Item 1. Financial
Statements
Notes to Consolidated
Financial Statements
September 30, 2012 and 2011 and the period
from
August 17, 1999 (Inception) to September
30, 2012
(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 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 device, which is designed to produce an elasticity image of the prostate as an adjunctive
aid in visualizing and documenting abnormalities of the prostate that have been detected by digital rectal examination. 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. Through its development partner, Artann Laboratories,
Inc. (“Artann”), clinical trials of the ProUroScan have been completed. On April 27, 2012, the ProUroScan received
clearance from the Food and Drug Administration (“FDA”) for marketing in the United States.
|
(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, 2012 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period. The accompanying
consolidated 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, 2011.
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. 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 anti-dilutive.
Anti-dilutive common equivalent shares issuable based on future exercise of stock options and warrants or conversion of convertible
debt 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, 2012 and 2011 and the period from August 17, 1999 (inception) to September 30,
2012 due to the Company’s net losses. 10,598,385 shares of common stock issuable under stock options, warrants, and convertible
debt were excluded from the computation of diluted net loss per common share for each of the three and nine month periods ended
September 30, 2012 and the period from August 17, 1999 (inception) to September 30, 2012, respectively, and 10,046,056 such shares
were excluded for each of the three and nine month periods ended September 30, 2011.
|
(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 non-employees. 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
option pricing model to estimate the fair value of options. The Black-Scholes 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. The weighted-average assumptions used in these calculations for options granted during the three and nine months
ended September 30, 2012 and 2011 are summarized as follows:
|
Three Months Ended
September 30
|
|
Nine months Ended
September 30
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Risk-free Interest Rate
|
0.50%
|
|
0.62%
|
|
0.50%
|
|
1.14%
|
|
Expected Life of Options Granted
|
3.8 years
|
|
4.0 years
|
|
3.8 years
|
|
4.0 years
|
|
Expected Volatility
|
121.3%
|
|
125.8%
|
|
121.3%
|
|
125.5%
|
|
Expected Dividend Yield
|
0
|
|
0
|
|
0
|
|
0
|
|
The expected life of the options is determined using
a simplified method, computed as the average of the option vesting periods and the contractual term of the option. For performance-based
options that vest upon the occurrence of an event, the Company uses an estimate of when the event will occur to determine the vesting
period used for each option grant. Expected volatility is based on a simple average of weekly price data since April 5, 2004, the
date the Company merged with PUC. Since the Company has only two employees, management expects and estimates that substantially
all employee stock options will vest; therefore, the forfeiture rate used was zero. 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.
During the three month period ended
September 30, 2012, the Company estimated that it was less likely than not that certain performance-based options will vest. As
a result, $137,394 of compensation expense previously recognized related to these options was reversed. Stock-based compensation
expense (income) related to options was $(100,604), $6,981 and $2,621,055 for the three and nine month periods ended September
30, 2012 and the period from August 17, 1999 (inception) to September 30, 2012, respectively, or $(0.01), $0.00, and $0.56 on a
per share basis. The Company estimates the amount of future stock-based compensation expense related to currently outstanding options
to be approximately $18,000 for the remainder of the year ending December 31, 2012 and $34,500 for the year ending December 31,
2013. Shares issued upon the exercise of stock options are newly issued from the Company’s authorized shares.
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 or original issue discount on the date the loans are made and expensed as interest or debt extinguishment expense over the
term of the debt. During the three and nine months ended September 30, 2012, the Company issued or accrued for issuance 30,000
and 137,500 warrants related to loans and loan guarantees valued at $18,000 and $91,125, respectively. No such warrants were issued
during the three and nine months ended September 30, 2011.
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
during the three and nine months ended September 30, 2012. The Company issued 0 and 150,000 warrants valued at $0 and $111,000
to a consultant as consideration for services during the three and nine months ended September 30, 2011.
The fair value of warrants is determined
using the Black-Scholes pricing model. The weighted-average assumptions used are summarized as follows:
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Risk-free Interest Rate
|
1.13%
|
|
n/a
|
|
0.95%
|
|
1.52%
|
|
Expected Life of Warrants Issued
|
5.25 years
|
|
n/a
|
|
5.13 years
|
|
4.89 years
|
|
Expected Volatility
|
122.7%
|
|
n/a
|
|
122.5%
|
|
126.3%
|
|
Expected Dividend Yield
|
0
|
|
n/a
|
|
0
|
|
0
|
|
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 or warrants. The value of the stock-based compensation that does
not represent original issue discount is recorded as debt issuance cost and amortized over the term of the loans.
Pursuant to the debt guarantees of the Company’s
bank loans (see Note 3) and loan arrangements with individual lenders (see Note 4), a total of 4,544 and 489,560 shares of stock
valued at $4,089 and $477,297 were issued or accrued for issuance and recorded as debt issuance cost during the three and nine
months ended September 30, 2012, respectively. In addition, 30,000 and 115,000 warrants valued at $18,000 and $83,550 were issued
or accrued for issuance and recorded as debt issuance cost in connection with loans received from individual lenders during the
three and nine months ended September 30, 2012, respectively.
Debt
issuance costs are summarized as follows:
|
|
September 30,
2012
|
|
December 31, 2011
|
Debt issuance costs, gross
|
|
$
|
1,684,656
|
|
|
$
|
1,204,639
|
|
Less amortization
|
|
|
(1,611,454
|
)
|
|
|
(1,130,008
|
)
|
Debt issuance costs, net
|
|
$
|
73,202
|
|
|
$
|
74,631
|
|
Amortization expense related to debt issuance costs
was $217,336, $562,276, and $3,664,899 for the three and nine months ended September 30, 2012, and the period from August 17, 1999
(Inception) to September 30, 2012, respectively. Amortization expense related to debt issuance costs was $87,353, and $304,081
for the three and nine months ended September 30, 2011.
The Company has incurred operating
losses, accumulated deficit and negative cash flows from operations since inception, and our requirement for additional working
capital to support future operations, raises substantial doubt as to our ability to continue as a going concern. As of September
30, 2012 the Company had an accumulated deficit of $38,286,094. 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,
2012
|
|
December 31,
2011
|
Accrued compensation
|
|
$
|
125,511
|
|
|
$
|
101,693
|
|
Accrued interest
|
|
|
151,532
|
|
|
|
47,799
|
|
Consulting fees
|
|
|
71,500
|
|
|
|
49,000
|
|
Audit fees
|
|
|
31,500
|
|
|
|
35,000
|
|
Legal fees
|
|
|
25,287
|
|
|
|
5,800
|
|
Directors’ fees
|
|
|
21,000
|
|
|
|
0
|
|
Accrued stock to be issued for loan consideration
|
|
|
4,089
|
|
|
|
160,044
|
|
Accrued use tax
|
|
|
0
|
|
|
|
1,092
|
|
Other
|
|
|
50
|
|
|
|
50
|
|
|
|
$
|
430,469
|
|
|
$
|
400,478
|
|
Note 3. Notes Payable – Bank.
The following summarizes notes payable - bank balances
at September 30, 2012 and December 31, 2011, and the related activity during the nine months ended September 30, 2012:
|
|
September 30, 2012
|
|
December 31, 2011
|
|
Activity during the
nine months ended
September 30, 2012
|
Short-term notes payable, bank:
|
|
|
|
|
|
|
|
|
|
|
Crown Bank promissory note
|
|
$
|
500,000
|
|
|
$
|
700,000
|
|
|
Principal reduction of $200,000
|
Central Bank promissory note
|
|
|
100,025
|
|
|
|
—
|
|
|
Reclassified from long-term; Note was extended through January 17, 2013
|
Central Bank line of credit
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Line was renewed through May 12, 2013
|
Total short-term notes payable, bank
|
|
$
|
700,025
|
|
|
$
|
800,000
|
|
|
|
Long-term
notes payable, bank:
|
|
|
|
|
|
|
|
|
|
|
Central Bank promissory note
|
|
$
|
—
|
|
|
$
|
100,025
|
|
|
Reclassified to short- term
|
Crown Bank Loans
Pursuant to loan consideration agreements dated October
11, 2011, on February 15, 2012, the Company issued an aggregate 150,000 shares of common stock to James Davis, a director of the
Company, and William Reiling, a greater than 5% shareholder, as guarantors of the Company’s Crown Bank loan (the “Guarantors”).
On March 30, 2012, the Guarantors purchased a total of $200,000 of the Company’s 10% Secured Convertible Subordinated Notes
(see Note 4), and the proceeds were used to reduce the principal amount of the Crown Bank loan. On the same date, the parties amended
the loan consideration agreements, pursuant to which 281,610 shares of common stock were issued to the Guarantors, representing
the maximum number of shares that could be earned for the guarantee period from April 1, 2012 to October 31, 2012 in the original
agreement. The $453,190 fair market value of the 431,610 total shares issued was recorded as debt issuance cost and is being amortized
over the term of the loan on a straight-line basis. During the three and nine months ended September 30, 2012 the Company recorded
debt extinguishment expense of $191,490 and $456,534, respectively, related to the consideration shares.
Central Bank Loans
On January 17, 2012, the Company renewed its $100,025
Central Bank loan. The renewed loan matures on January 17, 2013, and bears interest at the prime rate plus 1%, with a minimum annual
rate of 5.0% (currently 5%). Pursuant to agreements with the guarantor of this loan, the Company issued 6,666 shares of common
stock relating to the guarantee period from July 17, 2011 through January 17, 2012 that had been accrued for issuance during that
period. The Company issued 9,088 shares for the period from January 17, 2012 through July 17, 2012 and is accruing 1,515 shares
per month that will be issued at the end of the loan term. The $12,268 value of the 13,633 shares issued and accrued for the period
from January 17, 2012 through September 30, 2012 was recorded as debt issuance cost. During the three and nine months ended September
30, 2012 the Company recorded debt extinguishment expense of $3,862 and $12,083, respectively, related to the consideration shares.
Pursuant to the terms of a consideration agreement
with a guarantor of the Company’s $100,000 line of credit arrangement with Central Bank, on May 11, 2012, the Company issued
to the guarantor 8,064 shares of its common stock related to the guarantee period from May 11, 2012 through November 11, 2012,
and will accrue for later issuance 1,344 shares for each following month of the loan term. The $8,145 value of the shares is being
amortized as debt extinguishment expense over the initial guarantee period. Principal amounts borrowed against the line of credit
will bear interest at the prime rate plus 1.0%, with a minimum rate of 5.0% (currently 5%). During the three and nine months ended
September 30, 2012, the Company recorded interest expense of $0 and $3,956 and debt extinguishment expense of $3,984 and $6,153,
respectively, related to the consideration shares.
Note
4. Notes Payable.
The following summarizes notes payable balances at
September 30, 2012 and December 31, 2011, and the related activity during the nine months ended September 30, 2012:
|
|
September 30,
2012
|
|
December 31, 2011
|
|
Activity during the
nine months ended
September 30, 2012
|
Short-term notes payable:
|
|
|
|
|
|
|
|
|
|
|
Insurance policy financing
|
|
$
|
57,982
|
|
|
$
|
41,527
|
|
|
Original installment loan repaid; new installment loan established
|
Note payable due December 22, 2012
|
|
|
40,000
|
|
|
|
40,000
|
|
|
Maturity date was extended
|
Note payable due November 22, 2012
|
|
|
21,000
|
|
|
|
40,000
|
|
|
$20,000 was converted into a short-term convertible note, $1,000 of interest was converted to note principal, and the maturity date was extended
|
Note payable due December 26, 2012
|
|
|
150,000
|
|
|
|
0
|
|
|
New loan
|
Note payable due December 29, 2012
|
|
|
15,000
|
|
|
|
0
|
|
|
New loan
|
Less: original issue discount
|
|
|
(16,407
|
)
|
|
|
(7,241
|
)
|
|
Original issue discount related to warrants issued pursuant to note
|
Total short-term notes payable
|
|
$
|
267,575
|
|
|
$
|
114,286
|
|
|
|
Short-term convertible notes payable:
|
|
|
|
|
|
|
|
|
|
|
Note payable due August 10, 2013
|
|
$
|
65,698
|
|
|
$
|
65,698
|
|
|
Extended maturity date, reduced conversion price
|
Note payable due August 11, 2013
|
|
|
11,018
|
|
|
|
11,018
|
|
|
Extended maturity date, reduced conversion price
|
Notes payable due January 31, 2013
|
|
|
60,000
|
|
|
|
0
|
|
|
Notes issued for $40,000 cash and $20,000 conversion of short-term note
|
Total short-term convertible notes payable
|
|
$
|
136,716
|
|
|
$
|
76,716
|
|
|
|
Short-term convertible notes payable, related party:
|
|
|
|
|
|
|
|
|
|
|
Note payable due August 8, 2013
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
Extended maturity date, reduced conversion price
|
Notes payable due December 28, 2012
|
|
|
42,558
|
|
|
|
42,558
|
|
|
Extended maturity date
|
Total short-term convertible notes payable, related party
|
|
$
|
342,558
|
|
|
$
|
342,558
|
|
|
|
Long-term convertible notes payable:
|
|
|
|
|
|
|
|
|
|
|
Notes payable due September 20, 2013
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
No activity
|
Long-term convertible notes payable,
related party:
|
|
|
|
|
|
|
|
|
|
|
Notes payable due September 20, 2013
|
|
$
|
350,000
|
|
|
$
|
350,000
|
|
|
No activity
|
Notes payable due March 31, 2014
|
|
|
200,000
|
|
|
|
0
|
|
|
Notes issued for $200,000 cash, (proceeds used to reduce Crown Bank note principal –see Note 3)
|
Total long-term convertible notes payable, related party
|
|
$
|
550,000
|
|
|
$
|
350,000
|
|
|
|
Between February 1, 2012 and March 16, 2012, the Company
closed on a total of $60,000 in a private placement of unsecured convertible notes. The notes bear interest at 10% per annum payable
on the maturity date, mature on January 31, 2013, and the principal and accrued interest are convertible into shares of the Company’s
common stock at a conversion price of $1.30 per share. Of this amount, $40,000 was received in cash, and $20,000 was funded by
the reduction of an outstanding note payable, which was accounted for as a debt modification.
On March 22, 2012, the Company amended the terms of
a $20,000 promissory note with an individual lender to extend the maturity date of the note to May 22, 2012. The extension was
accounted for as a debt modification. On May 22, 2012, the Company again amended the promissory note to extend the maturity date
to November 22, 2012 and converted $1,000 of accrued interest into the principal amount of the note. The resulting $21,000 note
bears interest at 10% per annum payable on the maturity date. Pursuant to the terms of the amended note, the Company issued 30,000,
five-year warrants to the lender to acquire its common stock at an exercise price of $1.30 per share. The $30,300 value of the
warrants as determined by the Black-Scholes pricing model was recorded as debt extinguishment.
On March 22, 2012, the Company amended the terms of
a $40,000 promissory note with an individual lender to extend the maturity date of the note to June 22, 2012. The note bears interest
at 10% per annum payable on the maturity date. Pursuant to the amended note terms, the Company agreed to issue to the lender 10,000
five-year warrants to acquire its common stock at an exercise price of $1.30 per share for each month the note remains outstanding
beyond the original March 22, 2012 maturity date. During the three and nine months ended September 30, 2012, the Company accrued
for issuance 30,000 and 40,000 warrants and recognized $18,000 and $42,000 of debt extinguishment expense pursuant to this arrangement,
respectively. The warrants will be issued when the loan principal is repaid. On June 22, 2012, the Company again amended the promissory
note to extend the maturity date to December 22, 2012. As consideration to the lender for extending the maturity date, the Company
issued 15,000, five-year warrants to acquire its common stock at an exercise price of $1.30 per share. The $11,250 value of the
warrants as determined by the Black-Scholes pricing model was recorded as debt extinguishment expense.
On March 30, 2012, the Guarantors of the Company’s
Crown Bank Loan (see Note 3) purchased a total of $200,000 of the Company’s 10% Secured Convertible Subordinated Notes.
The notes mature on March 31, 2014, are collateralized by a subordinated interest in all of the Company’s assets, and
the principal and accrued interest thereon are convertible into the Company’s common stock at $1.30 per share.
On May 31, 2012, the Company borrowed $90,627 pursuant
to an insurance policy premium financing agreement. Under the terms of the agreement, the loan will be repaid in 11 monthly installments
of $8,345 beginning July 1, 2012. The annual interest rate of the loan is 3.2%.
On June 29, 2012, the Company borrowed $15,000 from
an individual lender pursuant to a promissory note. The note matures on December 29, 2012, and bears interest at a rate of 10%
per annum payable on the maturity date. As consideration to the lender for making the loan, the Company issued 22,500, five-year
warrants to acquire its common stock to the lender, with an exercise price of $1.30 per share. An original issue discount of $7,575
related to the warrants was recorded and is being amortized as interest expense over the term of the note. $3,788 of interest expense
was recorded during the three month period ended September 30, 2012.
On September 26, 2012, the Company borrowed $150,000
from an individual investor pursuant to a secured promissory note. The note matures on December 26, 2012, and is secured by a subordinated
security interest in all Company assets. In lieu of interest or any other consideration, the Company issued 30,000 shares of its
common stock to the lender. The $13,200 value of the shares was recorded as original issue discount and is being amortized as interest
expense over the term of the note. $580 of interest expense was recorded during the three month period ended September 30, 2012.
On September 27, 2012, the Company amended the maturity
date of a $300,000 convertible subordinated promissory note with an individual investor. Pursuant to an extension agreement with
the lender, the Company agreed to reduce the conversion price of the note from $1.30 per share to $1.00 per share in consideration
for a one year extension of the promissory note’s maturity date. The amended note matures on August 8, 2013. On the same
date, the Company amended the maturity date of a $65,698 unsecured convertible promissory note with a limited partnership to now
mature on August 10, 2013, and the maturity date of an $11,018 unsecured convertible promissory note with an individual lender
to now mature on August 11, 2013. Pursuant to the extension agreements with the lenders, the Company agreed to reduce the conversion
price of the notes from $1.30 per share to $1.00 per share in consideration for the one year extension of the promissory notes.
The note amendments did not result in the recording of additional expense, as there was no intrinsic value of the conversion features,
both before and after the modifications.
Note 5. Shareholders’ Equity.
Between April 12 and July 2, 2012, the Company sold
707,000 shares of its common stock at $1.00 per share in a private offering.
On August 9, 2012, the Company issued 25,000 non-qualified
stock options 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 $0.60 per share,
and vest ratably over 12 months. The options were valued at $0.46 per share using the Black-Scholes pricing model and will be expensed
as general and administrative expense on a straight-line basis over the vesting period. The assumptions used in the Black-Scholes
valuation of these options are shown in the table in Note 1(d).
On September 26, 2012, the Company issued 30,000
shares of its common stock to an individual lender as interest consideration for the loan (see Note 4).
Note
6. Income Taxes.
The Company has generated net operating loss carryforwards
of approximately $10.0 million. The Company has also generated approximately $13.2 million of built-in losses in the form of start-up
expenses. Federal and state tax laws impose significant restrictions on the utilization of net operating loss carryforwards and
built-in losses 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”). Although a formal study has not been
completed, the Company has analyzed its equity ownership changes and believes that such an ownership change occurred upon the completion
of its 2009 public offering. Federal net operating losses of approximately $5.3 million and built-in losses of $7.7 million incurred
prior to the 2009 public offering are limited to a total of approximately $1.1 million, consisting of annual amounts of approximately
$104,000 per year for each of the years 2013-2023. We believe that approximately $11.9 million of combined net operating losses
and built-in losses will expire unused due to IRC Section 382 limitations. These limitations could be further restricted if additional
ownership changes occur in future years.
Net federal and state operating loss carryforwards
of approximately $4.6 million generated subsequent to the Company’s 2009 public offering will begin to expire in 2025. The
net operating loss carryforwards are subject to examination until they expire.
The Company had no significant unrecognized tax benefits
as of December 31, 2011 and 2010 and, likewise, no significant unrecognized tax benefits that, if recognized, would affect the
effective tax rate. The Company had no positions for which it deemed that it is reasonably possible that the total amounts of the
unrecognized tax benefit will significantly increase or decrease. The Company has adopted the policy of classifying income tax
related interest and penalties as interest expense and general and administrative expense, respectively.
The tax years that remain subject to examination by
major tax jurisdictions currently are:
Federal 2009 - 2011
State of Minnesota 2009 - 2011
Note 7. Accrued Development
Expense.
In 2008 the Company entered into
a “Development and Commercialization Agreement” with Artann, under the terms of which the parties have been collaborating
to develop and commercialize the Company’s ProUroScan prostate mechanical imaging system. Under the terms of the Development
and Commercialization Agreement, the Company recorded as research and development expense a $750,000 milestone earned by Artann
upon the FDA’s April 27, 2012 approval of the Company’s ProUroScan System.
On May 24, 2012, the parties executed
an amendment to the Development and Commercialization Agreement to revise the scheduled timing of the $750,000 milestone payment.
Under the revised payment schedule, the Company made a $100,000 first payment on May 25, 2012 and agreed to make the following
payments to Artann:
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$400,000 to be paid in increments of 25% of all net cash received by the Company from any funding source between May 22, 2012
and October 27, 2012, with any unpaid balance payable on October 27, 2012; and
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a $250,000 payment on October 27, 2012.
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In addition, the Company agreed to
pay simple interest at a 10% annual rate on the difference between the cumulative amounts that would have been paid to Artann under
the previous payment schedule and the cumulative payments made under the revised schedule. Finally, in recognition of Artann’s
accommodation to the Company by rescheduling the timing of payments, the Company agreed to pay an accommodation fee equal to the
interest amount to be paid. Both the interest and the accommodation fee are being recorded as interest expense as it is
incurred.
As of September 30, 2012, the $577,500
unpaid balance of the milestone payment was recorded as accrued development expense.
Note 8. Subsequent Events.
On October 29, 2012, the Company borrowed $100,000
from an individual investor pursuant to a secured promissory note. The note matures on December 26, 2012, and is secured by a subordinated
security interest in all Company assets. In lieu of interest or any other consideration, the Company issued 20,000 shares of its
common stock to the lender. The $10,000 value of the shares was recorded as original issue discount and will be amortized as interest
expense over the term of the note.
On November 12, 2012, the Company and
Artann amended their Development and Commercialization Agreement (see Note 7). Under the terms of the amendment, the
amounts due on October 27, 2012 will be due on November 27, 2012. The Company agreed to pay simple interest on the amount due
at a rate of 20% per year.