Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly periodended June 30, 2009**

 

**or**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from         to         **

 

**Commission File Number: 000-51774**

 

**ProUroCareMedical Inc.**

(Exact name of registrantas 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 principalexecutive offices, and Zip Code)

 

**(952) 476-9093**

(Registrant’s telephonenumber, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x  NO o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  YES o  NO o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer o |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated filer o    |   | Smaller reporting  company x |

 

Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).  YESo  NOx

 

The registrant has9,894,991 shares of common stock outstanding as of August 6, 2009.

 

 

 

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**ProUroCareMedical Inc.**

**Form 10-Qfor the**

**QuarterEnded June 30, 2009**

 

**Table ofContents**

 
| ** **                           | ** **                                                                                  | **Page No.** |
|--------------------------------------|---------------------------------------------------------------------------------------------|-------------------|
|                                 |                                                                                        |              |
| PART I - FINANCIAL  INFORMATION | 1                                                                                           |
|                                 |                                                                                        |              |
| ITEM 1.                              | FINANCIAL  STATEMENTS                                                                       |              |
|                                 |                                                                                        |              |
|                                 | Condensed 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 | 18                |
|                                 |                                                                                        |              |
| ITEM 4T.                             | CONTROLS AND  PROCEDURES                                                                    | 25                |
|                                 |                                                                                        |              |
| PART II - OTHER INFORMATION     | 25                                                                                          |
|                                 |                                                                                        |              |
| ITEM 1A.                             | RISK FACTORS                                                                                | 25                |
|                                 |                                                                                        |              |
| ITEM 2.                              | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 27                |
|                                 |                                                                                        |              |
| ITEM 5.                              | OTHER INFORMATION                                                                           | 27                |
|                                 |                                                                                        |              |
| ITEM 6.                              | EXHIBITS                                                                                    | 27                |
|                                 |                                                                                        |              |
| SIGNATURES                           | 28                                                                                          |

 

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Tableof Contents

 

**PART I.FINANCIAL INFORMATION**

 

***Item1.  Financial Statements***

*** ***

**ProUroCare Medical Inc.**

**(A Development Stage Company)**

**Condensed Consolidated Balance Sheets**

** **
| ** **                                                                                                                                                                        | ** ** | **June 30,  2009** | ** ** | **December 31,  2008******* | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **(Unaudited)**         | ** ** | ** **                       | ** ** |
| **Assets**                                                                                                                                                                        | ** ** | ** **              | ** ** | ** **                       | ** ** |
| Current  assets:                                                                                                                                                                  |       |                    |       |                             |       |
| Cash                                                                                                                                                                              |       | $                       | 14,594     |                             | $          | 3,900 |   |
| Other  current assets                                                                                                                                                             |       | 108,165                 |       | 75,848                           |       |
| Total  current assets                                                                                                                                                             |       | 122,759                 |       | 79,748                           |       |
|                                                                                                                                                                              |       |                    |       |                             |       |
| Equipment  and furniture, net                                                                                                                                                     |       | 499                     |       | —                           |       |
| Other  assets                                                                                                                                                                     |       | 30,687                  |       | 996,806                          |       |
|                                                                                                                                                                              |       | $                       | 153,945    |                             | $          | 1,076,554 |   |
| **Liabilities and Shareholders’  Deficit**                                                                                                                                   |       |                    |       |                             |       |
| Current  liabilities:                                                                                                                                                             |       |                    |       |                             |       |
| Accounts  and notes payable                                                                                                                                                       |       | $                       | 2,819,661  |                             | $          | 5,685,371 |   |
| Other  liabilities                                                                                                                                                                |       | 418,128                 |       | 2,265,088                        |       |
| Total  current liabilities                                                                                                                                                        |       | 3,237,789               |       | 7,950,459                        |       |
|                                                                                                                                                                              |       |                    |       |                             |       |
| Commitments  and contingencies                                                                                                                                                    |       |                    |       |                             |       |
| Long-term  convertible debt, net of original issue discount                                                                                                                       |       | —                  |       | 221,199                          |       |
| Long-term  convertible debt - related parties net of original issue discount                                                                                                      |       | —                  |       | 162,759                          |       |
| Total  liabilities                                                                                                                                                                |       | 3,237,789               |       | 8,334,417                        |       |
| Shareholders’  deficit:                                                                                                                                                      |       |                    |       |                             |       |
| Common  stock, $0.00001 par. Authorized 50,000,000 shares; issued and outstanding 9,894,991  and 1,811,429 shares on June 30, 2009 and December 31, 2008,  respectively |       | 99                      |       | 18                               |       |
| Additional  paid-in capital                                                                                                                                                       |       | 20,185,096              |       | 13,677,932                       |       |
| Deficit  accumulated during development stage                                                                                                                                     |       | (23,269,039             | )          | (20,935,813                      | )          |
| Total  shareholders’ deficit                                                                                                                                                 |       | (3,083,844              | )          | (7,257,863                       | )          |
|                                                                                                                                                                              |       | $                       | 153,945    |                             | $          | 1,076,554 |   |

 

----

*** The Balance Sheet as of December 31, 2008 hasbeen derived from the audited financial statements at that date.

 

*See accompanying notes to consolidated financialstatements.*

 

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**ProUroCare Medical Inc.**

**(A Development Stage Company)**

**Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                      | ** ** | **Three Months Ended   June 30** | ** ** | **Six Months Ended  June 30** | ** ** | **Period from August 17,1999 (Inception) to** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **2009**                              | ** ** | **2008**                           | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **June 30, 2009** | ** ** |
| Operating  expenses:                            |       |                                  |       |                               |       |                                               |       |   |   |   |   |
| Research  and development                       |       | $                                     | 108,881    |                               | $          | 300,155                                            |       | $ | 208,881 |   | $ | 300,155 |   | $ | 5,664,188 |   |
| General  and administrative                     |       | 286,110                               |       | 216,372                            |       | 711,627                                            |       | 462,534 |   | 10,542,800 |   |
| Total  operating expenses                       |       | 394,991                               |       | 516,527                            |       | 920,508                                            |       | 762,689 |   | 16,206,988 |   |
| Operating  loss                                 |       | (394,991                              | )          | (516,527                           | )          | (920,508                                           | )          | (762,689 | ) | (16,206,988 | ) |
| Interest  income                                |       | —                                |       | 125                                |       | 21                                                 |       | 378 |   | 18,316 |   |
| Interest  expense                               |       | (40,949                               | )          | (465,182                           | )          | (1,088,472                                         | )          | (854,491 | ) | (6,250,939 | ) |
| Debt  extinguishment expense                    |       | (157,919                              | )          | (20,491                            | )          | (324,267                                           | )          | (45,831 | ) | (829,428 | ) |
| Net  loss                                       |       | $                                     | (593,859   | )                                  | $          | (1,002,075                                         | )          | $ | (2,333,226 | ) | $ | (1,662,633 | ) | $ | (23,269,039 | ) |
|                                            |       |                                  |       |                               |       |                                               |       |   |   |   |   |
| Net  loss per common share:                     |       |                                  |       |                               |       |                                               |       |   |   |   |   |
| Basic  and diluted                              |       | $                                     | (0.06      | )                                  | $          | (0.58                                              | )          | $ | (0.26 | ) | $ | (0.96 | ) | $ | (16.20 | ) |
|                                            |       |                                  |       |                               |       |                                               |       |   |   |   |   |
| Weighted  average number of shares outstanding: |       |                                  |       |                               |       |                                               |       |   |   |   |   |
| Basic  and diluted                              |       | 9,574,042                             |       | 1,727,350                          |       | 8,827,218                                          |       | 1,727,340 |   | 1,436,224 |   |

 

***See accompanying notes toconsolidated financial statements.***

 

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**ProUroCare Medical Inc.**

**(A Development StageCompany)**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

** **
| ** **                                                                                                             | ** ** | **Six Months  Ended   June 30** | ** ** | **Period  from August  17, 1999 (inception) to** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2009**                             | ** ** | **2008**                                         | ** ** | **June 30,  2009** | ** ** |
| Cash flows from operating activities:                                                                                  |       |                                 |       |                                             |       |   |   |
| Net loss                                                                                                               |       | $                                    | (2,333,226 | )                                                | $          | (1,662,633 | ) | $ | (23,269,039 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                           |       |                                 |       |                                             |       |   |   |
| Depreciation and amortization                                                                                          |       | 62                                   |       | 306                                              |       | 20,859 |   |
| Gain on sale of furniture and equipment                                                                                |       | —                               |       | —                                           |       | (2,200 | ) |
| Stock-based compensation                                                                                               |       | 158,233                              |       | 29,719                                           |       | 1,922,580 |   |
| Common stock issued for services rendered                                                                              |       | —                               |       | —                                           |       | 207,371 |   |
| Common stock issued for debt guarantees                                                                                |       | —                               |       | —                                           |       | 106,667 |   |
| Common stock issued for debt issuance cost                                                                             |       | —                               |       | —                                           |       | 6,667 |   |
| Common stock issued for debt extinguishment                                                                            |       | 33,333                               |       | —                                           |       | 33,333 |   |
| Notes payable issued for intangibles expensed as  research and development                                             |       | —                               |       | 150,000                                          |       | 150,000 |   |
| Warrants issued for services                                                                                           |       | —                               |       | —                                           |       | 540,636 |   |
| Warrants issued for debt guarantees                                                                                    |       | —                               |       | —                                           |       | 355,197 |   |
| Warrants issued for debt extinguishment                                                                                |       | 607                                  |       | 45,831                                           |       | 360,007 |   |
| Warrants issued for debt extinguishment-related  parties                                                               |       | —                               |       | —                                           |       | 26,828 |   |
| Warrants issued for debt issuance cost                                                                                 |       | —                               |       | —                                           |       | 12,834 |   |
| Amortization of note payable-original issue discount                                                                   |       | —                               |       | —                                           |       | 152,247 |   |
| Amortization of note payable-related parties  original issue discount                                                  |       | 2,720                                |       | 50,828                                           |       | 142,964 |   |
| Amortization of convertible debt-original issue  discount                                                              |       | 507,902                              |       | 165,776                                          |       | 1,146,587 |   |
| Amortization of convertible debt-related parties  original issue discount                                              |       | 444,328                              |       | 248,230                                          |       | 1,194,132 |   |
| Amortization of debt issuance costs                                                                                    |       | 309,529                              |       | 185,819                                          |       | 2,015,262 |   |
| 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                                                                                                   |       | 4,814                                |       | (249                                             | )          | (50,848 | ) |
| Accounts payable                                                                                                       |       | (144,493                             | )          | 105,874                                          |       | 785,341 |   |
| Other liabilities                                                                                                      |       | (911,880                             | )          | (68,659                                          | )          | 1,555,751 |   |
| Net cash used in operating activities                                                                                  |       | (1,928,071                           | )          | (749,158                                         | )          | (10,247,517 | ) |
| Cash flows from investing activities:                                                                                  |       |                                 |       |                                             |       |   |   |
| Purchases of equipment and furniture                                                                                   |       | (561                                 | )          | —                                           |       | (21,358 | ) |
| Net cash used in investing activities                                                                                  |       | (561                                 | )          | —                                           |       | (21,358 | ) |
|                                                                                                                        |            |                                      |            |                                                  |            |  |  |  |  |  |

 

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**ProUroCare Medical Inc.**

**(A Development StageCompany)**

**Consolidated Statementsof Cash Flows (continued)**

**(Unaudited)**

** **
| ** **                                                                | ** ** | **Six Months  Ended   June 30** | ** ** | **Period  from August  17, 1999 (Inception) to** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                             | ** ** | **2008**                                         | ** ** | **June 30,  2009** | ** ** |
| Cash flows from financing activities:                                     |       |                                 |       |                                             |       |   |   |
| Proceeds of note payable, bank                                            |       | 100,000                              |       | —                                           |       | 600,000 |   |
| Payments of note payable, bank                                            |       | (400,000                             | )          | —                                           |       | (900,000 | ) |
| Proceeds of notes payable                                                 |       | —                               |       | —                                           |       | 340,500 |   |
| Payment of notes payable                                                  |       | (87,864                              | )          | (153,793                                         | )          | (1,458,382 | ) |
| Proceeds of notes payable - related parties                               |       | 67,638                               |       | 112,500                                          |       | 627,738 |   |
| Payments of notes payable - related parties                               |       | (34,000                              | )          | (74,250                                          | )          | (237,300 | ) |
| Proceeds from long-term notes payable and bank debt                       |       | —                               |       | 348,750                                          |       | 3,807,337 |   |
| Proceeds from long-term notes payable, related  parties                   |       | —                               |       | 245,000                                          |       | 1,120,500 |   |
| Payments on long-term bank debt                                           |       | —                               |       | —                                           |       | (600,000 | ) |
| Proceeds from warrants                                                    |       | —                               |       | 31,250                                           |       | 104,500 |   |
| Payments for debt issuance costs                                          |       | (600                                 | )          | (105,152                                         | )          | (674,037 | ) |
| Payment for rescission of common stock                                    |       | —                               |       | —                                           |       | (100,000 | ) |
| Payments for offering expenses                                            |       | (363,662                             | )          | (41,046                                          | )          | (480,969 | ) |
| Cost of reverse merger                                                    |       | —                               |       | —                                           |       | (162,556 | ) |
| Net proceeds from issuance of common stock                                |       | 2,613,600                            |       | —                                           |       | 8,296,138 |   |
| Net cash provided by financing activities                                 |       | 1,895,112                            |       | 363,259                                          |       | 10,283,469 |   |
| Net increase (decrease) in cash                                           |       | (33,520                              | )          | (385,899                                         | )          | 14,594 |   |
| Cash, beginning of the period                                             |       | 48,114                               |       | 444,613                                          |       | — |   |
| Cash, end of the period                                                   |       | $                                    | 14,594     |                                             | $          | 58,714 |   | $ | 14,594 |   |
|                                                                      |       |                                 |       |                                             |       |   |   |
| Supplemental cash flow information:                                       |       |                                 |       |                                             |       |   |   |
| Cash paid for interest                                                    |       | $                                    | 71,883     |                                             | $          | 60,611 |   | $ | 788,292 |   |
| Non-cash investing and financing activities:                              |       |                                 |       |                                             |       |   |   |
| Deferred offering costs included in accounts payable                      |       | (200,508                             | )          | 70,061                                           |       | 370,936 |   |
| Deferred offering costs included in accrued expenses                      |       | (70,000                              | )          | (22,650                                          | )          | — |   |
| Debt issuance costs included in accounts payable                          |       | —                               |       | 36,373                                           |       | 114,156 |   |
| Warrants issued pursuant to notes payable                                 |       | 3,327                                |       | 68,048                                           |       | 467,191 |   |
| Warrants issued for debt issuance costs                                   |       | —                               |       | —                                           |       | 298,021 |   |
| Prepaid expenses financed by note payable                                 |       | 81,345                               |       | 43,860                                           |       | 246,871 |   |
| Convertible debt issued in lieu of cash for accrued  expenses             |       | —                               |       | —                                           |       | 31,413 |   |
| Common stock issued in lieu of cash for accrued  expenses                 |       | 20,250                               |       | —                                           |       | 259,053 |   |
| Common stock issued in lieu of cash for accrued  development cost         |       | 500,000                              |       | —                                           |       | 500,000 |   |
| Common stock issued for debt issuance cost                                |       | 72,734                               |       | —                                           |       | 237,568 |   |
| Warrants issued in lieu of cash for accrued expenses                      |       | —                               |       | —                                           |       | 1,250 |   |
| Conversion of notes payable, related parties into convertible  debentures |       | —                               |       | —                                           |       | 200,000 |   |

 

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**ProUroCare Medical Inc.**

**(A Development StageCompany)**

**Consolidated Statementsof Cash Flows (continued)**

**(Unaudited)**

** **
| ** **                                                                                                                                                                              | ** ** | **Six Months  Ended   June 30** | ** ** | **Period  from August  17, 1999 (Inception) to** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2009**                             | ** ** | **2008**                                         | ** ** | **June 30,  2009** | ** ** |
| Common stock issued in lieu of cash for accounts  payable                                                                                                                               |       |                                 | —     |                                             |       | — |   |   | 122,291 |   |
| Common stock issued in lieu of cash for notes  payable-related parties                                                                                                                  |       | —                               |       | —                                           |       | 10,300 |   |
| Convertible debt issued as debt issuance costs  related to guarantee of long-term debt (recorded as a beneficial conversion  in additional paid-in capital) applied to accounts payable |       | —                               |       | —                                           |       | 733,334 |   |
| Issuance of note payable for redemption of common  stock                                                                                                                                |       | —                               |       | —                                           |       | 650,000 |   |
| Conversion of accounts payable to note payable                                                                                                                                          |       | 12,293                               |       | —                                           |       | 253,906 |   |
| Conversion of accrued expenses to note payable                                                                                                                                          |       | 13,569                               |       | —                                           |       | 13,569 |   |
| Deposits applied to note payable and accrued  interest                                                                                                                                  |       | —                               |       | —                                           |       | 142,696 |   |
| Deposits applied to accounts payable                                                                                                                                                    |       | —                               |       | —                                           |       | 45,782 |   |
| Assumption of liabilities in the Profile, LLC  transaction                                                                                                                              |       | —                               |       | —                                           |       | 25,000 |   |
| Proceeds from sale of furniture and equipment                                                                                                                                           |       | —                               |       | —                                           |       | 2,200 |   |
| Deposits applied to accrued expenses                                                                                                                                                    |       | —                               |       | —                                           |       | 1,076 |   |
| Deferred offering costs offset against gross  proceeds of offering                                                                                                                      |       | 823,078                              |       | —                                           |       | 823,078 |   |
| Conversion of convertible debt to units (see Note 2)                                                                                                                                    |       | 1,638,750                            |       | —                                           |       | 1,638,750 |   |
| Conversion of convertible debt-related parties to  units (see Note 2)                                                                                                                   |       | 1,323,334                            |       | —                                           |       | 1,323,334 |   |
| Conversion of convertible debt-related parties to  common stock                                                                                                                         |       | 281,000                              |       | —                                           |       | 281,000 |   |
| Conversion of accrued expenses to units (see Note 2)                                                                                                                                    |       | 331,261                              |       | —                                           |       | 331,261 |   |
|                                                                                                                                                                                         |            |                                      |            |                                                  |            |  |  |  |  |  |

 

*See accompanying notes to consolidated financialstatements.*

 

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**ProUroCare Medical Inc.**

**(ADevelopment Stage Company)**

**Notes to Consolidated FinancialStatements**

 

**June 30, 2009 and 2008 and the period from**

**August 17, 1999 (Inception) to June 30, 2009**

 

(Unaudited)

 

**(1) Description of Business and Summary of Significant Accounting Policies.**

** **

***(a)***                     Description ofBusiness, Development Stage Activities

*** ***

ProUroCareMedical Inc. (“ProUroCare,” the “Company,” “we” or “us”) is a development stagecompany engaged in the business of developing for market innovative productsfor the detection and characterization of male urological prostatedisease.  The primary focus of theCompany is currently the prostate mechanical imaging system, designed for useas an aid to the physician in visualizing and documenting tissue abnormalitiesin the prostate that have been previously detected by a digital rectalexam.  The Company’s developmentalactivities, conducted by its wholly owned operating subsidiary ProUroCare Inc.(“PUC”), have included acquiring several technology licenses, purchasingintellectual property, entering into product development agreements andconducting clinical studies.

 

PUChad no activities from its incorporation in August 1999 until July 2001,when it acquired a license to certain microwave technology from CS MedicalTechnologies, LLC (“CS Medical”).  In January 2002,PUC acquired a license to certain prostate imaging technology from Profile, LLC(“Profile”).

 

Pursuantto a merger agreement effective April 5, 2004 (the “Merger”), PUC became awholly owned operating subsidiary of Global Internet Communications, Inc.(“Global”), which changed its name to ProUroCare Medical Inc. on April 26,2004.  In connection with the Merger, theCompany completed a private placement of 220,500 shares, as adjusted for theReverse Split (as defined below), of common stock (the “2004 Private Placement”)pursuant to Rule 506 under the Securities Act of 1933, as amended (the “SecuritiesAct”).

 

On December 27,2007, the Company’s shareholders approved a one-for-ten reverse split of theCompany’s common stock without a corresponding reduction in thenumber of authorized shares of the Company’s capital stock (the “Reverse Split”).  The Reverse Split became effective on February 14,2008.  The exercise price and the numberof shares of common stock issuable under the Company’s outstanding convertibledebentures, options and warrants were proportionately adjusted to reflect theReverse Split for all periods presented.

 

On January 12, 2009, the Company closed apublic offering of 3,050,000 units at $1.00 per unit (the “2009 Public Offering”)(see Note 2).  Each unit sold (the “2009Units”) consisted of one share of common stock and one redeemable warrant topurchase one share of common stock at an exercise price of $1.30 per share.

 

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***(b)***                     Basis of Presentation

*** ***

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States and pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”) for interimfinancial information.  Accordingly,certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been omitted pursuant to such rules andregulations, although the Company believes that the disclosures made areadequate to make the information not misleading.  Operating results for the three and sixmonths ended June 30, 2009 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2009 or any otherperiod.  The accompanying financialstatements and related notes should be read in conjunction with the auditedfinancial statements of the Company, and notes thereto, contained in our AnnualReport on Form 10-K for the year ended December 31, 2008.

 

***The accompanying condensed consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiary, PUC.  Significant intercompany accounts andtransactions have been eliminated in consolidation.  Certain comparative figures have beenreclassified to conform to the financial statement presentation adopted in thecurrent year, including the reclassification of transactions with relatedparties.  The financial informationfurnished reflects, in the opinion of management, all adjustments, consistingof normal recurring accruals, necessary for a fair presentation of the resultsof the interim periods presented.***

*** ***

***(c)***                      Net Loss PerCommon Share

*** ***

Basic and diluted loss per common share is computedby dividing net loss by the weighted-average number of common sharesoutstanding for the reporting period. Dilutive common-equivalent shares have not been included in thecomputation of diluted net loss per share because their inclusion would beantidilutive.  Antidilutive commonequivalent shares issuable based on future exercise of stock options orwarrants could potentially dilute basic loss per common share in subsequentyears.  All options and warrantsoutstanding were anti-dilutive for the three and six months ended June 30,2009 and 2008, and the period from August 17, 1999 (inception) to June 30,2009 due to the Company’s net losses. 8,236,533 shares of common stock issuable under stock options andwarrants were excluded from the computation of diluted net loss per commonshare for each of the three and six months ended June 30, 2009.  1,368,371 shares of common stock issuableunder stock options, warrants, convertible debentures and contingent shares andwarrants issuable under agreements with loan guarantors were excluded from thecomputation of diluted net loss per common share for each of the three and sixmonths ended June 30, 2008.  Alsoexcluded for the three and six months ended June 30, 2008 were theundetermined number of shares issuable pursuant to the convertible notes andwarrants issued in connection with our private placements, whose terms ofconversion were based on the price of the equity securities offered in theCompany’s public offering.  The number ofsuch shares was determined on the January 7, 2009 effective date of the2009 Public Offering to be 2,675,004 shares.

 

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***(d)***                     Stock-Based Compensation

*** ***

EffectiveAugust 17, 1999, the Company adopted the fair value recognition provisionsof Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accountingfor Stock-Based Compensation”**(“SFAS 123”)** to record option and warrant issuances,including stock-based employee compensation. The Company’s policy is to grant stock options at fair value at the dateof grant and to record the expense at fair value as required by SFAS 123, usingthe Black-Scholes pricing model.

 

Effective January 1, 2006, the Company adoptedSFAS No. 123 (revised 2004) “**Share-BasedPayment”**(“SFAS 123R”) that focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions.  Thisstatement replaced SFAS 123, and supersedes Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123R requires all companies to expensethe fair value of employee stock options and similar awards, which has been theCompany’s policy to date.  Stock-basedemployee and non-employee compensation cost related to stock options andwarrants was $9,527, $158,233 and $2,463,216 for the three and six months endedJune 30, 2009 and the period from August 17, 1999 (inception) to June 30,2009, respectively, or $0.00, $0.02, and $1.72 on a per share basis.Stock-based employee and non-employee compensation cost related to stockoptions and warrants was $(437) and $29,719 for the three and six months ended June 30,2008, respectively.  The Companyestimates the amount of future stock-based compensation expense related tocurrently outstanding options to be approximately $175,000, $24,000 and $12,000for the years ending December 31, 2009, 2010 and 2011, respectively.  The Company recognizes the expense related tothe fair value of the award on a straight-line basis over the vesting period.

 

TheBlack-Scholes option-pricing model was developed for use in estimating the fairvalue of traded options that have no vesting restrictions and are fullytransferable. In addition, option pricing models require the input of highlysubjective assumptions. Because the Company’s employee and consultant stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, the existing models may not necessarily providea reliable single measure of the fair value of the Company’s employee stockoptions.

 

Nostock options were issued in the three month period ended June 30, 2009 orin the three and six months ended June 30, 2008.  In determining the compensation cost of theoptions and warrants granted during the six months ended June 30, 2009, asspecified by SFAS 123R, the fair value of each option grant has been estimatedon the date of grant using the Black-Scholes pricing model and theweighted-average assumptions used in these calculations are summarized asfollows:

 

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| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **2009**                            | ** ** | **2008**                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free  Interest Rate          |       | n/a                                 |       | n/a                               |       | 2.98% |   | n/a |   |
| Expected Life of  Options Granted |       | n/a                                 |       | n/a                               |       | 3.85 years |   | n/a |   |
| Expected  Volatility              |       | n/a                                 |       | n/a                               |       | 130.6% |   | n/a |   |
| Expected  Dividend Yield          |       | n/a                                 |       | n/a                               |       | 0 |   | n/a |   |

 

The expected life of the options is determined using asimplified method, computed as the average of the option vesting periods andthe contractual term of the option.  Forperformance based options that vest upon the occurrence of an event, theCompany uses an estimate of when the event will occur as the vesting periodused in the Black-Scholes calculation for each option grant.  Expected volatility is based on a simpleaverage of weekly price data since the date of the Merger.  Based on the lack of history to calculate aforfeiture rate, the Company has not adjusted the calculated value of theoptions.  The risk-free rates for theexpected terms of the stock options and awards are based on the U.S. Treasuryyield curve in effect at the time of grant.

 

***(e)***                      Warrants

*** ***

In accordance with Emerging Issues Task Force (“EITF”)Issue No. 96-18, “Accounting for Equity Instruments that are Issued toOther than Employees for Acquiring, or in Conjunction with Selling, Goods andServices” (“EITF 96-18”) and EITF Issue No. 98-5, “Accounting forConvertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios” (“EITF 98-5”), the Company has elected to utilizethe fair-value method of accounting for warrants issued to non-employees asconsideration for goods or services received, including warrants issued tolenders and guarantors of Company debt. Excluding the 2009 Units, no warrants were granted during the three andsix months ended June 30, 2009.  The weighted-average fair value of thewarrants granted during the three and six months ended June 30, 2008 was$1.24 and $1.48, respectively, and such warrants were immediately vested andexercisable on the date of grant.

 

Thefair value of stock warrants is the estimated present value at grant date usingthe Black-Scholes pricing model with the following weighted averageassumptions:

 
| ** **                             | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2009**                            | ** ** | **2008**                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free  Interest Rate               |       | n/a                                 |       | 2.91%                             |       | n/a |   | 3.09% |   |
| Expected Life of  Warrants Granted (1) |       | n/a                                 |       | 5.0 years                         |       | n/a |   | 5.0 years |   |
| Expected  Volatility                   |       | n/a                                 |       | 130.0%                            |       | n/a |   | 129.1% |   |
| Expected  Dividend Yield               |       | n/a                                 |       | n/a                               |       | n/a |   | n/a |   |

 

----

 (1) The contractual term of the warrants.

 

The expected volatility is based on a simple averageof weekly price data since the date of the Merger.  Based on the lack of history to calculate aforfeiture rate, the Company has not adjusted the calculated value of thewarrants.  The risk-free rates for theexpected terms of the stock warrants are based on the U.S. Treasury yield curvein effect at the time of grants.

 

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***(f)***                        Other assets

 

Otherassets consist of deferred offering costs and debt issuance costs.

 

Thelegal, accounting, printing and certain other expenses directly related to the2009 Public Offering that became effective on January 7, 2009 wererecorded as a deferred offering cost asset as of December 31, 2008.  The deferred offering costs were recorded asa cost of the offering and a reduction of additional paid-in capital upon itsclosing on January 12, 2009.

 

Unamortizeddebt issuance costs at December 31, 2008 totaling $266,882, consisting of legal andaccounting fees, printing costs and commissions paid to the placement agents related to theCompany’s 2007 and 2008 private placements and the 2008 unit put arrangement,were expensed as interest expense upon the conversion of the related debtfollowing the closing of the Company’s 2009 Public Offering (see Note 2).

 

***On March 19, 2009, pursuantto guaranties received relating to the Company’s renewal of its $1.2 millionCrown Bank promissory note, the Company issued an aggregate of 133,334 sharesof its common stock***as consideration to the guarantors (see Note 3).  The $66,667 value of the shares on theissuance date was recorded as debt issuance cost and is being amortized on astraight-line basis through August 31, 2009.

*** ***

***On June 16,2009, pursuant to a guarantee received relating to the Company’s $100,000 CrownBank promissory note, the Company issued 6,667 shares of its common stock asconsideration to the guarantor (see Note 3). The $6,067 value of the shares on the issuance date along with $600 ofloan origination fees was recorded on the balance sheet as debt issuance costand is being amortized on a straight-line basis through December 31, 2009.***

*** ***

***Other assetsare summarized as follows:***

 
| ** **                 | ** ** | **June 30, 2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------------|------------|
| Deferred offering costs    |       | $                      | —     |                        | $          | 729,924 |   |
| Debt issuance costs, gross |       | 73,334                 |       | 701,238                     |       |
| Less amortization          |       | (42,647                | )          | (434,356                    | )          |
|                       |       |                   |       |                        |       |
| Other assets               |       | $                      | 30,687     |                        | $          | 996,806 |   |

 

Amortization expense related to debt issuance costs was $40,329,$309,529 and $2,015,262 for the three and six months ended June 30, 2009and the period from August 17, 1999 (inception) to June 30, 2009,respectively.  Amortization expenserelated to debt issuance costs was $94,301 and $185,819 for the three and sixmonths ended June 30, 2008, respectively.

 

***(g)***                     Restricted Cash

*** ***

Pursuantto the 2007 renewal of the Crown Bank promissory notes, the Company agreed todeposit with Crown Bank four months worth of future interest payments due underthe notes.  On March 19, 2009,pursuant to the renewal of a Crown Bank promissory note, this restriction wasremoved.

 

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** **

***(h)****                  **GoingConcern*

** **

We have incurred operating losses, accumulateddeficit and negative cash flows from operations since inception.  As of June 30, 2009, we had anaccumulated deficit of approximately $23,269,000.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.  The accompanying unaudited consolidatedfinancial statements do not include any adjustments related to recoverabilityand classification of asset carrying amounts or the amount and classificationof liabilities that might result should we be unable to continue as a goingconcern.

 

***(i)****                     **RecentAccounting Pronouncements*

** **

During May 2009, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 165, “Subsequent Events” (“SFAS165”).  SFAS 165 requires all publicentities to evaluate subsequent events through the date that the financialstatement are available to be issued and disclose in the notes the date throughwhich the Company has evaluated subsequent events and whether the financialstatements were issued or were available to be issued on the discloseddate.  SFAS 165 defines two types ofsubsequent events, as follows: the first type consists of transactions thatprovide additional evidence about conditions that existed at the date of thebalance sheet and the second type consists of events that provide evidenceabout conditions that did not exist at the date of the balance sheet but aroseafter that date.  SFAS 165 is effectivefor interim and annual periods ending after June 15, 2009 and must beapplied prospectively.  The disclosure ofthe subsequent events did not have a material effect on the consolidatedfinancial statements.

 

**Note 2.  2009 PublicOffering; Automatic Conversion of Convertible Debt.**

** **

**On January 7,2009, the Company’s 2009 Public Offering was declared effective by the SEC, andon January 12, 2009 the 2009 Public Offering was closed.  In the offering, the Company sold 3,050,000 of2009 Units at $1.00 per unit resulting in net cash received of $1,790,442,after offering costs of $1,259,558.**

** **

**The completionof the 2009 Public Offering triggered automatic conversion provisions ofseveral outstanding convertible debt instruments:**

** **

**·**                  Upon the January 7, 2009 effective dateof the 2009 Public Offering, $733,334 of convertibledebentures originally issued as consideration to guarantors of the Crown Bank loan, along with $143,815 interest accrued thereon, converted into292,384 shares of the Company’s common stock. Unamortized original issue discount relating to theconvertible debentures totaling $33,796 was expensed as interest expense uponthe conversion.

** **

·                  Upon the January 12,2009 closing of the 2009 Public Offering, the $1,757,500 aggregate amount ofpromissory notes issued in private debt placements between December 27,2007 and July 30, 2008, along with $162,959 of interest accrued thereon,automatically converted into 2,743,535 units identical to the 2009 Units (basedon 70 percent of the offering price, or $0.70 per share).  Also, the $142,500 promissory note issued toJames Davis, a greater than five percent shareholder of the Company, on December 27,2007, along with $14,923 of interest accrued thereon, automatically convertedinto 314,846 units identical to the 2009 Units (based on 50 percent of theoffering price, or $0.50 per share).  Theclosing of the 2009 Public Offering resolved a contingent conversion feature ofthe promissory notes.  

 

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Consequently, the valuationof the beneficial conversion feature of the promissory notes was recalculated,resulting in the recording of a $47,046 increase in the original issuediscount.  Unamortized original issuediscount relating to the warrants and the beneficial conversion feature ofthese notes (including the adjustment resulting from the new valuation)totaling $434,215 and unamortized debt issuance cost of $207,575 was expensedas interest expense upon the conversion.

 

·                  On February 6, 2009 (30days after the effective date of the 2009 Public Offering), the $299,250outstanding promissory notes issued pursuant to the Company’s unit putarrangement, along with the $9,563 interest accrued thereon, automaticallyconverted into 441,165 shares of the Company’s common stock.  The notes and accrued interest converted at70 percent of the 2009 Public Offering price, or $0.70 per share.  The closing of the 2009 Public Offeringresolved a contingent conversion feature of the promissory notes.  Consequently, the valuation of the beneficialconversion feature of the promissory notes was recalculated, resulting in therecording of a $81,059 increase in the original issue discount.  Unamortized original issue discount relatingto the warrants and the beneficial conversion feature of the notes (includingthe adjustment resulting from the new valuation) totaling $209,879 andunamortized debt issuance cost of $44,686 was expensed as interest expense uponthe conversion.

 

**Note 3.  NotesPayable – Bank.**

** **

OnMarch 19, 2009, the Company renewed its $1.2 million Crown Bank promissorynote, and repaid its $400,000 Crown Bank promissory note.  The renewed note matures on March 28,2010 and bears interest at the prime rate plus one percent,****but never lessthan 6.00 percent.  No other note termswere changed.  The note remainscollateralized by all Company assets and guaranteed by Mr. Davis andWilliam Reiling, greater than five percent shareholders of the Company.  The Company issued an aggregate of 133,334shares of its common stock asconsideration to the guarantors (see Note 6(a)).

 

On June 16, 2009, the Company borrowed $100,000from Crown Bank pursuant to a promissory note that is collateralized by allCompany assets and guaranteed by Ian Friendly. The note matures on March 28, 2010 and bears interest at the primerate plus one percent,****but never less than 6.00 percent.  The Company issued 6,667 shares of its commonstock as consideration to the guarantor(see Note 6(a)).

 

**Note 4.  NotesPayable.**

** **

On January 13, 2009,following the closing of the 2009 Public Offering, the Company repaid the remaining $9,350 principalamount of the loan from Roman Pauly and issued an immediately exercisablefive-year warrant to acquire 4,295 shares of the Company’s common stock at$1.50 per share pursuant to the terms of the note.

 

OnJanuary 22, 2009, the Company repaid the remaining $34,000principal balance of a promissory note due and issued to the Phillips W. SmithFamily Trust (the “Smith Trust”) a five-year, immediately exercisable warrantto acquire 28,656 shares of the Company’s common stock at $5.00 per sharepursuant to the terms of the note.

 

OnMarch 19, 2009, the Company amended the $600,000 Smith Trust promissorynote. Under the terms of the amendment, the note’s maturity date was extendedto March 28, 2010 and the interest rate floor was lowered from 6.50percent to 6.00 percent.  No other termswere changed.

 

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**Note 5.  Convertible NotesPayable.**

 

***On April 3, 2008, theCompany borrowed $112,500 pursuant to three promissory notes***that were convertible upon theCompany’s closing of an underwritten public offering at 70 percent of thepublic offering price.  On January 15,2009, the Company repaid $37,500 of the notes to Mr. Reiling.  On January 22, 2009, the Company repaid$8,000 and converted $29,500 of the notes due to the Smith Trust pursuant tothe terms of the note.  On March 19,2009, the remaining $37,500 promissory note, due to Mr. Davis, was refinancedalong with another $150,000 promissory note due to Mr. Davis.

*** ***

On September 25, 2008, the Company borrowed $150,000 pursuant to aconvertible promissory note issued in favor of Mr. Davis.  As the holder’s ability to exercise theconversion feature of the note was contingent upon an event outside the controlof the holder, the bargain conversion feature valued at $103,396 was notrecorded until the January 12, 2009 closing of the 2009 Public Offeringwhen the contingency was removed. ** **On March 19, 2009, Mr. Davisagreed to refinance the $150,000 debt (and $7,291 of interest accrued thereon)along with the $37,500 note discussed above (and $3,646 of accrued interestthereon), another $2,632 payable to Mr. Davis and $12,293 of expenses paidby Mr. Davis on behalf of the Company. Mr. Davis also agreed to loan to the Company an additional $67,638to pay for the exhibition of the prostate mechanical imaging system at theannual American Urology Association meeting, the retention of an investorrelations firm and the initiation of a clinical advisory board.  He also agreed to have certain websitemaintenance services performed for the Company. Pursuant to the refinancing andthe other arrangements, the Company issued a $281,000 unsecured convertiblepromissory note to Mr. Davis.  Thepromissory note was to mature on March 19, 2010, bore no interest and wasconvertible into our common stock at $0.55 per share at the option of Mr. Davis.  Theguidance provided by EITF Issue No. 96-19, “Debtor’s Accounting for aModification or Exchange of Debt Instruments” (“EITF 96-19) indicates that asubstantial modification of debt terms should be accounted for as anextinguishment of debt.  As the presentvalue of the cash flows under the new convertible promissory note was greaterthan 10 percent different from the present value of the cash flows under theoriginal note, the issuance of the new note was treated as a debtextinguishment.  Accordingly, $113,709 ofunamortized original issue discount related to the original $150,000 note wasexpensed as debt extinguishment expense and the bargain conversion option ofthe new note, valued at $123,000 using the Black-Sholes pricing model, wasrecorded as original issue discount and was amortized as debt extinguishmentexpense over the term of the note.  On May 26,2009, Mr. Davis exercised his conversion rights under the promissory note,and the note was converted into 510,909 shares of the Company’s common stock.

 

**Note 6. Shareholders’ Equity.**

** **

***(a)******        ******CommonStock***

 

**On January 7, 2009, upon the effective date ofthe 2009 Public Offering, the Company issued 292,384 shares of common stock tothe guarantors of the Crown Bank loan pursuant to the automatic conversion of$733,334 of convertible debentures and $143,815 interest accrued thereon.**

** **

**On January 12, 2009, the Company issued 3,050,000of 2009 Units pursuant to the closing of the 2009 Public Offering, and3,058,381 units identical to the 2009 Units pursuant to the automaticconversions of convertible debt (see Note 2).**

 

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**On January 15, 2009, the Company issued 454,546shares of common stock to Artann Laboratories Inc. (Artann”) in satisfaction ofa $500,000 liability pursuant to the Artann license agreement.**

** **

**On January 22, 2009, pursuant to the conversionof $29,500 of the principal balance of a convertible promissory note, theCompany issued 42,143 shares of common stock to the Smith Trust (see Note 5).**

** **

**On February 6, 2009,**the $299,250 outstanding promissory notes issuedpursuant to the Company’s 2008 unit put arrangement, along with the $9,563interest accrued thereon, automatically converted into 441,165 shares of theCompany’s common stock (see Note 2)

** **

**On March 19, 2009, pursuant to the renewal of its$600,000 Smith Trust promissory note, the Company issued 66,667 shares of itscommon stock**as consideration to the Smith Trust and will issue a further 11,111shares per month for each month the related notes remain outstanding after August 31,2009.  The guidance provided by EITF96-19 indicates that a substantial modification of debt terms should beaccounted for as an extinguishment of debt. As the present value of the cash flows under the loan renewal wasgreater than 10 percent different from the present value of the cash flowsunder the original agreement, the renewal of the note was treated as a debtextinguishment.  Accordingly, the $33,333value of the initial 66,667 shares issued was expensed as debt extinguishmentexpense.  Additional accruals of stock tobe issued if the promissory notes remain outstanding after August 31, 2009will be expensed each month as debt extinguishment expense.

** **

**On March 19, 2009, pursuant to guarantiesreceived relating to the Company’s renewal of its $1.2 million Crown Bankpromissory note, the Company issued an aggregate 133,334 shares of its commonstock**as consideration to Mr. Davis and Mr. Reiling, and will issue afurther 22,222 shares per month for each month the related notes remainoutstanding after August 31, 2009. Pursuant to EITF 96-19, since the present value of the cash flows underthe loan renewal was greater than 10 percent different from the present valueof the cash flows under the original agreement, the renewal of the note wastreated as a debt extinguishment. Accordingly, the $66,667 value of the initial 133,334 shares issued wascapitalized as debt issuance cost and is being expensed as debt extinguishmentexpense on a straight-line basis through August 31, 2009.  Additional accruals of stock to be issued ifthe promissory notes remain outstanding after August 31, 2009 will beexpensed each month as debt extinguishment expense.  In addition, the $12,000 loan origination feewas immediately expensed as debt extinguishment expense.

** **

***On April 13, 2009, theCompany issued an aggregate of 27,366 shares of its common stock its  independent directors, David Koenig, RobertRudelius and Scott Smith, as payment of $20,250 directors’ fees accrued throughDecember 31, 2008, in lieu of cash.***

*** ***

On May 26, 2009, the Company issued 510,909shares of common stock to Mr. Davis upon the conversion of a $281,000convertible promissory note pursuant to the terms thereof (see Note 5).

 

On June 16, 2009, the Company issued 6,667 sharesto Mr. Friendly as consideration for providing a guarantee of a $100,000bank loan (see Note 3).

 

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***(b)***         Stock Options

*** ***

OnMarch 3, 2009, the Company granted non-qualified stock options to acquirean aggregate of 70,000 shares of its common stock to its non-employeedirectors, and incentive options to acquire 45,000 shares of its common stockto Richard Thon, its Chief Financial Officer (the “CFO”).  The options are fully vested and areexercisable for a period of seven years at an exercise price of $0.85 pershare.  The 115,000 options were valuedat $0.68 per share using the Black-Scholes pricing model and were immediatelyexpensed as general and administrative expense.

 

Alsoon March 3, 2009, the Company granted an incentive stock option to acquirean aggregate of 100,000 shares of its common stock to Richard Carlson, itsChief Executive Officer (the “CEO”).  Ofthe options, 90,000 shares vest immediately and 10,000 shares will vest on January 2,2010.  At the same time, Mr. Carlsonagreed to cancel existing, unvested stock options to acquire 5,000 shares ofcommon stock at an exercise price of $7.50 per share.  SFAS 123R requires that options that arecancelled and reissued simultaneously be accounted for as a modification of theterms of the original option.  Accordingly,the incremental compensation cost of the fully vested portion of the newlyissued options valued at $0.68 per share using the Black-Scholes pricing modelover the $0.07 per share value of the cancelled options on the cancellationdate, or $61,200, was expensed immediately as general and administrativeexpense.

 

***(c)***          Warrants

*** ***

On January 12, 2009, theCompany issued 3,050,000 2009 Units pursuant to the closing of the 2009 PublicOffering, and 3,058,381 units identical to the 2009 Units pursuant to theautomatic conversions of convertible debt (see Notes 2 and  6(a)). Each five-year warrant is exercisable at $1.30 per share.  The Company may redeem outstandingwarrants at a price of $0.01 per warrant upon a minimum 30 days priorwritten notice if the last sale price of its common stock equals or exceeds$1.82 per share for a period of ten consecutive trading days.

 

Asadditional compensation pursuant to the 2009 Public Offering, we sold to theunderwriter, Feltl & Company, for nominal consideration, a warrant(the “Underwriter’s Warrant”) to purchase up to 305,000 units. The Underwriter’sWarrant is not exercisable until January 7, 2010 and thereafter isexercisable at a price per unit equal to $1.20 for a period of four years.  The warrants underlying the units that aresubject to the Underwriter’s Warrant are subject to redemption as describedabove commencing January 7, 2010.

 

***The warrants described below,issued or to be issued, are exempt from registration under Section 4(2) ofthe Securities Act as they were or will be issued in non-public offerings to alimited number of subscribers.  Each ofthe following warrants was valued using the Black-Scholes pricing model:***

*** ***

On January 13, 2009, the Company repaid the remaining $9,350principal amount of a promissory note due to Mr. Pauly, and issued animmediately exercisable five-year warrant to Mr. Pauly to acquire 4,295shares of the Company’s common stock at $1.50 per share pursuant to the termsof the note (see Note 4).

 

OnJanuary 22, 2009, the Company repaid the remaining $34,000 principalbalance of an outstanding convertible promissory note due to the Smith Trustand issued to the Smith Trust a five-year, immediately exercisable warrant toacquire 28,656 shares of the 

 

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Company’scommon stock at $5.00 per share pursuant to the terms of the note (see Note 4).

 

On July 23, 2009,the Company issued a two-year warrant to purchase 30,000 shares of our commonstock at an exercise price of $1.25 per share to Kohnstamm Communications asconsideration for services provided to the Company (see Note 9).

 

***Note7.  Income Taxes.***

*** ***

The Company has adopted the policy of classifyinginterest in interest expense and penalties in general and administrativeexpense.  The Company had recorded noaccrued interest or penalties as of the date of adoption.

 

The Company had no significant unrecognized taxbenefits as of June 30, 2009 and December 31, 2008 and, likewise, nosignificant unrecognized tax benefits that, if recognized, would affect theeffective tax rate.  The Company had nopositions for which it deemed that it is reasonably possible that the totalamounts of the unrecognized tax benefit will significantly increase ordecrease.  Any interest or penalties areexpensed as general and administrative expense as incurred.

 

The Company has generated net operating losscarryforwards of approximately $6.1 million which, if not used, will begin toexpire in 2021.  Federal and state taxlaws impose significant restrictions on the utilization of net operating losscarryforwards in the event of a change in ownership of the Company thatconstitutes an “ownership change,” as defined by Section 382 of theInternal Revenue Code of 1986, as amended (the “Code”).  The Company has analyzed the 2009 PublicOffering along with previous changes and believes that such an ownership changehas not occurred, and that the Company’s use of its net operating losscarryforwards is not subject to such restrictions.

 

EITF 05-8 “Income Tax Consequences of IssuingConvertible Debt with a Beneficial Conversion Feature” (EITF 05-8) provides (i) thatthe recognition of a beneficial conversion feature creates a difference betweenbook basis and tax basis of a convertible debt instrument, (ii) that basisdifference is a temporary basis for which a deferred tax liability should berecorded, and (iii) the effect of recognizing the deferred tax liabilityshould be charged to equity in accordance with SFAS No. 109 “Accountingfor Income Taxes”. The Company applied EITF 05-8 to the issuances ofconvertible debt from January 1, 2006 through June 30, 2009 and hadno differences in book and tax basis and no deferred tax liability as of June 30,2009. The Company reduced its net operating loss carryover and valuationallowance by approximately $881,000 for the non-deductibility of the beneficialconversion features during this period. When the valuation allowance related todeferred tax assets reverses, the Company will record an $881,000 tax benefitrelated to the beneficial conversion feature with a corresponding decrease toadditional paid-in capital.

 

The net operating loss carryforwards are subject toexamination until they expire.  The taxyears that remain subject to examination by major tax jurisdictions currentlyare:

 

Federal 2005 - 2007 State of Minnesota 2005 - 2007

 

**Note8.  Related Parties.**

** **

The Company considers itsdirectors, executives and beneficial shareholders of more than five percent ofits common stock to be related parties. During the six months ended June 30, 2009, the followingsignificant transactions were made between the Company and those parties thatwere related parties at the time of each transaction:

 

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**On January 15, 2009, the Company repaid anoutstanding $37,500 loan along with accrued interest thereon to Mr. Reiling.**

** **

**On March 19, 2009, pursuant to the guarantiesreceived relating to the Company’s renewal of its $1,200,000 Crown Bankpromissory note, the Company issued an aggregate 66,667 shares of its commonstock**as consideration to each of Mr. Davis and Mr. Reiling, and willissue a further 11,111 shares to each per month for each month the notes remainoutstanding after August 31, 2009.

** **

**On March 19,2009, a $37,500 convertible promissory note and a $150,000 convertiblepromissory note due to Mr. Davis were refinanced and combined with otherloans and advances on behalf of the Company from Mr. Davis in a $281,000convertible promissory note.  On May 26,2009, Mr. Davis exercised his conversion rights under the promissory noteand the note was converted into 510,909 shares of the Company’s common stock.**

** **

***On April 13, 2009, the Companyissued an aggregate of 27,366 shares of its common stock to Mr. Koenig, Mr. Rudeliusand Mr. Smith as payment of $20,250 directors’ fees accrued through December 31,2008, in lieu of cash.***

*** ***

**During June 2009,Mr. Davis advanced $22,000 to the Company to cover specific operatingexpenses.**

** **

**Note9.  Subsequent Events.**

 

TheCompany had the following significant subsequent events through August 14,2009, which is the date the financial statements were available to be issuedfor events requiring recording or disclosure in the financial statements forthe three and six months ended June 30, 2009.

 

On July 23,2009, the Company issued a two-year warrant to purchase 30,000 shares of ourcommon stock at an exercise price of $1.25 per share to Kohnstamm Communicationsas consideration for services provided to the Company.  The warrant, valued at $24,900 using theBlack-Scholes pricing model, will be recorded as general and administrativeexpense.

 

On July 15,2009, RPI filed a lawsuit against the Company seeking payment of $202,716 plusinterest, penalties, costs and disbursements, including attorneys’ fees. In thecomplaint, RPI alleges that the Company has breached obligations to pay RPI anaggregate of $202,716 under the terms of a License Agreement dated July 13,2001 between RPI and the Company and a Sponsored Research Agreement dated as ofDecember 9, 2005 between RPI and the Company.  The Company believes that the amounts beingsought by RPI substantially exceed any amounts due to RPI under such agreementsand intends to defend itself vigorously against such claims.

 

***On July 29, 2009, Mr. Davis provided the Company with a$100,000 short-term loan.  The loan bearsno interest, has no defined due date and is not documented.  The Company expects to repay the loan as soonas it is able.***

 

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***Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operation.***

*** ***

*The accompanyingManagement’s Discussion and Analysis of Financial Condition and Results ofOperation should be read in conjunction with our unaudited consolidatedfinancial statements, and notes thereto, filed with our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2009.*

 

**Disclosure Regarding Forward-Looking Statements**

 

Certainstatements contained in this Quarterly Report on Form 10-Q may be deemedto be forward-looking statements as defined by the Private SecuritiesLitigation Reform Act of 1995, and the Company intends that suchforward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements relate to,among other things: general economic or industry conditions, nationallyand in the physician, urology and medical device communities in which we intendto do business; our ability to raise capital to fund our 2009 and 2010 workingcapital needs and introduce our products into the marketplace; our ability tocomplete the development of our existing and proposed products on a timelybasis or at all; legislation or regulatory requirements, including our securingof all U.S. Food and Drug Administration (“FDA”) and other regulatory approvalson a timely basis, or at all, prior to being able to market and sell ourproducts in the United States; competition from larger and more wellestablished medical device companies and other competitors; the development ofproducts that may be superior to the products offered by us; securing andprotecting our intellectual property and assets, and enforcing breaches of thesame; clinical results not anticipated by management of the Company; thequality or composition of our products and the strength and reliability of ourcontract vendors and partners; changes in accounting principles, policies orguidelines; financial or political instability; acts of war or terrorism; andother economic, competitive, governmental, regulatory and technical factorsaffecting our operations, proposed products and prices. We caution that these statements are qualified by important factorsthat could cause actual results to differ materially from those reflected bythe forward-looking statements contained herein.

 

**Overview;****Product Offerings**

 

ProUroCare Medical Inc. (“ProUroCare,”the “Company,” “we,” “us” or “our,” which terms include reference to our whollyowned subsidiary, ProUroCare Inc. (“PUC”)) has developed and intends to market an innovativeprostate imaging system known as the ProUroScanTM system.  The ProUroScan system incorporates our newproprietary elasticity imaging technology to create a “map” and an electronicrecord of the prostate.

 

TheProUroScan system is an imaging system designed for use as an aid to thephysician in visualizing and documenting tissue abnormalities in the prostatethat have been previously detected by a digital rectal exam (“DRE”). As anadjunct to DRE, the ProUroScan system will be used following an abnormal DRE togenerate a real time image and map of the prostate and to store thisinformation electronically.

 

TheProUroScan’s unique technology uses measurements of relative tissue elasticityas detected by mechanical sensors and interpreted by mathematical algorithms tocreate images, rather than using ultrasound or other high-cost alternatives.  Our approach to imaging is based on the factthat most abnormal tissue in otherwise homogenous organ tissue is less elasticthan normal tissue.  Using the system’s speciallydesigned rectal probe, physicians can visualize the prostate gland and documentspecific areas of concern.  The real-timemap can be saved as a permanent electronic record and compared to maps createdin successive evaluations.

 

Ourimaging technology is based on work originally performed in the late 1990’s byArtann Laboratories Inc. (“Artann”) a scientific technology company basedin Trenton, New Jersey, that is 

 

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focusedon early-stage technology development. In 2002, we licensed the rights to thistechnology and since then have worked with Artann on its development. In September 2006,Artann was awarded a $3 million Small Business Innovation Research Phase IICompetitive Renewal grant from the National Cancer Institute (the “2006 NIHGrant”) to help advance the development and application for clearance of theProUroScan system by the U.S. Food and Drug Administration (“FDA”).  In April 2008, we acquired the patents,patent applications and other know how associated with this technology. In July 2008,the Company entered into new license and development and commercializationagreements with Artann relating to their existing technology and know-how andall future technology developed by Artann in our field of use. After we obtainFDA clearance, it is our intent to expand our working relationship with Artannto include their participation in the development and licensing of futuremechanical imaging  technology.

 

TheProUroScan system is not currently marketed or sold and is not cleared formarketing by the FDA. Our initial goal is to obtain a basic mapping and datamaintenance claim from the FDA under a 510(k) application for the currentgeneration system. Once FDA 510(k) clearance is obtained on our currentgeneration ProUroScan system, we intend to have the systems manufactured by oneor more FDA-regulated contract manufacturers and market the system incooperation with a medical device company that has an established presence inthe urology market.

 

TheProUroScan imaging system is currently in the final stages of a multi-site FDAclinical study designed to provide sufficient documentation of the system’seffectiveness in mapping the prostate and identifying abnormalities detected byDRE.  We expect to complete and submit a510(k) application for market clearance for this technology in the U.S. inthe third quarter of 2009.  Oncesubmitted, the FDA will have 90 days to review and grant clearance, askquestions or reject the 510(k) application. However, the 510(k) applicationprocess may be significantly longer if the FDA has questions upon its review orrequests additional information.  Noassurances can be given in regard to the timing of any of these events.

 

During the remainder of 2009, assuming our financingefforts are successful (see “Liquidity and Capital Resources,” below), we expect to obtain FDA clearance on a basic mapping and data maintenance labeling claim and prepare to launchour product into the market, although there can be no assurance that we will besuccessful in meeting these milestones. We are currently exploring potential marketing relationships withmedical product companies that are interested in marketing products in theprostate cancer detection market.   We expect such a relationshipwould provide both financial support and access to down stream engineering,regulatory, clinical, manufacturing and marketing capabilities.

 

**RecentFinancing Activity**

 

OnJanuary 12, 2009, we closed on the 2009 Public Offering and realized netproceeds of approximately $1,790,000.  Inaddition, the closing of the 2009 Public Offering triggered the automaticconversion of certain debt instruments into equity, as follows:

 

·                  $733,334 convertibledebentures together with $143,815 of interest accrued thereon converted into292,384 shares of our common stock;

 

·                  $1,900,000 of convertiblenotes issued in the 2007 and 2008 private placements together with $177,882 ofinterest accrued thereon converted into 3,058,381 units, each consisting of oneshare of common stock and one warrant to purchase common stock at $1.30 pershare (a “Unit”); and

 

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·                  $299,250 of convertible notes issued pursuantto the unit put arrangement together with $9,563 of interest accrued thereonconverted into 441,165 shares of our common stock.

 

On March 19, 2009, wereached an agreement with James Davis to refinance a $150,000 promissory note(and $7,291 of interest accrued thereon) along with a $37,500 note (and $3,646of accrued interest thereon), another $2,632 payable to Mr. Davis and$12,293 of expenses paid by Mr. Davis on our behalf.  Mr. Davis also agreed to lend to us anadditional $67,638 to pay for our exhibition of the prostate mechanical imagingsystem at the annual American Urology Association meeting, the retention of aninvestor relations firm and the initiation of a clinical advisory board.  He also agreed to have certain websitemaintenance services performed for us. Pursuant to the refinancing and the other arrangements, we issued a$281,000 unsecured convertible promissory note to Mr. Davis.  On May 26, 2009, Mr. Davis exercised his conversion rights under thepromissory note and the note was converted into 510,909 shares of the Company’scommon stock

 

InMarch 2009, we renewed $1.2 million of the secured bank debt to mature on March 28,2010 and repaid $400,000 of the secured debt.

 

On June 16, 2009, we borrowed $100,000 pursuant to a promissorynote issued in favor of Crown Bank.  Thepromissory note matures on March 28, 2010 and bears interest at the PrimeRate plus 1.0 percent**,**but neverless than 6.00 percent.  The note isguaranteed by Ian Friendly.  The note,along with the existing $1.2 million promissory note, is collateralized by allCompany assets.

 

**Results of Operations**

 

The following discussion of the financial condition and results ofoperations should be read in conjunction with the consolidated financialstatements included herewith. This discussion should not be construed to implythat the results discussed herein will necessarily continue into the future, orthat any conclusion reached herein will necessarily be indicative of actualoperating results in the future.

 

*Three months ended June 30,2009 compared to the three months ended June 30, 2008:*

 

*Operating Expenses/Operating Loss**.* Our operating expenses (and our operating loss) for the three monthsended June 30, 2009 were $394,991, a decrease of $121,536, or 24 percent,compared to $516,527 last year.  Thedecrease was primarily due to the 2008 acquisition of patents for $300,000,which was expensed at the time of the purchase. In addition, during the three months ended June 30, 2008, weincurred approximately $37,000 of legal fees related to negotiating developmentand licensing agreements.  Increasedresearch and development spending offset these expense reductions, including$59,000 of consulting costs related to the management of the ProUroScanclinical trials and $50,000 of product development expenses incurred under theArtann development agreement, compared to $0 in 2008.

 

*Net Interest Expense**. *Net interest expense for the three months ended June 30,2009 was $40,949, a decrease of 91 percent, compared to $465,182 lastyear.  Included in the 2008 expense wasapproximately $357,000 of original issue discount and debt issuance costamortization primarily related to our 2006, 2007 and 2008 private debtplacements.  Upon the closing of the 2009Public Offering and the subsequent automatic conversion of approximately $3.3million of debt and accrued interest into equity, the related original issuediscount and debt issuance cost was expensed. Consequently, the related amortization expense has been eliminated goingforward.  Also included in the 2008expense was approximately $61,000 of interest on the 2007 and 2008 private debtplacements.  Other interest expensedeclined about 16% to approximately $40,000 in the three months ended June 30,2009 compared to 

 

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approximately $48,000 last year reflecting the $400,000 reduction inoutstanding Crown Bank loans through much of the period.

 

*Debt Extinguishment Expense*. Our debt extinguishment expense arises primarily from the issuance ofstock or warrants pursuant to the provisions of short-term loans from lendersin certain refinancing transactions. Our debt extinguishment expense for thethree months ended June 30, 2009 was $157,919, an increase of 671 percent,compared to $20,491 last year.   Theincrease is due to the write-off of approximately $119,000 of unamortizedoriginal issue discount related to a beneficial conversion feature of a$281,000 promissory note issued to Mr. Davis upon its conversion.  Additionally, during the three months ended June 30,2009, approximately $39,000 of the cost of stock issued to guarantors of $1.3million of Crown Bank loans was amortized.

 

*Six months ended June 30, 2009compared to the six months ended June 30, 2008:*

 

*Operating Expenses/Operating Loss**.* Our operating expenses (and our operating loss) for the six months endedJune 30, 2009 were $920,508, an increase of $157,819, or 21 percent,compared to $762,689 last year. Compensation and benefits costs in the six months ended June 30,2009 increased approximately $42,000, or 26 percent, compared to last year as aresult of a $40,000 bonus awarded in recognition of the efforts of the Company’sofficers in the completion of the 2009 Public Offering.  Stock-based compensation increasedapproximately $129,000, or 432 percent, compared to last year, as a result ofthe granting of immediately vested stock options to directors and officersvalued at $139,400.  Other increases inoperating expenses during the first six months of 2009 included productdevelopment expenses of $150,000 incurred under the Artann developmentagreement, approximately $59,000 of consulting costs related to the managementof the ProUroScan clinical trials, new investor and public relations programsthat cost approximately $29,000 and trade show attendance costs ofapproximately $20,000.  No costs wereincurred for these activities during the six months ended June 30, 2008.Offsetting these increases were one-time costs incurred in 2008 includingacquisition of patents for $300,000, which was expensed at the time of thepurchase and approximately $70,000 of legal fees related to negotiatingdevelopment and licensing agreements.

 

*Net Interest Expense**. *Net interest expense for the six months ended June 30,2009 was $1,088,451, an increase of 27 percent, compared to $854,113 lastyear.  Included in the 2009 expense wasthe approximately $980,000 write-off of unamortized original issue discount anddebt issuance costs related to our 2006, 2007 and 2008 private debt placementsand the 2008 unit put arrangement upon the closing of the 2009 Public Offeringand the subsequent automatic conversion of approximately $3.3 million of debtand accrued interest into equity. Included in the 2008 expense was approximately $651,000 of originalissue discount and debt issuance cost amortization primarily related to our2006, 2007 and 2008 private debt placements. Also included in the 2008 expense was approximately $115,000 of intereston the 2007 and 2008 private debt placements. Other interest expense increased about 12 % to approximately $100,000 inthe six months ended June 30, 2009 compared to approximately $89,000 lastyear as a result of vendor finance charges.

 

*Debt Extinguishment Expense*. Our debt extinguishment expense arises primarily from the issuance ofstock or warrants issued pursuant to the provisions of short-term loans fromcertain lenders in certain refinancing transactions. Our debt extinguishmentexpense for the six months ended June 30, 2009 was $324,267, an increaseof 608 percent, compared to $45,831 last year.  The increase is due to the write-off of $113,000 of unamortized originalissue discount upon the refinancing of a $150,000 note with Mr. Davis, theexpensing of approximately $123,000 of original issue discount related to abeneficial conversion feature of a $281,000 promissory note issued to Mr. Davisupon its conversion, the issuance of 66,667 shares of stock valued at $33,333to the Phillips W. Smith Family Trust (the “Smith Trust”) 

 

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upon the extension of the $600,000 Smith Trust loan, and a $13,000 feeassociated with refinancing of $1.3 million loans with Crown Bank during thesix months ended June 30, 2009. Additionally, during the six months ended June 30, 2009,approximately $51,000 of the cost of stock issued to guarantors of the CrownBank loans was amortized.

 

**CurrentOperations – Employees and Expenses**

 

We currently employ twoemployees. We conduct our research and development, market research, regulatoryand other business operations through the use of consultants and medical devicedevelopment contractors, primarily Artann. We believe that using consultantsand contractors to perform these functions is more cost effective than hiringfull-time employees and affords us flexibility in directing our resourcesduring our development stage. During the second half of 2009, we expect tocomplete the clinical and regulatory process leading to FDA 510(k) marketclearance and establish a contract manufacturing capability in anticipation ofregulatory clearance to enter the market.

 

We incur ongoing expensesthat are directly related to being a publicly traded company, includingprofessional audit and legal fees, financial printing, press releases andtransfer agent fees. We currently rent approximately 750 square feet of officespace on a month-to-month basis at a cost of approximately $800 per month.Other expenses incurred include executive officer compensation, travel,insurance, telephone, supplies and other miscellaneous expenses.

 

**Liquidityand Capital Resources**

 

Net cash used in operating activities wasapproximately $1.9 million during the six months ended June 30, 2009compared to approximately $749,000 last year. The increase in cash used was primarily the result of payments to Artannof $600,000 and $250,000 for accrued licensing fees and accrued developmentcosts pursuant to our licensing and development agreements, respectively. Wealso paid $129,500 to Artann for development work performed under thedevelopment agreement.  In addition tonormal operating expenses, other uses of cash included payments for accountspayable and other accrued expenses, including accrued compensation, followingthe completion of the 2009 Public Offering.

 

Netcash provided by financing activities was approximately $1.9 million during thesix months ended June 30, 2009 compared to approximately $363,000 lastyear.  Proceeds from the 2009 PublicOffering less underwriter’s commissions and other payments for expenses of theoffering were approximately $2.3 million during the six months ended June 30,2009.  Offsetting this was our temporarypay-down of $400,000 of the secured bank debt in March 2009 pending there-establishment of a suitable guarantee of the loan.  In June 2009, we reestablished $100,000of this debt. During the six months ended June 30, 2008, net proceeds ofour private convertible debt placements with individual investors ofapproximately $584,000 were offset by repayments of notes payable and loansfrom directors of approximately $228,000.

 

As of July 31, 2009, we hadapproximately $69,000 cash on hand and current liabilities of approximately$3.4 million.  We currentlyhave $1.9 million of short-term debt that has been collateralized by theCompany’s assets and guaranteed by several individuals.  We plan to reestablish the remaining $300,000of secured bank debt that was temporarily repaid and increase the amount by upto an additional $500,000 during the third quarter of 2009, pending theidentification of suitable individual guarantors.  There can be no assurance that suitableguarantors can be identified during this period, or at all.

 

In addition to the guaranteed bank loans mentioned above, we areactively pursuing several potential near-term sources of funding to position usfor a commercial launch into the urology market and repay 

 

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certain existing liabilities. These sources include potential additional guaranteed bank debt and oneor more rounds of private placements of debt or equity securities.  We are also working to establish adistribution relationship with a medical products company during the next threeto six months.  We expect such adistribution partner could provide financial support in the form of licensingfees, loans, equity investment or some combination.  In addition to financial support, asuccessful collaboration with such a partner would allow us to gain access todown stream engineering, manufacturing, clinical and marketing support.   Finally, as a result of the closing on the2009 Public Offering and the subsequent conversion of convertible notes intoUnits, we have 6,108,381 redeemable warrants outstanding.  These warrants have an exercise price of$1.30 per share, which we may redeem once the last sale price of our commonstock equals or exceeds $1.82 per share for a period of ten consecutive tradingdays.  If this event were to occur, itwill allow all holders of warrants a period of 30 days to exercise theirwarrants.  If all such warrant holdersexercise their warrants, we could realize up to approximately $7.9 million,depending on the number of shares actually exercised.  There can be no assurance that we will beable to redeem the warrants, or of how much would be realized if such aredemption were to occur.

 

Ifadditional funds are raised by the issuance of convertible debt or equitysecurities or by the exercise of outstanding warrants, then existingshareholders will likely experience dilution in their ownership interest.  If additional funds are raised by theissuance of debt or certain equity instruments, we may become subject tocertain operational limitations, and such securities may have rights senior tothose of our existing holders of common stock.

 

During the remainder of 2009, we expect to submit anFDA 510(k) application for market clearance and make certain preparationsfor market entry.  Our ability to pursueadditional activities, such as establishing a contract manufacturingcapability, developing a more portable imaging system and other productenhancements and expanding the number of our clinical study sites, is dependentupon the success and timing of our financing efforts outlined above.

 

We expect that our cash needs for our normaloperating expenses (excluding the milestone payments due to Artann explainedbelow) will be approximately $575,000 over the last five months of 2009.  In addition, we expect tomake cash payments to Artann totaling approximately $90,000 for developmentservices that they are to provide during the remainder of 2009.  Tothe extent we are successful in obtaining sufficient financing, we will advanceother projects and activities needed for the long-term success of thebusiness.  These projects includeestablishing a contract manufacturing capability, including production toolingand molds, estimated to cost approximately $450,000; contracting for certainproduct engineering and development work to reduce the size of the ProUroScansystem and make certain enhancements that we estimate will cost approximately$725,000; and placing systems and performing additional patient studies at certainkey institutions, at a cost of between $275,000 and $300,000.  Finally, we expect to make payments ofapproximately $170,000 towards certain outstanding liabilities before year end.

 

Pursuant to the terms of theArtann development agreement, we are required to make cash and equity paymentsupon the achievement of several project milestones along with a monthlyretainer fee.  Upon the submission of our510(k) application to the FDA, we are required to make a cash payment toArtann of $250,000 and an equity payment of our common shares valued at$1,000,000. Upon receipt of FDA 510(k) clearance, we are required tomake a further cash payment of $750,000 and a second $1,000,000 equity payment.

 

If adequate funds are notavailable through these initiatives on a timely basis or on acceptable terms,we may be unable to commercialize our products during the expected timeframe.  We do not know what impact thecurrent unprecedented volatility in worldwide credit and equity markets mayhave on our ability to obtain future financing. Since September 2008, wehave seen unprecedented turmoil in equity 

 

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and credit markets that hasresulted in record-setting losses in the stock markets, dramatic decreases ofliquidity in the credit markets, bank failures, hedge fund closures and massivemarket intervention by the United States and foreign governments. Because ofthe unprecedented nature of these market events, and because the markets remainhighly-volatile today, we cannot predict what effect these events will have onour ability to obtain financing in the future. If we are forced to slow or stop our regulatory clearance process, itwould delay market entry for our products. Ultimately, if no additionalfinancing is obtained beyond what has been secured to date, we likely would beforced to cease operations. There can be no assurance we will be successful inraising such funds.

 

**Assets;Property Acquisitions and Dispositions**

 

Our primary assets arepatents and patent applications, which are the foundation for our proposedproduct offerings. These assets secure $1.3 million of senior bank notesand a $600,000 note issued to the Smith Trust and, as a result, are notavailable to secure other senior debt financing.

 

Assuming we are successfulin obtaining the financing required to establish a contract manufacturingcapability, we anticipate purchasing approximately $200,000 of tooling moldsand other capital for production, computer equipment, software and generaloffice furniture and equipment during the remainder of 2009. We do notanticipate selling any significant assets in the near term.

 

**GoingConcern**

 

We have incurred operatinglosses, accumulated deficit and negative cash flows from operations sinceinception. As of June 30, 2009, we had an accumulated deficit ofapproximately $23.3 million. These factors, among others, raisesubstantial doubt about our ability to continue as a going concern. Ourconsolidated financial statements included in this Quarterly Report on Form 10-Qdo not include any adjustments related to recoverability and classification ofasset carrying amounts or the amount and classification of liabilities that mightresult should we be unable to continue as a going concern.

 

**CriticalAccounting Policies**

 

Our financial statements are prepared inaccordance with accounting principles generally accepted in the United States,or GAAP. The application of GAAP requires that we make estimates that affectour reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. We evaluate our estimates andassumptions on an ongoing basis. Our actual results may differ significantlyfrom these estimates.

 

A description of the Company’s criticalaccounting policies that represent the more significant judgments and estimatesused in the preparation of the Company’s financial statements was provided inthe Management’s Discussion and Analysis of Financial Condition and Results ofOperations section of the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008.  Therewere not any material changes to our critical accounting policies during thethree months ended June 30, 2009.

 

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***Item 4T.  Controls andProcedures.***

*** ***

**Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Securities and Exchange Act of 1934, as amended (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specified inthe rules and forms of the Securities and Exchange Commission (the “SEC”).As of June 30, 2009, the end of the period covered by this QuarterlyReport on Form 10-Q, we carried out an evaluation, under the supervisionand with the participation of management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures pursuant to Rule 13a-15 underthe Exchange Act. Based upon that evaluation, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and proceduresare effective.

 

**Changes inInternal Control Over Financial Reporting**

 

During the quarter ended June 30, 2009,there has been no change in the Company’s internal control over financialreporting (as defined in Rule 13a-15(f) under the Exchange Act) thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**PART II.  OTHER INFORMATION.**

** **

***Item 1.  Legal Proceedings.***

*** ***

On July 28, 2009,(the “Company”) was notified that the Rensselaer Polytechnic Institute (“RPI”)filed a complaint against the Company on July 15, 2009 in the SupremeCourt of the State of New York, County of Rensselaer.  In the complaint, RPI alleges that theCompany has breached obligations to pay RPI an aggregate of $202,716 under theterms of a License Agreement dated July 13, 2001 between RPI and theCompany and a Sponsored Research Agreement dated as of December 9, 2005between RPI and the Company.  RPI isseeking damages in the amount of $202,716, plus interest, penalties, costs anddisbursements, including attorneys’ fees. The Company believes that the amounts being sought by RPI substantiallyexceed any amounts due to RPI under such agreements and intends to defenditself vigorously against such claims.

 

***Item 1A. Risk Factors.***

 

Investing in our common stock involves a high degree of risk. Youshould carefully consider the risks and uncertainties set forth under Item 1Aof our Annual Report on Form 10-K for the year ended December 31,2008, as well as the material changes to those risk factors set forth in Part II-Item1A to our Quarterly Report on Form 10-Q for the quarter ended March 31,2009 and the material changes set forth below before purchasing our commonstock.  These risks and uncertainties arenot the only ones facing our Company; additional risks and uncertainties mayalso impair our business operations. If any of the following risks actuallyoccur, our business, financial condition, results of operations or cash flowswould likely suffer. In that case, the trading price of our common stock couldfall, and you may lose all or part of your investment.  We undertake no obligation to update orrevise any forward-looking statement except as required by the SEC.

 

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*Risk factors**disclosed in our Annual Report onForm 10-K relating to our need foradditional financing and potential dilution to existing shareholders have beenrevised to read as follows:*

 

**We will need additional financing, and any such financingwill likely be dilutive to our existing shareholders.**

 

As of July 31, 2009, wehad approximately $69,000 of cash on hand and current liabilities of $3.4million, including $1.9 million of secured debt.  In March 2009, we temporarily paid down$400,000 of the secured bank debt and in June 2009 we re-established$100,000 of this debt.  We plan tore-establish the remaining $300,000 of secured bank debt and increase theamount by up to an additional $500,000 during the third quarter of 2009,pending the identification of suitable individual guarantors.  We will need additional financing to completeand submit a 510(k) application to the FDA and obtain clearance for abasic mapping and data maintenance claim. In addition, we will need funding topay, for example, up to $1,000,000 of future payments to Artann related toFDA 510(k) clearance milestones. If we fail to secure a distribution partner on terms acceptable to us,or at all, we could be required to undertake distribution activity at ourexpense, which could significantly increase our capital requirements and maydelay the commercialization of our products.

 

We are actively pursuingseveral potential near-term sources of funding to provide the working capitalneeded to repay our existing debt and to fund a commercial launch into theurology market.  These sources includecash advances from shareholders, additional guaranteed bank debt, conversion ofexisting debt to equity and one or more rounds of private placements of debt orequity securities.

 

If additional funds areraised by the issuance of convertible debt or equity securities, such as theissuance of stock or the issuance and exercise of warrants, the conversion ofexisting debt into equity or the issuance and conversion of convertible debt,then existing shareholders will experience dilution in their ownershipinterest. If additional funds are raised by the issuance of debt or certainequity instruments, we may become subject to certain operational limitations,and such securities may have rights senior to those of existing holders ofcommon stock. There can be no assurance that we will be successful in obtainingsuch additional financing, if needed. Additional financing may not be availableto us, may not be available on favorable terms and will likely be dilutive toexisting shareholders.

 

**Our assets are pledged to secure $1.3 million of seniorbank notes and $600,000 of notes issued to an investor which become due in March 2010and, as a result, are not available to secure other senior debt financing. Uponthe occurrence of an event of default, the bank’s security interests in ourassets will be assigned to guarantors of the senior bank notes and the holderof such $600,000 promissory note.**

 

Our $1.3 million seniordebt financing through Crown Bank, Minneapolis, Minnesota, has required us topledge all of our assets and certain licenses, as well as to provide personalguarantees of certain shareholders. In addition, we have issued a subordinatedpromissory note in the amount of $600,000 to an investor that has asubordinated interest in all of our assets and certain licenses. Both the$1.3 million senior bank notes and the $600,000 note become due on March 28,2010. Due to such security interests, the Company will not be in a position inthe future to pledge its assets to secure any debt or lending facility, in theevent we desire or need to borrow such funds on a secured lending basis. It isdoubtful that the Company would be able to obtain significant additional debtfinancing on an unsecured basis.

 

Moreover, under the termsand conditions of the Crown Bank facility and our agreement with suchguarantors, in the event of any default by us with our senior lender thatcauses the personal guarantees to be called and honored, we and our lender haveagreed that all of the bank’s security interests in the 

 

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Company’s assets shall beassigned to such guarantors, pro rata, in consideration of such breach andobligation to pay under the respective guarantees. In addition, the holders ofthe $600,000 promissory note has a subordinated interest in all of the Company’sassets in the event of a default under the note. Thus, our common shareholders,and any existing and future investors in our common stock, would, if theforegoing breach and circumstances occurred, not have access or recourse to theCompany’s assets and collateral, and thus, would likely face a complete loss oftheir investment in the Company.

 

***For a more detailed discussion of the risk factors that havenot been materially changed, see Item 1 of our Annual Report on Form 10-Kfor the year ended December 31, 2008 under the heading “Risk FactorsAssociated with our Business, Operations and Securities.” We undertake noobligation to update or revise any forward looking statements, except asrequired by the SEC.***

*** ***

***Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.***

*** ***

**Common Stock**

 

***On April 13, 2009, the Company issued an aggregate of27,366 shares of its common stock to our independent directors, David Koenig,Robert Rudelius and Scott Smith, as payment of $20,250 directors’ fees accruedthrough December 31, 2008, in lieu of cash.***

*** ***

**Sales of the securities described above were made incompliance with the requirements of Rule 506 of Regulation D under theSecurities Act of 1933, as amended (the “Securities Act”) and the exemptionfrom registration provided under Section 4(2) of the SecuritiesAct.  In qualifying for such exemption,the Company relied upon representations from the investors regarding theirstatus as “accredited investors” under Regulation D and the limited manner ofthe offering.**

** **

***Item5.  Other Information.***

 

None.

 

***Item6.  Exhibits****.*

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                        |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                   |
| 10.1 *               |       | Promissory Note dated  June 12, 2009 issued in favor of Crown Bank.                                                                                                                               |
|                 |       |                                                                                                                                                                                                   |
| 10.2 *               |       | Security Agreement with  Crown Bank dated June 12, 2009.                                                                                                                                          |
|                 |       |                                                                                                                                                                                                   |
| 31.1 *               |       | Certification of Principal  Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the  Sarbanes-Oxley Act of 2002.                                                                       |
|                 |       |                                                                                                                                                                                                   |
| 31.2 *               |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the  Sarbanes-Oxley Act of 2002.                                                                           |
|                 |       |                                                                                                                                                                                                   |
| 32.1 *               |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |

 

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*Filed herewith.

 

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**SIGNATURES**

** **

Pursuant to the Securities Exchange Act of1934, as amended, the Company has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
| ** **                 | **ProUroCare Medical Inc.**     |
|----------------------------|---------------------------------|
| ** **                 | ** **                      |
| ** **                 | ** **                      |
| Date: August 14, 2009 | By:                             | /s/ Richard C. Carlson |
|                       | Name: Richard C. Carlson        |
|                       | Title: Chief Executive  Officer |
|                       |                            |
|                       |                            |   |
| Date: August 14, 2009 | By:                             | /s/ Richard Thon |
|                       | Name: Richard Thon              |
|                       | Title: Chief Financial  Officer |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                        |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                   |
| 10.1 *               |       | Promissory Note dated  June 12, 2009 issued in favor of Crown Bank.                                                                                                                               |
|                 |       |                                                                                                                                                                                                   |
| 10.2 *               |       | Security Agreement with  Crown Bank dated June 12, 2009.                                                                                                                                          |
|                 |       |                                                                                                                                                                                                   |
| 31.1 *               |       | Certification of Principal  Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the  Sarbanes-Oxley Act of 2002.                                                                       |
|                 |       |                                                                                                                                                                                                   |
| 31.2 *               |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the  Sarbanes-Oxley Act of 2002.                                                                           |
|                 |       |                                                                                                                                                                                                   |
| 32.1 *               |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |

 

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*Filed herewith.

 

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