Tableof Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

 

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

 

**For the quarterly period ended September 30,2009**

 

**or**

 

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

 

**For the transition period from         to         **

 

**Commission File Number: 000-51774**

 

**ProUroCareMedical Inc.**

(Exact name of registrantas specified in its charter)

 

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

 

**6440 Flying Cloud Drive, Suite 101**

**Eden Prairie, MN  55344**

(Address of principalexecutive offices, and Zip Code)

 

**(952) 476-9093**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  YES x NOo

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  YES o NO o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

The registrant has 11,192,079 shares of common stockoutstanding as of November 12, 2009.

 

 

 

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**ProUroCareMedical Inc.**

**QuarterlyReport on Form 10-Q for the**

**QuarterEnded September 30, 2009**

 

**Table of Contents**

 
| ** **                          | ** ** | **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                                                 |   | [6] |
|                                |       |                                                                                        |   |   |
|                                | ITEM 2.    | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   | [21] |
|                                |       |                                                                                        |   |   |
|                                | ITEM 4T.   | CONTROLS AND  PROCEDURES                                                                    |   | [29] |
|                                |       |                                                                                        |   |   |
| PART II - OTHER  INFORMATION   |       | [29]                                                                                        |
|                                |       |                                                                                        |
|                                | ITEM 1.    | LEGAL PROCEEDINGS                                                                           |   | [29] |
|                                |       |                                                                                        |   |   |
|                                | ITEM 1A.   | RISK FACTORS                                                                                |   | [29] |
|                                |       |                                                                                        |   |   |
|                                | ITEM 2.    | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |   | [31] |
|                                |       |                                                                                        |   |   |
|                                | ITEM 4.    | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |   | [31] |
|                                |       |                                                                                        |   |   |
|                                | ITEM 5.    | OTHER INFORMATION                                                                           |   | [32] |
|                                |       |                                                                                        |   |   |
|                                | ITEM 6.    | EXHIBITS                                                                                    |   | [33] |
|                                |       |                                                                                        |   |   |
|                                | SIGNATURES |                                                                                        | [34] |

 

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**PART I.FINANCIAL INFORMATION**

** **

***Item 1. Financial Statements***

*** ***

**ProUroCare Medical Inc.**

**(A Development Stage Company)**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                   | ** ** | **September 30,********2009** | ** **    | **December 31,********2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|---------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **(Unaudited)**                    | ** **    | ** **                        | ** ** |
| **Assets**                                                                                                                                                                                   | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| Current assets:                                                                                                                                                                              |       |                               |          |                              |       |
| Cash                                                                                                                                                                                         |       | $                                  |  269,875 |                              | $          |  3,900 |   |
| Restricted cash                                                                                                                                                                              |       | —                             |          | 44,214                            |       |
| Other current assets                                                                                                                                                                         |       | 85,669                             |          | 31,634                            |       |
| Total current assets                                                                                                                                                                         |       | 355,544                            |          | 79,748                            |       |
| Equipment and  furniture, net                                                                                                                                                                |       | 452                                |          | —                            |       |
| Deferred offering  expenses                                                                                                                                                                  |       | 110,538                            |          | 729,924                           |       |
| Debt issuance costs,  net                                                                                                                                                                    |       | 65,868                             |          | 266,882                           |       |
|                                                                                                                                                                                         |       | $                                  |  532,402 |                              | $          |  1,076,554 |   |
| **Liabilities and Shareholders’ Deficit**                                                                                                                                               |       |                               |          |                              |       |
| Current liabilities:                                                                                                                                                                         |       |                               |          |                              |       |
| Notes payable, bank                                                                                                                                                                          |       | 1,300,000                          |          | 1,600,000                         |       |
| Notes payable                                                                                                                                                                                |       | 649,332                            |          | 34,425                            |       |
| Notes payable, related  party                                                                                                                                                                |       | 26,000                             |          | 634,000                           |       |
| Convertible debt, net  of original issue discount                                                                                                                                            |       | —                             |          | 1,033,484                         |       |
| Convertible debt  related parties, net of original issue discount                                                                                                                            |       | —                             |          | 1,179,913                         |       |
| Accounts payable                                                                                                                                                                             |       | 967,404                            |          | 1,203,549                         |       |
| Accrued license and  development fees                                                                                                                                                        |       | 15,000                             |          | 1,327,835                         |       |
| Accrued expenses                                                                                                                                                                             |       | 451,650                            |          | 937,253                           |       |
| Total current  liabilities                                                                                                                                                                   |       | 3,409,386                          |          | 7,950,459                         |       |
|                                                                                                                                                                                         |       |                               |          |                              |       |
| Commitments and  contingencies:                                                                                                                                                              |       |                               |          |                              |       |
| Long-term note payable,  bank                                                                                                                                                                |       | 100,025                            |          | —                            |       |
| Long-term note payable                                                                                                                                                                       |       | 300,000                            |          | —                            |       |
| Long-term note payable  - related party                                                                                                                                                      |       | 243,000                            |          | —                            |       |
| Long-term convertible  debt, net of original issue discount                                                                                                                                  |       | —                             |          | 221,199                           |       |
| Long-term convertible  debt - related parties net of original issue discount                                                                                                                 |       | —                             |          | 162,759                           |       |
| Total liabilities                                                                                                                                                                            |       | 4,052,411                          |          | 8,334,417                         |       |
| Shareholders’ deficit:                                                                                                                                                                  |       |                               |          |                              |       |
| Common stock, $0.00001  par.  Authorized 50,000,000 shares;  issued and outstanding 9,946,325 and 1,811,429 shares on September 30,  2009 and December 31, 2008, respectively |       | 99                                 |          | 18                                |       |
| Additional paid-in  capital                                                                                                                                                                  |       | 20,332,965                         |          | 13,677,932                        |       |
| Deficit accumulated  during development stage                                                                                                                                                |       | (23,853,073                        | )             | (20,935,813                       | )          |
| Total shareholders’  deficit                                                                                                                                                            |       | (3,520,009                         | )             | (7,257,863                        | )          |
|                                                                                                                                                                                         |       | $                                  |  532,402 |                              | $          |  1,076,554 |   |

 

*See accompanying notes to consolidated financialstatements.*

 

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**ProUroCare Medical Inc.**

**(A Development Stage Company)**

**Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** | **Period from August 17,1999 (Inception) to** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **September 30**  | ** ** | **September 30** | ** ** | **September 30,**                             | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2009** | ** ** |
| Operating  expenses:                            |       |                   |       |                  |       |                                               |       |   |   |   |   |
| Research  and development                       |       | $                      | 132,744    |                  | $          | 30,000                                             |       | $ | 341,625 |   | $ | 330,155 |   | $ | 5,796,932 |   |
| General  and administrative                     |       | 358,886                |       | 263,987               |       | 1,070,513                                          |       | 726,521 |   | 10,901,686 |   |
| Total  operating expenses                       |       | 491,630                |       | 293,987               |       | 1,412,138                                          |       | 1,056,676 |   | 16,698,618 |   |
| Operating  loss                                 |       | (491,630               | )          | (293,987              | )          | (1,412,138                                         | )          | (1,056,676 | ) | (16,698,618 | ) |
| Interest  income                                |       | —                 |       | 124                   |       | 21                                                 |       | 502 |   | 18,316 |   |
| Interest  expense                               |       | (50,687                | )          | (473,782              | )          | (1,139,159                                         | )          | (1,328,273 | ) | (6,301,626 | ) |
| Debt  extinguishment expense                    |       | (41,717                | )          | (29,045               | )          | (365,984                                           | )          | (74,876 | ) | (871,145 | ) |
| Net  loss                                       |       | $                      | (584,034   | )                     | $          | (796,690                                           | )          | $ | (2,917,260 | ) | $ | (2,459,323 | ) | $ | (23,853,073 | ) |
|                                            |       |                   |       |                  |       |                                               |       |   |   |   |   |
| Net  loss per common share:                     |       |                   |       |                  |       |                                               |       |   |   |   |   |
| Basic  and diluted                              |       | $                      | (0.06      | )                     | $          | (0.45                                              | )          | $ | (0.32 | ) | $ | (1.41 | ) | $ | (14.48 | ) |
|                                            |       |                   |       |                  |       |                                               |       |   |   |   |   |
| Weighted  average number of shares outstanding: |       |                   |       |                  |       |                                               |       |   |   |   |   |
| Basic  and diluted                              |       | 9,899,013              |       | 1,779,854             |       | 9,188,409                                          |       | 1,744,972 |   | 1,646,820 |   |

 

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

 

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**ProUroCare Medical Inc.**

**(A Development Stage Company)**

**Consolidated Statementsof Cash Flows**

**(Unaudited)**

** **
| ** **                                                                                                              | ** ** | **Nine Months Ended   September 30** | ** ** | **Period from August  17, 1999 (inception) to** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2009**                                  | ** ** | **2008**                                        | ** ** | **September 30, 2009** | ** ** |
| Cash  flows from operating activities:                                                                                  |       |                                      |       |                                            |       |   |   |
| Net  loss                                                                                                               |       | $                                         | (2,917,260 | )                                               | $          | (2,459,323 | ) | $ | (23,853,073 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                                            |       |                                      |       |                                            |       |   |   |
| Depreciation  and amortization                                                                                          |       | 109                                       |       | 459                                             |       | 20,906 |   |
| Gain  on sale of furniture and equipment                                                                                |       | —                                    |       | —                                          |       | (2,200 | ) |
| Stock-based  compensation                                                                                               |       | 192,122                                   |       | 48,085                                          |       | 1,956,469 |   |
| Common  stock issued to related parties for services rendered                                                           |       | 7,250                                     |       | 37,964                                          |       | 214,621 |   |
| Common  stock issued for debt guarantees                                                                                |       | —                                    |       | —                                          |       | 106,667 |   |
| Common  stock issued for debt issuance cost                                                                             |       | —                                    |       | —                                          |       | 6,667 |   |
| Common  stock issued for debt extinguishment                                                                            |       | 33,333                                    |       | —                                          |       | 33,333 |   |
| Notes  payable issued for intangibles expensed as research and development                                              |       | —                                    |       | 150,000                                         |       | 150,000 |   |
| Warrants  issued for services                                                                                           |       | 26,400                                    |       | —                                          |       | 567,036 |   |
| Warrants  issued for debt guarantees                                                                                    |       | —                                    |       | —                                          |       | 355,197 |   |
| Warrants  issued for debt extinguishment                                                                                |       | 607                                       |       | 66,548                                          |       | 360,007 |   |
| Warrants  issued for debt extinguishment-related parties                                                                |       | —                                    |       | —                                          |       | 26,828 |   |
| Warrants  issued for debt issuance cost                                                                                 |       | —                                    |       | —                                          |       | 12,834 |   |
| Amortization  of note payable-original issue discount                                                                   |       | —                                    |       | 88,888                                          |       | 152,247 |   |
| Amortization  of note payable-related parties original issue discount                                                   |       | 2,720                                     |       | —                                          |       | 142,964 |   |
| Amortization  of convertible debt-original issue discount                                                               |       | 507,902                                   |       | 253,619                                         |       | 1,146,587 |   |
| Amortization  of convertible debt-related parties original issue discount                                               |       | 444,328                                   |       | 377,292                                         |       | 1,194,132 |   |
| Amortization  of debt issuance costs                                                                                    |       | 354,678                                   |       | 299,999                                         |       | 2,060,411 |   |
| Bargain  conversion option added to note payable-related parties for debt  extinguishment                               |       | —                                    |       | —                                          |       | 48,214 |   |
| Write-off  debt issuance cost for debt extinguishment                                                                   |       | —                                    |       | —                                          |       | 42,797 |   |
| Write-off  of deferred offering cost                                                                                    |       | —                                    |       | —                                          |       | 59,696 |   |
| License  rights expensed as research and development, paid by issuance of common stock  to CS Medical Technologies, LLC |       | —                                    |       | —                                          |       | 475,000 |   |
| License  rights expensed as research and development, paid by issuance of common stock  to Profile, LLC                 |       | —                                    |       | —                                          |       | 1,713,600 |   |
| Changes  in operating assets and liabilities:                                                                           |       |                                      |       |                                            |       |   |   |
| Other  current assets                                                                                                   |       | 27,310                                    |       | 7,570                                           |       | (28,352 | ) |
| Accounts  payable                                                                                                       |       | (60,926                                   | )          | 146,022                                         |       | 868,908 |   |
| Accrued  development expense                                                                                            |       | (827,835                                  | )          | —                                          |       | 500,000 |   |
| Accrued  expenses                                                                                                       |       | (105,523                                  | )          | 12,646                                          |       | 1,034,273 |   |
| Net  cash used in operating activities                                                                                  |       | (2,314,785                                | )          | (970,231                                        | )          | (10,634,231 | ) |
| Cash  flows from investing activities:                                                                                  |       |                                      |       |                                            |       |   |   |
| Purchases  of equipment and furniture                                                                                   |       | (561                                      | )          | —                                          |       | (21,358 | ) |
| Deposit  into a restricted cash account                                                                                 |       | —                                    |       | —                                          |       | (44,214 | ) |
| Withdrawal  from a restricted cash account                                                                              |       | 44,214                                    |       |                                            |       | 44,214 |   |
| Net  cash provided by (used in) investing activities                                                                    |       | 43,653                                    |       | —                                          |       | (21,358 | ) |
|                                                                                                                         |            |                                           |            |                                                 |            |  |  |  |  |  |

 

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**ProUroCareMedical Inc.**

**(A Development Stage Company)**

**Consolidated Statements of Cash Flows (continued)**

**(Unaudited)**

** **
| ** **                                                                | ** ** | **Nine Months Ended   September 30** | ** ** | **Period from August  17, 1999 (inception) to** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                                  | ** ** | **2008**                                        | ** ** | **September 30, 2009** | ** ** |
| Cash  flows from financing activities:                                    |       |                                      |       |                                            |       |   |   |
| Proceeds  of note payable, bank                                           |       | 100,000                                   |       | —                                          |       | 600,000 |   |
| Payments  of note payable, bank                                           |       | (400,000                                  | )          | —                                          |       | (900,000 | ) |
| Proceeds  of notes payable                                                |       | —                                    |       | —                                          |       | 340,500 |   |
| Payment  of notes payable                                                 |       | (111,938                                  | )          | (320,976                                        | )          | (1,482,456 | ) |
| Proceeds  of notes payable - related parties                              |       | 93,638                                    |       | 112,500                                         |       | 653,738 |   |
| Payments  of notes payable - related parties                              |       | (34,000                                   | )          | (76,450                                         | )          | (237,300 | ) |
| Proceeds  from long-term notes payable and bank debt                      |       | 400,025                                   |       | 833,625                                         |       | 4,207,362 |   |
| Proceeds  from long-term notes payable, related parties                   |       | 243,000                                   |       | 207,000                                         |       | 1,363,500 |   |
| Payments  on long-term bank debt                                          |       | —                                    |       | —                                          |       | (600,000 | ) |
| Proceeds  from warrants                                                   |       | —                                    |       | 46,875                                          |       | 104,500 |   |
| Payments  for debt issuance costs                                         |       | (600                                      | )          | (146,452                                        | )          | (674,037 | ) |
| Payment  for rescission of common stock                                   |       | —                                    |       | —                                          |       | (100,000 | ) |
| Payments  for offering expenses                                           |       | (366,618                                  | )          | (44,035                                         | )          | (483,925 | ) |
| Cost  of reverse merger                                                   |       | —                                    |       | —                                          |       | (162,556 | ) |
| Net  proceeds from issuance of common stock                               |       | 2,613,600                                 |       | —                                          |       | 8,296,138 |   |
| Net  cash provided by financing activities                                |       | 2,537,107                                 |       | 612,087                                         |       | 10,925,464 |   |
| Net  increase (decrease) in cash                                          |       | 265,975                                   |       | (358,144                                        | )          | 269,875 |   |
| Cash,  beginning of the period                                            |       | 3,900                                     |       | 444,613                                         |       | — |   |
| Cash,  end of the period                                                  |       | $                                         | 269,875    |                                            | $          | 86,469 |   | $ | 269,875 |   |
|                                                                      |       |                                      |       |                                            |       |   |   |
| Supplemental  cash flow information:                                      |       |                                      |       |                                            |       |   |   |
| Cash  paid for interest                                                   |       | $                                         | 100,779    |                                            | $          | 105,726 |   | $ | 817,188 |   |
| Non-cash  investing and financing activities:                             |       |                                      |       |                                            |       |   |   |
| Deferred  offering costs included in accounts payable                     |       | (162,926                                  | )          | 176,634                                         |       | 408,518 |   |
| Deferred  offering costs included in accrued expenses                     |       | —                                    |       | 89,404                                          |       | 70,000 |   |
| Debt  issuance costs included in accounts payable                         |       | —                                    |       | 60,099                                          |       | 114,156 |   |
| Warrants  issued pursuant to notes payable                                |       | 3,327                                     |       | 169,739                                         |       | 467,191 |   |
| Warrants  issued for debt issuance costs                                  |       | —                                    |       | —                                          |       | 298,021 |   |
| Prepaid  expenses financed by note payable                                |       | 81,345                                    |       | 54,504                                          |       | 246,871 |   |
| Convertible  debt issued in lieu of cash for accrued expenses             |       | —                                    |       | 23,750                                          |       | 31,413 |   |
| Common  stock issued in lieu of cash for accrued expenses                 |       | 20,250                                    |       | 21,670                                          |       | 259,053 |   |
| Common  stock issued in lieu of cash for accrued development cost         |       | 500,000                                   |       | —                                          |       | 500,000 |   |
| Common  stock issued for debt issuance cost                               |       | 153,064                                   |       | —                                          |       | 317,898 |   |
| Warrants  issued in lieu of cash for accrued expenses                     |       | —                                    |       | 1,250                                           |       | 1,250 |   |
| Conversion  of notes payable, related parties into convertible debentures |       | —                                    |       | —                                          |       | 200,000 |   |

 

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**ProUroCareMedical Inc.**

**(A Development Stage Company)**

**Consolidated Statements of Cash Flows (continued)**

**(Unaudited)**

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

 

*See accompanying notes to consolidated financialstatements.*

 

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**ProUroCare Medical Inc.**

**(A Development StageCompany)**

**Notesto Consolidated Financial Statements**

** **

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

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

 

(Unaudited)

 

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

 

***(a)***         Description of Business,Development Stage Activities

*** ***

ProUroCare Medical Inc. (“ProUroCare,”the “Company,” “we” or “us”) is a development stage company engaged in thebusiness of developing for market innovative products for the detection andcharacterization of male urological prostate disease.  The primary focus of the Company is currentlythe prostate mechanical imaging system, designed for use as an aid to thephysician in visualizing and documenting abnormalities in the prostate thathave been previously detected by a digital rectal exam.  The Company’s developmental activities,conducted by its wholly owned operating subsidiary ProUroCare Inc. (“PUC”),have included acquiring several technology licenses, purchasing intellectualproperty, entering into product development agreements and conducting clinicalstudies.

 

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’s capital stock (the “Reverse Split”).  The Reverse Split became effective on February 14,2008.  The exercise price and the numberof shares of common stock issuable under the Company’s outstanding convertibledebentures, options and warrants were proportionately adjusted to reflect theReverse Split for all periods presented.

 

OnJanuary 12, 2009, the Company closed a public offering of 3,050,000 unitsat $1.00 per unit (the “2009 Public Offering”) (see Note 2).  Each unit sold (the “2009 Units”) consistedof one share of common stock and one redeemable warrant to purchase one shareof common stock at an exercise price of $1.30 per share.

 

OnSeptember 25, 2009, the Company commenced a tender offer to holders ofcertain outstanding warrants to provide additional consideration for theexercise of such warrants (the “Replacement Warrant Offering”).  Pursuant to the offer, the Companytemporarily 

 

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modifiedthe terms of the warrants so that each holder who tendered warrants for earlyexercise on or before November 6, 2009 received, in addition to the sharesof common stock purchased upon exercise, an equal number of new three-yearwarrants to purchase shares of ProUroCare common stock at an exercise price of$1.30 per share (the “Replacement Warrants”). Warrants to purchase 1,244,829 shares of common stock were tenderedresulting in gross proceeds to the Company of $1,618,278 (see Note 10).

 

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

*** ***

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States (“GAAP”)and pursuant to the rules and regulations of the Securities and ExchangeCommission (the “SEC”) for interim financial information.  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith GAAP have been omitted pursuant to such rules and regulations,although the Company believes that the disclosures made are adequate to makethe information not misleading. Operating results for the three and nine months ended September 30,2009 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2009 or any other period.  The accompanying financial statements andrelated notes should be read in conjunction with the audited financialstatements of the Company, and notes thereto, contained in our Annual Report onForm 10-K for the year ended December 31, 2008.

 

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

*** ***

***(c)***          Net Loss Per Common Share

*** ***

Basicand diluted loss per common share is computed by dividing net loss by theweighted-average number of common shares outstanding for the reportingperiod.  Dilutive common-equivalentshares have not been included in the computation of diluted net loss per sharebecause their inclusion 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 anti-dilutive for the three and nine months endedSeptember 30, 2009 and 2008, and the period from August 17, 1999(Inception) to September 30, 2009 due to the Company’s net losses.  8,686,033 shares of common stock issuableunder stock options and warrants were excluded from the computation of dilutednet loss per common share for each of the three and nine months ended September 30,2009.  1,605,386 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 each of the threeand nine months ended September 30, 2008. Also excluded for the three and nine months ended September 30,2008 were the undetermined number of shares issuable pursuant to theconvertible notes and warrants issued in connection with our privateplacements, whose terms of conversion were based on the price of the equitysecurities offered in the Company’s public offering.  The number of such shares 

 

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wasdetermined on the January 7, 2009 effective date of the 2009 PublicOffering to be 2,997,898 shares.

 

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

*** ***

The Company’s policy is togrant stock options at fair value at the date of grant and to recordstock-based employee compensation expense at fair value.  The Company recognizes the expense related tothe fair value of the award on a straight-line basis over the vestingperiod.  From time to time, the Companyissues options to consultants.  The fairvalue of options issued to non-employees (typically consultants) is measured onthe earlier of the date the performance is complete or the date the consultant iscommitted to perform.  In the event thatthe measurement date occurs after an interim reporting date, the options aremeasured at their then-current fair value at each interim reporting date.  The fair value of options so determined areexpensed on a straight-line basis over the associated performance period.

 

The Company uses theBlack-Scholes pricing model to estimate the fair value of options.  The Black-Scholes option-pricing model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable. In addition, option pricingmodels require the input of highly subjective assumptions. Because the Company’semployee and consultant stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, the existingmodels may not necessarily provide a reliable single measure of the fair valueof the Company’s stock options.

 

Stock-based compensation cost related to stock options was$33,889, $192,122 and $1,833,895 for the three and nine months ended September 30,2009 and the period from August 17, 1999 (Inception) to September 30,2009, respectively, or $0.00, $0.02 and $1.12 on a per share basis. Stock-basedemployee and non-employee compensation cost related to stock options was$18,366 and $33,585 for the three and nine months ended September 30,2008, respectively.  The Companyestimates the amount of future stock-based compensation expense related tocurrently outstanding options to be approximately $462,000, $244,000 and$12,000 for the years ending December 31, 2009, 2010 and 2011,respectively.

 

In determining thecompensation cost of the options granted during the three and nine months endedSeptember 30, 2009 and 2008, 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 asfollows:

 
| ** **                        | ** ** | **Three  Months Ended  September 30** | ** ** | **Nine  Months Ended  September 30** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free  Interest Rate          |       | 1.80%                                      |       | 3.13%                                     |       | 1.73% |   | 3.13% |   |
| Expected Life of  Options Granted |       | 3.6 years                                  |       | 4.3 years                                 |       | 3.6 years |   | 4.3 years |   |
| Expected  Volatility              |       | 134.0%                                     |       | 131.2%                                    |       | 134.6% |   | 131.2% |   |
| Expected  Dividend Yield          |       | 0                                          |       | 0                                         |       | 0 |   | 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 vestingperiod.  Expected volatility is based ona 

 

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simple average of weekly price data since the date of theMerger.  Based on the lack of history tocalculate a forfeiture rate, the Company has not adjusted the calculated valueof the options.  The risk-free rates forthe expected terms of the stock options and awards are based on the U.S.Treasury yield curve in effect at the time of grant.

 

***(e)***          Warrants

*** ***

The Company’s policy is torecord warrants issued to non-employees as consideration for goods or servicesreceived at their fair value on the issue date and expense them as an operatingexpense depending on the nature of the goods or services received.

 

Stock-basedconsideration related to warrants issued to non-employees for goods andservices received was $26,400, $26,400 and $689,121 for the three and ninemonths ended September 30, 2009 and the period from August 17, 1999(inception) to September 30, 2009, respectively, or less than $0.01, lessthan $0.01 and $0.42 on a per share basis, respectively. Stock-basedconsideration related to warrants issued to non-employees for goods andservices received was $14,500 and $14,500 for the three and nine months ended September 30,2008, respectively.

 

Inaddition to warrants issued to non-employees as consideration for goods orservices, from time to time the Company has issued warrants as considerationfor loan or loan guarantees.  Warrantsrelated to loans or loan guarantees are recorded as a debt issuance cost assetand amortized as interest expense on a straight-line basis over the term of theunderlying loan.

 

The weighted-average fairvalue of warrants granted during the three and nine months ended September 30,2009, excluding the 2009 Units, was $0.88 and $0.88, respectively, and suchwarrants were immediately vested and exercisable on the date of grant.The weighted-average fair value of thewarrants granted during the three and nine months ended September 30, 2008was $1.33 and $1.23, respectively, and such warrants were immediately vestedand exercisable on the date of grant.

 

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  September 30** | ** ** | **Nine  Months Ended  September 30** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free  Interest Rate               |       | 1.08%                                      |       | 2.82%                                     |       | 1.08% |   | 3.12% |   |
| Expected Life of  Warrants Granted (1) |       | 2.0 years                                  |       | 4.2 years                                 |       | 2.0 years |   | 3.6 years |   |
| Expected  Volatility                   |       | 135.2%                                     |       | 134.0%                                    |       | 135.2% |   | 131.2% |   |
| Expected  Dividend Yield               |       | 0                                          |       | 0                                         |       | 0 |   | 0 |   |

 

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(1) Based on the contractual term of thewarrants.

 

The expected volatility is based on a simple average ofweekly price data since the date of the Merger. Based on the lack of history to calculate a forfeiture rate, the Companyhas not adjusted the calculated value of the warrants.  The risk-free rates for the expected terms ofthe stock warrants are based on the U.S. Treasury yield curve in effect at thetime of grants.

 

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***(f)***            Deferred Offering Costs

*** ***

The legal, accounting,printing and certain other expenses directly related to the Company’sReplacement Warrant Offering were recorded as a deferred offering cost asset asof September 30, 2009.  Upon the November 6,2009 closing of the Warrant Replacement Offer, the deferred offering costs wererecorded as a cost of the offering and a reduction of additional paid-incapital (see Note 10).

 

The legal, accounting,printing and certain other expenses directly related to the 2009 PublicOffering that became effective on January 7, 2009 were recorded as adeferred offering cost asset as of December 31, 2008.  The deferred offering costs of $823,078 wererecorded as a cost of the offering and a reduction of additional paid-incapital upon its closing on January 12, 2009.

 

***(g)***         Debt Issuance Costs

*** ***

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

 

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

*** ***

***On June 16, 2009, pursuantto a guarantee received relating to the Company’s $100,000 Crown Bankpromissory note, the Company issued 6,667 shares of its common stock asconsideration to the guarantor (see Note 3). The $5,467 value of the shares on the issuance date along with $600 ofloan origination fees was recorded on the balance sheet as debt issuance costand is being amortized on a straight-line basis through December 31, 2009.***

*** ***

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

 
| ** **                 | ** ** | **September 30,  2009** | ** **   | **December 31,  2008** | ** ** |
|----------------------------|------------|------------------------------|--------------|-----------------------------|------------|
| Debt issuance costs, gross |       | 153,664                      |         | 701,238                     |       |
| Less amortization          |       | (87,796                      | )            | (434,356                    | )          |
|                       |       |                         |         |                        |       |
| Other assets               |       | $                            |  65,868 |                        | $          |  266,882 |   |
|                            |            |                              |              |                             |            |  |  |

 

Amortizationexpense related to debt issuance costs was $45,149, $354,678 and $2,060,411 forthe three and nine months ended September 30, 2009 and the period from August 17,1999 (Inception) to September 30, 2009, respectively.  Amortization expense related to debt issuancecosts was $114,180 and $299,999 for the three and nine months ended September 30,2008, respectively.

 

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***(h)***         Restricted Cash

*** ***

Pursuant to the 2007 renewalof the Crown Bank promissory notes, the Company agreed to deposit with CrownBank four months worth of future interest payments due under the notes.    On March 19, 2009, pursuant to therenewal of a Crown Bank promissory note, this restriction was removed.

 

***(i)***            GoingConcern

** **

We have incurred operating losses, accumulated deficit and negativecash flows from operations since inception. As of September 30, 2009, we had an accumulated deficit ofapproximately $23,853,000.  Thesefactors, among others, raise substantial doubt about our ability to continue asa going concern.  The accompanyingunaudited consolidated financial statements do not include any adjustmentsrelated to recoverability and classification of asset carrying amounts or theamount and classification of liabilities that might result should we be unableto continue as a going concern.

 

**Note 2.  2009 Public Offering; Automatic Conversion ofConvertible Debt.**

** **

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

** **

**The completion of the 2009 Public Offering triggeredautomatic conversion provisions of several outstanding convertible debt instruments:**

** **

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

** **

·                  Upon the January 12,2009 closing of the 2009 Public Offering, the $1,757,500 aggregate amount ofpromissory notes issued in private debt placements between December 27,2007 and July 30, 2008, along with $162,959 of interest accrued thereon,automatically converted into 2,743,535 units identical to the 2009 Units (basedon 70 percent of the offering price, or $0.70 per share).  Also, the $142,500 promissory note issued toJames Davis, a greater than five percent shareholder of the Company, on December 27,2007, along with $14,923 of interest accrued thereon, automatically convertedinto 314,846 units identical to the 2009 Units (based on 50 percent of theoffering price, or $0.50 per share).  Theclosing of the 2009 Public Offering resolved a contingent conversion feature ofthe promissory notes.  Consequently, thevaluation of the beneficial conversion feature of the promissory notes wasrecalculated, resulting in the recording of a $47,046 increase in the originalissue discount.  Unamortized originalissue discount relating to the warrants and the beneficial conversion featureof these notes (including the adjustment resulting from the new valuation)totaling $434,215 and unamortized debt issuance cost of $207,575 was expensedas interest expense upon the conversion.

 

·                  On February 6,2009 (30 days after the effective date of the 2009 Public Offering), the$299,250 outstanding promissory notes issued pursuant to the Company’s unit put

 

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arrangement,along with the $9,563 interest accrued thereon, automatically converted into441,165 shares of the Company’s common stock. The notes and accrued interest converted at 70 percent of the 2009Public Offering price, or $0.70 per share. The closing of the 2009 Public Offering resolved a contingent conversionfeature of the promissory notes. Consequently, the valuation of the beneficial conversion feature of thepromissory notes was recalculated, resulting in the recording of a $81,059increase in the original issue discount. Unamortized original issue discount relating to the warrants and thebeneficial conversion feature of the notes (including the adjustment resultingfrom the new valuation) totaling $209,879 and unamortized debt issuance cost of$44,686 was expensed as interest expense upon the conversion.

 

**Note 3.  Notes Payable — Bank.**

** **

***(a)******        ******ShortTerm***

 

OnMarch 19, 2009, the Company renewed its $1.2 million Crown Bank promissorynote, and repaid its $400,000 Crown Bank promissory note.  The renewed note matures on March 28,2010 and bears interest at the prime rate plus one percent,****but never lessthan 6.00 percent.  No other note termswere changed.  The note remainscollateralized by all Company assets and guaranteed by two individual guarantors.  The Company issued an aggregate of 133,334shares of its common stock asconsideration to the guarantors (see Note 6(a)) and will accrue forissuance 22,222 shares of its common stock for each month or portion thereofthat the principal amount of the loan remains outstanding beginning September 1,2009.  As of September 30, 2009,22,222 shares of common stock had been accrued for issuance. All accrued shareswill be issued upon repayment of the loan.

 

On June 16, 2009, the Company borrowed $100,000from Crown Bank pursuant to a promissory note that is collateralized by allCompany assets and guaranteed by an individual guarantor.  The note matures on March 28,2010 and bears interest at the prime rate plus one percent,****but never lessthan 6.00 percent.  The Company issued6,667 shares of its common stock asconsideration to the guarantor (see Note 6(a)), and will accrue for issuance1,111 shares of its common stock for each month or portion thereof thatthe principal amount of the loan remains outstanding beginning January 1,2010. All accrued shares will beissued upon repayment of the loan.

 

***(b)******        ******Long Term***

 

OnSeptember 23, 2009, the Company borrowed $100,025 from Central Bankpursuant to a promissory note.  Thepromissory note matures on January 17, 2011, and bears interest at theprime rate plus one percent, with a minimum rate of 6.0 percent.  The promissory note was guaranteed by anindividual guarantor.  As consideration forproviding the guaranty, the Company issued to the guarantor 6,667 shares ofstock (see Note 6(a)), and will accruefor issuance 1,111 shares of its common stock for each month or portionthereof that the principal amount of the loan remains outstanding beginning March 23,2010.  All accrued shares will be issuedupon repayment of the loan.  In addition,the Company executed a security agreement with the guarantor, providing himwith a subordinated security interest in the Company’s assets.

 

**Note 4.  Notes Payable.**

** **

On January 13, 2009, following theclosing of the 2009 Public Offering, the Company repaid the remaining $9,350 principalamount of the loan from an investor and issued an immediately 

 

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exercisable five-year warrant to acquire 4,295 shares of the Company’scommon stock at $1.50 per share pursuant to the terms of the note.

 

OnJanuary 22, 2009, the Company repaid the remaining $34,000principal balance of a promissory note due and issued to the lender afive-year, immediately exercisable warrant to acquire 28,656 shares of theCompany’s common stock at $5.00 per share pursuant to the terms of the note.

 

OnMarch 19, 2009, the Company renewed and amended a $600,000 promissory notewith an investor. Under the terms of the amendment, the note’s maturity datewas extended to March 28, 2010 and the interest rate floor was loweredfrom 6.50 percent to 6.00 percent.  Noother terms were changed.

 

Between May 1, 2009and September 16, 2009, James Davis, a greater than 10 percentshareholder of the Company, made various payments for the benefit of theCompany and provided the Company with certain cash advances totalingapproximately $243,000.  The purpose ofthese payments and advances was to help fund specific Company activitiesrelated to product development, clinical studies and Food and DrugAdministration (“FDA”) related activities. On September 21, 2009, Mr. Davis and the Company executed apromissory note in the principal amount of $243,000 (the “Davis Note”) toformalize the Company’s obligation to Mr. Davis for these amounts.  Upon execution of the Davis Note, the Companyagreed, as consideration for making the payments and advances represented bythe Davis Note, to issue to Mr. Davis 19,833 shares of its common stockand to accrue for future issuance to Mr. Davis 2,700 shares of commonstock for each month (or portion thereof) that the Davis Note is outstandingafter March 21, 2010.  In addition,under the terms of the Davis Note, the Company will accrue for issuance to Mr. Davis,in lieu of cash interest, 1,618 shares of its common stock for each month (orportion thereof) that the principal amount of the Davis Note isoutstanding.  All of the shares accruedfor issuance to Mr. Davis will be issued upon repayment of the DavisNote.  The Davis Note matures on March 28,2011. The promissory note provides Mr. Davis with a subordinatedsecurity interest in the Company’s assets.

 

OnSeptember 23, 2009, the Company borrowed $300,000 from an investorpursuant to a secured promissory note. The promissory note matures on March 28, 2011. Under the terms ofthe promissory note, the Company will accrue for issuance to the investor 1,998shares of its common stock for each month or portion thereof that the principalamount of the loan remains outstanding, in lieu of cash interest.  As consideration for making the loan, theCompany issued to the investor 20,000 shares of stock and will accrue forissuance 3,333 shares of its common stock for each month or portion thereofthat the principal amount of the loan remains outstanding beginning March 23,2010.  All accrued shares will be issuedupon repayment of the loan.  Thepromissory note provides the investor a subordinated security interest in theCompany’s assets.

 

**Note 5.  Convertible Notes Payable.**

 

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

 

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On September 25, 2008, the Company borrowed $150,000 pursuant to aconvertible promissory note issued in favor of Mr. Davis.  As the holder’s ability to exercise theconversion feature of the note was contingent upon an event outside the controlof the holder, the bargain conversion feature valued at $103,396 was notrecorded until the January 12, 2009 closing of the 2009 Public Offeringwhen the contingency was removed. ** **On March 19, 2009, Mr. Davisagreed to refinance the $150,000 debt (and $7,291 of interest accrued thereon)along with the $37,500 note discussed above (and $3,646 of accrued interestthereon), another $2,632 payable to Mr. Davis and $12,293 of expenses paidby Mr. Davis on behalf of the Company. Mr. Davis also agreed to loan to the Company an additional $67,638to pay for the exhibition of the prostate mechanical imaging system at theannual American Urology Association meeting, the retention of an investorrelations firm and the initiation of a clinical advisory board.  He also agreed to have certain websitemaintenance services performed for the Company. Pursuant to the refinancing andthe other arrangements, the Company issued a $281,000 unsecured convertiblepromissory note to Mr. Davis.  Thepromissory note was to mature on March 19, 2010, bore no interest and wasconvertible into our common stock at $0.55 per share at the option of Mr. Davis.  Itwas determined that a substantial modification of the terms of the note wasmade as the present value of the cash flows under the new convertiblepromissory note was greater than 10 percent different from the present value ofthe cash flows under the original note. Accordingly, $113,709 of unamortized original issue discount related tothe original $150,000 note was expensed as debt extinguishment expense and thebargain conversion option of the new note, valued at $123,000 using theBlack-Sholes pricing model, was recorded as original issue discount andamortized as debt extinguishment expense over the term of the note.  On May 26, 2009, Mr. Davisexercised his conversion rights under the promissory note, and the note wasconverted into 510,909 shares of the Company’s common stock.

 

**Note 6.  Shareholders’ Equity.**

** **

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

 

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

** **

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

** **

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

** **

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

** **

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

 

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**On March 19, 2009, pursuant to the renewal of its$600,000 promissory note with an individual lender, the Company issued 66,667shares of its common stock**as consideration to the lender andwill issue a further 11,111 shares per month for each month the related notesremain outstanding after August 31, 2009. It was determined that a substantial modification of the terms of thenote was made as the present value of the cash flows under the new convertiblepromissory note was greater than 10 percent different from the present value ofthe cash flows under the original note. Accordingly, the $33,333 value of the initial 66,667 shares issued wasexpensed as debt extinguishment expense. Additional accruals of stock to be issued if the promissory notes remainoutstanding after August 31, 2009 will be expensed each month as debtextinguishment expense.  During the threemonths ended September 30, 2009, 11,111 shares were accrued for issuancepursuant to this loan guarantee compensation arrangement, resulting inadditional debt extinguishment expense of $5,556.

** **

**On March 19, 2009, pursuant to guarantiesreceived relating to the Company’s renewal of its $1.2 million Crown Bankpromissory note, the Company issued an aggregate 133,334 shares of its commonstock**as consideration to Mr. Davis and another guarantor, and will issuea further 22,222 shares per month for each month the related notes remainoutstanding after August 31, 2009. It was determined that a substantial modification of the terms of thenote was made as the present value of the cash flows under the new convertiblepromissory note was greater than 10 percent different from the present value ofthe cash flows under the original note. Accordingly, the $66,667 value of the initial 133,334 shares issued wascapitalized as debt issuance cost and expensed as debt extinguishment expenseon a straight-line basis through August 31, 2009.  In addition, the $12,000 loan origination feewas immediately expensed as debt extinguishment expense.  Additional accruals of stock to be issued ifthe promissory notes remain outstanding after August 31, 2009 will beexpensed each month as debt extinguishment expense.  During the three months ended September 30,2009, 22,222 shares were accrued for issuance pursuant to this loan guaranteecompensation arrangement, resulting in additional debt extinguishment expenseof $11,112.

** **

***On April 13, 2009, the Companyissued an aggregate of 27,366 shares to its independent directors, DavidKoenig, Robert Rudelius and Scott Smith, as payment of $20,250 directors’ feesaccrued through December 31, 2008, in lieu of cash.***

*** ***

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

 

On June 16, 2009, the Company issued 6,667 shares valued at $5,467to a guarantor as consideration for providing a guarantee of a $100,000 bankloan (see Note 3).

 

On September 21, 2009, the Company issued 19,833 shares valued at$28,262 to Mr. Davis as consideration for providing a $243,000 loan (seeNote 3).

 

On September 23, 2009, the Company issued 6,667 shares valued at$9,000 to a guarantor as consideration for providing a guarantee of a $100,025bank loan (see Note 3).

 

On September 23, 2009, the Company issued 20,000 shares valued at$27,000 to anindividual lenderas consideration for providing a $300,000 loan (see Note 4).

 

On September 29, 2009, the Company issued 4,834 shares to Mr. Koenigas payment of $7,250directors’ fees accrued through June 30, 2009, in lieu of cash.

 

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***(b)***         Stock Options

*** ***

OnMarch 3, 2009, the Company granted non-qualified stock options to acquirean aggregate of 70,000 shares of its common stock to its non-employeedirectors, and incentive options to acquire 45,000 shares of its common stockto Richard Thon, our Chief Financial Officer (the “CFO”).  The options are fully vested and areexercisable for a period of seven years at an exercise price of $0.85 pershare.  The 115,000 options were valuedat $0.68 per share using the Black-Scholes pricing model and $78,200 wasimmediately expensed as general and administrative expense.

 

Alsoon March 3, 2009, the Company granted an incentive stock option to acquirean aggregate of 100,000 shares of its common stock to Richard Carlson, ourChief Executive Officer (the “CEO”).  Ofthe options, 90,000 shares vest immediately and 10,000 shares will vest on January 2,2010.  At the same time, Mr. Carlsonagreed to cancel existing, unvested stock options to acquire 5,000 shares ofcommon stock at an exercise price of $7.50 per share.  The options that were cancelled andsimultaneously reissued were treated as a modification of the terms of theoriginal option.  Accordingly, theincremental compensation cost of the fully vested portion of the newly issuedoptions valued at $0.68 per share using the Black-Scholes pricing model overthe $0.07 per share value of the cancelled options on the cancellation date, or$61,200, was expensed immediately as general and administrative expense.

 

OnJuly 23, 2009, the Company granted a non-qualified stock option to acquirean aggregate of 6,500 shares of its common stock to a consultant pursuant to aconsulting arrangement.  The options arefully vested and are exercisable for a period of five years at an exerciseprice of $1.21 per share.  The optionswere valued at $0.87 per share using the Black-Scholes pricing model and $5,655was immediately expensed as general and administrative expense.

 

OnJuly 23, 2009, the Company granted a non-qualified stock option to acquirean aggregate of 100,000 shares of its common stock to a consultant pursuant toa consulting arrangement.  The optionsexpire seven years from the date of issuance and have an exercise price of$1.21 per share.  Options to purchase50,000 shares vested immediately, and were valued at $0.97 per share using theBlack-Scholes pricing model.  Options topurchase the remaining 50,000 shares vest on July 23, 2010 if theconsultant remains a consultant to the Company at that time.  The cost of these options will ultimately be measuredon the date that the consultant’s performance is complete, which is the vestingdate.  For purposes of measuring the costduring interim periods, the options are measured at their then-current fairvalue at each interim reporting date. The fair value of the unvested options as of September 30, 2009 asdetermined using the Black Scholes pricing model was $1.25 per share.  The value of the options to purchase all100,000 shares is being recognized as general and administrative expense overthe 12 month consulting period.  TheCompany expensed $18,500 and $18,500 in the three and nine months ended September 30,2009, respectively.

 

On August 11, 2009, theCompany issued 1,000 non-qualified stock options (immediately exercisable) toeach of its three outside directors, Mr. Koenig, Mr. Smith and Mr. Rudelius,pursuant to its standard annual option award program, upon their re-election tothe Company’s Board of Directors.  Theoptions are fully vested and exercisable for a period of seven years at an exerciseprice of $1.25 per share.  The optionswere valued at $1.00 per share using the Black-Scholes pricing model and $3,000was immediately expensed as general and administrative expense.

 

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OnSeptember 29, 2009, the Company issued non-qualified stock options to eachof its three outside directors, Mr. Koenig (50,000 options), Mr. Smith(30,000 options) and Mr. Rudelius (30,000 options).  On the same date, the Company issuedincentive stock options to its executive officers, Mr. Carlson (150,000options) and Mr. Thon (60,000 options). The options expire seven years from the date of issuance, areexercisable at $1.50 per share and vest upon the latter of the date that theCompany is cleared by the FDA to sell its ProUroScan system in the UnitedStates or the date that the Company closes on an aggregate of $2 million ormore of incremental financing after the date of grant, including financingreceived upon the exercise of existing warrants.  The options were valued at $1.21 per shareusing the Black-Scholes pricing model and are being expensed over the estimatedvesting period as general and administrative expense.  No expense was recognized in the three andnine months ended September 30, 2009.

 

***(c)***          Warrants

*** ***

On January 12,2009, the Company issued 3,050,000 2009 Units pursuant to the closing of the2009 Public Offering, and 3,058,381 units identical to the 2009 Units pursuantto the automatic conversions of convertible debt (see Notes 2 and 6(a)).  Each five-year warrant is exercisable at$1.30 per share.  The Company may redeem outstandingwarrants at a price of $0.01 per warrant upon a minimum 30 days priorwritten notice if the last sale price of its common stock equals or exceeds$1.82 per share for a period of ten consecutive trading days.

 

As additionalcompensation pursuant to the 2009 Public Offering, we sold to the underwriter,Feltl & Company, for nominal consideration, a warrant (the “Underwriter’sWarrant”) to purchase up to 305,000 units. The Underwriter’s Warrant isnot exercisable until January 7, 2010 and thereafter is exercisable at aprice per unit equal to $1.20 for a period of four years.  The warrants underlying the units that aresubject to the Underwriter’s Warrant are subject to redemption as describedabove commencing January 7, 2010.

 

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

*** ***

On January 13, 2009, the Company repaid the remaining $9,350principal amount of a promissory note due to an individual lender, and issued an immediately exercisable five-yearwarrant to the lender to acquire 4,295 shares of the Company’s common stock at$1.50 per share pursuant to the terms of the note (see Note 4).

 

OnJanuary 22, 2009, the Company repaid the remaining $34,000 principalbalance of an outstanding convertible promissory note due to an individual lender and issued to the lender a five-year, immediatelyexercisable warrant to acquire 28,656 shares of the Company’s common stock at$5.00 per share pursuant to the terms of the note (see Note 4).

 

On July 23, 2009,the Company issued a two-year warrant to purchase 30,000 shares of our commonstock at an exercise price of $1.25 per share to it public relations firm asconsideration for services provided to the Company during the three monthsended September 30, 2009.  Thewarrant, valued at $26,400 using the Black-Scholes pricing model, was recordedas general and administrative expense.

 

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***Note7.  Income Taxes.***

*** ***

TheCompany has adopted the policy of classifying interest in interest expense andpenalties in general and administrative expense.  The Company had recorded no accrued interestor penalties as of the date of adoption.

 

TheCompany had no significant unrecognized tax benefits as of September 30,2009 and December 31, 2008 and, likewise, no significant unrecognized taxbenefits that, if recognized, would affect the effective tax rate.  The Company had no positions for which itdeemed that it is reasonably possible that the total amounts of theunrecognized tax benefit will significantly increase or decrease.  Any interest or penalties are expensed asgeneral and administrative expense as incurred.

 

TheCompany has generated net operating loss carryforwards of approximately $6.1million which, if not used, will begin to expire in 2021.  Federal and state tax laws impose significantrestrictions on the utilization of net operating loss carryforwards in theevent of a change in ownership of the Company that constitutes an “ownershipchange,” as defined by Section 382 of the Internal Revenue Code of 1986,as amended (the “Code”).  The Company hasanalyzed the 2009 Public Offering along with previous changes and believes thatsuch an ownership change has not occurred, and that the Company’s use of itsnet operating loss carryforwards is not subject to such restrictions.

 

The Company reviewed the beneficial conversionfeatures of its issuances of convertible debt from January 1, 2006 throughSeptember 30, 2009 and determined that there are no differences in bookand tax basis and no deferred tax liability as of September 30, 2009.  The Company reduced its net operating losscarryover and valuation allowance by approximately $881,000 for thenon-deductibility of the beneficial conversion features during this period.When the valuation allowance related to deferred tax assets reverses, theCompany will record an $881,000 tax benefit related to the beneficialconversion feature with a corresponding decrease to additional paid-in capital.

 

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

 

Federal 2006 - 2008 State of Minnesota 2006 - 2008

 

**Note 8. Related Parties.**

** **

The Company considers its directors,executives and beneficial shareholders of more than five percent of its commonstock to be related parties.  During thenine months ended September 30, 2009, the following significanttransactions were made between the Company and those parties that were relatedparties at the time of each transaction:

 

**On January 15, 2009, the Company repaid anoutstanding $37,500 loan along with accrued interest thereon to William Reiling,then a greater than five percent shareholder.**

** **

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

 

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**On March 19,2009, a $37,500 convertible promissory note and a $150,000 convertiblepromissory note due to Mr. Davis were refinanced and combined with otherloans and advances on behalf of the Company from Mr. Davis in a $281,000convertible promissory note.  On May 26,2009, Mr. Davis exercised his conversion rights under the promissory noteand the note was converted into 510,909 shares of the Company’s common stock(see Note 5).**

** **

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

*** ***

**On September 1,2009, the Company borrowed $26,000 from Mr. Smith for working capitalpurposes.  On November 6, 2009, theentire amount due to Mr. Smith was applied toward his exercise of warrantstendered in the Replacement Warrant Offering. Although no promissory note was issued, on November 6, 2009, theCompany issued 925 shares of its common stock valued at $1,322 to Mr. Smithas consideration for making the loan and in lieu of cash interest.**

** **

Between May 1, 2009and September 16, 2009, Mr. Davis made various payments for thebenefit of the Company and provided the Company with certain cash advancestotaling approximately $243,000.  On September 21,2009, Mr. Davis and the Company executed the Davis Note.  Upon execution of the Davis Note, the Companyagreed, as consideration for making the payments and advances represented bythe Davis Note, to issue to Mr. Davis 19,833 shares of its common stockand to accrue for future issuance to Mr. Davis 2,700 shares of commonstock for each month (or portion thereof) that the Davis Note is outstandingafter March 21, 2010.  In addition,under the terms of the Davis Note, the Company will accrue for issuance to Mr. Davisin lieu of cash interest, 1,618 shares of its common stock for each month (orportion thereof) that the principal amount of the Davis Note isoutstanding.  All of the shares accruedfor issuance to Mr. Davis will be issued upon repayment of the DavisNote.  The Davis Note matures on March 28,2011. The promissory note provides Mr. Davis with a subordinatedsecurity interest in the Company’s assets (see Note 4).

 

**Note9.  Contingencies**

 

*Litigation*

 

On July 15, 2009,Rensselaer Polytechnic Institute (“RPI”) filed a lawsuit against the Companyseeking payment of $202,716 plus interest, penalties, costs and disbursements,including attorneys’ fees. In the complaint, RPI alleges that the Company hasbreached obligations to pay RPI an aggregate of $202,716 under the terms of alicense agreement dated July 13, 2001 between RPI and the Company and asponsored research agreement dated as of December 9, 2005 between RPI andthe Company.  The Company believes thatthe amounts being sought by RPI substantially exceed any amounts due to RPIunder such agreements and intends to defend itself vigorously against suchclaims.

 

**Note 10. Subsequent Events.**

 

TheCompany had the following significant subsequent events through November 13,2009, which is the date the financial statements were available to be issuedfor events requiring recording or disclosure in the financial statements forthe three and nine months ended September 30, 2009.

 

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OnSeptember 25, 2009, the Company commenced its Replacement WarrantOffering.  The warrants subject to theoffer were: (a) 3,050,000 publicly traded warrants to purchase commonstock that were issued on January 12, 2009; and (b) 3,058,381unregistered warrants to purchase common stock which were also issued on January 12,2009 (together, the “Warrants”). Pursuant to the offer, the Company temporarily modified the terms of theWarrants so that each holder who tendered Warrants for early exercise on or beforeNovember 6, 2009 received, in addition to the shares of common stockpurchased upon exercise, new three-year warrants to purchase the same number ofshares of ProUroCare common stock at an exercise price of $1.30 per share (the “ReplacementWarrants”).  Warrants to purchase1,244,829 shares of common stock were tendered resulting in gross proceeds tothe Company of $1,618,278, including the cancellation of a $26,000 loan fromScott Smith and $11,250 of directors’ fees owed to Robert Rudelius in lieu of cashpayments for the exercise of a portion the Warrants they exercised.

 

The$1,356,864 fair value of the Replacement Warrants was expensed with anoffsetting entry to additional paid-in capital. The $1,618,278 purchase price of the stock issued pursuant to theWarrant exercise, less the expenses of the offering (estimated to beapproximately $172,000 when all expenses are received) will be recorded ascapital stock and additional paid-in capital.

 

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***Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operation.***

*** ***

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

 

**Disclosure Regarding Forward-Looking Statements**

 

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

 

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

 

ProUroCare Medical Inc. (“ProUroCare,”the “Company,” “we,” “us” or “our,” which terms include reference to our whollyowned subsidiary, ProUroCare Inc. (“PUC”)) has developed and intends to marketan innovative prostate imaging system known as the ProUroScanTM system. The ProUroScan system incorporates our new proprietary elasticityimaging technology to create a “map” and an electronic record of the prostate.

 

The ProUroScan system isan imaging system designed for use as an aid to the physician in visualizingand documenting abnormalities in the prostate that have been previouslydetected by a digital rectal exam (“DRE”). As an adjunct to DRE, the ProUroScansystem will be used following an abnormal DRE to generate a real-time image andmap of the prostate.  The finalcomposite image is saved as a permanent electronic record and can beconveniently retrieved to view previous test results.

 

Our approach to imagingis based on the fact that most abnormalities in otherwise homogenous organtissue is less elastic than normal tissue. The ProUroScan’s unique technology uses measurements of relative tissueelasticity as detected by mechanical sensors and interpreted by mathematicalalgorithms to create images, rather than using ultrasound or other alternativetechnologies.  Using the system’sspecially designed rectal probe, physicians can quickly and cost-effectivelyvisualize the prostate gland and document specific areas of concern.  The real-time map can be saved as a permanentelectronic record.

 

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Our imaging technology isbased on work originally performed in the late 1990’s by Artann LaboratoriesInc. (“Artann”), a scientific technology company based in Trenton, New Jersey,that is focused on early-stage technology development. In 2002, we licensed therights to this technology and since then have worked with Artann on itsdevelopment. In September 2006, Artann was awarded a $3 million SmallBusiness Innovation Research Phase II Competitive Renewal grant from theNational Institute of Health and the National Cancer Institute to help advancethe development and application for clearance of the ProUroScan system by theFDA.  In July 2008, the Companyentered into new license and development and commercialization agreements withArtann relating to their existing technology and know-how and all futuretechnology developed by Artann in our field of use. After we obtain FDAclearance, it is our intent to expand our working relationship with Artann toinclude their participation in the development and licensing of futuremechanical imaging technology.

 

The ProUroScan system isnot currently marketed or sold and is not cleared for marketing by the FDA. Ourinitial goal is to obtain a basic mapping and data maintenance claim from theFDA under a 510(k) application for the current generation system. Once FDA510(k) clearance is obtained on our current generation ProUroScan system,we intend to have the systems manufactured by one or more FDA-regulatedcontract manufacturers and market the system in cooperation with a medicaldevice company that has an established worldwide presence in the urologymarket.

 

We recently completed amulti-site clinical study of the ProUroScan imaging system designed to providedocumentation to the FDA of the system’s effectiveness in visualizing anddocumenting abnormalities of the prostate detected by DRE.  We expect to complete and submit to the FDA a510(k) application for clearance to market this technology in the U.Swithin the next few weeks.

 

We believe there is amarket need to be able to visualize and create an electronic record or map thatcan show the position of abnormalities in the prostate gland. We believe theProUroScan System will offer a solution that meets these needs and that willenable physicians to monitor and compare images of the prostate over time(assuming we apply for and obtain FDA approval or clearance for thisindication).

 

We believe the ProUroScanSystem’s existing technology provides a platform on which to develop multiplefuture generation systems. In the future, following our initial FDA 510(k) clearance,we intend to work with Artann to develop and introduce enhanced versions andadditional indications.  For example, weplan to study and develop an enhanced version of the system that may be able tomonitor changes in prostate tissue over time, guide biopsy of the prostategland and assess changes in prostate size following drug treatment for benignprostatic hypertrophy.  Future generationsystems will require us to obtain regulatory approval or clearance for use ofthe ProUroScan system for additional related indications and file additionalsubmissions with the FDA if we are to obtain expanded labeling claims.

 

During the remainder of 2009 and into early 2010, weexpect to obtain FDA clearance on a basic mapping and data maintenance labeling claim and prepare to launchour product into the market, although there can be no assurance that we will besuccessful in meeting these milestones. We are currently exploring potential marketing relationships withmedical product companies that are interested in marketing products in theprostate cancer detection market.   We expect such a relationshipwould provide both financial support and access to down stream engineering,regulatory, clinical, manufacturing and marketing capabilities.

 

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**RecentFinancing Activity**

 

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

 

·                  $733,334 convertible debentures together with$143,815 of interest accrued thereon converted into 292,384 shares of ourcommon stock;

 

·                  $1,900,000 of convertible notes issued in the2007 and 2008 private placements together with $177,882 of interest accruedthereon converted into 3,058,381 units, each consisting of one share of commonstock and one warrant to purchase common stock at $1.30 per share (a “Unit”);and

 

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

 

OnMarch 19, 2009, we reached an agreement with James Davis to refinance a$150,000 promissory note (and $7,291 of interest accrued thereon) along with a$37,500 note (and $3,646 of accrued interest thereon), another $2,632 payableto Mr. Davis and $12,293 of expenses paid by Mr. Davis on ourbehalf.  Mr. Davis also agreed tolend to us an additional $67,638 to pay for our exhibition of the prostatemechanical imaging system at the annual American Urology Association meeting,the retention of an investor relations firm and the initiation of a clinicaladvisory board.  He also agreed to havecertain website maintenance services performed for us.  Pursuant to the refinancing and the otherarrangements, we issued a $281,000 unsecured convertible promissory note to Mr. Davis.  On May 26, 2009, Mr. Davis exercised his conversion rights under thepromissory note and the note was converted into 510,909 shares of the Company’scommon stock

 

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

 

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

 

Between May 1, 2009and September 16, 2009, Mr. Davis, made various payments for thebenefit of the Company and provided us with certain cash advances totalingapproximately $243,000, including $100,000 loaned to us on July 29, 2009and $40,000 loaned to the Company on September 16, 2009.  The purpose of these payments and advanceswas to help fund specific Company activities related to product development,clinical studies and FDA related activities. On September 21, 2009, Mr. Davis and the Company executed apromissory note in the principal amount of $243,000 (the “Davis Note”) toformalize our obligation to Mr. Davis for these amounts.  The Davis Note matures on March 28,2011.  Upon execution of the Davis Note,we agreed, as consideration for making the payments and advances represented bythe Davis Note, to issue to Mr. Davis 19,833 shares of its common stockand to accrue for future issuance to Mr. Davis 2,700 shares of commonstock for each month (or portion thereof) that the Davis Note is outstandingafter March 21, 2010.  In addition,under the terms of the Davis Note, we will accrue for issuance to Mr. Davisin lieu of cash interest, 1,618 shares of our common stock for each month (orportion thereof) that the principal amount of the Davis Note isoutstanding.  All of the shares accruedfor issuance to Mr. Davis will be issued upon repayment of the Davis Note.

 

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On September 23,2009, we borrowed $300,000 from Jack Petersen pursuant to a secured promissorynote.  The promissory note matures on March 28,2011. Under the terms of the promissory note, we will accrue for issuance to Mr. Petersen1,998 shares of our common stock for each month or portion thereof that theprincipal amount of the loan remains outstanding, in lieu of cashinterest.  As consideration for makingthe loan, we issued to Mr. Petersen 20,000 shares of stock and will accruefor issuance 3,333 shares of our common stock for each month or portion thereofthat the principal amount of the loan remains outstanding beginning March 23,2010.  All accrued shares will be issuedupon repayment of the loan.  Thepromissory note provides Mr. Petersen with a subordinated securityinterest in our assets.

 

On September 23,2009, we borrowed $100,025 from Central Bank pursuant to a promissorynote.  The promissory note matures on January 17,2011, and bears interest at the prime rate plus one percent, with a minimumrate of 6.0 percent.  The promissory notewas guaranteed by Bruce Johnson.  Asconsideration for providing the guaranty, we issued to Mr. Johnson 6,667shares of stock and will accrue for issuance 1,111 shares of our common stockfor each month or portion thereof that the principal amount of the loan remainsoutstanding beginning March 23, 2010. All accrued shares will be issued upon repayment of the loan.  In addition, we executed a security agreementwith Mr. Johnson, providing him with a subordinated security interest inour assets.

 

OnSeptember 25, 2009, the Company commenced a tender offer to holders ofcertain outstanding warrants to provide additional consideration for theexercise of such warrants.  The warrantssubject to the tender offer were: (a) 3,050,000 publicly traded warrantsto purchase common stock that were issued on January 12, 2009; and (b) 3,058,381unregistered warrants to purchase common stock which were also issued on January 12,2009 (together, the “Warrants”). Pursuant to the offer, the Company temporarily modified the terms of theWarrants so that each holder who tendered Warrants for early exercise on orbefore November 6, 2009 received, in addition to the shares of commonstock purchased upon exercise, new three-year warrants to purchase the samenumber of shares of ProUroCare common stock at an exercise price of $1.30 pershare (the “Replacement Warrants”). Warrants to purchase 1,244,829 shares of common stock were tenderedresulting in gross proceeds to the Company of $1,618,278, including thecancellation of a $26,000 loan from Scott Smith and $11,250 of directors’ feesowed to Robert Rudelius in lieu of cash payments for the exercise of a portionthe Warrants they exercised.

 

**Resultsof Operations**

 

The following discussionof the financial condition and results of operations should be read inconjunction with the consolidated financial statements included herewith. Thisdiscussion should not be construed to imply that the results discussed hereinwill necessarily continue into the future, or that any conclusion reachedherein will necessarily be indicative of actual operating results in thefuture.

 

*Threemonths ended September 30, 2009 compared to the three months ended September 30,2008:*

 

*OperatingExpenses/Operating Loss**.*  Our operatingexpenses (and our operating loss) for the three months ended September 30,2009 were $491,630, an increase of $197,643, or 67 percent, compared to$293,987 last year.  Approximately$86,000 of consulting expenses related to conducting our clinical trials wasincurred during the three months ended September 30, 2009.  Contracted engineering and development costsincreased 137% to approximately $71,000 in 2009 from $30,000 in 2008, or, as weinitiated manufacturing engineering efforts to bring the ProUroScan system intoproduction.  Increased public andinvestor relations efforts resulted in an increase of expense to approximately$61,000 in 2009 from $6,900 in 2008, including approximately $26,000 of expenserelated to the issuance of warrants to consultants.

 

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*NetInterest Expense**. *Net interest expense for the three monthsended September 30, 2009 was $50,687, a decrease of 89 percent, comparedto $473,658 last year.  Included in the2008 expense was approximately $360,000 of original issue discount and debtissuance cost amortization primarily related to our 2006, 2007 and 2008 privatedebt placements.  Upon the closing of the2009 Public Offering and the subsequent automatic conversion of approximately$3.3 million of debt and accrued interest into equity, the related originalissue discount and debt issuance cost was expensed.  Consequently, the related amortizationexpense has been eliminated going forward. Also included in the 2008 expense was approximately $66,000 of intereston the 2007 and 2008 private debt placements.

 

*Debt Extinguishment Expense*. Our debt extinguishment expense arises primarily from the issuance ofstock or warrants as consideration to loan guarantors in certain refinancingtransactions. Our debt extinguishment expense for the three months ended September 30,2009 was $41,717, an increase of 44 percent, compared to $29,045 last year.

 

*Ninemonths ended September 30, 2009 compared to the nine months ended September 30,2008:*

 

*OperatingExpenses/Operating Loss**.*  Our operatingexpenses (and our operating loss) for the nine months ended September 30,2009 were $1,412,138, an increase of $355,462, or 34 percent, compared to$1,056,676 last year.  Compensation andbenefits costs in the nine months ended September 30, 2009 increasedapproximately $42,000, or 17 percent, compared to last year as a result of a$40,000 bonus awarded in recognition of the efforts of the Company’s officersin the completion of the 2009 Public Offering. Stock-based compensation increased approximately $144,000, or 300percent, compared to last year, as a result of the granting of options topurchase an aggregate of 644,500 shares of our common stock to directors,officers and consultants.  Expensesincurred during the first nine months of 2009 that were not incurred during2008 included product development expenses of $190,000 incurred under theArtann development agreement, approximately $150,000 of consulting costsrelated to the management of the ProUroScan clinical trials, new investor andpublic relations programs that cost approximately $90,000, contractedengineering costs of approximately $31,000 related to manufacturing engineeringto bring the ProUroScan system into production, the recording of a $25,000lawsuit contingency reserve and trade show attendance costs of approximately$23,000.  Offsetting these increases wereone-time costs incurred in 2008 including acquisition of patents for $300,000,which was expensed at the time of the purchase, approximately $85,000 of legalfees related to negotiating development and licensing agreements and a $38,000stock grant to directors.

 

*NetInterest Expense**. *Net interest expense for the nine monthsended September 30, 2009 was $1,139,138, a decrease of $188,633, or 14percent, compared to $1,327,771 last year. The largest portion of our interest expenses in both years was relatedto the expensing of original issue discount and debt issuance costs related toour 2006, 2007 and 2008 private debt placements and the 2008 unit putarrangement.  In 2009, we wrote-offapproximately $980,000 of unamortized original issue discount and debt issuancecosts upon the closing of the 2009 Public Offering and the subsequent automaticconversion of approximately $3.3 million of debt and accrued interest intoequity.  Included in the 2008 expense wasapproximately $1,011,000 of original issue discount and debt issuance costamortization.  Also included in the 2008expense was approximately $181,000 of interest on the 2007 and 2008 privatedebt placements, compared to approximately $5,000 in 2009.  Other interest expense increased to $145,000in 2009 from approximately $136,000 in 2008, or about 7 percent, as a result offinance charges accrued on certain vendor payables.

 

*Debt Extinguishment Expense*. Our debt extinguishment expense arises primarily from the issuance ofstock or warrants issued pursuant to the provisions of short-term loans fromcertain lenders in certain refinancing transactions. Our debt extinguishmentexpense for the nine months ended September 30, 

 

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2009 was $365,984, anincrease of $291,108, or 387 percent, compared to $74,876 last year.   The increase is due to the expensing ofapproximately $123,000 of original issue discount related to a beneficialconversion feature of a $281,000 promissory note issued to Mr. Davis uponits conversion, the write-off of $113,000 of unamortized original issuediscount upon the refinancing of a $150,000 note with Mr. Davis, theissuance of 66,667 shares of stock valued at $33,333 to the Phillips W. SmithFamily Trust (the “Smith Trust”) upon the extension of the $600,000 Smith Trustloan and a $13,000 fee associated with refinancing of $1.3 million loans withCrown Bank during the nine months ended September 30, 2009.  Additionally, during the nine months ended September 30,2009, approximately $81,000 of the cost of stock issued to guarantors of thebank loans was amortized.

 

**Current Operations — Employees and Expenses**

 

We currently employ twoemployees. We conduct our research and development, market research, regulatoryand other business operations through the use of consultants and medical devicedevelopment contractors, primarily Artann. We believe that using consultantsand contractors to perform these functions is more cost effective than hiringfull-time employees and affords us flexibility in directing our resourcesduring our development stage. During the remainder of 2009 and in early 2010,we expect to complete the clinical and regulatory process leading to FDA 510(k) marketclearance and establish a contract manufacturing capability in anticipation ofregulatory clearance to enter the market.

 

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

 

**Liquidity and Capital Resources**

 

Netcash used in operating activities was approximately $2.3 million during the nine monthsended September 30, 2009 compared to approximately $970,000 lastyear.  The increase in cash used wasprimarily the result of payments to Artann of $600,000 and $250,000 for accruedlicensing fees and accrued development costs pursuant to our licensing anddevelopment agreements, respectively. We also paid $174,500 to Artann fordevelopment work performed under the development agreement.  In addition to normal operating expenses,other uses of cash included payments for accounts payable and other accruedexpenses, including a portion of the accrued compensation, following thecompletion of the 2009 Public Offering.

 

Net cash provided byfinancing activities was approximately $2.5 million during the nine monthsended September 30, 2009 compared to approximately $612,000 lastyear.  Proceeds from the 2009 PublicOffering less underwriter’s commissions and other payments for expenses of theoffering were approximately $2.3 million during the nine months ended September 30,2009.  In June and September, 2009,we borrowed a total of $200,025 pursuant to two bank loans, and $543,000pursuant to two loans from investors. Offsetting this was our pay-down of $400,000 bank debt in March 2009.  During the nine months ended September 30,2008, we received net proceeds from our private convertible debt placements,including warrants, with individual investors of approximately $914,000 andapproximately $263,000 from other private loans.  These loan receipts were offset by repaymentsof notes payable and loans from directors totaling approximately $410,000 andpayments made for debt issuance and deferred offering costs totalingapproximately $190,000.

 

Duringthe remainder of 2009, we expect to submit an FDA 510(k) application formarket clearance and make certain preparations for commercialization.  Our ability to pursue additional activities,such as 

 

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establishinga contract manufacturing capability, developing a more portable imaging systemand other product enhancements and expanding the number of our clinical studysites, is dependent upon the success and timing of our financing effortsoutlined above.

 

Weexpect that our cash needs for our normal operating expenses (excluding themilestone payments due to Artann explained below) will be approximately$1,150,000 during the fourth quarter of 2009 and through the first half of2010.  Tothe extent we are successful in obtaining sufficient financing, we will advanceother projects and activities needed for the long-term success of thebusiness.  These projects includecontracting for certain product engineering and development work to reduce thesize and cost of the ProUroScan system and make certain enhancements that weestimate will cost approximately $325,000; establishing a contractmanufacturing capability, including production tooling and molds, estimated tocost approximately $350,000; and placing systems and performing additionalpatient studies at certain key institutions, at a cost of approximately$170,000.  During this same period, anddepending on our level of success in obtaining sufficient financing to do so,we expect to make payments of approximately $360,000 towards certainoutstanding liabilities.

 

Pursuant to the terms ofthe Artann development agreement, we are required to make cash and equitypayments upon the achievement of several project milestones along with amonthly retainer fee.  Upon thesubmission of our 510(k) application to the FDA, we are required to make acash payment to Artann of $250,000 and an equity payment of our common sharesvalued at $1,000,000. Upon receipt of FDA 510(k) clearance, we arerequired to make a further cash payment of $750,000 and a second $1,000,000equity payment.  We are currently workingwith Artann to potentially restructure these payment terms.

 

As of September 30,2009, we had approximately $270,000 of cash on hand and current liabilities of$3.4 million, including $1.8 million of secured debt that matures on March 28,2010.  On November 6, 2009,1,244,829 warrants were tendered in our Warrant Replacement Offer, from whichwe realized net cash proceeds of approximately $1.4 million.  We will need additional financing to fundoperations and to initiate production of the ProUroScan system throughout 2010and beyond.  We are actively pursuingseveral potential near-term sources of funding to provide the working capitalneeded to repay our existing debt and to fund a commercial launch into theurology market.  These potential sourcesinclude cash advances from shareholders, additional loans or guaranteed bankdebt, working with lenders to extend the maturity dates of our existing secureddebt and one or more rounds of private placements of debt or equity securities.

 

We are also working toestablish a distribution relationship with a medical products company duringthe next six to nine months.  We expectsuch a distribution partner could provide financial support in the form of licensingfees, loans, equity investment or some combination.  In addition to financial support, asuccessful collaboration with such a partner would allow us to gain access todownstream engineering, manufacturing, clinical and marketing support.  If we fail to secure a distribution partneron terms acceptable to us, or at all, we could be required to undertakedistribution activity at our expense, which could significantly increase ourcapital requirements and may delay the commercialization of our products.

 

Finally, we may redeemunexercised warrants once the last sale price of our common stock equals orexceeds $1.82 per share for a period of ten consecutive trading days.  If this event were to occur, it will allowall holders of warrants a period of 30 days to exercise their warrants at $1.30per share.  There can be no assurancethat we will be able to redeem the warrants, or of how much would be realizedif such a redemption were to occur.

 

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If additional funds areraised by the issuance of convertible debt or equity securities, such as theissuance of stock, the issuance and exercise of warrants or the issuance andconversion of convertible debt, then existing shareholders will experiencedilution in their ownership interest. If additional funds are raised by theissuance of debt or certain equity instruments, we may become subject tocertain operational limitations, and such securities may have rights senior tothose of existing holders of common stock. There can be no assurance that wewill be successful in obtaining such additional financing, if needed.Additional financing may not be available to us, may not be available onfavorable terms and will likely be dilutive to existing shareholders.

 

If adequate funds are notavailable through our financing initiatives on a timely basis or on acceptableterms, we may be unable to commercialize our products during the expected timeframe.  We do not know what impact theunprecedented volatility in worldwide credit and equity markets in late 2008and early 2009 may have on our ability to obtain future financing. During thatperiod, we saw unprecedented turmoil in equity and credit markets that resultedin record-setting losses in the stock markets, dramatic decreases of liquidityin the credit markets, bank failures, hedge fund closures and massive marketintervention by the United States and foreign governments. Because of theunprecedented nature of these market events, and because the markets remainunsettled today, we cannot predict what effect these events will have on ourability to obtain financing in the future. If for any reason the regulatory clearance process is significantlydelayed, it would delay market entry for our products. Ultimately, if noadditional financing is obtained beyond what has been secured to date, welikely would be forced to cease operations. There can be no assurance we willbe successful in raising such funds.

 

**Assets; Property Acquisitions andDispositions**

 

Our primary assets arepatents and patent applications, which are the foundation for our proposedproduct offerings. These assets secure $1,300,000 of senior bank notes and$1,243,000 of subordinated notes and, as a result, are not available to secureother senior debt financing.

 

Assuming we aresuccessful in obtaining the financing required to establish a contractmanufacturing capability, we anticipate purchasing approximately $60,000 oftooling molds and other capital for production, computer equipment, softwareand general office furniture and equipment through the first half of 2010. Wedo not anticipate selling any significant assets in the near term.

 

**Going Concern**

 

Wehave incurred operating losses, accumulated deficit and negative cash flowsfrom operations since inception. As of September 30, 2009, we had anaccumulated deficit of approximately $23.9 million. These factors, amongothers, raise substantial doubt about our ability to continue as a goingconcern. Our consolidated financial statements included in this QuarterlyReport on Form 10-Q do not include any adjustments related torecoverability and classification of asset carrying amounts or the amount andclassification of liabilities that might result should we be unable to continueas a going concern.

 

**Critical Accounting Policies**

 

Ourfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States, or GAAP. The application of GAAPrequires that we make estimates that affect our reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe 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 

 

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reasonableunder the circumstances. We evaluate our estimates and assumptions on anongoing basis. Our actual results may differ significantly from theseestimates.

 

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 the Management’s Discussion and Analysisof Financial Condition and Results of Operations section of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.  There were not any material changes to ourcritical accounting policies during the nine months ended September 30,2009.

 

***Item4T.  Controls and Procedures.***

*** ***

**Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures designed to ensure that informationrequired to be disclosed in our reports filed or submitted under the Securitiesand Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission (the “SEC”). As of September 30,2009, the end of the period covered by this Quarterly Report on Form 10-Q,we carried out an evaluation, under the supervision and with the participationof management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Rule 13a-15 under the Exchange Act.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 September 30, 2009, there has been no change in theCompany’s internal 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.

 

**PART II.  OTHER INFORMATION.**

** **

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

*** ***

As previouslyreported in the Company’s Quarterly Report on Form 10Q for the quarterended June 30, 2009,on July 28, 2009, (the “Company”) was notifiedthat the Rensselaer Polytechnic Institute (“RPI”) filed a complaint against theCompany on July 15, 2009 in the Supreme Court of the State of New York,County of Rensselaer.  In the complaint,RPI alleges that the Company has breached obligations to pay RPI an aggregateof $202,716 under the terms of a license agreement dated July 13, 2001between RPI and the Company and a sponsored research agreement dated as of December 9,2005 between RPI and the Company.  RPI isseeking damages in the amount of $202,716, plus interest, penalties, costs anddisbursements, including attorneys’ fees. The Company believes that the amounts being sought by RPI substantiallyexceed any amounts due to RPI under such agreements and intends to defenditself vigorously against such claims.

 

***Item1A. Risk Factors.***

 

Investing in our common stock involves a high degreeof risk. You should carefully consider the risks and uncertainties set forthunder Item 1A of our Annual Report on Form 10-K for the year ended 

 

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December 31, 2008, as well as the materialchanges to those risk factors set forth in Part II, Item 1A to ourQuarterly Reports on Form 10-Q for the quarters ended March 31, 2009and June 30, 2009, and the material changes set forth below beforepurchasing our common stock.  These risksand uncertainties are not the only ones facing our Company; additional risksand uncertainties may also impair our business operations. If any of thefollowing risks actually occur, our business, financial condition, results ofoperations or cash flows would likely suffer. In that case, the trading priceof our common stock could fall, and you may lose all or part of yourinvestment.  We undertake no obligationto update or revise any forward-looking statement except as required by theSEC.

 

*Riskfactors**disclosed in our Annual Report on Form 10-K relating to our need for additional financing and potential dilution toexisting shareholders have been revised to read as follows:*

 

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

 

As of September 30,2009, we had approximately $270,000 of cash on hand and current liabilities of$3.4 million, including $1.8 million of secured debt that matures on March 28,2010.  On November 6, 2009,1,244,829 warrants were tendered in our Warrant Replacement Offer, from whichwe realized net cash proceeds of approximately $1.4 million.  We will need additional financing to fundoperations and to ramp-up production of the ProUroScan system to meetcommercial demands throughout 2010 and beyond. We will also need funding to pay, for example, up to $1,000,000 offuture payments to Artann related to FDA 510(k) clearancemilestones.  If we fail to secure adistribution partner on terms acceptable to us, or at all, we could be requiredto undertake distribution activity at our expense, which could significantlyincrease our capital requirements and may delay the commercialization of ourproducts.

 

We are actively pursuingseveral potential near-term sources of funding to provide the working capitalneeded to repay our existing debt and to fund a commercial launch into theurology market.  These potential sourcesinclude cash advances from shareholders, additional loans or guaranteed bankdebt, working with lenders to extend the maturity dates of existing debt andone or more rounds of private placements of debt or equity securities.

 

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

 

***Our assets arepledged to secure $1,300,000 of senior bank notes, $1,143,000 of notes issuedto investors and $100,000 of other bank debt and, as a result, are notavailable to secure other senior debt financing. Upon the occurrence of anevent of default, the bank’s security interests in our assets will be assignedto guarantors of the bank notes and the holders of such $1,143,000 ofpromissory notes.***

 

Our $1,300,000 seniordebt financing through Crown Bank, Minneapolis, Minnesota, has required us topledge all of our assets and certain licenses, as well as to provide personalguarantees of certain shareholders. In addition, we have issued a total of$1,243,000 of promissory notes to three individual 

 

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investors and a bank thathave subordinated interests in all of our assets and certain licenses.  Due to such security interests, we will notbe in a position in the future to pledge our assets to secure any debt or lendingfacility in the event we desire or need to borrow such funds on a securedlending basis. It is doubtful that we would be able to obtain significantadditional debt financing on an unsecured basis.

 

Moreover, under the termsand conditions of the Crown Bank facility and our agreement with the facility’sguarantors, in the event of any default by us with our senior lender thatcauses the personal guarantees to be called and honored, all of the bank’ssecurity interests in our assets shall be assigned to such guarantors, prorata, in consideration of such breach and obligation to pay under therespective guarantees. In addition, the holders and guarantor of the $1,243,000of promissory notes have a security interest in our assets in the event of adefault under the note. Thus, our common shareholders, and any existing andfuture investors in our common stock, would, if the foregoing breach andcircumstances occurred, not have access or recourse to the assets andcollateral, and thus, would likely face a complete loss of their investment inthe Company.

 

***Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.***

*** ***

**Common Stock**

 

On September 29, 2009, we issued 4,834 shares of our common stockto David Koenig as payment for $7,250 of director’s fees, in lieu of cash.

 

**Warrants**

** **

On July 23, 2009,the Company issued a two-year warrant to purchase 30,000 shares of our commonstock at an exercise price of $1.25 per share to Kohnstamm Communications asconsideration for services provided to the Company during the three monthsended September 30, 2009.  Thewarrant, valued at $26,400 using the Black-Scholes pricing model, was recordedas general and administrative expense.

 

**Sales of thesecurities described above were made in compliance with the requirements of Rule 506of Regulation D under the Securities Act of 1933, as amended (the “SecuritiesAct”) and the exemption from registration provided under Section 4(2) ofthe Securities Act.  In qualifying forsuch exemption, the Company relied upon representations from the investorsregarding their status as “accredited investors” under Regulation D and thelimited manner of the offering.**

** **

***Item 4.*** Submission of Matters to a Vote of Security Holders.

*** ***

***The Company held our Annual Meeting of Shareholders on August 11,2009, at which the shareholders took the following actions:***

*** ***

Matter 1: Election ofDirectors

 

The director nomineesdescribed in the Company’s Proxy Statement were elected as follows:

 
| ** **          | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|---------------------|------------|-----------|------------|--------------|------------|
| Richard  C. Carlson |       | 5,159,372 |       | 12,062       |       |
| David  F. Koenig    |       | 5,016,365 |       | 155,069      |       |
| Robert  Rudelius    |       | 5,039,705 |       | 131,729      |       |
| Scott  E. Smith     |       | 5,034,705 |       | 136,729      |       |

 

Each director hasconsented to hold office until the next annual meeting of shareholders or untilhis successor is elected and shall have qualified.

 

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Matter 2:  Approve and adopt the 2009 Stock Plan

 

The adoption of our 2009Stock Plan was approved as follows:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 4,334,101 |       | 161,958     |       | 223,4260    |       |

 

Matter 3: Approve andadopt Amended and Restated Articles of Incorporation:

 

The adoption of our Amended and Restated Articles ofIncorporation was approved as follows:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 5,104,911 |       | 61,023      |       | 5,500       |       |

 

Matter 4: Appointment of Independent RegisteredAccounting Firm

 

The appointment of Baker Tilly Virchow Krause, LLP asthe Company’s independent registered public accounting firm for the 2009 fiscalyear was ratified as follows:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 5,161,435 |       | 10,000      |       | 0           |       |

 

***Item 5.  Other Information.***

 

None.

 

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***Item 6.  Exhibits****.*

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                              |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                   |
| 3.1                  |       | ProUroCare Medical Inc.  Amended and Restated Articles of Incorporation (incorporated by reference to  Exhibit 3.1 to Current Report on Form 8-K filed August 7,  2009).                      |
|                 |       |                                                                                                                                                                                                         |
| 10.1                 |       | ProUroCare  Medical Inc. 2009 Stock Plan (incorporated by reference to Exhibit 10.1  to Current Report on Form 8-K filed August 17, 2009).                                               |
|                 |       |                                                                                                                                                                                                         |
| 10.2                 |       | Promissory Note dated  September 21, 2009 issued in favor of James L. Davis (incorporated by  reference to Exhibit 10.44 to Registration  Statement filed on Form S-4 October 16, 2009). |
|                 |       |                                                                                                                                                                                                         |
| 10.3                 |       | Promissory Note dated  September 23, 2009 issued in favor of Jack Petersen (incorporated by  reference to Exhibit 10.45 to Registration Statement  on Form S-4 filed October 16, 2009).  |
|                 |       |                                                                                                                                                                                                         |
| 10.4                 |       | Promissory Note dated  September 23, 2009 issued in favor of Central Bank (incorporated by  reference to Exhibit 10.46 to Registration Statement  on Form S-4 filed October 16, 2009).   |
|                 |       |                                                                                                                                                                                                         |
| 10.5                 |       | Security Agreement with  Bruce Johnson dated September 23, 2009 (incorporated by reference to  Exhibit 10.47 to Registration Statement on Form S-4 filed  October 16, 2009).             |
|                 |       |                                                                                                                                                                                                         |
| 31.1                 | *          |                                                                                                                                                                                                         | Certification  of Principal Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                                                         |   |
| 31.2                 | *          |                                                                                                                                                                                                         | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                                                         |   |
| 32.1                 | *          |                                                                                                                                                                                                         | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |

 

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*Filed herewith.

 

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**SIGNATURES**

** **

Pursuant to the 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:  November 13, 2009 | By:                          | /s/  Richard C. Carlson |
|                               | Name:                        | Richard  C. Carlson |
|                               | Title:                       | Chief  Executive Officer |
|                               |                         |
|                               |                         |
| Date:  November 13, 2009 | By:                          | /s/  Richard Thon |
|                               | Name:                        | Richard  Thon |
|                               | Title:                       | Chief  Financial Officer |
|                               |                         |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                              |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                         |
| 3.1                  |       | ProUroCare Medical Inc.  Amended and Restated Articles of Incorporation (incorporated by reference to  Exhibit 3.1 to Current Report on Form 8-K filed August 7,  2009).                      |
|                 |       |                                                                                                                                                                                                         |
| 10.1                 |       | ProUroCare  Medical Inc. 2009 Stock Plan (incorporated by reference to  Exhibit 10.1 to Current Report on Form 8-K filed August 17,  2009).                                              |
|                 |       |                                                                                                                                                                                                         |
| 10.2                 |       | Promissory Note dated  September 21, 2009 issued in favor of James L. Davis (incorporated by  reference to Exhibit 10.44 to Registration  Statement filed on Form S-4 October 16, 2009). |
|                 |       |                                                                                                                                                                                                         |
| 10.3                 |       | Promissory Note dated  September 23, 2009 issued in favor of Jack Petersen (incorporated by  reference to Exhibit 10.45 to Registration Statement  on Form S-4 filed October 16, 2009).  |
|                 |       |                                                                                                                                                                                                         |
| 10.4                 |       | Promissory Note dated  September 23, 2009 issued in favor of Central Bank (incorporated by  reference to Exhibit 10.46 to Registration Statement  on Form S-4 filed October 16, 2009).   |
|                 |       |                                                                                                                                                                                                         |
| 10.5                 |       | Security Agreement with  Bruce Johnson dated September 23, 2009 (incorporated by reference to  Exhibit 10.47 to Registration Statement on Form S-4 filed  October 16, 2009).             |
|                 |       |                                                                                                                                                                                                         |
| 31.1                 | *          |                                                                                                                                                                                                         | Certification  of Principal Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                                                         |   |
| 31.2                 | *          |                                                                                                                                                                                                         | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                                                         |   |
| 32.1                 | *          |                                                                                                                                                                                                         | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |

 

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*Filed herewith.

 

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