Notes
to Consolidated Financial Statements
March 31, 2013 and 2012 and the period
from
August 17, 1999 (Inception) to March
31, 2013
(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 prostate imaging device, known as the ProUroScan
TM
System, which is designed to produce an 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”)
in conjunction with its development partner, Artann Laboratories, Inc. (“Artann”), 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. In April 2012, the ProUroScan System received initial clearance for marketing
in the United States by the Food and Drug Administration (“FDA”). The Company is currently in the process of raising
additional financing required to complete and obtain FDA approval of a reusable probe for the ProUroScan and move to commercialization.
|
(b)
|
Basis of Presentation
|
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant
to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information.
Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with
GAAP have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate
to make the information not misleading. Operating results for the three months ended March 31, 2013 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2013 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, 2012.
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 antidilutive. Antidilutive
common equivalent shares issuable based on future exercise of stock options or warrants could potentially dilute basic loss per
common share in subsequent years. All options and warrants outstanding were anti-dilutive for the three months ended March 31,
2013 and 2012 and the period from August 17, 1999 (Inception) to March 31, 2013 due to the Company’s net losses. 9,480,383
and 10,436,577 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 months ended March 31, 2013 and 2012, 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 and warrants
to non-employees (typically consultants). It is the Company’s policy to grant warrants at or above the fair market value
at the date of grant, determined to be the average of the last closing price of the stock over the previous 10-trading days. The
fair value of options or warrants issued to non-employees 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.
|
(e)
|
Stock-Based Loan Consideration
|
The Company issues stock and warrants to various lenders
and loan guarantors in consideration for their making or guaranteeing certain loans to the Company. The Company values the stock
and warrants at fair value at the date of grant, and records the value as debt issuance cost. The debt issuance cost is amortized
as either debt extinguishment expense or interest expense, depending on the specific terms of loan amendments.
The Company uses the Black-Scholes option-pricing model
to estimate the fair value of warrants, in the same manner as it values stock option (see Note 1(d) above. For the same reasons,
the existing model may not necessarily provide a reliable single measure of the fair value of the Company’s stock warrants.
The Company has received a cash payment for a subscription
to a private debt offering. However, under the terms of the debt offering, the funds cannot be used by the Company until a closing
on the minimum amount of the offering is held, so the cash is restricted and will be returned to the subscriber if a closing is
not completed.
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 March 31, 2013 the Company
had an accumulated deficit of $39,413,458. These factors, among others, raise substantial doubt about the Company’s ability
to continue as a going concern. The accompanying unaudited consolidated financial statements do not include any adjustments related
to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result
should the Company be unable to continue as a going concern.
Note 2. Accrued Expenses.
Accrued expenses are summarized as follows:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Accrued interest
|
|
$
|
238,998
|
|
|
$
|
183,924
|
|
Accrued compensation
|
|
|
198,330
|
|
|
|
118,080
|
|
Accrued royalties
|
|
|
45,501
|
|
|
|
33,000
|
|
Legal fees
|
|
|
24,158
|
|
|
|
0
|
|
Accrued directors fees
|
|
|
20,000
|
|
|
|
0
|
|
Consulting fees
|
|
|
13,500
|
|
|
|
41,275
|
|
Audit fees
|
|
|
6,850
|
|
|
|
42,000
|
|
Accrued use tax
|
|
|
1,892
|
|
|
|
2,002
|
|
Accrued loan consideration to be paid in stock
|
|
|
0
|
|
|
|
73,652
|
|
|
|
$
|
549,229
|
|
|
$
|
493,933
|
|
Note 3. Debt Issuance Costs
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 compensation issued in the form of common stock or warrants 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 and loans received from individual lenders, 829,500 warrants valued at $241,136 were issued or accrued for issuance
during the three months ended March 31, 2013 (see Notes 4, 5 and 6). Of this, warrants valued at $73,652 were issued in lieu of
amounts previously accrued for issuance in the form of common stock. Bank refinance fees of $2,500 paid in cash were recorded as
debt issuance cost and immediately amortized as debt extinguishment expense.
Debt issuance costs are summarized as follows:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Debt issuance costs, gross
|
|
$
|
1,957,803
|
|
|
$
|
1,787,819
|
|
Less amortization
|
|
|
(1,942,434
|
)
|
|
|
(1,782,573
|
)
|
Debt issuance costs, net
|
|
$
|
15,369
|
|
|
$
|
5,246
|
|
Debt issuance cost amortization is recorded as either
debt extinguishment expense or interest expense, depending on the specific terms of loan amendments. The amortization of debt issuance
costs for the three months ended March 31, 2013 and 2012, and the period from August 17, 1999 (Inception) to March 31, 2013 was
recorded as follows:
|
|
Three months ended March 31,
|
|
|
August 17, 1999
(Inception) to
|
|
|
|
2013
|
|
|
2012
|
|
|
March 31, 2013
|
|
Interest expense
|
|
$
|
7,650
|
|
|
$
|
2,787
|
|
|
$
|
620,075
|
|
Debt extinguishment expense
|
|
|
152,211
|
|
|
|
79,476
|
|
|
|
3,375,804
|
|
Amortization expense
|
|
$
|
159,861
|
|
|
$
|
82,273
|
|
|
$
|
3,995,879
|
|
Note 4. Notes Payable – Bank.
The following summarizes the balances of bank notes
payable at March 31, 2013 and December 31, 2012:
|
|
March 31, 2013
|
|
|
December 31,
2012
|
|
Short-term notes payable, bank:
|
|
|
|
|
|
|
|
|
Crown Bank promissory note
|
|
$
|
450,000
|
|
|
$
|
500,000
|
|
Central Bank line of credit
|
|
|
100,000
|
|
|
|
100,000
|
|
Central Bank promissory note
|
|
|
100,020
|
|
|
|
0
|
|
Total short-term notes payable, bank
|
|
$
|
550,020
|
|
|
$
|
600,000
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable, bank:
|
|
|
|
|
|
|
|
|
Central Bank promissory note
|
|
$
|
0
|
|
|
$
|
100,025
|
|
Crown Bank Loan
On March 27, 2013, the Company
refinanced its $500,000 promissory note with Crown Bank (the “Crown Loan”). Pursuant to the amendment, a principal
reduction payment of $50,000 was made on March 27, 2013, with a second $50,000 reduction due on January 15, 2014. The note matures
on February 15, 2014, and bears interest at the prime rate plus one percent,
but never less than 6.0% (currently 6.0%).
The Crown Loan remains secured by all Company assets and continues to be guaranteed by James L. Davis, a director of the Company
and William S. Reiling, a greater than 5% shareholder of the Company (see Note 6 for consideration paid to the guarantors in the
form of equity). On the renewal date, it was determined that a substantial modification of the terms of the note was made as the
present value of the cash flows under the new promissory note was greater than 10% higher than the present value of the cash flows
under the original note. Accordingly, the value of the warrants issued pursuant to this arrangement were recorded as recorded as
debt issuance cost and are being expensed as debt extinguishment expense as they are earned. The Company recognized $100,576 of
debt extinguishment expense related to the warrants and $2,500 of debt extinguishment expense related to bank fees during the three
months ended March 31, 2013.
Central Bank Loans
On January 17, 2013, the Company renewed its
$100,025 Central Bank loan. The renewed loan matures on January 17, 2014, and bears interest at the prime rate plus one
percent, with a minimum annual rate of 5.0% (currently 5.0%). On May 11, 2013, the Company renewed its $100,000 Central Bank
line of credit. The renewed line of credit matures on January 17, 2014, and bears interest at the prime rate plus
one percent, with a minimum annual rate of 5.0% (currently 5%). The Central Bank facilities (the “Central Loans”)
are guaranteed by an individual investor (see Note 6 for consideration paid to the guarantor in the form of equity). On
the renewal dates, it was determined that a substantial modification of the terms of the Central Loans was made as the
present value of the cash flows under the new promissory notes were greater than 10% higher than the present value of the
cash flows under the original note. Accordingly, the value of the warrants issued pursuant to this arrangement were recorded
as recorded as debt issuance cost and are being expensed as debt extinguishment expense as they are earned. The Company
recognized $6,985 of debt extinguishment expense related to the Central Loans during the three months ended March 31,
2013.
Note 5. Notes Payable.
The following summarizes notes payable balances at
March 31, 2013 and December 31, 2012.
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Short-term notes payable:
|
|
|
|
|
|
|
|
|
Insurance policy financing
|
|
$
|
16,678
|
|
|
$
|
33,266
|
|
Note payable due August 22, 2013
|
|
|
40,000
|
|
|
|
40,000
|
|
Note payable due May 22, 2013
|
|
|
21,000
|
|
|
|
21,000
|
|
Note payable due May 31, 2013
|
|
|
15,000
|
|
|
|
15,000
|
|
Total short-term notes payable
|
|
$
|
92,678
|
|
|
$
|
109,266
|
|
|
|
|
|
|
|
|
|
|
Short-term notes payable, related party:
|
|
|
|
|
|
|
|
|
Note payable due December 26, 2013
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Note payable due March 31, 2014
|
|
|
200,000
|
|
|
|
—
|
|
Total short-term notes payable, related party
|
|
$
|
450,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short-term convertible notes payable:
|
|
|
|
|
|
|
|
|
Note payable due August 10, 2013
|
|
$
|
65,698
|
|
|
$
|
65,698
|
|
Note payable due August 11, 2013
|
|
|
11,018
|
|
|
|
11,018
|
|
Notes payable due January 31, 2013
|
|
|
60,000
|
|
|
|
60,000
|
|
Notes payable due September 20, 2013
|
|
|
150,000
|
|
|
|
150,000
|
|
Total short-term convertible notes payable
|
|
$
|
286,716
|
|
|
$
|
286,716
|
|
|
|
|
|
|
|
|
|
|
Short-term convertible notes payable, related party:
|
|
|
|
|
|
|
|
|
Note payable due August 8, 2013
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Notes payable due September 20, 2013
|
|
|
350,000
|
|
|
|
350,000
|
|
Notes payable due December 28, 2013
|
|
|
6,400
|
|
|
|
6,400
|
|
Total short-term convertible notes payable, related party
|
|
$
|
656,400
|
|
|
$
|
656,400
|
|
|
|
|
|
|
|
|
|
|
Long-term convertible notes payable, related party:
|
|
|
|
|
|
|
|
|
Notes payable due March 31, 2014
|
|
$
|
0
|
|
|
$
|
200,000
|
|
On April 27, 2013, the Company refinanced $250,000
of short term notes with Jeanne Rudelius, a relative of Director Robert Rudelius. Under the terms of the new note, the loan matures
on December 26, 2013, bears interest at 10% per year, and the principal and accrued interest thereon is convertible into the Company’s
common stock at $0.50 per share (see Note 6 for consideration paid to the lender in the form of warrants).
On May 1, 2013, the Company extended the maturity date
of its $6,400 loan short term note payable with a related party. Under the terms of the amended loan, the note matures on December
28, 2013, bears interest at 10% per year, and the principal and accrued interest thereon is convertible into the Company’s
common stock at $0.50 per share (see Note 6 for consideration paid to the lender in the form of equity).
Note 6. Shareholders’ Equity.
Stock and Stock Options
On January 4, 2013, the Company issued 20,000 shares
of its commons stock to director Larry Getlin in lieu of cash for $12,800 of accrued consulting fees. On March 26, 2013, the Company
issued 80,000 shares of its common stock to a consultant in lieu of $34,000 of accrued consulting fees.
No stock options were granted
during the three months ended March 31, 2013 and March 31, 2012.
Stock-based compensation expense related to options
and warrants for the periods ended March 31, 2013 and 2012, and the period from August 17, 1999 (inception) to March 31, 2013,
is outlined below. The Company estimates the amount of future stock-based compensation expense related to currently outstanding
options to be approximately $23,958 for the remaining part of the year for the year ending December 31, 2013. Shares issued upon
the exercise of stock options are newly issued from the Company’s authorized shares.
|
|
Three months ended March 31,
|
|
|
August 17, 1999 (Inception) to
|
|
|
|
2013
|
|
|
2012
|
|
|
March 31, 2013
|
|
|
|
Expense
|
|
|
Per Share
|
|
|
Expense
|
|
|
Per Share
|
|
|
Expense
|
|
|
Per Share
|
|
Stock-based compensation
|
|
$
|
11,730
|
|
|
$
|
0.00
|
|
|
$
|
57,291
|
|
|
$
|
0.00
|
|
|
$
|
2,774,391
|
|
|
$
|
0.51
|
|
Common stock and warrants issued as consideration
for loans and loan guarantees
The Company issues stock and warrants to various lenders
and loan guarantors in consideration for their making or guaranteeing certain loans to the Company. Depending on the terms, cash
flows, and other characteristics of the each loan or loan renewal, consideration paid in the form of stock and warrants is recorded
as debt issuance cost or original issue discount, and amortized over the corresponding term of each loan as either interest expense
or debt extinguishment expense.
Crown Note consideration (see Note 4)
As of December 31, 2012, the Company had accrued
for issuance 80,460 shares of its common stock valued at $62,760 as consideration to the two guarantors of the Crown Note for
the guarantee period from November 1, 2012 through December 31, 2012. On May 8, 2013, the guarantors agreed to accept
as consideration warrants instead of common shares. Accordingly, the Company issued a total of 583,340 immediately vested
warrants with a fair value determined using the Black-Scholes pricing model of $163,336 for the guarantee period from
November 1, 2012 through March 31, 2013. At the same time the Company issued a total of 590,626 warrants valued at $165,375
as consideration to the guarantors for the period from April 1, 2013 to February 15, 2014. The warrants will vest as to
28,125 shares on the first of each month from April 2013 to January, 2014, and as to 14,063 shares on February 1, 2014,
subject to adjustment if the amount of the loan guaranteed should change. All the warrants issued are five-year warrants
exercisable at $0.50 per share.
Central Loans consideration (see Note 4)
As of December 31, 2012, the Company had accrued
for issuance 11,774 shares of its common stock valued at $10,892 as consideration to the guarantor of the Central Loans for
the guarantee period from July 17, 2012 through December 31, 2012. On May 8, 2013, the guarantor agreed to accept as
consideration warrants instead of common shares. Accordingly, the Company issued to the guarantor 25,000 immediately vested
warrants with a fair value of $7,000 for the guarantee period from July 17, 2012 through January 17, 2013 in the case of the
Central Bank promissory note, and 25,000 immediately vested warrants with a fair value of $7,000 for the guarantee period
from November 12, 2012 through May 12, 2013 in the case of the Central Bank line of credit. The Company also issued 50,000
warrants with a fair value of $14,000 for the period from January 17, 2013 to January 16, 2014 in the case of the Central
Bank promissory note and 50,000 warrants valued at $14,000 for the period from May 12, 2013 to May 11, 2014 in the case of
the Central Bank line of credit. These warrants will vest ratably on a monthly basis over the term of the loans, subject to
adjustment if the amount of the loan amounts guaranteed should change. All the warrants issued are five-year warrants
exercisable at $0.50 per share.
Consideration for $250,000 short term related
party note (see Note 5)
On May 8, 2013, the lender of $250,000
pursuant to short term notes agreed to refinance the notes with a convertible note that matures on December 26, 2013. As
consideration to the lender, the Company issued 150,000 immediately vested warrants with a fair value of $42,000, which were
expensed as debt extinguishment expense on the refinancing date. The warrants issued are five-year warrants exercisable at
$0.50 per share.
Consideration for other short term notes (see
Note 5)
Pursuant to existing terms of several other loans with
an aggregate principal amount of $76,000, the Company accrued for issuance a total of 71,250 warrants with a fair value of $49,800
during the three months ended March 31, 2013. All the warrants will vest on issuance upon repayment of the related loans, and will
be exercisable for five years at $1.30 per share
Note 7. Income Taxes.
The Company has generated net operating loss carryforwards
of approximately $10.3 million. The Company has also generated approximately $13.9 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 $5.4 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 $12.0 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 $5.7 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, 2012 and 2011 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 - 2012
State of Minnesota 2009 - 2012
Note 8. Commitments and
Contingencies
Due to funding limitations, the Company executive officers
have not received their salaries for an extended time. In April, 2013, our officers ceased to be statutory employees of the Company,
and now provide consulting services to the Company. Certain provisions of previous employment agreements with our officers concerning
termination of employment by the employee for good reason, including material payment obligations, may continue to be enforceable.
Under those provisions, our former officers might be entitled to severance payments of approximately $300,000.
Note 9. Subsequent Events.
On May 8, 2013, the Company issued
327,600 warrants to certain consultants in satisfaction of $81,900 of accrued consulting fees. The five-year warrants issued will
vest upon the Company’s first commercial sale of product or upon a change of control of the Company, and are exercisable
at $0.50 per share.
Between March 12 and May 8, 2013, officers,
directors, and other related parties made cash advances to the Company totaling $146,341. On May 8, the Company issued
698,046 warrants to certain of these in lieu of cash repayment of $116,341 of these advances. The warrants issued are
immediately exercisable, five-year warrants exercisable at $0.50 per share.
On May 8, 2013, the Company executed a consulting
agreement with its interim CEO, Stan Myrum, effective as of April 23,
2013.
Under the terms of his consulting agreement, Mr. Myrum
will earn an hourly fee to be paid in cash, and was issued a commitment fee of 150,000 warrants to purchase our common stock.
The agreement expires July 21, 2013, with automatic, successive two-month extension periods unless either party terminates the
agreement. Mr. Myrum will be eligible for an undetermined, mutually agreed upon bonus upon entering each extension period.
The warrants will vest upon the first to occur of (a) the first commercialization by the Company of its products or (b) a Change
of Control of the Company. The warrants issued are immediately exercisable, five-year warrants exercisable at $0.50 per share.