**Table of Contents**

** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C. 20549

** **

**FORM 10-Q**

** **

**(Mark One)**

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2008**

 
| ** ** | **or** |
|------------|--------|

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from          to         **

 

**Commission File Number 333-103781**

 

**ProUroCare Medical Inc.**

(Exact name of registrantas specified in its charter)

 

| **Nevada**                                                        | ** ** | **20-1212923**                      |
|-------------------------------------------------------------------|------------|-------------------------------------|
| (State or other  jurisdiction   of incorporation or organization) |       | (IRS Employer   Identification No.) |

 

**5500 Wayzata Blvd., Suite 310**

**Golden Valley, Minnesota 55416**

(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.                                                                      YESx 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-2 ofthe Exchange Act.

 

Large acceleratedfiler o                                        Acceleratedfiler o

Non-accelerated filer o                                        Smallerreporting company x

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

 

The registrant has 1,786,984 shares of common stockoutstanding as of August 2, 2008.

 

 

 

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**ProUroCareMedical Inc.**

**Form 10-Qfor the**

**QuarterEnded June 30, 2008**

 

**Table ofContents**

 
| ** **                           | **Page No.** |
|--------------------------------------|-------------------|
|                                 |              |
| PART I  - FINANCIAL INFORMATION | 1                 |
|                                 |              |
|                                 | ITEM 1.           | FINANCIAL STATEMENTS |   |
|                                 |              |   |   |
|                                 |              | Consolidated Balance Sheets | 1 |
|                                 |              |   |   |
|                                 |              | Consolidated Statements of Operations | 2 |
|                                 |              |   |   |
|                                 |              | Consolidated Statements of Cash Flows | 3 |
|                                 |              |   |   |
|                                 |              | Notes to Consolidated Financial Statements | 5 |
|                                 |              |   |
|                                 | ITEM  2.          | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS |   |
|                                 | OF  OPERATIONS    | 22 |
|                                 |              |   |
|                                 | ITEM  4T.         | CONTROLS AND  PROCEDURES | 29 |
|                                 |              |
| PART II - OTHER INFORMATION     |              | 30 |
|                                 |              |
|                                 | ITEM 1.           | LEGAL PROCEEDINGS | 30 |
|                                 |              |
|                                 | ITEM 1A.          | RISK FACTORS |   | 30 |
|                                 |              |
|                                 | ITEM  2.          | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 36 |
|                                 |              |   |
|                                 | ITEM 5.           | OTHER  INFORMATION | 36 |
|                                 |              |   |   |
|                                 | ITEM 6.           | EXHIBITS | 37 |
|                                 |              |   |   |
|                                 | SIGNATURES        |   |
|                                      |                   |  |  |  |  |  |  |  |  |  |  |  |  |

** **

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**PART I. FINANCIALINFORMATION**

** **

***Item 1.  Financial Statements***

*** ***

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                        | ** ** | **June 30, 2008   (Unaudited)** | ** ** | **December 31, 2007   (Audited)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| **Assets**                                                                                                                                                                        | ** ** | ** **                                     | ** ** | ** **                                       | ** ** |
| Current assets:                                                                                                                                                                   |       |                                           |       |                                             |       |
| Cash                                                                                                                                                                              |       | $                                              | 14,580     |                                             | $          | 400,613 |   |
| Restricted cash                                                                                                                                                                   |       | 44,134                                         |       | 44,000                                           |       |
| Other current  assets                                                                                                                                                             |       | 65,842                                         |       | 21,733                                           |       |
| Total current  assets                                                                                                                                                             |       | 124,556                                        |       | 466,346                                          |       |
| Equipment and  furniture, net                                                                                                                                                     |       | 299                                            |       | 605                                              |       |
| Deferred  offering expenses                                                                                                                                                       |       | 221,095                                        |       | 132,638                                          |       |
| Debt issuance  costs, net                                                                                                                                                         |       | 395,027                                        |       | 439,321                                          |       |
|                                                                                                                                                                              |       | $                                              | 740,977    |                                             | $          | 1,038,910 |   |
| **Liabilities and Shareholders’ Deficit**                                                                                                                                    |       |                                           |       |                                             |       |
| Current  liabilities:                                                                                                                                                             |       |                                           |       |                                             |       |
| Notes payable,  bank                                                                                                                                                              |       | $                                              | 1,600,000  |                                             | $          | — |   |
| Notes payable,  net of original issue discount                                                                                                                                    |       | 932,490                                        |       | 263,143                                          |       |
| Convertible  debentures, net of original issue discount                                                                                                                           |       | 576,312                                        |       | —                                           |       |
| Convertible  notes, net of original issue discount                                                                                                                                |       | 776,386                                        |       | —                                           |       |
| Accounts payable                                                                                                                                                                  |       | 696,683                                        |       | 484,375                                          |       |
| Accrued expenses                                                                                                                                                                  |       | 710,616                                        |       | 801,925                                          |       |
| Loans from  officers and directors                                                                                                                                                |       | 2,200                                          |       | 10,450                                           |       |
| Total current  liabilities                                                                                                                                                        |       | 5,294,687                                      |       | 1,559,893                                        |       |
|                                                                                                                                                                              |       |                                           |       |                                             |       |
| Commitments and  contingencies                                                                                                                                                    |       |                                           |       |                                             |       |
| Long-term bank  debt                                                                                                                                                              |       | —                                         |       | 1,600,000                                        |       |
| Long-term note  payable                                                                                                                                                           |       | —                                         |       | 600,000                                          |       |
| Long-term  convertible notes, net of original issue discount                                                                                                                      |       | 327,085                                        |       | 970,600                                          |       |
| Total  liabilities                                                                                                                                                                |       | 5,621,772                                      |       | 4,730,493                                        |       |
| Shareholders’  deficit:                                                                                                                                                      |       |                                           |       |                                             |       |
| Common stock,  $0.00001 par. Authorized 50,000,000 shares; issued and outstanding 1,727,350  and 1,727,311 shares on June 30, 2008 and December 31, 2007,  respectively |       | 17                                             |       | 17                                               |       |
| Additional  paid-in capital                                                                                                                                                       |       | 13,059,917                                     |       | 12,586,496                                       |       |
|                                                                                                                                                                              |       |                                           |       |                                             |       |
| Deficit  accumulated during development stage                                                                                                                                     |       | (17,940,729                                    | )          | (16,278,096                                      | )          |
| Total  shareholders’ deficit                                                                                                                                                 |       | (4,880,795                                     | )          | (3,691,583                                       | )          |
|                                                                                                                                                                              |       | $                                              | 740,977    |                                             | $          | 1,038,910 |   |

 

*See accompanying notes to financial statements.*

 

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**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statementsof Operations**

(Unaudited)
| ** **                                      | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | **Period from   August 17,1999   (inception) to  June 30, 2008** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **                                                                                               | ** ** | ** ** |
| ** **                                      | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **                                                                                               | ** ** | ** ** |
| ** **                                      | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** |
| ** **                                      | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008**                                                                                                 | ** ** | **2007** |
| Operating  expenses:                            |       |                                                |       |                                              |       |                                                                                                     |       |   |   |   |   |
| Research and  development                       |       | $                                                   | 300,155    |                                              | $          | 82,414                                                                                                   |       | $ | 300,155 |   | $ | 107,234 |   | $ | 5,157,707 |   |
| General and  administrative                     |       | 216,372                                             |       | 430,992                                           |       | 462,534                                                                                                  |       | 875,433 |   | 8,267,030 |   |
| Total operating  expenses                       |       | 516,527                                             |       | 513,406                                           |       | 762,689                                                                                                  |       | 982,667 |   | 13,424,737 |   |
| Operating loss                                  |       | (516,527                                            | )          | (513,406                                          | )          | (762,689                                                                                                 | )          | (982,667 | ) | (13,424,737 | ) |
| Interest income                                 |       | 125                                                 |       | —                                            |       | 378                                                                                                      |       | — |   | 18,136 |   |
| Interest expense                                |       | (465,182                                            | )          | (279,266                                          | )          | (854,491                                                                                                 | )          | (574,461 | ) | (4,106,921 | ) |
| Debt  extinguishment cost                       |       | (20,491                                             | )          | (74,502                                           | )          | (45,831                                                                                                  | )          | (158,202 | ) | (427,207 | ) |
| Net loss                                        |       | $                                                   | (1,002,075 | )                                                 | $          | (867,174                                                                                                 | )          | $ | (1,662,633 | ) | $ | (1,715,330 | ) | $ | (17,940,729 | ) |
|                                            |       |                                                |       |                                              |       |                                                                                                     |       |   |   |   |   |
| Net loss per  common share:                     |       |                                                |       |                                              |       |                                                                                                     |       |   |   |   |   |
| Basic and  diluted                              |       | $                                                   | (0.58      | )                                                 | $          | (0.55                                                                                                    | )          | $ | (0.96 | ) | $ | (1.12 | ) | $ | (17.88 | ) |
|                                            |       |                                                |       |                                              |       |                                                                                                     |       |   |   |   |   |
| Weighted average  number of shares outstanding: |       |                                                |       |                                              |       |                                                                                                     |       |   |   |   |   |
| Basic and  diluted                              |       | 1,727,350                                           |       | 1,572,558                                         |       | 1,727,340                                                                                                |       | 1,536,975 |   | 1,003,154 |   |

 

***See accompanying notes tofinancial statements.***

** **

**2**

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** **

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                                                              | ** ** | **Six months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** | **Period from August   17, 1999 (inception)   to** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2008**                                            | ** ** | **2007**                                            | ** ** | **June 30, 2008**                                                      | ** ** |
| Cash flows from  operating activities:                                                                                  |       |                                                |       |                                                |       |                                                                             |       |
| Net loss                                                                                                                |       | $                                                   | (1,662,633 | )                                                   | $          | (1,715,330                                                                       | )          | $ | (17,940,729 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                            |       |                                                |       |                                                |       |                                                                             |       |
| Depreciation and  amortization                                                                                          |       | 306                                                 |       | 1,948                                               |       | 20,498                                                                           |       |
| Gain on sale of  furniture and equipment                                                                                |       | —                                              |       | —                                              |       | (2,200                                                                           | )          |
| Stock-based  compensation                                                                                               |       | 29,719                                              |       | 458,101                                             |       | 1,734,821                                                                        |       |
| Issuance of  common stock for services rendered                                                                         |       | —                                              |       | —                                              |       | 156,904                                                                          |       |
| Issuance of  common stock for debt guarantees                                                                           |       | —                                              |       | —                                              |       | 88,889                                                                           |       |
| Issuance of  notes payable for intangibles expensed as research and development                                         |       | 150,000                                             |       | —                                              |       | 150,000                                                                          |       |
| Warrants issued  for services                                                                                           |       | —                                              |       | 72,000                                              |       | 540,636                                                                          |       |
| Warrants issued  for debt guarantees                                                                                    |       | —                                              |       | —                                              |       | 320,974                                                                          |       |
| Warrants issued  for debt extinguishment                                                                                |       | 45,831                                              |       | 158,202                                             |       | 356,488                                                                          |       |
| Amortization of  note payable original issue discount                                                                   |       | 50,828                                              |       | 23,162                                              |       | 293,015                                                                          |       |
| Amortization of  convertible debt original issue discount                                                               |       | 414,006                                             |       | 121,216                                             |       | 868,848                                                                          |       |
| Amortization of  debt issuance and deferred offering costs                                                              |       | 185,819                                             |       | 261,501                                             |       | 1,469,988                                                                        |       |
| 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:                                                                           |       |                                                |       |                                                |       |                                                                             |       |
| Deposits                                                                                                                |       | —                                              |       | —                                              |       | (189,554                                                                         | )          |
| Other current  assets                                                                                                   |       | (249                                                | )          | 7,911                                               |       | 89,040                                                                           |       |
| Accounts payable                                                                                                        |       | 105,874                                             |       | 16,370                                              |       | 836,329                                                                          |       |
| Accrued expenses                                                                                                        |       | (68,659                                             | )          | 132,344                                             |       | 941,329                                                                          |       |
| Net cash used in  operating activities                                                                                  |       | (749,158                                            | )          | (462,575                                            | )          | (7,973,631                                                                       | )          |
| Cash flows from  investing activities:                                                                                  |       |                                                |       |                                                |       |                                                                             |       |
| Purchases of  equipment and furniture                                                                                   |       | —                                              |       | —                                              |       | (20,797                                                                          | )          |
| Deposit into a  restricted cash account                                                                                 |       | (134                                                | )          | —                                              |       | (44,134                                                                          | )          |
| Net cash used in  investing activities                                                                                  |       | (134                                                | )          | —                                              |       | (64,931                                                                          | )          |
| Cash flows from  financing activities:                                                                                  |       |                                                |       |                                                |       |                                                                             |       |
| Proceeds of note  payable, bank                                                                                         |       | —                                              |       | —                                              |       | 500,000                                                                          |       |
| Payments of note  payable, bank                                                                                         |       | —                                              |       | —                                              |       | (500,000                                                                         | )          |
| Proceeds of  notes payable                                                                                              |       | 112,500                                             |       | —                                              |       | 728,000                                                                          |       |
| Payment of notes  payable                                                                                               |       | (219,793                                            | )          | (25,000                                             | )          | (1,257,089                                                                       | )          |
| Proceeds from  long-term notes payable and bank debt                                                                    |       | 593,750                                             |       | —                                              |       | 4,343,750                                                                        |       |
| Payments on  long-term bank debt                                                                                        |       | —                                              |       | —                                              |       | (600,000                                                                         | )          |
| Proceeds from  warrants                                                                                                 |       | 31,250                                              |       | —                                              |       | 81,250                                                                           |       |
| Payments for  debt issuance costs                                                                                       |       | (105,152                                            | )          | —                                              |       | (630,378                                                                         | )          |
| Payment for  rescission of common stock                                                                                 |       | —                                              |       | —                                              |       | (100,000                                                                         | )          |
| Proceeds from  loans from officers and directors                                                                        |       | —                                              |       | 117,000                                             |       | 172,600                                                                          |       |
| Payments of  loans from officers and directors                                                                          |       | (8,250                                              | )          | (79,100                                             | )          | (135,100                                                                         | )          |
| Payments for  deferred offering expenses                                                                                |       | (41,046                                             | )          | —                                              |       | (69,873                                                                          | )          |
| Cost of reverse  merger                                                                                                 |       | —                                              |       | —                                              |       | (162,556                                                                         | )          |
| Net proceeds  from issuance of common stock                                                                             |       | —                                              |       | 447,611                                             |       | 5,682,538                                                                        |       |
| Net cash  provided by financing activities                                                                              |       | 363,259                                             |       | 460,511                                             |       | 8,053,142                                                                        |       |
| Net increase in  cash                                                                                                   |       | (386,033                                            | )          | (2,064                                              | )          | 14,580                                                                           |       |
| Cash, beginning  of the period                                                                                          |       | 400,613                                             |       | 2,407                                               |       | —                                                                           |       |
| Cash, end of the  period                                                                                                |       | $                                                   | 14,580     |                                                | $          | 343                                                                              |       | $ | 14,580 |   |

 

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| ** **                                                                                                                                                                               | ** ** | **Six months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** | **Period from August   17, 1999 (inception)   to** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2008**                                            | ** ** | **2007**                                            | ** ** | **June 30, 2008**                                                      | ** ** |
| Supplemental  cash flow information:                                                                                                                                                     |       |                                                |       |                                                |       |                                                                             |       |
| Cash paid for  interest                                                                                                                                                                  |       | $                                                   | 61,611     |                                                | $          | 135,190                                                                          |       | $ | 654,947 |   |
| Non-cash  investing and financing activities:                                                                                                                                            |       |                                                |       |                                                |       |                                                                             |       |
| Conversion of  notes payable into long-term convertible debentures                                                                                                                       |       | —                                              |       | —                                              |       | 175,000                                                                          |       |
| Conversion of  loans from directors into long-term convertible debentures                                                                                                                |       | —                                              |       | —                                              |       | 25,000                                                                           |       |
| Deferred  offering costs included in accounts payable                                                                                                                                    |       | 70,061                                              |       | —                                              |       | 180,049                                                                          |       |
| Deferred  offering costs included in accrued expenses                                                                                                                                    |       | (22,650                                             | )          | —                                              |       | —                                                                           |       |
| Debt issuance  costs included in accounts payable                                                                                                                                        |       | 36,373                                              |       | —                                              |       | 92,190                                                                           |       |
| Warrants issued  pursuant to notes payable                                                                                                                                               |       | 68,048                                              |       | 22,500                                              |       | 392,235                                                                          |       |
| Prepaid expenses  financed by note payable                                                                                                                                               |       | 43,860                                              |       | 42,585                                              |       | 154,882                                                                          |       |
| Common stock  issued in lieu of cash for accrued expenses                                                                                                                                |       | —                                              |       | 49,911                                              |       | 229,636                                                                          |       |
| Common stock  issued for debt issuance cost                                                                                                                                              |       | —                                              |       | —                                              |       | 158,167                                                                          |       |
| Common stock  issued in lieu of cash for accounts payable                                                                                                                                |       | —                                              |       | 20,704                                              |       | 122,291                                                                          |       |
| Common stock  issued in lieu of cash for loans from officers and directors                                                                                                               |       | —                                              |       | 7,000                                               |       | 10,300                                                                           |       |
| Proceeds from  sale of furniture and equipment                                                                                                                                           |       | —                                              |       | —                                              |       | 2,200                                                                            |       |
| 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                                                                          |       |
| Warrants issued  for debt issuance costs                                                                                                                                                 |       | —                                              |       | —                                              |       | 242,612                                                                          |       |
| Conversion of  accounts payable to note payable                                                                                                                                          |       | —                                              |       | —                                              |       | 241,613                                                                          |       |
| 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                                                                           |       |
| Deposits applied  to accrued expenses                                                                                                                                                    |       | —                                              |       | —                                              |       | 1,076                                                                            |       |
|                                                                                                                                                                                          |            |                                                     |            |                                                     |            |                                                                                  |            |  |  |  |

 

*See accompanying notes to financial statements.*

 

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**ProUroCareMedical Inc.**

**A Development Stage Company**

**Notes to Consolidated Financial Statements**

**June 30, 2008 and2007 and the period from**

**August 17, 1999(inception) to June 30, 2008**

 

(Unaudited)

 

**(1)  Descriptionof Business and Summary of Significant Accounting Policies**

** **

***(a)***                                 Description ofBusiness, Development Stage Activities and Basis of Presentation

*** ***

ProUroCare Medical Inc. (“ProUroCare,”the “Company,” “we” or “us”) is a development stage company that is focused ondeveloping advanced mechanical imaging technology for assessing diseases of theprostate.  The Company’s developmentalactivities, conducted by its wholly owned operating subsidiary ProUroCare Inc.(“PUC”), have included the acquisition of several technology licenses, thepurchase of intellectual property, the development of a strategic business planand a senior management team, product development and fund raising activities.

 

PUC had no activities fromits incorporation in August 1999 until July 2001, when it acquired alicense to certain microwave technology from CS Medical Technologies, LLC (“CSMedical”).  In January 2002, PUCacquired a license to certain prostate imaging technology from Profile, LLC (“Profile”).

 

Pursuant to a mergeragreement effective April 5, 2004 (the “Merger”), PUC became a whollyowned operating subsidiary of Global Internet Communications, Inc. (“Global”),which changed its name to ProUroCare Medical Inc. on April 26, 2004.  In connection with the Merger, the Companycompleted a private placement of 220,500 shares, as adjusted for the ReverseSplit (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 capital stock (the “Reverse Split”).  The reverse stock 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.

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiary, PUC. Significant inter-company accounts and transactions have been eliminatedin consolidation.

 

***(b)***                                 Restatement ofShare Data

*** ***

All share data has beenadjusted to give effect to the Reverse Split.

 

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At the effective time of theMerger, all 350,100 shares of common stock of PUC that were outstandingimmediately prior to the Merger and held by PUC shareholders were cancelled,with one share of ProUroCare common stock issued to Global.  Simultaneously, the non-dissentingshareholders of PUC received an aggregate of 960,300 shares of common stock ofGlobal in exchange for their aggregate of 320,100 shares of PUC.  All share data has been adjusted to give effectto the Merger under which each PUC share was converted into three shares ofGlobal.  The share data in this paragraphhas been restated to give effect to the Reverse Split, as noted above.

 

***(b)***                                 InterimFinancial Information

*** ***

The accompanying unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) and pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”) for interim financialinformation.  Accordingly, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with GAAP have been omitted pursuant to such rules andregulations.  Operating results for thethree and six month periods ended June 30, 2008 are not necessarilyindicative of the results that may be expected for the year ending December 31,2008 or any other period.  Theaccompanying financial statements and related notes should be read inconjunction with the audited financial statements of the Company, and notesthereto, contained in our Annual Report on Form 10-KSB for the year ended December 31,2007.

 

Thefinancial information furnished reflects, in the opinion of management, alladjustments, consisting of normal recurring accruals, necessary for a fairpresentation of the results of the interim periods presented.

 

***(c)***                      AccountingEstimates

*** ***

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofexpenses during the reporting periods. The Company’s significant estimatesinclude the determination of the fair value of its common stock and stock-basedcompensation awarded to employees, directors, loan guarantors and consultantsand the accounting for debt with beneficial conversion features. Actual resultscould differ from those estimates.

 

*Valuation of Stock-Based Compensation.* Effective as of August 17,1999 (inception), the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation”**(“SFAS 123”)**andon January 1, 2006 adopted SFAS No. 123 (revised 2004) “**Share-Based Payment”**,****(“SFAS123R”), which requires the measurement and recognition of compensation expensefor all share-based payment awards made to employees and directors includingemployee stock options based on fair values. The Company’s determination of fair value of share-based payment awardsis based on the date of grant using an option-pricing model which incorporatesa number of highly complex and subjective variables.  These variables include, but are not limitedto, the Company’s expected stock price volatility and estimates regardingprojected employee stock option exercise behaviors and forfeitures.  The Company recognizes the expense related tothe fair value of the award straight-line over the vesting period.

 

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*Debt with Beneficial Conversion Features*.  The beneficial conversion features of thepromissory notes are valued using the Black-Scholes pricing model whichapproximates fair value. The resulting original issue discount is amortizedover the life of the promissory notes (generally no more that 24 months) usingthe straight-line method, which approximates the interest method.

 

***(d)***                                 Net Loss PerCommon Share

*** ***

Basicand diluted loss per common share is computed by dividing net loss by theweighted-average number of common shares outstanding for the reportingperiod.  These calculations reflect theeffects of the Company’s Reverse Split (see Note 1(a)).  Dilutive common-equivalent shares have notbeen included in the computation of diluted net loss per share because theirinclusion would be antidilutive. Antidilutive common equivalent shares issuable based on future exerciseof stock options or warrants could potentially dilute basic loss per commonshare in subsequent years.  All optionsand warrants outstanding were antidilutive for the three and six month periodsended June 30, 2008 and 2007, and the period from August 17, 1999(inception) to June 30, 2008 due to the Company’s net losses.  1,368,371 and 760,824 shares of common stockissuable under stock options, warrants, convertible debentures and contingentshares and warrants issuable under agreements with loan guarantors were excludedfrom the computation of diluted net loss per common share for the periods endedJune 30, 2008 and 2007, respectively, as were the undetermined number ofshares issuable pursuant to the convertible notes and warrants issued inconnection with our private placements as described and defined in Note 5.

 

***(e)***                                  Stock-BasedCompensation

*** ***

Effective as of August 17,1999, the Company adopted the fair value recognition provisions of SFAS 123 torecord option and warrant issuances, including stock-based employeecompensation.  The Company’s policy is togrant stock options at fair value at the date of grant and to record theexpense at fair value as required by SFAS 123, using the Black-Scholes pricingmodel.

 

Effective January 1, 2006, the Company adopted SFAS123R, that focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions.  This statement replaced SFAS 123 andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees.”  SFAS123R requires all companies to expense the fair value of employee stock optionsand similar awards, which has been the Company’s policy to date.  Stock-based employee and non-employeecompensation cost related to stock options was $(437), $15,219 and $1,597,297for the three and six month periods ended June 30, 2008 and the periodfrom August 17, 1999 (inception) to June 30, 2008, respectively.  Stock-based employee and non-employeecompensation cost related to stock options was $273,877 and $362,101 for thethree and six month periods ended June 30, 2007.  The Company estimates the amount of futurestock-based compensation expense related to currently outstanding options to beapproximately $38,300, $30,601, $24,083 and $24,084 for the years ending December 31,2008, 2009, 2010 and 2011, respectively.

 

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The Black-Scholesoption-pricing model was developed for use in estimating the fair value oftraded options that have no vesting restrictions and are fully transferable. Inaddition, option pricing models require the input of highly subjectiveassumptions. Because the Company’s employee and consultant stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, the existing models may not necessarily provide a reliablesingle measure of the fair value of the Company’s employee stock options.

 

No stock options were issuedin the three and six month periods ended June 30, 2008.  In determining the compensation cost of theoptions and warrants granted during the three and six month periods ended June 30,2007, as specified by SFAS 123R, the fair value of each option grant has beenestimated on the date of grant using the Black-Scholes pricing model and theweighted-average assumptions used in these calculations are summarized as follows:

 
| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free  Interest Rate          |       | n/a                                                |       | 5.16                                             | %          | n/a |   | 4.90 | % |
| Expected Life of  Options Granted |       | n/a                                                |       | 4.0 years                                        |       | n/a |   | 4.0 years |   |
| Expected  Volatility              |       | n/a                                                |       | 133.6                                            | %          | n/a |   | 133.4 | % |
| Expected  Dividend Yield          |       | n/a                                                |       | 0                                                |       | n/a |   | 0 |   |

 

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.  Because of the limited trading history of theCompany’s stock, until December 31, 2007 the expected volatility was basedon a simple average of daily price data since the date of the Merger on April 5,2004.  Beginning on January 1, 2008,expected volatility is based on a simple average of weekly price data since thedate of the Merger.  Based on the lack ofhistory to calculate a forfeiture rate, the Company has not adjusted thecalculated value of the options.  Therisk-free rates for the expected terms of the stock options and awards arebased on the U.S. Treasury yield curve in effect at the time of grant.

 

***(f)***                                    Warrants

*** ***

In accordance with Emerging Issues Task Force (“EITF”) Issue No. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling, Goods and Services” (“EITF 96-18”)and EITF Issue No. 98-5, “Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF98-5”), the Company has elected to utilize the fair-value method of accountingfor warrants issued to non-employees as consideration for goods or servicesreceived, including warrants issued to lenders and guarantors of Company debt.The weighted-average per share fair value of warrants granted during the threeand six month periods ended June 30, 2008 was $1.89 and $1.48,respectively, and such warrants were immediately vested and exercisable on thedate of grant.  See Note 6(c) for adescription of warrants issued during the three and six month period ended June 30,2008.

 

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The fair value of stockwarrants is the estimated present value at grant date using the Black-Scholespricing model with the following weighted-average assumptions:

 
| ** **                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free  Interest Rate             |       | 2.91                                               | %          | 4.75                                             | %          | 3.09 | % | 4.71 | % |
| Expected Life of  Warrants Issued(1) |       | 5.0 years                                          |       | 5.0 years                                        |       | 5.0 years |   | 4.8 years |   |
| Expected  Volatility                 |       | 130.0                                              | %          | 133.7                                            | %          | 129.1 | % | 133.7 | % |
| Expected  Dividend Yield             |       | 0                                                  |       | 0                                                |       | 0 |   | 0 |   |

 

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(1) The contractualterm of the warrants.

 

Because of the limited trading history of the Company’sstock, until December 31, 2007 the expected volatility was based on asimple average of daily price data since the date of the Merger on April 5,2004.  Beginning on January 1, 2008,expected volatility is based on a simple average of weekly price data since thedate of the Merger.  Based on the lack ofhistory to calculate a forfeiture rate, the Company has not adjusted thecalculated value of the warrants.  Therisk-free rates for the expected terms of the stock warrants are based on theU.S. Treasury yield curve in effect at the time of grants.

 

***(g)***                                 Debt IssuanceCosts

*** ***

Debt issuance costs at December 31,2007 consisted of legal and accounting fees, printing costs and commissions paid to the placementagents related to the Company’s Crown Bank promissorynotes, a promissory note issued to the Phillips W. Smith Family Trust, a fivepercent shareholder (the “Smith Trust”) and the Company’s December 27,2007 private placements of convertible debentures and warrants (the “2007Private Placement”).  During the threeand six month period ended June 30, 2008, the Company incurred additionaldebt issuance costs related to a second closing on the 2007 Private Placementand on closings on an aggregate of $545,000 of units consisting of unsecured, subordinated,convertible promissory notes and common stock purchase warrants in additionalprivate placements (the “2008 PrivatePlacements”).  Debt issuancecosts are amortized over the term of the related debt as interest expense usingthe straight-line method, which approximates the interest method.

 

***Debt issuance costs aresummarized as follows:***

 
| ** **                  | ** ** | **June 30, 2008** | ** ** | **December 31,   2007** | ** ** |
|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| Debt issuance  costs, gross |       | $                           | 593,638    |                              | $          | 452,113 |   |
| Less  amortization          |       | (198,611                    | )          | (12,792                           | )          |
| Debt issuance  costs, net   |       | $                           | 395,027    |                              | $          | 439,321 |   |

 

Amortizationexpense related to debt issuance costs was $94,301, $185,819 and $1,469,988 forthe three and six months ended June 30, 2008 and the period from August 17,1999 (inception) to June 30, 2008, respectively.  Amortization expense related to debt issuancecosts was $131,473 and $261,501 for the three and six months ended June 30,2007, respectively.

 

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***(h)***                                 DeferredOffering Costs

*** ***

Thelegal fees related to an anticipated public offering the Company expects tocomplete in the second half of 2008 were recorded as a deferred offering costasset as of June 30, 2008.  Thedeferred costs related to the public offering will be recorded as a cost of theoffering upon its closing, or expensed as a general and administrative expenseif no such closing occurs.

 

***(i)***                                    Restricted Cash

*** ***

Pursuant to the renewal ofthe Crown Bank promissory notes (see Note 2), the Company agreed to depositwith Crown Bank four months worth of future interest payments due under thenotes.  The Company has further agreed todeposit with Crown Bank all of the interest due on the notes through maturityupon the closing, and out of the net proceeds of, a future underwritten public offering of equity securities of theCompany.  The funds on deposit arenot available to the Company for any purpose other than for debt service on theCrown Bank promissory notes.

 

***(j)***                                    Going Concern

** **

We have incurred operating losses, accumulateddeficit and negative cash flows from operations since inception.  As of June 30, 2008, we had anaccumulated deficit of approximately $17,940,000.  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.

 

**Note 2.  NotesPayable – Bank.**

** **

InFebruary 2006, the Company completed two closings of senior debt financingtotaling $2,200,000 pursuant to promissory notes issued to Crown Bank.  The average interest rate of the notes was6.49 percent and 6.87 percent for the three and six month periods ended June 30,2008, respectively.  On October 15,2007, the Company retired $600,000 of the Crown Bank Promissory notes, and on October 31,2007, the Company renewed the remaining $1,600,000 of notes to mature in February 2009.  The renewed notes bear interest at a rate ofthe prime rate plus one percent (6.00 percent and 8.25 percent at June 30,2008 and December 31, 2007, respectively), with $1.2 million of therenewed notes subject to a minimum interest rate of 6.5%.  The promissory notes are secured by a pledgeof all Company assets, including its intellectual property, and are guaranteedby Bruce Culver, James Davis and William Reiling, each five percentshareholders of the Company.

 

Inconnection with the renewal, and as a condition to the effectiveness of theterms and conditions of the renewal of the notes, the Company agreed to depositinto escrow with Crown Bank four months worth of future interest payments dueunder the notes.  On December 28,2007, the Company deposited $44,000 with Crown Bank as the four months interestrequirement, thereby making effective the terms of the renewed notes.  The Company has further agreed to depositinto escrow with Crown Bank all of the interest due on the notes through maturityupon the closing, and out of the net proceeds of, an underwritten public offering of equity securities of the Company.

 

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**Note 3.  NotesPayable.**

** **

On June 1, 2006, theCompany borrowed $75,000 from Mr. Roman Pauly, and in connection therewithissued to Mr. Pauly a promissory note to mature on August 30, 2006(the “Pauly Note”).  On March 20,2007, the Pauly Note was amended to extend the due date of the note until theCompany closes on an aggregate of $750,000 of incremental debt or equityfinancing.  On January 22, 2007, January 3,2008 and February 29, 2008, the Company repaid $25,000, $33,000 and $7,650of the principal of the Pauly Note, respectively.  At June 30, 2008, the outstandingbalance of the Pauly Note was $9,350. The Pauly Note, as amended, bears interest at the prime rate (5.00percent and 7.25 percent at June 30, 2008 and December 31, 2007,respectively).  In connection with theamendments, following repayment of the Pauly Note, the Company will issue afive-year warrant to Mr. Pauly to acquire 41.7 shares of the Company’scommon stock at $5.00 per share for each day the promissory note is outstandingafter August 30, 2006.  The guidanceprovided by EITF Issue No. 96-19 “Debtor’s Accounting for a Modificationor exchange of Debt Instruments (“EITF 96-19”) indicates that a substantialmodification of debt terms should be accounted for as an extinguishment ofdebt.  The present value of the cashflows under the August 24, 2006 modification was greater than 10 percentdifferent from the present value of the cash flows under the originalagreement.  Accordingly, the accrual ofwarrants to be issued pursuant to the amended note was recorded as debtextinguishment expense (see Note 6(c)).

 

On November 30, 2006,the Company borrowed $100,000 from Adron Holdings, LLC (“Adron”).  In connection therewith, the Company issuedto Adron an unsecured promissory note that bore an annual interest rate of 60percent and was set to mature on January 2, 2007 (the “Adron Note”).  On each of March 20, 2007 and August 8,2007, the Company amended the Adron Note, resulting in a change of the annualinterest rate to 42 percent, the extension of its due dates and an agreement toissue to Adron five-year warrants to acquire 167 shares at $5.00 per share foreach day the principal remained unpaid on and after March 1, 2007.  In January 2008, the Company repaid allof the outstanding principal amount of the Adron Note and issued five-year,immediately exercisable warrants to acquire up to 52,357 shares of the Company’scommon stock at $5.00 per share (see Note 6(c)). The guidance provided by EITF96-19 indicates that a substantial modification of debt terms should beaccounted for as an extinguishment of debt. The present value of the cash flows under the modifications was greaterthan 10 percent different from the present value of the cash flows under theexisting agreement.  Accordingly, theaccrual of warrants to be issued pursuant to the Adron Note were recorded asdebt extinguishment expense (see Note 6(c)).

 

On May 25, 2007, the Company borrowed $42,585 from a commerciallender pursuant to an insurance policy financing agreement. The financingagreement called for ten monthly installment payments of $4,453 beginning July 1,2007, with an imputed annual interest rate of 9.85 percent.  The proceeds were paid directly to aninsurance company as a prepayment on an insurance policy.  The remaining principal balance of thefinancing agreement was repaid during the six months ended June 30,2008.  On May 27, 2008, the Companyborrowed $43,860 from the same commercial lender pursuant to another insurancepolicy financing agreement.  The financingagreement calls for ten monthly installment payments of $4,554 beginning July 1,2008, with an imputed annual interest rate of 8.26 percent.

 

**On July 31,2007, the Company borrowed, for working capital purposes, $100,000 from theSmith Trust pursuant to a promissory note. The note bears interest at the prime rate (5.00 percent on June 30,2008)**. Following repayment of thepromissory note, the Company will issue a five-year warrant to the Smith Trustto acquire 1 share of the Company’s common stock per $1,000 principal balanceoutstanding at $5.00 per share, for each day the promissory note is outstanding(see Note 

** **

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** **

**6(c)).** On January 3, 2008, the Company repaid$66,000 of this note.  On March 11, 2008, the Company amended the promissorynote with the Smith Trust.  Under theterms of the amendment, unpaid principal and interest will be payable upon theCompany’s closing of an aggregate of $500,000 or more of incremental debt orequity financing following the date of the amendment.  Interest expense recorded during the three and sixmonth periods ended June 30, 2008 and the period from August 17, 1999(inception) to June 30, 2008was $451, $1,027 and $4,354, respectively.  No interest expense was recognized in thecomparable 2007 periods.

** **

***At varioustimes the Company receives short-term, unsecured loans from certain officersand directors solely for short-term working capital needs.  These loans are made without any interest orother consideration accruing to the officers and directors, and had no definedterms.  As of December 31, 2007, theCompany had borrowed a total of $10,450 from David Koenig, a director.  During the six months ended June 30,2008, the Company repaid $8,250 of the loan.***

*** ***

On October 31, 2007,the Company issued a promissory note for $600,000 in favor of the Smith Trust,effective as of October 15, 2007. The proceeds were used to retire $600,000 of the Crown Bank promissorynotes.  The promissory note issued to theSmith Trust matures on February 28, 2009, bears interest at the prime rateplus one percent (6.00 percent at June 30, 2008 and 8.25 percent at December 31,2007, respectively) and has a subordinated security interest in all of theCompany’s assets.  Interest expenserecorded during the three and six months ended June 30, 2008 and theperiod from August 17, 1999 (inception) to June 30, 2008 was $9,233,$20,188 and $31,080, respectively.  Nointerest expense was recorded in the comparable 2007 periods. In considerationfor this loan, on November 7, 2007, the Company agreed to issue 33,333shares of its common stock to the Smith Trust, the value of which was recordedas debt issuance cost asset (see Note 1(h)). We also agreed to issue to the Smith Trust: (i) an aggregate amountof 6,667 shares of our common stock if the Crown Bank promissory notes remainoutstanding on October 31, 2008 and (ii) five-year warrants toacquire a maximum aggregate of 16,667 shares of our common stock at an exerciseprice of $2.00.  The total aggregatenumber of shares subject to the warrants will be determined by dividing 100,000by the per share price in an underwritten public offering (not less than $2.00),minus 33,333.  The warrants will beissued on the earlier of (i) the date of an underwritten public offeringor (ii) October 31, 2008, and will be exercisable beginning on theone-year anniversary of that date.  On March 11, 2008, the Companyamended the promissory note with the Smith Trust.  Under the terms of the amendment, interestaccrued pursuant to the promissory note will be payable on the maturity date,rather than payable monthly.

 

On April 3, 2008, the Company purchased certain patents,patent applications and know-how from Profile (the “Profile Assets”)(see Note8).  $150,000 of the purchase price wasfinanced under a secured promissory note issued in favor of Profile (the “ProfileNote”).  Pursuant to the terms of theProfile Note, the principal and interest accrued thereon becomes due andpayable five business days following the close of a public offering of theCompany’s equity securities or August 29, 2008, whichever occurs first(the “Maturity Date”).  Interest willaccrue at an annual rate of 10 percent prior to the Maturity Date and 18percent thereafter.  In the event theProfile Note is not fully paid at the Maturity Date or within 45 daysthereafter, Profile may enforce its right to have the Profile Assets returned,and the Company will not be able to recoup any monies that were previously paidto Profile.  The Profile Note was made inconnection with, and subject to the terms and conditions of, a SecurityAgreement dated April 3, 2008 between the Company and Profile under whichthe Company granted to Profile a security interest in the Profile Assets.

 

**On April 3, 2008, the Company borrowedan aggregate of $112,500 pursuant to three promissory notes, each in the amountof $37,500.  The promissory notes wereissued in favor of James Davis,**

** **

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** **

**William Reiling and the Smith Trust.  Payment in full of the promissory notes andthe interest accrued thereon at an annual rate of 10 percent is due on September 1,2008.  As consideration for providing theloans, the Company issued immediately exercisable, five-year warrants topurchase 25,000 shares of the Company’s common stock at $1.50 per share to eachlender.  The gross proceeds wereallocated between the note and the warrants based on the relative fair value atthe time of issuance.  The warrants,valued at $69,000 using the Black-Scholes pricing model, with a relative fairvalue of $42,769, were recorded as original issue discount on the relatedpromissory notes, and are being expensed as interest expense over the term ofthe promissory notes.  Interest expenserelated to the amortization of the original issue discount was $25,548 for thethree and six month periods ended June 30, 2008 and**the period from August 17, 1999 (inception) to June 30,2008, respectively.  The proceeds from the promissory notes wereused toward the purchase of the Profile Assets (see Note 8).

** **

**Note 4.  Convertible Debentures.**

 

Asconsideration to the original guarantors (Bruce Culver, James Davis, WilliamReiling and the Smith Trust) to provide their guarantees for the Crown Bankpromissory notes, the Company issued $733,334 of unsecured convertible 10percent debentures.  Of the $733,334,$400,000 matures on February 16, 2009 and $333,334 matures on February 28,2009.  The debentures are convertibleinto Company common stock at a price of $3.00 per share.  The $733,334 face value of the convertibledebentures (before the impact of the calculation of the beneficial conversionfeature – see below) is recorded as a current liability, with the offset of thecost of the debentures recorded as a debt issuance cost asset.  The debt issuance cost asset is beingamortized as interest expense over the term of the underlying bank notepayable.  The convertible debentures are being treated as debt issuance costbecause they represent the costs directly attributable to the bank promissorynote financing.

 

Theembedded conversion feature of the convertible debentures does not meet all thecharacteristics of a derivative instrument as described in SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”), and thereforewas not separated from the host contract and accounted for as aderivative.  The embedded conversionfeature does not provide for net settlement, the shares to be issued pursuantto the exercise of the conversion feature will be unregistered and, due to thelarge number of shares involved and the thinly traded market for the Company’sshares, cannot be readily settled net by a means outside the contract.  The value of the beneficial conversionfeature was computed as the difference between the fair market value of theshares at the transaction dates and the lowest possible conversion price duringthe debenture term ($3.00 per share), multiplied by the number of conversionshares that would be issued at that conversion price (244,445 shares).  The value so computed was in excess of theface value of the convertible debentures issued, and was therefore limited tothe face value of the debentures issued ($733,334).  The beneficial conversion feature wasrecorded as an original issue discount as defined in EITF 98-5 against theconvertible debt liability and is alsobeing amortized as interest expense over the term of the convertibledebentures.  Interest expense related to the amortization of the original issuediscount was $60,943, $121,887 and $576,312 for the three and six month periodsended June 30, 2008 and the period from August 17,1999 (inception) to June 30, 2008, respectively.  Interestexpense related to the amortization of the original issue discount was $60,943and $121,216 for the three and six month periods ended June 30, 2007.

 

On March 21, 2007, theCompany and the four convertible debenture holders agreed to amend thedebenture agreements.  Pursuant to therevised debenture agreements, among other things, the Company issued a total of12,478 shares of its Investment Units to the four guarantors in lieu of 

 

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$49,911 of accruedinterest.  Each Investment Unit consistsof one share of the Company’s common stock and a 3-year warrant (immediatelyexercisable) to acquire 0.5 shares of the Company’s common stock for $2.50($5.00 per share).  The guidance providedby EITF 96-19 indicates that a substantial modification of debt terms should beaccounted for as an extinguishment of debt. The present value of the cash flows under the March 20, 2007modification was greater than 10 percent different from the present value ofthe cash flows under the original agreement. Accordingly, the warrants issued, valued at $26,829 using theBlack-Scholes method, were recorded as debt extinguishment expense.  No other gain or loss was recorded.

 

**On December 27, 2007, the**four convertible debenture holders agreed toamend the terms of their debentures to provide for automatic conversion of theprincipal amount of the debentures and the unpaid interest accrued thereon intoshares of the Company’s common stock at $3.00 per share upon the closing of anunderwritten public offering by the Company. The $733,334 outstanding principal amount of the debentures will convertinto 244,445 shares of the Company’s common stock.  As of June 30, 2008, $105,120 of unpaidaccrued interest related to the debentures was outstanding.  Interest will continue to accrue on thedebentures until they are converted or otherwise retired.  Interest expenserecorded during the three and six month periods ended June 30, 2008, andthe period from August 17, 1999 (inception) to June 30, 2008 was$18,539, $37,077 and $175,199, respectively. Interest expense recorded during the three and six month periods ended June 30,2007 was $18,539 and $36,873, respectively.

** **

**Note 5.  Convertible Notes.**

 

**(a)**          Short-term Convertible Notes

** **

**On December 27, 2007, the Company closed on thesale of $1,050,000 of units consisting of unsecured, subordinated, convertiblepromissory notes (the “2007 Notes”) and common stock purchase warrants (the “2007Warrants”) in a private placement (the “2007 Private Placement”).  Net cash proceeds to the Company were$712,923, after deducting $337,077 of expenses of the offering (including$105,000 of commissions paid to the placement agent) and excluding from thecash proceeds the conversion into units of $25,000 of loans made to the Companyby James Davis and $25,000 of certain loans from the Company’s directors.**

** **

**At the closing, the Company issued $997,500 inprincipal amount of 2007 Notes and 2007 Warrants to purchase 210,000 shares ofcommon stock.  The 2007 Notes bearinterest at 10 percent per year, mature on June 27, 2009 and will convertinto the type of equity securities offered by the Company in any underwrittenpublic offering prior to maturity at 70 percent of the public offeringprice.  In the event a public offering isnot completed before the maturity date, the entire principal and unpaid accruedinterest will convert into the Company’s common stock at $0.05 per share.  The Company may, at its option, prepay the2007 Notes anytime on or after December 27, 2008.  The 2007 Warrants will become exercisableupon the earlier of the closing of a public offering or the maturity date ofthe 2007 Notes, and will remain exercisable until December 31, 2012.  The exercise price will be 50 percent of thepublic offering price, or in the event a public offering is not completedbefore the maturity date, at 50 percent of the closing price of the Company’scommon stock on the maturity date of the 2007 Notes.**

** **

**On December 27, 2007, the Company also converted$150,000 of existing loans from James Davis into a note (the “Davis Note”) andwarrants (the “Davis Warrants”).  Theprincipal amount of the note issued to Mr. Davis was $142,500.  Mr. Davis also received warrants topurchase 30,000**

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** **

**shares of the Company’s common stock.  The terms of the Davis Note and DavisWarrants are the same as those issued in the 2007 Private Placement, exceptthat, the Davis note is convertible into the type of equity securities offeredby the Company in an underwritten public offering at 50 percent of the publicoffering price.  In addition, Mr. Davisagreed that the equity securities issued upon conversion of the Davis Note andthe common stock issued upon exercise of the Davis Warrants will not betransferable for a period of one year beginning on the effective date of thepublic offering triggering conversion of the note.**

** **

On January 4, 2008, the Company closed on the sale of$80,000 of additional units as part of the 2007 Private Placement with the sameterms as noted above.  Net cash proceedsto the Company were $69,600, after deducting $10,400 of commissions paid to theplacement agent.  At closing, the Companyissued $76,000 in principal amount of 2007 Notes and 2007 Warrants to purchase16,000 shares of common stock.  In total,in the two closings of the 2007 Private Placement, the Company issued a totalof $1,073,500 in principal amount of 2007 Notes and 2007 Warrants to purchase226,000 shares of common stock.

 

(b) Long-term ConvertibleNotes

 

On February 13, February 28and May 2, 2008, the Company closed on an aggregate $545,000 of units consisting ofunsecured, subordinated, convertible promissory notes and common stock purchasewarrants in the 2008 PrivatePlacements.  Net cash proceeds to theCompany were approximately $413,875, after deducting approximately $131,125 ofexpenses of the offerings (including $70,850 of commissions paid to theplacement agent).  Each $10,000 unitconsists of a note in the principal amount of $9,500 (the “2008 Notes”) and a warrant to purchase 2,000 sharesof our common stock (the “2008 Warrants”).  The terms of the 2008Notes and 2008 Warrants are identical to the 2007 Notes and 2007 Warrants,respectively, except that the Company’s option to prepay $370,500 of the 2008Notes begins anytime on or after February 13, 2009 with a maturity date ofAugust 13, 2009, and the Company’s option to prepay $147,250 of the 2008Notes begins anytime on or after May 2, 2009 with a maturity date of November 2,2009.

 

The embedded conversion features of the 2007 Notes, Davis Notes and the2008 Notes do not meet all the characteristics of a derivative instrument asdescribed in SFAS 133, and therefore were not separated from the host contractsand accounted for as derivatives.  Theembedded conversion features are indexed to the Company’s common stock, andwould be classified in shareholders’ equity under the guidance of EITF Issue No. 00-19“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock” (“EITF 00-19”), if they were freestandingderivatives.  The embedded conversionfeature contains an explicit limit on the number of shares to be delivered, theCompany has sufficient authorized and unissued shares available to settle themaximum number of shares and the debenture agreement does not contain a netcash settlement feature.  The beneficialconversion features of the promissory notes, valued at $872,184 using theBlack-Scholes pricing model, along with the $50,630 relative fair value of the2007 Warrants, the Davis Warrants and the 2008 Warrants, were recorded as anoriginal issue discount as defined in EITF 98-5 against the convertible debtliability, and is being amortized as interest expense over the term of theconvertible debentures.  During the threeand six month periods ended June 30, 2008, $163,343 and $292,119 of theoriginal issue discount was amortized as interest expense, respectively.

 

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**Note 6. Shareholders’ Equity.**

** **

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

 

***No common stock was issued duringthe six months ended June 30, 2008.***

*** ***

***(b)***         Stock Options

*** ***

***No stock options were issued duringthe six months ended June 30, 2008.***

*** ***

***(c)***          Warrants

*** ***

***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 4, 2008, pursuant to a final separation agreement with aformer employee of the Company, the Company issued to the former employeefive-year warrants (immediately exercisable) to acquire up to 14,500 shares ofthe Company’s common stock at an exercise price of $5.00 per share, and amendeda previously issued warrant to acquire up to 30,000 shares of the Company’scommon stock to provide for cashless exercise thereof.  The warrants, valued at $14,500 using theBlack-Scholes pricing model, were recorded as compensation expense in the firstquarter of 2008.  No expense was recordedduring the three months ended June 30, 2008.

 

·                  Pursuant to the terms of the Adron Note (seeNote 3), upon the repayment of the principal thereon on January 16, 2008,the Company issued five-year, immediately exercisable warrants to acquire up to52,357 shares of the Company’s common stock at $5.00 per share.  During the six months ended June 30,2008, the accrual of 1,347 warrants (and subsequently issued as part of the January 16,2008 issuance noted above) valued at $4,849 using the Black-Scholes pricingmodel was expensed as debt extinguishment expense.  During the three and six month periods ended June 30,2007 the accrual of 17,948 and 25,338 warrants valued at $54,611 and $91,215was recorded as debt extinguishment expense, respectively.  During the six months ended June 30,2007, the issuance of 5,167 warrants valued at $23,162 was expensed as interestexpense.

 

·                  In connection with amendments to the PaulyNote (see Note 3), following repayment of the Pauly Note, the Company willissue a five-year warrant (immediately exercisable) to Mr. Pauly toacquire 41.7 shares of the Company’s common stock at $5.00 per share for eachday the Pauly Note is outstanding after August 30, 2006.  As of June 30, 2008, the Company hadaccrued for issuance warrants to acquire 27,981 shares of the Company’s commonstock pursuant to this arrangement. During the three and six months ended June 30, 2008, the accrual of3,795 and 7,590 warrants valued using the Black-Scholes pricing model at$20,491 and $40,983, respectively, were expensed as debt extinguishmentexpense. During the three and six months ended June 30, 2007, the accrualof 3,795 and 7,548 warrants valued using the Black-Scholes pricing model at$20,491 and $40,758, respectively, were expensed as debt extinguishmentexpense.

 

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·                  On July 31, 2007, the Company borrowed$100,000 for short-term working capital needs pursuant to a promissory noteissued to the Smith Trust (see Note 3). Following repayment of the promissory note, the Company will issue afive-year warrant (immediately exercisable) to the Smith Trust to acquire 1share of the Company’s common stock per $1,000 principal outstanding at $5.00per share for each day the promissory note is outstanding after August 30,2006.  As of June 30, 2008, theCompany had accrued for issuance warrants to acquire 21,720 shares of theCompany’s common stock pursuant to this arrangement.  During the three and six months ended June 30,2008, the accrual of 3,094 and 6,320 warrants valued using the Black-Scholespricing model at $12,376 and $25,280 , respectively, was expensed as interestexpense.

 

·                  On April 3,2008, as consideration to James Davis, William Reiling and the Smith Trust forproviding certain loans to the Company, the Company issued five-year warrants(immediately exercisable) to purchase a total of 75,000 shares of the Company’scommon stock at $1.50 per share to each lender (see Note 3).  The gross proceeds were allocated between thenote and the warrants based on the relative fair value at the time of issuance.  The warrants, valued at $69,000 using theBlack-Scholes pricing model, were allocated $42,768 which was recorded asoriginal issue discount on the related promissory notes and is being expensedas interest expense over the term of the promissory notes.

 

***Note7.  Income Taxes.***

*** ***

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN48”). FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in its tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The Company adopted FIN 48 as of January 1,2007, and the adoption had no significant impact on the consolidated financialstatements.

 

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, 2008 and December 31, 2007 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 or decrease.

 

The Company has generated net operating losscarryforwards of approximately $4.5 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 Merger andprivate placement transactions that occurred in April 2004, and believesthat they do not constitute such an ownership change.  However, additional shares and warrantslikely to be issued pursuant to the Company’s financing efforts, together withcertain transactions occurring in the previous 36-month period, may constitute achange in ownership that could subject the Company’s use of its net operatingloss carryforwards to the above limitations. Based on the Company’s estimates, the limitation would apply tosubstantially all of the $4.5 million net operating loss carryforwards.

 

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

 

Federal 2004 - 2006 State of Minnesota 2004 - 2006

 

**Note 8.  AssetPurchase Agreement.**

 

**On April 3, 2008, the Company purchased theProfile Assets from Profile pursuant to an asset purchase agreement.  Prior to purchasing the Profile Assets, theCompany had licensed certain rights to the Profile Assets from Profile.  Profile is a five percent shareholder of theCompany.  The technology encompassed bythe Profile Assets provides the basis for the ProUroScanTM system,the Company’s initial product currently in the final stages ofdevelopment.  The purchase price of theProfile Assets was $300,000, of which $150,000 was paid in cash and $150,000was financed under the Profile Note (see Note 3).  As indicated by SFAS No. **2, “Accounting for Research and Development Costs,”regarding costs of intangibles that are purchased from others for a particularresearch and development project and that have no alternative future uses, the entire $300,000 purchase price was expensed as researchand development expense in the three month period ended June 30, 2008.

** **

**Note 9.  SubsequentEvents.**

 

OnJuly 11, 2008, the Company issued incentive stock options to acquire70,000 shares of its common stock to its Chief Executive Officer, RichardCarlson.  The options are exercisable fora period of seven years at an exercise price of $1.00 per share.  Of the options, 10,000 shares vest immediatelyand 20,000 shares will vest on July 1 of each of 2009, 2010 and 2011.  At the same time, Mr. Carlson agreed tocancel existing, fully-vested stock options to acquire 15,000 shares of commonstock at an exercise price of $23.50 per share. FAS 123R requires that options that are cancelled and reissued simultaneouslybe accounted for as a modification of the terms of the original option.  Accordingly, the incremental compensationcost of the fully vested portion of the newly issued options, valued at $0.79per share using the Black-Scholes pricing model, over the $0.31 per share valueof the cancelled options on the cancellation date will be expensed immediatelyas general and administrative expense. The value of the unvested portion will be recorded as general andadministrative expense over the three-year vesting period.

 

OnJuly 11, 2008, the Company issued incentive stock options to acquire35,000 shares of its common stock to its Chief Financial Officer, RichardThon.  The options are exercisable for aperiod of seven years at an exercise price of $1.00 per share.  Of the options, 10,000 shares vestimmediately and 8,333 shares will vest on July 1 of each of 2009, 2010 and2011.  At the same time, Mr. Thonagreed to cancel existing, fully-vested stock options to acquire 20,000 sharesof common stock at an exercise price of $25.00 per share.  FAS 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 $0.79 per share using the Black-Scholes pricingmodel, over the $0.27 per share value of the cancelled options on thecancellation date will be expensed immediately as general and administrativeexpense.  The value of the unvestedportion will be recorded as general and administrative expense over thethree-year vesting period.

 

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***On July 11, 2008, theCompany’s directors received 21,667 of shares of the Company’s common stock inlieu of cash for $21,667 of unpaid director’s fees earned and previouslyexpensed through June 30, 2008.***

*** ***

***On July 11, 2008, theCompany issued a***total of 37,967 shares of theCompany’s common stock to its directors in recognition of extraordinary amount oftime and effort they have spent on the Company’s restructuring and refocusingefforts since January 2007.  Theshares were valued at $1.00 per share on the date of issuance.

*** ***

On July 15, 2008 and July 29, 2008, the Company closed on an aggregate $175,000 of units consisting of unsecured,subordinated, convertible promissory notes and common stock purchase warrantsas part of the 2008 Private Placements(see Note 5(b)).  The terms of the2008 Notes and 2008 Warrants issued are identical to the previous 2008 Notesand 2008 Warrants, respectively, except that the Company’s option to prepay the$142,500 of 2008 Notes issued begins anytime on or after July 15, 2009with a maturity date of January 15, 2010. The beneficial conversion features of the promissory notes, valued at$74,355 using the Black-Scholes pricing model, along with the $11,855 relativefair value of the 2008 Warrants will be recorded as an original issue discountas defined in EITF 98-5 against the convertible debt liability, and amortizedas interest expense over the term of the convertible debentures.

 

On July 16, 2008, PUC entered into an employment agreement with Mr. Carlson,its Chief Executive Officer.  Theagreement provides for a minimum annual salary of $150,000, a cash incentivebonus potential of up to 40 percent of Mr. Carlson’s base pay andeligibility to participate in an annual grant of options to purchase shares ofcommon stock, as determined by the Company’s Board of Directors.  The agreement provides for severance paymentsif the Company terminates Mr. Carlson without cause or if Mr. Carlsonterminates the agreement for good reason that includes six months of basesalary plus one month of base salary for each year of service (up to a maximumof 12 months of base salary), payment of earned bonuses, continued payment ofexisting health and life insurance benefits for a period of six months, andimmediate vesting of all unvested stock options then held by Mr. Carlson.  In addition, within a one-year periodfollowing a “change in control” of the Company, upon termination without cause,unacceptable demotion or reduction in responsibilities or a relocation of morethan 100 miles, Mr. Carlson will receive as severance, six months of basesalary plus one month of base salary for each year of service (up to a maximumof 12 months of base salary), and immediate vesting of all unvested stockoptions then held by Mr. Carlson. The agreement prohibits Mr. Carlson from directly or indirectlyparticipating in the ownership, management, operation or control of acompetitive business for a period of one year after his employment with theCompany terminates.  The agreement willexpire on December 31, 2009.

 

**On July 25, 2008, the Company enteredinto two agreements with Artann Laboratories, Inc. (“Artann”).  Under the first agreement, the “LicenseAgreement,” Artann granted to the Company an exclusive, worldwide,sublicensable license to certain patent applications, trade secrets andtechnology to make, use and market certain mechanical imaging products in thediagnosis or treatment of urologic disorders of the prostate, kidney or liverfield of use.  Artann also agreed totransfer possession of five fully functional prostate imaging systems to theCompany and grant the Company full access to all relevant documentationthereto.  As consideration, the Companyagreed to pay, on the effective date of the agreement, an upfront cash licensefee of $600,000 and shares of the Company’s common stock valued at$500,000.  In addition, the Company shallpay Artann a royalty equal to four percent of the first $30,000,000 of netcumulative sales of licensed products, three percent of the next $70,000,000 ofnet cumulative**

** **

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** **

**sales and two percent of net cumulative salesover $100,000,000.  Further, the Companywill pay Artann a technology royalty of 1% of net sales on prostate imagingsystem products**through December 31, 2016.  Thecombined royalties are subject to a minimum annual royalty equal to $50,000 peryear for each of the first two years after clearance from the Food and Drug Administration(“FDA”) for commercial sale and $100,000 per year for each year thereafteruntil termination or expiration of the License Agreement.  The Company also agreed to grant Artann a non-exclusivefully paid up, sub-licensable, royalty free and worldwide license for Artann to make, use or sell anymechanical imaging system for the diagnosis or treatment of disorders of thefemale human breast.  The LicenseAgreement will become effective on the tenth day after the close of one or more public or private equity offerings by theCompany that raises at least $4,000,000 or November 30, 2008, whichever isfirst to occur.  The License Agreement will terminate upon theexpiration of all royalty obligations, by failure of either party to cure abreach of the agreement within a 60-day cure period, if the Company fails tomake a payment to Artann and such failure is not cured within a 30-day cureperiod or should one of the parties become insolvent, go into liquidation orreceivership or otherwise lose legal control of its business.

** **

**Under the second Artann agreement, the “Developmentand Commercialization Agreement,”**the partiesintend to collaborate together to develop, commercialize and market prostatemechanical imaging systems.  Artann willconduct and complete all pre-clinical activities and testing on the prostateimaging system, conduct clinical trials, prepare and submit FDA regulatorysubmissions and provide hardware and software development, refinement anddebugging services to ready the prostate imaging system for commercialsale.  For these development services,the Company will make cash milestonepayments to Artann of $250,000 upon initiation of an FDA approved clinicalstudy, $250,000 upon completion of that FDA approved clinical study andsubmission of an FDA regulatory approval application on the prostate imagingsystem and $750,000 upon FDA clearance to allow the prostate imaging system tobe commercially sold in the United States. In addition, the Company willissue to Artann shares of common stock of the Company having a value of$1,000,000 upon completion of the FDA approved clinical study and submission of an FDA regulatory approvalapplication on the prostate imaging system and, as a success bonus, the Companywill issue to Artann shares of its common stock having a value of $1,000,000upon FDA clearance.  The success bonus will be reduced by tenpercent for each month that FDA clearance is delayed following fifteen monthsfrom the effective date of the Development and Commercialization Agreement.  The Company will also pay a monthlyretainer fee for technical advice and training by Artann personnel.  The monthly fee retainer shall be $30,000 permonth for each of the first six months following the effective date of the Development and Commercialization Agreementand $15,000 per month for the next twelve months.

** **

**Additionally, Artann will supply to theCompany such quantities of the prostate imaging system as is reasonablyrequired for pre-commercial testing, evaluation, marketing and clinical studyand to facilitate the transfer of commercial production to a third party.  Artann also agrees to use best reasonableefforts to provide a limited number of commercial systems, if requested by theCompany.  The pre-commercial andcommercial systems will be sold to the Company at prices yet to bedetermined.  Qualified Artann personnelshall provide manufacture and scale-up services to the Company or a third partymanufacturer designated by the Company to facilitate the commercial manufactureof the prostate imaging systems at a cost of $1,200 per day per individual forsuch services.**

** **

**The effective date of the Development andCommercialization Agreement is the tenth day after the close of**one or more public or private equity offerings thatraises at least $4,000,000 by the Company or November 30, 2008, whicheveris first to occur.  The initial term of the Development 

** **

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** **

**and Commercialization Agreement**isfor three years and may thereafter be renewed for additional one year termsupon mutual agreement of the parties. The Development andCommercialization Agreement may alsoterminate if the Company fails tomake a payment to Artann and such failure is not cured within a 60-day cure periodor should one of the parties become insolvent, go into liquidation orreceivership or otherwise lose legal control of its business.

** **

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***Item 2.  Management’s Discussion and Analysis ofFinancial 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, in Part I, Item 1 of thisQuarterly Report on Form 10-Q for the quarter ended June 30, 2008.*

 

**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 such forward-lookingstatements 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 2008 and 2009 workingcapital needs and launch our products into the marketplace in subsequent years;our ability to complete the development of our existing and proposed productson a timely basis or at all; legislation or regulatory requirements, includingour securing of all U.S. Food and Drug Administration (“FDA”) and otherregulatory approvals on a timely basis, or at all, prior to being able tomarket and sell our products in the United States; competition from larger andmore well established medical device companies and other competitors; thedevelopment of products that may be superior to the products offered by us;securing and protecting our intellectual property and assets, and enforcing breachesof the same; 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”)) is a development stage company thatis focused on developing advanced mechanical imaging technology for assessingthe size, shape and volume of the prostate by creating a visual image of theprostate gland for use in identifying and characterizing abnormal lesions ortissue and monitoring the effects of prostate treatments.

 

The Company’s primaryactivities to date have focused on acquiring technology, intellectual propertyrights and working with Artann Laboratories Inc. (“Artann”) to completedevelopment of the ProUroScanTM prostate imaging system.  We have assembled an experienced managementteam and identified the necessary clinical, regulatory and reimbursementresources to assist us in moving the product to market.  We have aggressively worked to obtain thefunding to complete development of the ProUroScanTM system and to bring it to market.

 

Our initial product is the ProUroScanTM system, a mechanical imaging systemthat enables physicians to identify and characterize the existence of abnormalprostate tissue and monitor changes in prostate tissue over time.  During the next 12 months, assuming ourfinancing efforts are successful (see “Liquidity and Capital Resources,” below), we expect to prepare the ProUroScanTM system for clinical trials, obtain FDA clearanceon a basic mapping and data maintenancelabeling claim and prepare to launch our product into the market,although there can be no assurance that we will be successful in meeting thesemilestones.  We 

 

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are currently exploring potential marketingrelationships with medical device companies that are interested in marketingproducts in the prostate cancer detection market.   We expect such arelationship would provide both financial support and access to down streammarketing, engineering, manufacturing and sales capabilities.

** **

**CurrentDevelopments**

 

**On April 3, 2008, we purchased certain patents, patentapplications and know-how (the “Profile Assets”) from Profile, LLC (“Profile”)for $300,000.  The technology encompassedby the Profile Assets provides the basis for the ProUroScan**TM system, our initial productcurrently in the final stages of development. Prior to purchasing the Profile Assets, we had licensed certain rightsto the Profile Assets from Profile.  Bypurchasing the Profile Assets, we secure ownership of our key intellectualproperty and eliminate potentially very significant royalty payments to Profileupon commercialization of the ProUroScanTM system.  As discussed in Note 8 to the consolidatedfinancial statements, we financed the purchase of the Profile Assets by issuinga $150,000 promissory note to Profile (secured by the Profile Assets) and byissuing an aggregate $112,500 of unsecured promissory notes to three individual investors along with75,000 warrants.

 

TheProUroScanTM systemhas been developed by us under development contracts with Artann, a scientifictechnology company focused on early-stage technology development.  In September 2006, Artann was awarded a$3 million Small Business Innovation Research Phase II Competitive Renewalgrant from the National Cancer Institute (the “2006 NIH Grant”) to help advancethe development and application for clearance of our ProUroScanTM system by the FDA.  It is our intent to work with Artann underthis grant to finalize our current system for clinical trials, and to expandour working relationship with Artann to include their participation in thedevelopment and licensing of future generations of the ProUroScanTM system.

 

**On July 25,2008, the Company entered into two agreements with Artann.  Under the first agreement, the “LicenseAgreement,” Artann granted to the Company an exclusive, worldwide,sublicensable license to certain patent applications, trade secrets andtechnology to make, use and market certain mechanical imaging products in thediagnosis or treatment of urologic disorders of the prostate, kidney or liverfield of use.  Artann also agreed totransfer possession of five fully functional prostate imaging systems to theCompany and grant the Company full access to all relevant documentationthereto.  As consideration, we agreed topay, on the effective date of the License Agreement, an upfront cash licensefee of $600,000 and shares of our common stock valued at $500,000.  In addition, we agreed to pay Artann aroyalty fee equal to four percent of the first $30,000,000 of net cumulativesales of licensed products, three percent of the next $70,000,000 of netcumulative sales and two percent of net cumulative sales over$100,000,000.  Further, we will payArtann a technology royalty fee of one percent of net sales of the prostateimaging system products**through the earlier of December 31, 2016 or thedate of last commercial sale of such products.  The combined royalties aresubject to a minimum annual royalty equal to $50,000 per year for each of thefirst two years after FDA clearance for commercial sale and $100,000 per yearfor each year thereafter until termination or expiration of the LicenseAgreement.  We also agreed to grantArtann a non-exclusive fully paid up, sub-licensable, royalty free and worldwide license for Artann to make, use or sell anymechanical imaging system for the diagnosis or treatment of disorders of thefemale human breast.  The LicenseAgreement will become effective on the tenth day after the close of one ormore public or private equity offerings in which we raise at least $4,000,000or November 30, 2008, whichever is first to occur.  TheLicense Agreement will terminate upon the expiration of all royaltyobligations, by failure of either party to cure a breach of the agreementwithin a 60-day cure period, if we fail to make a payment to Artann and suchfailure is not cured within a 30-day 

 

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**cure periodor should one of the parties become insolvent, go into liquidation orreceivership or otherwise lose legal control of its business.**

** **

**Under thesecond Artann agreement, the “Development and Commercialization Agreement,”**the parties intend to collaboratetogether to develop, commercialize and market prostate mechanical imagingsystems.  Artann will conduct andcomplete all pre-clinical activities and testing on the prostate imagingsystem, conduct clinical trials, prepare and submit FDA regulatory submissionsand provide hardware and software development, refinement and debuggingservices to ready the prostate imaging system for commercial sale.  For these development services, we will payto Artann cash milestonepayments of $250,000 upon initiation of an FDA approved clinical study,$250,000 upon completion of that FDA approved clinical study and submission ofan FDA regulatory approval application on the prostate imaging system and$750,000 upon FDA clearance that allows the prostate imaging system to becommercially sold in the United States. In addition, we will issue to Artann shares of our common stock having avalue of $1,000,000 upon completion of the FDA approved clinical study and submission of an FDA regulatory approvalapplication on the prostate imaging system and, as a success bonus, we will issue to Artann shares ofour common stock having a value of $1,000,000 upon FDA clearance.  The success bonuswill be reduced by ten percent for each month that FDA clearance is delayedfollowing fifteen months from the effective date of the Development andCommercialization Agreement.  We willalso pay a monthly retainer fee for technical advice and training by Artannpersonnel.  The monthly fee retainershall be $30,000 per month for each of the first six months following theeffective date of the Developmentand Commercialization Agreement and $15,000 per month for the next twelve months.

** **

**Additionally,Artann will supply us with such quantities of the prostate imaging system as isreasonably required for pre-commercial testing, evaluation, marketing andclinical study and to facilitate the transfer of commercial production to athird party manufacturer.  Artann alsoagrees to use best reasonable efforts to provide a limited number of commercialsystems, if requested by us.  Thepre-commercial and commercial systems will be sold to us at prices yet to bedetermined.  Qualified Artann personnelshall provide manufacture and scale-up services to us or a third partymanufacturer we designate to facilitate the commercial manufacture of theprostate imaging systems at a cost of $1,200 per day per individual for suchservices.**

** **

**The effectivedate of the Development and Commercialization Agreement is the tenth day afterthe close of**one or more public or private equityofferings that raises at least $4,000,000 by the Company or November 30,2008, whichever is first to occur.  The initial term of the Development andCommercialization Agreement is for three years and may thereafter be renewed foradditional one year terms upon mutual agreement of the parties.  The Development and Commercialization Agreement may also terminate if we fail to make a payment to Artann andsuch failure is not cured within a 60-day cure period or should one of theparties become insolvent, go into liquidation or receivership or otherwise loselegal control of its business.

** **

**Resultsof Operations**

 

The following discussionof the financial condition and results of operations should be read inconjunction with the financial statements included herewith. This discussionshould not be construed to imply that the results discussed herein willnecessarily continue into the future, or that any conclusion reached hereinwill necessarily be indicative of actual operating results in the future.

 

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*Threemonths ended June 30, 2008 compared to the three months ended June 30,2007:*

 

*OperatingExpenses/Operating Loss.* Our operating expenses (and our operating loss) for the three monthsended June 30, 2008 were $516,525, an increase of $3,119, or approximately1 percent, compared to $513,406 last year. The operating expenses for the three months ended June 30, 2008included our acquisition of certain patents, patent applications and know-howfor $300,000, which was expensed as research and development costs.  The operating expenses for the three monthsended June 30, 2007 included approximately $221,000 related to theextension of the exercise period of certain stock options pursuant toseparation agreements with two former officers of the Company, and the issuanceof warrants valued at $72,000 to Artann pursuant to a cooperation agreement in April 2007.

 

Fees for legal servicesincreased approximately $48,000, or 195 percent, compared to last year, arisingfrom our contract negotiations with Artann and patent maintenance related legalexpenses.

 

*NetInterest Expense. *Netinterest expense for the three months ended June 30, 2008 was $465,182, anincrease of 67 percent, compared to $279,266 last year.  The increased interest can be attributed tothe issuance of convertible notes to investors in our 2007 and 2008 privateplacements.  Amortization of the originalissue discount attributable to the warrants and the beneficial conversionfeature of the convertible notes issued in the private placements resulted inapproximately $163,000 of recorded interest expense in the three months ended June 30,2008, while the interest on the convertible notes totaled approximately$42,000.  These increases were partiallyoffset by interest expense reductions resulting from declining interest rates(the prime rate is down approximately 30 percent from last year) and areduction in the amounts of other loans that were outstanding.

 

*Debt Extinguishment Expense*.  Our debt extinguishment expense for the threemonths ended June 30, 2008 was $20,491, a decrease of 72 percent, comparedto $74,502 last year.  Our debtextinguishment expense arises primarily from the cost of warrants accrued forissuance pursuant to the provisions of short-term loans from certain individuallenders.  The decrease was due to therepayment of a significant portion of these outstanding short term loans inlate 2007 and in early 2008.

 

*Six months ended June 30, 2008 compared to the six months ended June 30,2007:*

 

*OperatingExpenses/Operating Loss.* Our operating expenses (and our operating loss) for the six months endedJune 30, 2008 were $762,689, a decrease of $219,978, or approximately 22percent, compared to $982,667 last year.

 

Compensation and benefitscosts in the six months ended June 30, 2008 decreased approximately$81,000, or 34 percent, compared to last year as a result of the departure ofthree former employees in the first quarter of 2007.  Stock-based compensation declinedapproximately $428,000, or 94 percent, compared to last year, as the 2007period included approximately $221,000 related to the extension of the exerciseperiod of certain stock options pursuant to separation agreements with twoformer officers of the Company and a one-time, $96,000 expense related to anextension of the exercise period of a warrant. In addition, several employee stock options became fully vested during2007 and were therefore fully expensed prior to 2008.  Fees for legal services increasedapproximately $67,000, or 84 percent, compared to last year, due to legal feesassociated with our negotiations with Artann, one-time costs of our reversestock split, the filing of our Registration Statement on Form S-8 andother SEC filings and from patent maintenance related legal expenses.

 

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Research and developmentcosts in the six months ended June 30, 2008 increased approximately$193,000, or 180 percent, compared to last year, due to the expensing of our$300,000 acquisition of the Profile Assets. Research and development costs recognized during the six months ended June 30,2007 included the issuance of warrants valued at $72,000 to Artann pursuant toa cooperation agreement signed in April 2007 and approximately $24,000 ofresearch costs related to a discontinued prostate visioning system project.

 

*NetInterest Expense. *Netinterest expense for the six months ended June 30, 2008 was $854,491, anincrease of 49 percent, compared to $574,461 last year.  The increased interest can be attributed tothe issuance of convertible notes to investors in our 2007 and 2008 privateplacements.  Amortization of the originalissue discount attributable to warrants issued in the private placementsresulted in approximately $292,000 of recorded interest expense in the sixmonths ended June 30, 2008, while the interest on the convertible notestotaled approximately $77,000.  Theseincreases were partially offset by interest expense reductions resulting fromdeclining interest rates (the prime rate is down approximately 30 percent fromlast year) and a reduction in the amounts of other loans that were outstanding.

 

*Debt Extinguishment Expense*.  Our debt extinguishment expense for the sixmonths ended June 30, 2008 was $45,831, a decrease of 71 percent, comparedto $158,202 last year.  Our debtextinguishment expense arises primarily from the cost of warrants accrued forissuance pursuant to the provisions of amendment to short-term loans fromcertain individual lenders.  The decreasewas due to the repayment of a significant portion of these outstanding shortterm loans in late 2007 and in early 2008.

 

**Assets; Property Acquisitions and Dispositions**

 

Our primary assets are patents and patentapplications, which are the foundation for our proposed product offerings.  These assets****secure a $1.6 million senior bank note and anote issued to an investor in the amount of $600,000 and are also pledged ascollateral on a $150,000 loan and, as a result, are not available to secureother senior debt financing.  We anticipate purchasing approximately$116,000 of computer equipment, development tools and molds, software andproduction tooling during the next 12 months. We do not anticipate selling any significant equipment or other assetsin the near term.

 

**Current Operations – Employees and Expenses**

 

We currently employ only two employees.  We conduct our research and development,market research, regulatory and other business operations through the use of avariety of consultants and medical device development contractors, primarilyArtann.  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.  As weprepare for submission to the FDA and market launch of our ProUroScanTM system, over the next 12 months we expect tohire approximately 6 employees in the areas of engineering, regulatorycompliance, marketing and quality assurance. During the next 12 months, we expect to complete the development ofclinical ProUroScanTM systems, conduct clinical trialsand file a 510(k) submission with the FDA, begin the registration processin the European Union and establish strategic marketing and contractmanufacturing relationships in anticipation of regulatory clearance to enterthe market.

 

We incur ongoing expenses that aredirectly related to being a publicly traded company, including professionalaudit and legal fees, financial printing, press releases and transfer agentfees.  We currently occupy temporary officeswithin the office of a former Company director, for which we accrue rent on amonth-to-month basis of approximately $2,200 per month.  Upon successful completion of our current fundingefforts, we expect to relocate to permanent offices of approximately 2,000 squarefeet.  Other

 

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expenses incurred include executive officercompensation, expensing of stock options, travel, insurance, telephone,supplies and other miscellaneous expenses. In the next 12 months, the Company anticipates that it will spendapproximately $1.3 million in marketing and administrative expenses.  Of this amount, we expect that approximately$400,000 will be for compensation, benefits and payroll taxes and approximately$275,000 will be for consulting costs.

 

Theremaining work to prepare the ProUroScanTM systemfor FDA clinical studies consists primarily of engineering and user interfacerefinements, safety and bio-testing and completion of documentation andvalidation studies.  Over the next 12months, we expect this work to be performed by Artann and other independentcontractors.  Pursuant to the terms ofthe Artann Development and Commercialization Agreement, over the next 12 monthswe expect to make cash payments of approximately $750,000 and an equity paymentof the Company’s common shares valued at approximately $1,000,000 fordevelopment and clinical work.  Inaddition, pursuant to the terms of the Artann License Agreement, over the next12 months we expect to make a cash payment of $600,000 and an equity payment ofthe Company’s common shares valued at approximately $500,000 to Artann forlicensing fees.

 

Wealso anticipate developing a small internal engineering team with competenciesin electrical and mechanical engineering and software design and development tofill specific project requirements not covered by Artann or other outsidecontractors.  Internal salaries, benefitsand miscellaneous departmental expenses for software and hardware development,regulatory work and project management over the next 12 months are estimated tobe $245,000.

 

**Liquidity and Capital Resources**

 

On May 2, 2008 and July 29,2008, the Company closed on an aggregate of $330,000 of units consisting of unsecured, subordinated,convertible promissory notes and common stock purchase warrants in a private placement on terms essentially thesame as the 2007 and 2008 private placements as described in the notes to theconsolidated financial statements.  As ofJuly 29, 2008, the Company has closed on a total of $2,000,000 of units inthe 2007 and 2008 private placements, including the conversion of $175,000 ofexisting debt into units.

 

Net cash used in operating activities was $316,859 and $749,158 during the threeand six month periods ended June 30, 2008, compared to $172,829 and$462,575 in the comparable periods in 2007. The increase in cash used was primarily the result of cash used topurchase the Profile Assets and the payments of accrued expenses, includingaccrued compensation, in the first quarter of 2008.

 

Net cash provided by financing activities was $197,860 and $363,259during the three and six month periods ended June 30, 2008, compared to$154,500 and $460,511 in the comparable periods in 2007.  Net proceeds of our private placements duringthe six months ended June 30, 2008 of $519,848 and the issuance of$112,500 of notes payable were offset by payments of notes payable and loansfrom directors of $228,043.  During thesix months ended June 30, 2007, net proceeds from the issuance of commonstock of $447,611 and a net increase in loans from officers and directors of$37,900 was offset by payments of notes payable of $25,000.

 

We do not currently have sufficient funds tocomplete the development of our products and gain approval of them from theFDA.  As of June 30, 2008, we hadapproximately $15,000 of cash on hand and current liabilities (excludingoriginal issue discounts on debt) of approximately $5.3 million.  We estimate that we will need approximately$3.6 million of cash over the next 12 months to complete the development of afirst generation system, submit a premarket notification application to the FDAand obtain FDA 510(k) clearance for basic mapping and data maintenancelabeling claims.  In addition, we have$2.2 million of 

 

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secured debt and $733,334 of convertibledebt, both of which mature at the end of February 2009, $150,000 ofsecured debt that matures at the end of August 2008 and other short termliabilities exceeding $1,613,000.

 

During the next 12 months, we plan to raiseapproximately $4.8 million through private or public offerings of our debt orequity securities, alternative financing sources that may become available tous or some combination of these.  Weanticipate that the net proceeds from such financings will be sufficient tofund our operations and retire approximately $1.2 million of short termliabilities. We intend to address the $2.2 million secured debt that matures inFebruary 2009 by seeking an equity investment or licensing fee from astrategic marketing partner, or by seeking an extension of the maturitydates.  We expect that the convertibledebt will be converted into common stock during the next 12 months.  If we are unsuccessful in obtaining an equityinvestment or licensing fee, or an extension of the maturity date of the secureddebt, or if the convertible debt is not converted into our common stock, wewill need to raise additional funds.

 

Sources of alternativefinancing include possible strategic investments from medical device companiesthat may be interested in marketing products in the prostate cancer detectionmarket.  In addition to financialsupport, a successful collaboration with such a company would allow us to gainaccess to down stream marketing, engineering, manufacturing and sales support.

 

Approximately $2.6 millionof our outstanding convertible notes and debentures will automatically convertinto equity upon our closing of an underwritten public offering.  In addition, to date we have issued a totalof 400,000 warrants in our 2007 and 2008 private placements, and additionalwarrants may be issued pursuant to our financing efforts.

 

Weare attempting to raise enough cash to complete the development of a firstgeneration ProUroScanTM systemand to seek or obtain FDA 510(k) clearance for basic mapping and data maintenancelabeling claims.  However, if ourfinancing efforts are unsuccessful or significantly delayed for any reason, orif our product development efforts experience significant unforeseen delays, wemay not have sufficient funds to complete these objectives, and will requireadditional financing.  If additionalfunds are raised by the issuance of convertible debt or equity securities, suchas the issuance of stock, or the issuance and exercise of warrants or the issuanceand conversion of convertible debentures, then existing shareholders willexperience dilution in their ownership interests.  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 existing holders of common stock. If adequate funds are notavailable through these initiatives on a timely basis, or are not available onacceptable terms, we may be unable to fund expansion, or to develop or enhanceour products.  Ultimately, if noadditional financing is obtained beyond what has been secured to date, we couldpotentially be forced to cease operations. See Part II, Item 1A of this Quarterly Report on Form 10-Q andItem 1 of our Annual Report on Form 10-KSB for the year ended December 31,2007 for more complete information concerning our risk factors.

 

**Going Concern**

 

We have incurred operating losses, accumulateddeficit and negative cash flows from operations since inception.  As of June 30, 2008, we had anaccumulated deficit of approximately $18.0 million.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.  Our unaudited consolidated financialstatements included in Part II, Item 1 of 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 thatmight result should we be unable to continue as a going concern.

 

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**CriticalAccounting Policies**

 

Ourfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”). The application ofGAAP requires that we make estimates that affect our reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the reporting period. We base our estimates on historical experience andon various other assumptions that we believe to be reasonable under thecircumstances. We evaluate our estimates and assumptions on an ongoing basis.Our actual results may differ significantly from these estimates.

 

Adescription of the Company’s critical accounting policies that represent themore significant judgments and estimates used in the preparation of the Company’sfinancial statements was provided in Item 6. Management’s Discussion andAnalysis or Plan of Operations of the Company’s Annual Report on Form 10-KSBfor the year ended December 31, 2007.

 

***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 Exchange Act of 1934, as amended (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission (the “SEC”).As of June 30, 2008, the end of the period covered by this QuarterlyReport on Form 10-Q, we carried out an evaluation, under the supervision andwith the participation of management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures are effective.

 

**Changes in Internal Control Over Financial Reporting**

 

Duringthe quarter ended June 30, 2008, there has been no change in the Company’sinternal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION.**

** **

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

*** ***

***The Company, like most other public companies, is involvedin legal proceedings in the conduct of the ordinary course of its business.***

*** ***

***Item1A. Risk Factors***

 

**Investing in our common stock involves a highdegree of risk. You should carefully consider the risks and uncertainties setforth under Item 1 of our Annual Report on Form 10-KSB for the year ended December 31,2007, as well as the material changes to those risk factors set forth belowbefore purchasing our common stock. These risks and uncertainties are not the only ones facing our Company;additional risks and uncertainties may also impair our business operations. Ifany of the following risks actually occur, our business, financial condition,results of operations or cash flows would likely suffer. In that case, thetrading price of our common stock could fall, and you may lose all or part ofyour investment.  We undertake noobligation to update or revise any forward-looking statement except as requiredby the SEC.**

** **

*The following changes to risk factors disclosed in ourAnnual Report on Form 10-KSB are as a result of our April 3, 2008acquisition of the Profile Assets that we had previously licensed:*

 

*Risk Factors Deleted:*

 

·                  We license from third parties, and do not ownor control, key intellectual property critical to our products.

 

·                  If we lose our right to license and use fromthird parties certain critical intellectual property for any reason, our entirebusiness would be in jeopardy.

 

·                  The protections for the intellectual propertywe license from other parties may be successfully challenged by third parties.

 

·                  We will begin tolose patent protection on our licensed prostate-imaging systems and relatedpatent technologies beginning in 2012.  As we lose patent protection onour critical licensed technologies, it may have a material adverse effect onour business

 

*Risk Factors Added:*

 

**The intellectual property we own is subject to asecured $150,000 loan which, if not settled upon maturity, could lead to theloss of our patent rights and put****our entire business in jeopardy.**

 

**We have purchasedcertain patents, patent applications and know-how from Profile, LLC**that is critical to our proposed products.  A portion of the purchase priceof the patents, patent applications and know-how was financed under a secured,$150,000 promissory note issued in favor of Profile.  Pursuant to the terms of the note, theprincipal and interest accrued thereon becomes due and payable five businessdays following the close of a public offering of our equity securities August 29,2008, whichever occurs first.  In theevent the note is not fully paid upon maturity or within 45 days thereafter,Profile may enforce its right, which is secured by an agreement under which wegranted to Profile a security interest, to have the patents, patentapplications and know-how returned, and we will not be able to recoup anymonies that were previously paid to Profile.  If theforegoing breach 

 

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**andcircumstances occurred, the viability of the Company would be in question. Ouronly alternatives would be to find existing and non-infringing technology toreplace the lost technology, if any exists, or develop new technologyourselves.  The pursuit of any suchalternative would likely cause significant delay in the development andintroduction of our proposed products and could have a material adverse effecton our business.**

** **

**The protections for our key intellectual property may be successfullychallenged by third parties.**

 

We own various key intellectual properties.  No assurance can be given that anyintellectual property claims will not be successfully challenged by thirdparties.  Any challenge to ourintellectual property, regardless of merit, would likely involve costlylitigation which could have a material adverse effect on our business.  If a successful challenge were made tointellectual property that is critical to our proposed products, the pursuit ofany such alternative would likely cause significant delay in the developmentand introduction of such products. Moreover, a successful challenge could callinto question the validity of our business.

 

**We will begin tolose patent protection on our prostate-imaging systems and related patenttechnologies beginning in 2012.  As we lose patent protection on ourcritical technologies, it may have a material adverse effect on our business.**

 

Werely on certain patents to provide us with exclusive rights for ourtechnology.  One of these patents willexpire in 2012, another in 2013, while the remainder will expire between 2016and 2021.  As we begin to lose certainpatent protections on our prostate-imaging systems and related criticalpatented technologies in 2012, we may face strong competition as a result, whichcould have a material adverse effect our business.

 

*The following changes to risk factors disclosed in ourAnnual Report on Form 10-KSB are as a result of the completion of our July 25,2008 agreements with Artann:*

 

*Risk Factors Deleted:*

 

·                  We are relying upon Artann Laboratories, Inc.(“Artann”) to complete development of the ProUroScanTM systemand will not be able to control the pace of that development.  Failureto establish a new development and licensing agreement on terms acceptable tothe Company would significantly delay the development and market introductionof the ProUroScanTM systemand would have a material adverse effect on our business.

 

·                  Failure to obtain a license for intellectualproperties owned by Artann would have a material adverse effect on ourbusiness.

 

·                  We expect to rely materially on Artann andother consultants and contractors, some of whom may be partially or wholly paidthrough issuances of common stock dilutive to our shareholders.

 

·                  We have limited experience in assembling and testing our products andmay encounter problems or delays in the assembly of our products or fail tomeet certain regulatory requirements which could result in an adverse effect onour business and financial results.

 

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*Risk Factors Added:*

 

**We expect to rely materially on Artann and other consultants andcontractors, some of whom may be partially or wholly paid through issuances ofcommon stock dilutive to our shareholders.**

 

We materially rely on consultants and contractors toperform a significant amount of research and development, pre-manufacturing,clinical, regulatory and marketing activities. Specifically, over the contract periods of the License and theDevelopment and Commercialization Agreements with Artann, we expect to issueequity securities to Artann valued up to $2.5 million.  We expect that certain other consultants andcontractors will also accept payment of a portion of their compensation in theform of our equity securities.  Any suchissuances would be dilutive to shareholders.

 

*The following risk factor, previously disclosed in ourAnnual Report on Form 10-KSB, is updated to provide more currentinformation:*

 

**We are currently in need of financing and will need additionalfinancing during 2008, and any such financing will likely be dilutive to ourexisting shareholders.**

 

We do not currently have sufficient funds tocomplete the development of our products and gain approval of them from theFDA.  As of June 30, 2008, we hadapproximately $15,000 of cash on hand and current liabilities (excludingoriginal issue discounts on debt) of approximately $5.3 million.  We estimate that we will need approximately$3.6 million of cash over the next 12 months to complete the development of afirst generation system, submit a premarket notification application to the FDAand obtain FDA 510(k) clearance for basic mapping and data maintenancelabeling claims.  In addition, we have$2.2 million of secured debt and $733,334 of convertible debt, both of whichmature at the end of February 2009, $150,000 of secured debt that maturesat the end of August 2008 and other short term liabilities exceeding$1,613,000.

 

During the next 12 months, we plan to raise approximately$4.8 million through private or public offerings of our debt or equitysecurities, alternative financing sources that may become available to us orsome combination of these.  We anticipatethat the net proceeds from such financings will be sufficient to fund ouroperations and retire approximately $1.2 million of short term liabilities. Weintend to address the $2.2 million secured debt that matures in February 2009by seeking an equity investment or licensing fee from a strategic marketing partner,or by seeking an extension of the maturity dates.  We expect that the convertible debt will beconverted into common stock during the next 12 months.  If we are unsuccessful in obtaining an equityinvestment or licensing fee, or an extension of the maturity date of thesecured debt, or if the convertible debt is not converted into our commonstock, we will need to raise additional funds.

 

Sources of alternative financinginclude possible strategic investments from medical device companies that may beinterested in marketing products in the prostate cancer detection market.  In addition to financial support, asuccessful collaboration with such a company would allow us to gain access todown stream marketing, engineering, manufacturing and sales support.

 

Approximately $2.6 million of ouroutstanding convertible notes and debentures will automatically convert intoequity upon our closing of an underwritten public offering.  In addition, to date we have issued a total of400,000 warrants in our 2007 and 2008 private placements, and additionalwarrants may be issued pursuant to our financing efforts.

 

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** **

**We are attempting to raise enough cash to complete thedevelopment of a first generation ProUroScan**TM system and to seek or obtain FDA 510(k) clearancefor basic mapping and data maintenance labeling claims.  However, if our financing efforts areunsuccessful or significantly delayed for any reason, or if our productdevelopment efforts experience significant unforeseen delays, we may not havesufficient funds to complete these objectives, and will require additionalfinancing.  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 or the issuance andconversion of convertible debentures, then existing shareholders willexperience dilution in their ownership interests.  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 existing holders of common stock.

** **

*The following risk factor is added to provide currentinformation:*

 

**We have not made the required payments due undercertain agreements.**

 

Wehave not made the required $9,350 payment of principal under a short-term loanagreement. We plan to amend the terms of this short-term loan agreement,subject to agreement by the lender, so that the outstanding principal amountwill become due and payable upon the Company obtaining a sufficient amount offunding.  In addition, as of July 31,2008, we have not paid $41,517 of interest payments due pursuant to certainshort-term loan agreements.  We expect toreach agreement with the lenders to defer payment of the accrued interest untilthe closing of an underwritten public offering. As consideration, we expect to issue to the lenders warrants to acquirea limited number of shares of the Company’s common stock.  If we fail to negotiate amendments to theseshort-term loan agreement, we will remain in past due status with suchagreements and will be forced to borrow additional funds to retire theobligations.

 

***The risks and uncertainties listed below are fully describedin our Annual Report on Form 10-KSB, to which no material changes havebeen made:***

** **
| **·** | ** ** | **As a development stage company,  we have no operating history and our business plan has not yet been fully  tested. We anticipate incurring future losses until our products are  completed, regulatory approval is secured and our products are introduced  into the United States and worldwide markets.** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                           |
| ·     |       | We  have a history of operating losses and have received a “going-concern”  qualification from our independent registered public accounting firm.                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                           |
| ·     |       | Even if we raise enough cash in our financing  efforts to complete development of a first generation ProUroScanTM system and to obtain FDA clearance of a  510(k) on a basic mapping and data maintenance claim, we will still  require additional financing to launch our product into the market.  |
|       |       |                                                                                                                                                                                                                                                                                                           |
| ·     |       | If we are unable to secure a  distribution partner for the commercial launch of our first generation ProUroScanTM system, we may require additional financing  to launch our product into the market.                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                           |
| ·     |       | If FDA clearance is delayed, including because we  are not able to raise enough funds to get us through the regulatory process,  we could potentially be forced to cease operations.                                                                                                                           |

 

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| · |   | Our  assets are pledged to secure a $1.2 million senior bank note and a $600,000 note  issued to an investor and, as a result, are not available to secure other  senior debt financing. Upon the occurrence of an event of default, our assets  will be assigned to guarantors of the senior bank note and the holder of such  $600,000 promissory note.                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Our  products have not been, and may never be, fully commercially completed and  developed.                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | The  commercialization of our products may be significantly delayed by  governmental regulation and any and all such delays, if they occur, may have  a material adverse effect on our business.                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Even  if successfully developed, our products may not be commercially viable.                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Even  if successfully developed, our products may not be accepted by the  marketplace.                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | A failure to successfully  implement a “patient pay” sales model prior to establishing third party  reimbursement would have a material adverse effect on product sales and our  financial results.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Our  failure to receive third-party coverage and reimbursement for our products, when  in the marketplace, could result in diminished marketability of our products.                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Once we commercialize the ProUroScanTM system, we may be subject, directly or indirectly, to  federal and state healthcare fraud and abuse laws and regulations and could  face substantial penalties if we are unable to fully comply with such laws.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Any failure in our efforts or our contractor’s  efforts to train physicians or other medical staff could result in lower than  expected product sales.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | There is no guarantee that the FDA will grant  510(k) clearance or PMA approval of our future products and failure to  obtain necessary clearances or approvals for our future products would  adversely affect our ability to grow our business.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Clinical trials necessary to support our future  submissions will be expensive and may require the enrollment of large numbers  of patients, and suitable patients may be difficult to identify and recruit. Delays  or failures in our clinical trials will prevent us from commercializing any  modified or new products and will adversely affect our business, operating  results and prospects. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | If the third parties on which we rely to conduct  our clinical trials and to assist us with pre-clinical development do not  perform as contractually required or expected, we may not be able to obtain  regulatory approval for or commercialize our products.                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Even if  our products are cleared or approved by regulatory authorities, if we or our  contract manufacturers or suppliers fail to comply with ongoing FDA or other  foreign regulatory authority requirements, or if we experience unanticipated  problems with our products, these products could be subject to restrictions  or withdrawal from the market.                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Our products may in the future be subject to  product recalls that could harm our reputation, business and financial  results.                                                                                                                                                                                                                                                                       |

 

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| · |   | If our products cause or contribute to a death or  a serious injury, or malfunction in certain ways, we will be subject to  medical device reporting regulations, which can result in voluntary  corrective actions or agency enforcement actions.                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | Federal regulatory reforms may adversely affect  our ability to sell our products profitably.                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | Rapid  technological change in our competitive marketplace may render our proposed  products obsolete or may diminish our ability to compete in the marketplace.                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | We  will depend upon others for the manufacturing of our products, which will  subject our business to the risk that we will be unable to fully control the  supply of our products to the market.                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | Our  reliance on third-party manufacturers and other third parties in other  aspects of our business may reduce any profits we may earn from our products  and may negatively affect future product development.                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | We  may not be able to enter into manufacturing agreements or other collaborative  agreements on terms acceptable to us, if at all, which could have a material  adverse effect on our business.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | The  funding provided by the government from the $3,000,000 Small Business  Innovation Research Phase II Competitive Renewal grant awarded to Artann by  the National Institutes of Health (“NIH”) may be reduced or delayed. If such  reduction or delay occurs, this may have a material adverse effect on our  business. |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | We  are highly dependent on the services provided by certain key personnel.                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | We  may not be able to successfully compete against companies in our industry  with greater resources, or with any competition.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | Our  common stock is illiquid and may be difficult to sell.                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | There  is currently limited trading volume in our common stock, which may make it  difficult to sell shares of our common stock.                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | Because  our stock is deemed a “penny stock,” you may have difficulty selling shares  of our common stock.                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| · |   | The shares and warrants that may be issued in  future financings may trigger an “ownership change” as defined by the  Internal Revenue Code of 1986, as amended (the “Code”) and our ability to use operating loss  carryforwards to offset income in future years may be limited.                                |

 

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| · |   | Our  business and products subject us to the risk of product liability claims.               |
|--------|--------|----------------------------------------------------------------------------------------------|
|   |   |                                                                                         |
| · |   | We  have never paid dividends and do not expect to pay dividends in the  foreseeable future. |

 

***For a more detailed discussion of the risk factors listedabove that have not been materially changed, see Item 1 of our Annual Report onForm 10-KSB for the year ended December 31, 2007 under the heading “RiskFactors Associated with our Business, Operations and Securities.” We undertakeno obligation to update or revise any forward looking statements, except asrequired by the SEC.***

*** ***

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

*** ***

***Convertible PromissoryNote Issuances***

*** ***

**On May 2, 2008, the Company closed on the sale of $155,000 ofunits consisting of unsecured, subordinated, convertible promissory notes (the “Notes”)and common stock purchase warrants (the “Warrants”) in a privateplacement.  Net cash proceeds to theCompany were approximately $120,000, after deducting approximately $35,000 ofexpenses of the offering (including $20,150 of commissions and fees paid to theplacement agent).  The net proceeds willbe used to pay certain existing obligations and for general corporate purposes.**

** **

**At the closing, the Company issued $147,250 in principal amount ofNotes and Warrants to purchase 31,000 shares of common stock.  The Notes bear interest at ten percent peryear, mature on November 2, 2009, and will convert into the type of equitysecurities offered by the Company in any underwritten public offering prior tomaturity at 70 percent of the public offering price.  In the event a public offering is notcompleted before the maturity date, the entire principal and unpaid accruedinterest will convert into the Company’s common stock at $0.05 per share.  The Company may, at its option, prepay theNotes anytime on or after May 2, 2009. The Warrants will become exercisable upon the earlier of the closing ofa public offering or the maturity date of the Notes and will remain exercisableuntil December 31, 2012.  Theexercise price will be 50 percent of the public offering price, or in the eventa public offering is not completed before the maturity date, at 50 percent ofthe closing price of the Company’s common stock on the maturity date.**

** **

**Sales of the securities described above were made in compliance withthe requirements of Rule 506 of Regulation D under the Securities Act of1933, as amended (the “Securities Act”) and the exemption from registrationprovided under Section 4(2) of the Securities Act.  In qualifying for such exemption, the Companyrelied upon representations from the investors regarding their status as “accreditedinvestors” under Regulation D and the limited manner of the offering asconducted by the placement agent and the Company.**

** **

**Warrants**

 

Pursuant to the terms of an aggregate$112,500 of promissory notes issued in favor of William Reiling, James Davisand the Phillips W. Smith Family Trust (the “Smith Trust”) on April 3,2008, the Company issued five-year warrants (immediately exercisable) toacquire up to an aggregate of 75,000 shares of the Company’s common stock at$1.50 per share to each lender.

 

The above warrant issuances were made, and the prospective issuanceswill be made, in reliance on exemption from registration provided under Section 4(2) ofthe Securities Act, for issuance by an issuer not involving a public offering.

 

***Item5.  Other Information.***

*** ***

None.

 

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***Item6.  Exhibits***

*** ***
| **Exhibit No.** | ** **    | **Description** |
|----------------------|---------------|-----------------|
|                 |          |            |
| 10.1                 |   * |            | Employment Agreement by and between ProUroCare Inc. and Richard  Carlson dated July 16, 2008. |
|                 |          |            |   |
| 10.2                 |   * |            | License Agreement by and between ProUroCare Medical Inc. and Artann  Laboratories Inc. dated July 25, 2008. |
|                 |          |            |   |
| 10.3                 |   * |            | Development and Commercialization Agreement by and between ProUroCare  Medical Inc. and Artann Laboratories Inc. dated July 25, 2008. |
|                 |          |            |   |
| 10.4                 |   * |            | Form of Stock Option Agreement and Notice of Stock Option Grant  for incentive stock options issued to Richard Carlson and Richard Thon on  July 11, 2008. |
|                 |          |            |   |
| 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 SecuritiesExchange Act of 1934, as amended, the Company has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

 
|                       | **ProUroCare Medical Inc.**     |
|----------------------------|---------------------------------|
|                       |                            |
|                       |                            |
| Date: August 14, 2008 | By:                             |   /s/ Richard C. Carlson |
|                       | Name: Richard C. Carlson        |
|                       | Title: Chief Executive  Officer |
|                       |                            |
|                       |                            |
| Date: August 14, 2008 | By:                             |   /s/ Richard Thon |
|                       | Name: Richard Thon              |
|                       | Title: Chief Financial  Officer |

 

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**Exhibit Index**

*** ***
| **Exhibit No.** | ** **    | **Description** |
|----------------------|---------------|-----------------|
|                 |          |            |
| 10.1                 |   * |            | Employment Agreement by and between ProUroCare Inc. and Richard  Carlson dated July 16, 2008. |
|                 |          |            |   |
| 10.2                 |   * |            | License Agreement by and between ProUroCare Medical Inc. and Artann  Laboratories Inc. dated July 25, 2008. |
|                 |          |            |   |
| 10.3                 |   * |            | Development and Commercialization Agreement by and between ProUroCare  Medical Inc. and Artann Laboratories Inc. dated July 25, 2008. |
|                 |          |            |   |
| 10.4                 |   * |            | Form of Stock Option Agreement and Notice of Stock Option Grant  for incentive stock options issued to Richard Carlson and Richard Thon on  July 11, 2008. |
|                 |          |            |   |
| 31.1                 |   * |            | Certification of Principal Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002. |
|                 |          |            |   |
| 31.2                 |   * |            | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002. |
|                 |          |            |   |
| 32.1                 |   * |            | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |

 

----

*Filed herewith.

 

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