
provided by financing activities was $1.9 million during the nine months ended
September 30, 2010, resulting from the $885,000 proceeds of a private debt
offering, $875,000 of gross proceeds from the SPA equity offering and proceeds
of $472,000 from the exercise of warrants by certain warrant holders, including
the 2010 Warrant Tender Offer. These financing sources were offset by
$300,000 of bank debt repayments and $163,000 of offering
costs. Proceeds from the 2009 public offering less underwriter’s
commissions and other payments for expenses of the offering were approximately
$2.3 million during the nine months ended September 30, 2009. In June
and September, 2009, we borrowed a total of $200,025 pursuant to two bank loans,
and $543,000 pursuant to two loans from investors. Offsetting this
was our pay-down of $400,000 of bank debt in March 2009.
Cash
Requirements
The
timing for market launch of the ProUroScan System is dependent upon receipt of
FDA market clearance and the time and resources required to scale-up
manufacturing, quality assurance, sales and marketing
activities. Prior to receiving market clearance, we are conserving
cash by incurring only expenses essential to obtain FDA clearance, to validate
manufacturing processes by the production of three ProUroScan Systems and to
prepare detailed commercialization scale-up plans. Once FDA clearance
is obtained, we will implement all phases of the commercialization plans as
quickly as our available funding will allow. We believe that it will
take approximately two to four months to complete these activities and begin
commercial sales depending primarily on funding availability.
As we
achieve our financing goals (see “
Current Financing Plans,”
below)
we expect to accelerate the development of a compact version of
the ProUroScan System, which will eventually become our primary commercial
product. We will also use incremental funding to enhance and expand
our patent positions on the current ProUroScan system and potential future
products and line extensions. In the interim, we plan to begin
placing clinical systems and training physicians who will serve as members of
our physician advisory council.
If we
receive FDA clearance at the beginning of the first quarter 2011, we expect to
initiate production and launch the current cart-based version of the ProUroScan
System in the second quarter and introduce the compact version of the product in
the third quarter. Our ability to achieve these goals is dependent
upon the amount and timing of funding available to us both before and after FDA
clearance is received. The cash requirements outlined below assume
that FDA clearance is obtained in January 2011.
Through
the second quarter of 2011, we expect our total spending to be approximately
$5.0 million. We expect our cash needs for our operating expenses
(excluding payments due to Artann explained below) will be approximately $3.0
million through mid-2011. Of this amount, we anticipate on-going general
and administrative expenses, including the cost of existing personnel, rent,
legal, audit and other costs of being a public company, will be approximately
$860,000. Costs associated with the placement of systems, physician
training and conduct of post-FDA clearance studies at key institutions will be
approximately $580,000. We expect that the cost of new personnel added in
engineering, manufacturing, quality/clinical, sales, marketing, and
administration during this period will total approximately $560,000. We
estimate the cost of contracting for product engineering work to continue the
preparation of the current cart-based ProUroScan system for manufacturing and to
develop the compact version of the ProUroScan System will cost approximately
$540,000. We also plan to spend $140,000 on new patent applications and
additional embodiments of existing patents.
Other
cash needs through mid-2011 include payments of approximately $275,000 to reduce
short-term liabilities, $270,000 to fund inventory purchases, and $160,000 of
capital equipment purchases.
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 an
equity payment to Artann. The amount of the equity payment,
originally set at $1,000,000, is subject to a $100,000 reduction per month,
which began on April 23, 2010 and will continue until FDA clearance is
received. As of October 23, 2010, the equity payment had been reduced
to $300,000.
Our
$900,000 secured promissory note with Crown Bank matures in March
2011. We also have a $100,025 note at another bank that matures in
January 2011 and a $300,000 promissory note with an investor that matures in
March 2011. These notes are all held or guaranteed by shareholders
that have been instrumental in financing our funding needs over the past few
years. We anticipate we will be able to renew or refinance a
significant portion of these notes if required.
As noted
above, prior to receiving market clearance we are conserving cash by incurring
only expenses essential to obtain FDA clearance, to validate manufacturing
processes by the production of three ProUroScan Systems and to prepare detailed
commercialization scale-up plans. We believe that we currently have
sufficient cash to fund these limited activities through late March
2011. Additional financing as outlined below would be required to
fund operations beyond that time if FDA clearance is not received before
then.
Current
Financing Plans
Our
near-term financing goal is to raise a sufficient amount of capital prior to
receipt of FDA clearance of the ProUroScan System to fund existing operations
and certain activities in preparation for market entry. Such funding
may be in the form of issuances of private sales of our debt or equity
securities. Following FDA clearance, we expect to fund operations and
market entry through the calling of currently redeemable warrants, follow-on
financing arrangements pursuant to the Seaside SPA, potential support from a
corporate distribution partner and potential further private sales of our debt
or equity securities.
As of
September 30, 2010, following the September 28th closing of the SPA, we had
approximately $1,128,000 of cash on hand. In addition, on that date
we had 6,431,306 redeemable warrants outstanding, each with an exercise price of
$1.30 per share. Of these, we currently have the right to redeem
3,590,894 warrants originally issued in our 2009 public offering at any
time. Upon our exercise of our right to redeem the currently
redeemable warrants, holders of the warrants will have a period of 30 days to
exercise their warrants. We could realize up to approximately $4.7 million
depending on the number of shares actually exercised. We intend to exercise our
redemption rights on these warrants to meet a portion of our financing needs
outlined above. The timing of this redemption is dependent upon the
timing of receipt of FDA clearance, our cash position, the availability of other
sources of funds and upon market conditions. We will gain the ability
to redeem the additional 2,840,412 warrants issued in our 2009 and 2010 Warrant
Tender Offers and our June 2010 private debt placement 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 then exercised our redemption right
on these warrants, an additional $3.7 million could be raised depending on the
number of shares actually exercised pursuant to such
redemption. There can be no assurance that we will be able to redeem
the warrants, or how much would be realized if such redemption were
made.
As a
result of the Seaside SPA, we expect to close on $2.25 million of additional
financing during the six months following FDA clearance of the ProUroScan System
(see “
Recent Financing
Activity
”, above).
We plan
to identify a distribution partner to help market our products. We
expect such a distribution partner may provide financial support in the form of
loans, licensing fees, equity investment or a combination of
these. In addition to financial support, a successful collaboration
with such a partner would allow us to gain access to downstream marketing,
manufacturing and sales support.
In
addition to warrant exercises, the Seaside SPA and possible corporate partner
funding, we will likely pursue additional funding in 2011 following FDA
clearance to more aggressively scale up manufacturing and marketing activities
associated with our market launch, accelerate development of a portable system
and low cost sensors and expand clinical studies with our physician advisory
council. The additional funding may be from the issuance of equity
securities, convertible debt, private debt or debt guarantees for which
stock-based consideration is paid. If any of these funding events
occur, existing shareholders will likely experience dilution in their ownership
interest. If additional funds are raised by the issuance of debt or
certain equity instruments, we may become subject to certain operational
limitations, and such securities may have rights senior to those of our existing
holders of common stock.
If our
funding from warrants or other private funding initiatives is delayed or proves
insufficient to allow an aggressive ramp-up toward market launch, or if FDA
clearance of the ProUroScan System is delayed, we will be forced to delay U.S.
commercialization activities. An alternative strategy could involve
expanded sales and marketing activities in select foreign markets. In
these markets, we would attempt to begin selling systems through dedicated
international distributors.
Off-Balance
Sheet Arrangements
None.
Going
Concern
We have
incurred operating losses, accumulated deficit and negative cash flows from
operations since inception. As of September 30, 2010, we had an accumulated
deficit of approximately $33.4 million. These factors, among others, raise
substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements included in this Quarterly Report on Form 10-Q
do not include any adjustments related to recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern.
Critical
Accounting Policies
Our
critical accounting policies are policies which have a high impact on the
reporting of our financial condition and results, and require significant
judgments and estimates. Our critical accounting policies relate to (a) the
valuation of stock-based compensation awarded to employees, directors, loan
guarantors and consultants, (b) the valuation of warrants issued as an incentive
for early-exercise of outstanding warrants and (c) the accounting for debt with
beneficial conversion features.
Valuation
of Stock-Based Compensation
Since
inception, we have measured and recognized compensation expense for all
share-based payment awards made to employees and directors including employee
stock options based on fair value. Our determination of fair value of
share-based payment awards is based on the date of grant using an option-pricing
model which incorporates a number of highly complex and subjective variables.
These variables include, but are not limited to, the expected volatility of our
stock price and estimates regarding projected employee stock option exercise
behaviors and forfeitures. We recognize the expense related to the fair value of
the award straight-line over the vesting period.
Valuation
of Warrants Issued as an Incentive for Early-Exercise of Outstanding
Warrants
We have
completed two tender offers pursuant to which we have issued warrants as an
incentive to certain warrant holders to exercise their existing warrants during
the offering periods. Our determination of fair value of the
replacement warrants is based on the date of grant using an option-pricing model
which incorporates a number of highly complex and subjective variables. These
variables include, but are not limited to, the expected volatility of our stock
price. We recognize the expense related to the fair value of the warrants
immediately upon issuance as incentive for early warrant exercise
expense.
Accounting
for Debt with Beneficial Conversion Features
The
beneficial conversion features of the promissory notes were valued using the
Black-Scholes pricing model. The resulting original issue discount is amortized
over the life of the promissory notes using the straight-line method, which
approximates the interest method.
Item
4. Controls and Procedures.
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission (the “SEC”). As of
September 30, 2010, the end of the period covered by this Quarterly Report on
Form 10-Q, we carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange
Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are
effective.
Changes
in Internal Control Over Financial Reporting
During
the quarter ended September 30, 2010, there has been no change in the Company’s
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
PART
II. OTHER INFORMATION.
Item 1A. Risk Factors.
Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks and uncertainties set forth under Part I, Item 1A of our
Annual Report on Form 10-K for the year ended December 31,
2009. These risks and uncertainties are not the only ones facing our
Company; additional risks and uncertainties may also impair our business
operations. If any of the risks actually occur, our business, financial
condition, results of operations or cash flows would likely suffer. In that
case, the trading price of our common stock could fall, and you may lose all or
part of your investment. We undertake no obligation to update or
revise any forward-looking statement except as required by the SEC.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
On July
2, 2010, we issued 22,762 shares of our common stock to our directors as payment
for $36,416 of director’s fees, in lieu of cash.
On July
25, 2010, a warrant holder exercised 20,000 warrants and received 20,000 shares
of our common stock. The aggregate exercise price was
$10,000.
Sales of
the securities described above were made in compliance with the requirements of
Rule 506 of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”) and the exemption from registration provided under Section
4(2) of the Securities Act. In qualifying for such exemption, the
Company relied upon representations from the investors regarding their status as
“accredited investors” under Regulation D and the limited manner of the
offering.
Issuer Purchase of Equity
Securities
Period
|
(a)
Total Number of Shares (or Units) Purchased
|
(b)
Average Price Paid per Share (or Unit)
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May
Yet Be Purchased Under the Plans or Programs
|
August
2, 2010 (1)
|
465,912
(2)
|
(3)
|
465,912
|
(4)
|
(1)
|
The
2010 Warrant Tender Offer closed on August 2, 2010, and all exchanges for
warrants tendered pursuant to the offer occurred on such
date.
|
(2)
|
The
number of registered warrants that were exchanged by the Company in the
2010 Warrant Tender Offer. The warrants are exercisable into
465,912 shares of common
stock.
|
(3)
|
On
July 2, 2010, the Company commenced a tender offer to holders of certain
outstanding warrants to provide additional consideration for the exercise
of such warrants (the “2010 Warrant Tender Offer”). The Company offered to
holders of the subject warrants the opportunity to exercise their existing
warrants and receive, in addition to the shares of common stock purchased
upon exercise, new, three-year replacement warrants. The
replacement warrants have an exercise price of $1.30 per share and will be
redeemable at the Company’s discretion at any time after the last sales
price of its common stock equals or exceeds $4.00 for ten consecutive
trading days. The Company must provide 30 days’ prior written
notice of a decision to redeem either the existing or replacement
warrants. Warrants not exercised during this 30-day period will
be redeemed at $0.01 per warrant. On August 2, 2010, the
Company closed the 2010 Warrant Tender
Offer.
|
(4)
|
The
tender offer has expired.
|
Item 6. Exhibits
Exhibit No.
|
Description
|
|
|
4.1
|
Form
of Second Amendment to Warrant Agreement between ProUroCare Medical Inc.
and Interwest Transfer Company, Inc. (incorporated by reference to Exhibit
4.24 to Registration Statement on Form S-4 filed July 2,
2010).
|
|
|
4.2
|
Specimen
2010 Replacement Warrant (incorporated by reference to Exhibit 4.25 to
Registration Statement on Form S-4 filed July 2, 2010).
|
|
|
10.1
|
$900,000
Promissory Note dated June 28, 2010 issued in favor of Crown Bank
(incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K filed July 2, 2010).
|
|
|
10.2
|
$100,000
Promissory Note dated June 28, 2010 issued in favor of Crown Bank
(incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K filed July 2, 2010).
|
|
|
10.3
|
Form of
Loan Guarantor Compensation Letter Agreement dated June 28, 2010
(incorporated by reference to Exhibit 10.3 to Current Report on
Form 8-K filed July 2, 2010).
|
|
|
10.4
|
Securities
Purchase Agreement dated as of September 28, 2010 between ProUroCare
Medical Inc. and the purchasers identified therein ((incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K
filed September 29, 2010).
|
|
|
31.1 *
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2 *
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1 *
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the Securities Exchange Act of 1934, as amended, the Company has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
ProUroCare
Medical Inc.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Richard C. Carlson
|
|
|
|
Name: Richard
C. Carlson
|
|
|
|
Title: Chief
Executive Officer
|
|
|
By:
|
/s/ Richard Thon
|
|
|
|
Name: Richard Thon
|
|
|
|
Title: Chief Financial
Officer
|
|
Exhibit Index
Exhibit No.
|
Description
|
|
|
4.1
|
Form
of Second Amendment to Warrant Agreement between ProUroCare Medical Inc.
and Interwest Transfer Company, Inc. (incorporated by reference to Exhibit
4.24 to Registration Statement on Form S-4 filed July 2,
2010).
|
|
|
4.2
|
Specimen
2010 Replacement Warrant (incorporated by reference to Exhibit 4.25 to
Registration Statement on Form S-4 filed July 2, 2010).
|
|
|
10.1
|
$900,000
Promissory Note dated June 28, 2010 issued in favor of Crown Bank
(incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K filed July 2, 2010).
|
|
|
10.2
|
$100,000
Promissory Note dated June 28, 2010 issued in favor of Crown Bank
(incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K filed July 2, 2010).
|
|
|
10.3
|
Form of
Loan Guarantor Compensation Letter Agreement dated June 28, 2010
(incorporated by reference to Exhibit 10.3 to Current Report on
Form 8-K filed July 2, 2010).
|
|
|
10.4
|
Securities
Purchase Agreement dated as of September 28, 2010 between ProUroCare
Medical Inc. and the purchasers identified therein ((incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K
filed September 29, 2010).
|
|
|
31.1 *
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2 *
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1 *
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of
2002.
|
*Filed
herewith