Notes to Consolidated
Financial Statements
December 31, 2012 and 2011 and the
period from
August 17, 1999 (inception) to December
31, 2012
|
(1)
|
Description of Business and Summary of Significant Accounting
Policies
|
|
(a)
|
Description of Business, Development Stage Activities and Basis
of Presentation
|
ProUroCare Medical Inc. (“ProUroCare,”
the “Company,” “we” or “us”) is engaged in the business of developing for market innovative
products for the detection and characterization of male urological prostate disease. The primary focus of the Company is currently
the prostate imaging device, known as the ProUroScan
TM
System, which is designed to produce an elasticity image of
the prostate as an adjunctive aid in visualizing and documenting abnormalities of the prostate that have been detected by digital
rectal examination. The Company’s developmental activities, conducted by its wholly owned operating subsidiary, ProUroCare
Inc. (“PUC”), have included the acquisition of several technology licenses, the purchase of intellectual property,
the development of a strategic business plan and a senior management team, product development, pursuit of regulatory clearance
of the ProUroScan System, and fund raising activities.
PUC had no activities from its incorporation in
August 1999 until July 2001, when it acquired a license to certain microwave technology from CS Medical Technologies, LLC (“CS
Medical”). In January 2002, PUC acquired a license to certain prostate imaging technology from Profile, LLC (“Profile”).
Pursuant to a merger agreement effective April 5,
2004 (the “Merger”), PUC became a wholly owned operating subsidiary of Global Internet Communications, Inc. (“Global”),
which subsequently changed its name to ProUroCare Medical Inc. In connection with the Merger, the Company completed a private
placement of 220,500 shares of common stock (the “2004 Private Placement”) (see Note 12(b)).
On
February 14, 2008, the Company implemented a one-for-ten reverse split of the Company’s common stock
without a corresponding
reduction in the number of authorized shares of the Company’s capital stock (the “Reverse Split”). The exercise
price and the number of shares of common stock issuable under the Company's outstanding convertible debentures, options and warrants
have been proportionately adjusted to reflect the Reverse Split for all periods presented.
Between December 27, 2007 and December 11, 2008,
the Company closed on a total of $2.0 million of private placements of investment units and $315,000 of private placements of
convertible debentures in a unit put arrangement (see Note 12(d)) each consisting of convertible debentures and warrants. Upon
the closing of the Company’s 2009 Public Offering (as defined below), the convertible debentures issued in these private
placements were automatically converted into equity.
On January 12, 2009, the Company closed a public
offering of 3,050,000 equity units at $1.00 per unit (see Note 12(d)). Concurrently, $1.9 million of convertible promissory notes
issued in private placements during 2007 and 2008, along with $177,882 of interest accrued thereon automatically converted into
3,058,381 equity units.
In November, 2009 and August, 2010, the Company
completed tender offers to holders of certain outstanding warrants that provide consideration as an incentive for the early exercise
of such warrants. Pursuant to the offers, the Company temporarily modified the terms of certain outstanding warrants so that each
holder who tendered them for early exercise received, in addition to the shares of common stock purchased upon exercise, new three-year
warrants to purchase the same number of shares of the Company’s common stock at an exercise price of $1.30 per share (the
“Replacement Warrants”). Upon the closings of the tender offers, the Company issued a total of 2,252,358 shares of
common stock and 2,252,358 Replacement Warrants. See Note 12(g).
On September 28, 2010, the Company sold 1,400,000
unregistered shares of its common stock to Seaside 88, LP at $0.625 per share, realizing gross proceeds of $875,000.
The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, PUC. Significant inter-company accounts and transactions have
been eliminated in consolidation.
|
(b)
|
Restatement of Share Data
|
All share data has been restated to give effect to
the Reverse Split (see Note 1(a)).
At the effective time of the Merger, all 1,050,300
shares of common stock of PUC that were outstanding immediately prior to the Merger and held by PUC shareholders were cancelled,
with one share of ProUroCare common stock issued to Global. Simultaneously, the non-dissenting shareholders of PUC received an
aggregate of 960,300 shares of common stock of Global in exchange for their aggregate of 960,300 shares of PUC. The share data
in this paragraph has been restated to give effect to the Reverse Split, as noted above.
All share data has been restated
to give effect to the Merger under which each PUC share was converted into three shares of Global.
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting periods. The Company’s significant estimates
include the determination of the fair value of its common stock and stock-based compensation awarded to employees, directors, loan
guarantors and consultants, the determination of the fair value of warrants issued as an incentive for early-exercise of outstanding
warrants and the accounting for debt with beneficial conversion features. Actual results could differ from those estimates.
Valuation of Stock-Based Compensation.
Since
inception, the Company has measured and recognized compensation expense for all share-based payment awards, including stock options
and warrants, made to employees, consultants and directors based on fair values. The Company’s determination of fair value
of share-based payment awards is based on the date of grant using an option-pricing model which incorporates a number of highly
complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility
and estimates regarding projected employee stock option exercise behaviors and forfeitures. The Company recognizes the expense
related to the fair value of the award straight-line over the vesting period.
Valuation of Warrants Issued as an Incentive for
Early-Exercise of Outstanding Warrants.
We completed two tender offers in 2009 and 2010 pursuant to which we have issued warrants
as an incentive to certain warrant holders to exercise their existing warrants during the offering periods. Our determination of
fair value of the replacement warrants is based on the date of grant using an option-pricing model which incorporates a number
of highly complex and subjective variables. These variables include, but are not limited to, the expected volatility of our stock
price. We recognize the expense related to the fair value of the warrants immediately upon issuance as incentive for early warrant
exercise expense.
Debt with Beneficial Conversion Features
.
Beneficial conversion features of convertible promissory notes were valued using the Black-Scholes pricing model, which is considered
the Company’s equivalent to the fair value of the conversion. The resulting original issue discount is amortized over the
life of the promissory notes (generally no more that 24 months) using the straight-line method, which approximates the interest
method.
|
(d)
|
Net Loss Per Common Share
|
Basic and diluted loss per common share is computed
by dividing net loss by the weighted-average number of common shares outstanding for the reporting period. These calculations reflect
the effects of the Reverse Split (see Note 1(a)). Dilutive common-equivalent shares have not been included in the computation of
diluted net loss per share because their inclusion would be antidilutive. Antidilutive common equivalent shares issuable based
on future exercise of stock options or warrants could potentially dilute basic loss per common share in subsequent years. All options
and warrants outstanding were antidilutive for the years ended December 31, 2012 and 2011 and the period from August 17, 1999 (inception)
to December 31, 2012 due to the Company’s net losses. 8,792,651and 10,232,340 shares of common stock issuable under our stock
options, warrants, convertible debt and contingent shares and warrants issuable under agreements with loan guarantors were excluded
from the computation of diluted net loss per common share for the years ended December 31, 2012 and 2011, respectively.
Certain comparative figures have been reclassified
to conform to the financial statement presentation adopted in the current year.
The Company maintains its cash in financial institutions.
The balances, at times, may exceed federally insured limits.
|
(g)
|
Equipment and Furniture
|
Equipment and furniture are stated at cost and depreciated
using the straight-line method over the estimated useful lives ranging from three to seven years. Maintenance, repairs, and minor
renewals are expensed as incurred.
The costs associated with acquisition of licenses
for technology are recognized at the fair value of stock and cash used as consideration. Costs of acquiring technology that has
no alternative future uses are expensed immediately as research and development expense.
|
(i)
|
Stock-Based Compensation
|
The Company’s policy is to grant stock options
with an exercise price set at fair value of its common stock on the date of grant and to record stock-based employee compensation
expense at fair value. The Company recognizes the expense related to the fair value of the award on a straight-line basis over
the vesting period. From time to time, the Company issues options and warrants to non-employees as consideration for goods or services
received, including warrants issued to lenders and guarantors of Company debt (see Note 12(f)). The fair value of options and warrants
issued to non-employees is measured on the earlier of the date the performance is complete or the date the consultant is committed
to perform. In the event that the measurement date occurs after an interim reporting date, the options are measured at their then-current
fair value at each interim reporting date. The fair value of options so determined is expensed on a straight-line basis over the
associated performance period.
The Company uses the Black-Scholes option-pricing
model to estimate the fair value of options and warrants. The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require
the input of highly subjective assumptions. Because the Company’s employee and consultant stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect
the fair value estimate, the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s
stock options.
|
(j)
|
Financial Instruments
|
The carrying amount for all financial instruments
approximates fair value. The carrying amounts for cash, notes payable, accounts payable and accrued liabilities approximate fair
value because of the short maturity of these instruments. The carrying amounts for long-term debt, and other obligations approximates
fair value as the interest rates and terms are substantially similar to rates and terms which could be obtained currently for similar
instruments.
|
(k)
|
Research and Development
|
Expenditures for research and product development
costs, including certain upfront license fees for technologies under development, are expensed as incurred.
The Company has issued common stock and warrants
as consideration to various individual lenders and loan guarantors of its bank debt. The fair value of the equity consideration
along with loan initiation fees is recorded on the balance sheet as debt issuance cost. Debt issuance costs are amortized over
the term of the related debt as interest expense or debt extinguishment expense using the straight-line method, which approximates
the interest method.
The Company utilizes the liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences
attributable to temporary differences between the financial statement and income tax reporting bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance to the extent that realization is not assured.
|
(2)
|
Going Concern; Management’s Plan to Fund Working
Capital Needs
|
The Company incurred net losses of $2,959,145, $2,063,212
and $38,921,614 and negative cash flows from operating activities of $1,120,865, $837,776, and $15,586,951 for the years ended
December 31, 2012 and 2011 and for the period from August 17, 1999 (inception) to December 31, 2012, respectively. The Company
expects to increase its expenditures following receipt of FDA approval of a reusable probe for its ProUroScan System, as it ramps
ups its operational capabilities through both contracted and internal resources. The Company’s business plan is dependent
upon its ability to obtain sufficient capital to fund its transition from product development to production and marketing its products.
To fund its operations and pay its obligations, the
Company will pursue additional public or private funding during 2013 and 2014 to finance additional product development and operations
leading to a commercial market launch. The funding may be in the form of convertible debt, equity securities, private debt or debt
guarantees for which stock-based consideration is paid, a public offering of our securities or a combination of these.
As of December 31, 2012, the Company had 3,590,894
currently redeemable warrants outstanding. These warrants have an exercise price of $1.30 per share. Upon exercise of our right
to redeem the warrants, holders of the warrants will have a period of 30 days to exercise their warrants. The Company could realize
up to $4.7 million depending on the number of shares actually exercised. The Company will also gain the ability to redeem a further
1,688,299 warrants with a $1.30 exercise price if the last sale price of our common stock were to equal or exceed $4.00 per share
for a period of 10 consecutive trading days. If the Company were to subsequently exercise its redemption right on these warrants,
up to an additional $2.2 million could be realized depending on the number of shares actually exercised. The Company’s ability
to successfully raise additional funding through the exercise of warrants will depend to a high degree upon the market price of
its common stock in relation to the exercise price. Given that the exercise price of the warrants currently exceeds the market
price, the Company may choose to offer an exercise price reduction as an inducement to the holders to exercise the warrants. There
can be no assurance that the Company will be able to seek redemption of the warrants, or how much would be realized by warrant
exercises during the redemption period.
The Company plans to identify a strategic partner to
help market our products. The Company expects such a strategic partner may provide financial support in the form of licensing fees,
loans, equity investment or a combination of these. In addition to financial support, a successful collaboration with such a partner
would allow the Company to gain access to downstream marketing, manufacturing and sales support. There can be no assurance that
a strategic partner can be successfully identified and engaged during 2013 or 2014, if at all.
If
additional funds are raised by the issuance of convertible debt or equity securities, or by the exercise of outstanding warrants,
then existing shareholders will experience dilution in their ownership interest. If additional funds are raised by the issuance
of debt or certain equity instruments, the Company may become subject to certain operational limitations, and such securities may
have rights senior to those of our existing holders of common stock. If adequate funds are not available through these initiatives
on a timely basis, or are not available on acceptable terms, the Company may be unable to fund expansion and may be forced to delay
market entry. Ultimately, if no additional financing is obtained beyond what has been secured to date, the Company likely would
be forced to cease operations. There can be no assurance the Company will be successful in raising such funds.
|
(3)
|
Equipment and Furniture
|
Equipment and furniture consisted of the following
at December 31:
|
|
2012
|
|
|
2011
|
|
Computer equipment
|
|
$
|
2,632
|
|
|
$
|
4,473
|
|
Furniture
|
|
|
4,279
|
|
|
|
4,279
|
|
Training models
|
|
|
8,582
|
|
|
|
0
|
|
Tooling and molds
|
|
|
14,314
|
|
|
|
14,314
|
|
|
|
|
29,807
|
|
|
|
23,066
|
|
Less accumulated depreciation
|
|
|
(6,175
|
)
|
|
|
(8,356
|
)
|
|
|
$
|
23,632
|
|
|
$
|
14,710
|
|
Depreciation expense for the years ended December
31, 2012 and 2011 and the period from August 17, 1999 (inception) to December 31, 2012 is as follows:
|
|
2012
|
|
|
2011
|
|
|
August 17, 1999
(Inception) to December
31, 2012
|
|
Depreciation expense
|
|
$
|
636
|
|
|
$
|
522
|
|
|
$
|
22,693
|
|
The Company issues stock, warrants, and convertible
debt to various lenders and loan guarantors in consideration for their making or guaranteeing certain loans to the Company (see
Notes 9, 10, and 12(f)). Depending on the terms, cash flows, and other characteristics of the each loan or loan renewal, consideration
paid in the form of stock, warrants, and convertible debt is recorded as debt issuance cost or original issue discount and amortized
over the corresponding term of each loan as either interest expense or debt extinguishment expense.
Pursuant to the debt guarantees of the Company’s
bank loans (see Note 10) and loan arrangements with individual lenders (see Note 9), a total of 546,647 shares of stock valued
at $546,860 were issued or accrued for issuance and recorded as debt issuance cost during the year ended December 31, 2012. In
addition, 160,000 warrants valued at $114,650 were issued or accrued for issuance and recorded as debt issuance cost in connection
with loans received from individual lenders during the year ended December 31, 2012.
Debt issuance costs
are summarized as follows:
|
|
For the years ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Debt issuance costs
|
|
$
|
1,787,819
|
|
|
$
|
1,204,639
|
|
Less amortization
|
|
|
(1,782,573
|
)
|
|
|
(1,130,008
|
)
|
Debt issuance costs, net
|
|
$
|
5,246
|
|
|
$
|
74,631
|
|
Amortization expense related to debt issuance costs
for the years ended December 31, 2012 and 2011 and the period from August 17, 1999 (inception) to December 31, 2012 is as follows:
|
|
2012
|
|
|
2011
|
|
|
August 17, 1999
(Inception) to December
31, 2012
|
|
Amortization expense
|
|
$
|
733,395
|
|
|
$
|
415,146
|
|
|
$
|
3,836,018
|
|
Accrued expenses consisted of the following at December
31:
|
|
2012
|
|
|
2011
|
|
Accrued interest
|
|
$
|
183,924
|
|
|
$
|
47,799
|
|
Accrued compensation
|
|
|
118,080
|
|
|
|
101,693
|
|
Accrued loan consideration to be paid in stock
|
|
|
73,652
|
|
|
|
160,044
|
|
Audit fees
|
|
|
42,000
|
|
|
|
35,000
|
|
Consulting fees
|
|
|
41,275
|
|
|
|
49,000
|
|
Accrued royalties
|
|
|
33,000
|
|
|
|
0
|
|
Accrued use tax
|
|
|
2,002
|
|
|
|
1,092
|
|
Legal fees
|
|
|
0
|
|
|
|
5,800
|
|
Other
|
|
|
0
|
|
|
|
50
|
|
|
|
$
|
493,933
|
|
|
$
|
400,478
|
|
|
(6)
|
Agreements with Artann Laboratories Inc.
|
The Company has developed its ProUroScan
System under contracts with Artann, a scientific technology company based in Trenton, New Jersey, that is focused on early stage
technology development. In 2008 the Company entered into two agreements with Artann.
Under the first agreement, the “License Agreement,”
Artann granted to the Company an exclusive, worldwide, sublicensable license to certain patent applications, trade secrets and
technology to make, use and market certain mechanical imaging products in the diagnosis or treatment of urologic disorders of the
prostate, kidney or liver field of use. As consideration, during the period from August 17, 1999 (Inception) to December 31, 2010,
the Company paid a cash license fee of $600,000 and issued 454,546 shares of the Company’s common stock valued at $500,000,
all of which was recorded as a general and administrative expense. In addition, the Company agreed to pay Artann a royalty equal
to four percent of the first $30 million of net cumulative sales of licensed products, three percent of the next $70 million of
net cumulative sales and two percent of net cumulative sales over $100 million. Further, the Company will pay Artann a technology
royalty of one percent of net sales on prostate imaging system products through December 31, 2016. The combined royalties are subject
to a minimum annual royalty equal to $50,000 per year for each of the first two years after clearance from the FDA for commercial
sale and $100,000 per year for each year thereafter until termination or expiration of the License Agreement. The License Agreement
will terminate upon the expiration of all royalty obligations, by failure of either party to cure a breach of the agreement within
a 60-day cure period, if the Company fails to make a payment to Artann and such failure is not cured within a 30-day cure period
or should one of the parties become insolvent, go into liquidation or receivership or otherwise lose legal control of its business.
Under the second agreement, the “Development
and Commercialization Agreement,” the parties agreed to collaborate on developing, commercializing and marketing prostate
mechanical imaging systems. For the services provided under this agreement, during the period from August 17, 1999 (Inception)
to December 31, 2010 the Company paid $500,000 in cash to Artann and issued 769,231 shares of the Company’s common stock
valued at $1,565,385, all of which were recorded as research and development expense. The Company recorded a $750,000 milestone
fee earned by Artann as research and development expense upon the FDA’s April 27, 2012 approval of the Company’s
ProUroScan System. Under the terms of amendments to the agreement executed in 2011 and 2012, the parties agreed to restructure
the timing of the payment of the milestone fee. Under the revised payment schedule, the Company made a $100,000 first payment on
May 25, 2012 and agreed to pay 25% of all net cash received by the Company from any funding source until the balance is paid. The
Company agreed to pay simple interest on the unpaid amount at a rate of 20% per year. As of December 31, 2012, $515,000 of the
milestone fee remained unpaid and was recorded as accrued development expense.
|
(7)
|
Commitments and Contingencies
|
The Company rents a small amount of office space on
a month-to-month basis at a cost of approximately $1,000 per month, which is the market price for similar office space in Minneapolis,
Minnesota. Rent expense for the years ended December 31, 2012 and 2011, and the period from August 17, 1999 (inception) to December
31, 2012 is as follows:
|
|
2012
|
|
|
2011
|
|
|
August
17, 1999
(Inception) to
December 31, 2012
|
|
Rent expense
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
|
$
|
302,874
|
|
The Company has generated net operating loss carryforwards
of approximately $10.3 million. The Company has also generated approximately $13.6 million of built-in losses in the form of start-up
expenses. Federal and state tax laws impose significant restrictions on the utilization of net operating loss carryforwards and
built-in losses in the event of a change in ownership of the Company that constitutes an “ownership change,” as defined
by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Although a formal study has not been
completed, the Company has analyzed its equity ownership changes and believes that such an ownership change occurred upon the completion
of its 2009 public offering. Federal net operating losses of approximately $5.4 million and built-in losses of $7.7 million incurred
prior to the 2009 public offering are limited to a total of approximately $1.1 million, consisting of annual amounts of approximately
$104,000 per year for each of the years 2013-2023. We believe that approximately $12.0 million of combined net operating losses
and built-in losses will expire unused due to IRC Section 382 limitations. These limitations could be further restricted if additional
ownership changes occur in future years.
Net federal and state operating loss carryforwards
of approximately $4.9 million generated subsequent to the Company’s 2009 public offering will begin to expire in 2025.The
net operating loss carryforwards are subject to examination until they expire.
The Company had no significant unrecognized tax benefits
as of December 31, 2012 and 2011 and, likewise, no significant unrecognized tax benefits that, if recognized, would affect the
effective tax rate. The Company had no positions for which it deemed that it is reasonably possible that the total amounts of the
unrecognized tax benefit will significantly increase or decrease. The Company has adopted the policy of classifying income tax
related interest and penalties as interest expense and general and administrative expense, respectively
The tax years that remain subject to examination by
major tax jurisdictions currently are:
Federal 2009 - 2012
State of Minnesota 2009 - 2012
The Company has recorded a full valuation allowance
against its deferred tax assets and deferred tax liability due to the uncertainty of realizing the related benefits and costs as
follows:
|
|
2012
|
|
|
2011
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,952,000
|
|
|
$
|
3,372,000
|
|
Capitalized start up costs
|
|
|
5,253,000
|
|
|
|
4,730,000
|
|
Expenses paid with options and warrants
|
|
|
608,000
|
|
|
|
740,000
|
|
Capitalized licenses
|
|
|
564,000
|
|
|
|
644,000
|
|
Deferred compensation
|
|
|
45,000
|
|
|
|
33,000
|
|
Accrued expenses to be paid in stock
|
|
|
0,000
|
|
|
|
39,000
|
|
Less: valuation allowance
|
|
|
(10,422,000
|
)
|
|
|
(9,558,000
|
)
|
Net deferred tax assets
|
|
$
|
0
|
|
|
$
|
0
|
|
The change in the valuation allowance was $864,000,
$329,000, and $10,422,000 for the years ended December 31, 2012 and 2011 and the period from August 17, 1999 (inception) to December
31, 2012, respectively.
Reconciliation between the federal statutory rate
and the effective tax rates for the years ended December 31, 2012 and 2011 and the period from August 17, 1999 (inception) to December
31, 2012 is as follows:
|
|
2012
|
|
|
2011
|
|
|
Period from
August 17, 1999
(Inception) to
December 31, 2012
|
|
Federal statutory tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State taxes, net of federal benefit
|
|
|
(4.5
|
)
|
|
|
(4.5
|
)
|
|
|
(4.5
|
)
|
Employee incentive stock options
|
|
|
(1.2
|
)
|
|
|
2.1
|
|
|
|
1.3
|
|
Expired warrants and options
|
|
|
7.2
|
|
|
|
1.9
|
|
|
|
2.0
|
|
Replacement warrants issued as an incentive to early exercise warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
2.7
|
|
Capitalized license fees
|
|
|
–
|
|
|
|
–
|
|
|
|
0.5
|
|
Beneficial conversion feature of convertible debt
|
|
|
–
|
|
|
|
–
|
|
|
|
2.2
|
|
Deductible expense for stock and warrants issued less than book expense
|
|
|
3.1
|
|
|
|
3.9
|
|
|
|
3.0
|
|
Change in valuation allowance
|
|
|
29.4
|
|
|
|
30.6
|
|
|
|
26.8
|
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The Company has provided
equity consideration to certain lenders and loan guarantors. See Note 12(f) for more information regarding the equity consideration
issued. See Note 13 for information regarding related party transactions and loans.
On June 1, 2012, the Company borrowed $90,627 pursuant
to an unsecured insurance policy financing agreement. The financing agreement is payable in 11 monthly installments of $8,345 per
month and bears interest at 3.2% per year. As of December 31, 2012, the outstanding loan balance was $33,266. During the year ended
December 31, 2012, the Company repaid the $41,526 balance of a similar insurance policy financing agreement that was outstanding
as of December 31, 2011.
On December 22, 2011, the Company borrowed $40,000
from an individual lender pursuant to a promissory note. Of this, $20,000 was applied toward the purchase of a convertible note
on February 1, 2012 (see Note 9(c)). On March 22, 2012, the Company amended the terms the remaining $20,000 promissory note to
extend the maturity date of the note to May 22, 2012. The extension was accounted for as a debt modification. On May 22, 2012,
the Company again amended the promissory note to extend the maturity date to November 22, 2012 and converted $1,000 of accrued
interest into the principal amount of the note. The resulting $21,000 note bears interest at 10% per annum payable on the maturity
date. The note provides for automatic successive one-month renewal periods unless the note holder gives the Company a termination
notice at least 10 business days in advance. The loan amendment was accounted for as a debt extinguishment.
On December 22, 2011, the Company borrowed $40,000
from an individual lender pursuant to a promissory note. On March 22, 2012, the parties amended the terms the promissory note to
extend the maturity date of the note to June 22, 2012. On June 22, 2012, the parties again amended the promissory note to extend
the maturity date to December 22, 2012. On December 22, 2012, the parties amended the note again to change the maturity date to
April 22, 2013, and to provide for automatic successive one-month renewal periods unless the note holder gives the Company a termination
notice at least 10 business days in advance. The amended note bears interest at 10% per annum, payable on the maturity date. The
loan amendments were accounted for as a debt extinguishment.
On June 29, 2012, the Company borrowed $15,000 from
an individual lender pursuant to a promissory note that was to mature on December 31, 2012, subject to automatic successive one-month
renewal periods unless the note holder gives the Company a termination notice at least 10 business days in advance. The bears interest
at a rate of 10% per annum payable on the maturity date. As consideration to the lender for making the loan, the Company issued
22,500, five-year warrants to acquire its common stock to the lender, with an exercise price of $1.30 per share. An original issue
discount of $7,575 related to the warrants was recorded and amortized as interest expense over the term of the note.
|
(b)
|
Short Term Notes, Related Party
|
Between September 26, 2012 and October 29,
2012, the Company borrowed a total of $250,000 from Jeanne Rudelius, a sister of Director Robert Rudelius, pursuant to
secured promissory notes. The notes matured on December 26, 2012, and are secured by a subordinated security interest in all
Company assets. In lieu of interest or any other consideration, the Company issued a total of 50,000 shares of its common
stock to the lender. The $23,200 value of the shares was recorded as original issue discount and amortized as interest
expense over the term of the note. The Company is working with Ms. Rudelius to refinance the note, but there is no assurance
it will be successful in doing so.
|
(c)
|
Short Term Convertible Notes
|
During the year ended December 31, 2011, the Company
closed on $500,000 in a private placement of 10% secured, subordinated convertible notes (the “2011 Convertible Notes”).
Of this amount, $350,000 was sold to related parties (see Note 9(d)) and $150,000 was sold to unrelated parties. The notes bear
interest at 10% per annum payable on the maturity date, mature on September 20, 2013, and the principal and accrued interest are
convertible into shares of the Company’s common stock at a conversion price of $1.30 per share.
On September 27, 2012, the Company amended the maturity
date of a $65,698 unsecured convertible promissory note with a limited partnership. In consideration for a one year extension of
the promissory note’s maturity date, the Company agreed to reduce the conversion price of the note from $1.30 per share to
$1.00 per share. The amended promissory note bears interest at 6.0% per year and matures on August 10, 2013. The Company may prepay
the note at any time with 30 days notice, during which time the holder may exercise its conversion rights under the terms of the
convertible note. The note amendment did not result in the recording of additional expense, as there was no intrinsic value of
the conversion feature both before and after the modification.
On September 27, 2012, the Company amended the maturity
date of an $11,018 unsecured convertible promissory note with an individual lender. In consideration for a one year extension of
the promissory note’s maturity date, the Company agreed to reduce the conversion price of the note from $1.30 per share to
$1.00 per share. The amended promissory note bears interest at 6.0% per year and matures on August 11, 2013. The Company may prepay
the note at any time with 30-days’ notice, during which time the holder may exercise its conversion rights under the terms
of the convertible note. The note amendment did not result in the recording of additional expense, as there was no intrinsic value
of the conversion feature both before and after the modification.
Between February 1, 2012 and March 16, 2012, the Company
closed on a total of $60,000 in a private placement of unsecured convertible notes. The notes bear interest at 10% per annum payable
on the maturity date, mature on January 31, 2013, and the principal and accrued interest are convertible into shares of the Company’s
common stock at a conversion price of $1.30 per share. Of this amount, $40,000 was received in cash, and $20,000 was funded by
the reduction of an outstanding note payable (see Note 9(a)), which was accounted for as a debt modification. The Company is working
with the lenders to refinance the notes, and to obtain proceeds to repay the notes, but there is no assurance that either effort
will be successful.
|
(d)
|
Short Term Convertible Notes, Related Party
|
Between August 1 and December 1, 2011, the directors
of the Company advanced a total of $42,558 to the Company to pay various expenses. On December 1, 2011, the Company issued convertible
notes to the directors in settlement of these advances. On December 28, 2012, $6,500 of the notes were repaid in cash, and $29,658
of the notes and $3,941 of accrued interest thereon were converted into 30,544 common stock pursuant to the conversion terms. The
remaining $6,400 note is unsecured, bears interest at 10% per year, matures on February 28, 2013, and is convertible into the Company’s
common stock at $1.10 per share.
During the year ended December 31, 2011, the Company
sold $350,000 of the 2011 Convertible Notes (see Note 9(c)) to related parties (see Note 13).
On September 27, 2012, the Company extended the maturity
date of an existing $300,000 convertible subordinated promissory note with Jack Petersen, a greater than 5% shareholder. In consideration
for a one year extension of the promissory note’s maturity date, the Company agreed to reduce the conversion price of the
note from $1.30 per share to $1.00 per share. The amended note bears interest at 6.0% per year and matures on August 8, 2013. The
Company may prepay the note at any time with 30 days notice, during which time Mr. Petersen may exercise his conversion rights
under the terms of the convertible note. The convertible note provides Mr. Petersen with a subordinated security interest in the
Company’s assets. The note amendment did not result in the recording of additional expense, as there was no intrinsic value
of the conversion feature both before and after the modification.
|
(e)
|
Long Term Convertible Notes, Related Party
|
On March 30, 2012, the Guarantors of the Company’s
Crown Bank Loan (see Note 10(a)) purchased a total of $200,000 of the Company’s convertible subordinated notes.
The
notes mature on March 31, 2014, bear interest at 10% per year, are collateralized by a subordinated interest in all of the Company’s
assets, and the principal and accrued interest thereon are convertible into the Company’s common stock at $1.30 per share.
|
(10)
|
Notes Payable - Bank
|
The Company has a senior secured
promissory note with Crown Bank (the “Crown Loan”) that is guaranteed by Mr. Davis and Mr. Reiling and is collateralized
by all Company assets. Mr. Davis and Mr. Reiling have agreed to share their collateral interest in the Crown Loan with other secured
parties who have collectively guaranteed or loaned to the Company loans totaling $1,950,025 (the “Collateral Sharing Agreement”).
The Crown Loan bears interest at the prime rate plus one percent,
but never less than 6.0% (6.0% at both December 31, 2012
and 2011).
The principal balance of the Crown
Loan was $500,000 and $700,000 as of December 31, 2012 and 2011, respectively. A $200,000 principal reduction was made on March
30, 2012. On January 23, 2013, the Company amended the maturity date of the Crown Loan to February 15, 2013. On March 27, 2013,
the Crown Loan was further amended to mature on February 15, 2014. Pursuant to the terms of the new promissory note, the Company
made a principal reduction payment of $50,000 on March 27, 2013, with a second $50,000 reduction due on January 15, 2014. There
were no other changes to the terms of the Crown Loan.
The Company has a $100,025 unsecured promissory note
and a $100,000 line of credit with Central Bank (referred to together as the “Central Loans”). The Central Loans bear
interest at the prime rate plus one percent, with a minimum annual rate of 5.0% (5.0% at both December 31, 2012 and 2011), and
are guaranteed by an individual guarantor, who participates in the Collateral Sharing Agreement. On January 17, 2013, the maturity
date of the Central Bank note was extended to January 17, 2014. The line of credit arrangement is scheduled to expire on May 11,
2013.
|
(11)
|
Future Maturities of Long-term Debt
|
Future maturities of long-term notes for the years
succeeding December 31, 2012 are as follows:
Year
|
|
Notes
Payable-
Bank
|
|
|
Convertible
Notes Payable-
Related Party
|
|
|
Total
|
|
2013
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2014
|
|
|
100,025
|
|
|
|
200,000
|
|
|
|
300,025
|
|
Total
|
|
$
|
100,025
|
|
|
$
|
200,000
|
|
|
$
|
300,025
|
|
|
(12)
|
Shareholders’
Equity (Deficit)
|
|
(a)
|
Common stock issued related to formation and licensing activities
|
Pursuant to 2001 and 2002 formation activities, the
Company issued 300,000, 300,000, and 400,000 shares to Clinical Network Inc., CS Medical, and Profile, respectively.
|
(b)
|
Common Stock and Warrants issued related to Merger
|
On the April 5, 2004 date of the
Merger (see Note 1(a)), all 1,050,300 shares of common stock of PUC that were outstanding immediately prior to the Merger and held
by PUC shareholders were cancelled, with one share of PUC common stock issued to Global. Simultaneously, the non-dissenting former
shareholders of 960,300 shares of PUC common stock received an aggregate of 960,300 shares of common stock of Global, representing
approximately 82.1% of Global’s common stock outstanding immediately after the Merger. Original shareholders of Global received
209,700 shares. The Company also repurchased 90,000 shares with respect to which dissenters’ rights were exercised for an
aggregate purchase of $750,000.
Global was a non-operating public
shell company at the time of the Merger. Accordingly, the Merger transaction was recorded as a recapitalization rather than a business
combination. The assets and liabilities resulting from the reverse acquisition were the former PUC assets and liabilities (at historical
cost) plus a $13,500 accrued Global liability (assumed at historical cost). There were no other assets or liabilities on Global’s
books at the time of the Merger. The Company recorded costs associated with the Merger totaling $162,556 during 2004.
|
(c)
|
Common stock and warrants issued related to Private Placements
|
During the period from period from
August 17, 1999 (inception) to December 31, 2010, the Company completed numerous private placements of common stock and units consisting
of common stock and warrants to acquire common stock pursuant to Rule 506 of the Securities Act. During this period, the Company
issued a total of 1,844,327 shares of common stock and 97,035 warrants, and realized net proceeds from these placements totaling
$6,417,157.
Between April 12, 2012 and July 2, 2012, the Company
sold 707,000 shares of common stock at $1.00 per share in a private placement pursuant to Rule 506 of the Securities Act.
|
(d)
|
Common stock and warrants issued pursuant to the 2007 and 2008 Private Placements, the 2008 Unit Put Arrangement and
the 2009 Public Offering
|
During
the period from August 17, 1999 (Inception) to December 31, 2010, the Company closed on the sale of an aggregate $1,900,000 of
convertible debt in its 2007 and 2008 private placements. At the closings, the Company issued warrants to purchase a total of 400,000
shares of common stock at $0.50 per share to the investors.
The
Company recorded a total of $993,585 of original issue discount related to these warrants and the bargain conversion feature of
the convertible notes, which was amortized as interest expense over the term of the notes. Of these warrants, 366,000, 0 and 390,000
were exercised during the years ended December 31, 2012 and 2011, and the period from August 17, 1999 (inception) to December 31,
2012
,
respectively. On December 31, 2012, 10,000 of the warrants expired unexercised.
Upon the closing of the Company’s 2009 Public Offering (see below), the notes, along with $177,882 of interest accrued thereon,
automatically converted into 3,058,381 units identical to those sold in the 2009 Public Offering.
Also, during the period from August 17, 1999 (Inception)
to December 31, 2010, the Company issued an aggregate of $299,250 of convertible promissory notes and 95,500 warrants to purchase
shares of its common stock at an exercise price of $1.00 per share in its 2008 private placement of unit put options. Upon the
closing of the Company’s 2009 Public Offering (see below), the promissory notes, along with $9,563 interest accrued thereon,
automatically converted into 441,165 shares of the Company’s common stock. The Company recorded a total of $226,802 of original
issue discount related to these warrants and the bargain conversion feature of the convertible notes, which was amortized as interest
expense over the term of the notes. The warrants expired on December 31, 2012.
On
January 12, 2009, the Company sold 3,050,000 units at $1.00 per unit in a public offering (the “2009 Public Offering”),
with each unit consisting of one share of common stock and one redeemable warrant to purchase one share of common stock at an exercise
price of $1.30 per share. The sale resulted in net cash proceeds of $1,790,472 after costs of $1,259,528.
T
he Company also sold to the underwriter a five-year warrant to purchase up to 305,000 units at $1.20 per unit for nominal
consideration.
|
(e)
|
Common stock and warrants issued for services and liabilities
|
During the period from August 19, 1999 (inception)
through December 31, 2010, the Company issued a total of 1,415,352 shares of its common stock and 106,865 warrants to acquire common
stock to various service providers in payment of services provided and other liabilities, including the payment of directors’
fees. In total, these shares and warrants were used to pay for a total of $3,413,142 of expenses incurred during this period.
During the years ended December 31, 2012 and 2011,
the company issued the following shares of common stock and warrants in payment of services and liabilities:
|
|
Common Stock
|
|
|
Warrants
|
|
|
Expense
|
|
|
Warrant
Exercise
Price Per
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Share
|
|
Common stock issued in lieu of cash for Directors’ fees
|
|
|
101,016
|
|
|
|
100,187
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
79,500
|
|
|
$
|
88,000
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in lieu of cash for accounts payable and services on April 30, 3012
|
|
|
5,923
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
952
|
|
|
$
|
4,971
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three year warrants issued to consultant for services on June 21, 2011
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
150,000
|
|
|
$
|
0
|
|
|
$
|
116,334
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and immediately exercisable three year warrants issued to service provider in lieu of cash March 22, 2011
|
|
|
0
|
|
|
|
76,932
|
|
|
|
0
|
|
|
|
20,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to director Dave Koenig for consulting fees, in lieu of cash
|
|
|
19,000
|
|
|
|
11,112
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
19,000
|
|
|
$
|
12,000
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to director Lawrence Getlin for consulting fees, in lieu of cash
|
|
|
38,950
|
|
|
|
23,182
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
38,950
|
|
|
$
|
25,500
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
164,889
|
|
|
|
214,413
|
|
|
|
0
|
|
|
|
170,000
|
|
|
$
|
138,402
|
|
|
$
|
246,805
|
|
|
|
|
|
|
(f)
|
Common stock and warrants issued as consideration for loans and loan guarantees
|
The Company issues stock, warrants,
and convertible debt to various lenders and loan guarantors in consideration for their making or guaranteeing certain loans to
the Company. Depending on the terms, cash flows, and other characteristics of the each loan or loan renewal, consideration paid
in the form of stock, warrants, and convertible debt is recorded as debt issuance cost or original issue discount, and amortized
over the corresponding term of each loan as either interest expense or debt extinguishment expense. During the period from August
19, 1999 (inception) through December 31, 2010, the Company issued or accrued for issuance a total of 940,136 shares of common
stock, 1,158,155 warrants, and $733,334 of convertible debt in consideration for loans and guarantees. The interest expense and
debt extinguishment expense recorded during this period related to the stock, warrants and convertible debt were $3,463,473 and
$1,025,512, respectively. As of December 31, 2010, $4,400 of unamortized debt issuance cost related to stock issued as consideration
for loan guarantees remained.
Common
stock issued as consideration for loans and loan guarantees during the year ended December 31, 2012 is summarized as follows:
|
|
Shares
|
|
|
Fair
Value
|
|
|
Expense
Recognized
|
|
|
|
Shares
Accrued
as
of
January
1
|
|
|
Accrued
|
|
|
Issued
|
|
|
Shares
Accrued
as
of
December
31
|
|
|
Shares
Accrued
as
of
January
1
|
|
|
Accrued
|
|
|
Issued
|
|
|
Shares
Accrued
as
of
December
31
|
|
|
Interest
|
|
|
Debt
Extinguish-
ment
|
|
Crown Bank Loan (see Note 10(a))
|
|
|
155,172
|
|
|
|
512,070
|
|
|
|
586,782
|
|
|
|
80,460
|
|
|
|
152,068
|
|
|
$
|
515,950
|
|
|
$
|
605,258
|
|
|
$
|
62,760
|
|
|
$
|
0
|
|
|
$
|
589,504
|
|
Central Bank Loan (see Note 10(b)
|
|
|
6,666
|
|
|
|
18,174
|
|
|
|
15,754
|
|
|
|
9,086
|
|
|
$
|
6,666
|
|
|
$
|
16,357
|
|
|
$
|
14,845
|
|
|
$
|
8,178
|
|
|
$
|
0
|
|
|
$
|
16,172
|
|
Central Bank Credit Line (see Note (10(c))
|
|
|
2,824
|
|
|
|
16,403
|
|
|
|
16,539
|
|
|
|
2,688
|
|
|
$
|
1,310
|
|
|
$
|
14,553
|
|
|
$
|
13,149
|
|
|
$
|
2,714
|
|
|
$
|
6,048
|
|
|
$
|
10,316
|
|
Jeanne Rudelius Loan (see
Note 9(b))
|
|
|
0
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
23,200
|
|
|
$
|
23,200
|
|
|
$
|
0
|
|
|
$
|
23,200
|
|
|
$
|
0
|
|
Common
stock issued as consideration for loans and loan guarantees during the year ended December 31, 2011 is summarized as follows:
|
|
Shares
|
|
|
Fair
Value
|
|
|
Expense
Recognized
|
|
|
|
Shares
Accrued
as
of
January
1
|
|
|
Accrued
|
|
|
Issued
|
|
|
Shares
Accrued
as
of
December
31
|
|
|
Shares
Accrued
as
of
January
1
|
|
|
Accrued
|
|
|
Issued
|
|
|
Shares
Accrued
as
of
December
31
|
|
|
Interest
|
|
|
Debt
Extinguish-
ment
|
|
Crown Bank Loan (see Note 10(a))
|
|
|
0
|
|
|
|
381,838
|
|
|
|
226,666
|
|
|
|
155,172
|
|
|
$
|
0
|
|
|
$
|
434,234
|
|
|
$
|
282,166
|
|
|
|
152,068
|
|
|
$
|
0
|
|
|
$
|
360,680
|
|
Central Bank Loan (see Note 10(b)
|
|
|
11,111
|
|
|
|
13,333
|
|
|
|
17,778
|
|
|
|
6,666
|
|
|
$
|
15,000
|
|
|
$
|
13,333
|
|
|
$
|
21,667
|
|
|
$
|
6,666
|
|
|
$
|
0
|
|
|
$
|
12,518
|
|
Central Bank Credit Line (see Note (10(c))
|
|
|
0
|
|
|
|
11,299
|
|
|
|
8,475
|
|
|
|
2,824
|
|
|
$
|
0
|
|
|
$
|
6,666
|
|
|
$
|
5,347
|
|
|
$
|
1,310
|
|
|
$
|
3,946
|
|
|
$
|
0
|
|
$300,000 Loan (see Note 9(d))
|
|
|
65,301
|
|
|
|
5,331
|
|
|
|
70,632
|
|
|
|
0
|
|
|
$
|
88,154
|
|
|
$
|
7,197
|
|
|
$
|
95,351
|
|
|
$
|
0
|
|
|
$
|
7,800
|
|
|
$
|
0
|
|
Warrants
issued as consideration for loans during the year ended December 31, 2012 is summarized as follows:
|
|
|
|
|
|
|
Warrants Issued or
Accrued for Issuance
|
|
|
Expense Recognized
|
|
|
|
Warrant
Term
|
|
Exercise
Price
|
|
|
Number
|
|
|
Fair Value
|
|
|
Interest
|
|
|
Debt
Extinguishment
|
|
Warrants issued pursuant to $40,000 Loan (see Note 9(a))
|
|
5 years
|
|
$
|
1.30
|
|
|
|
120,000
|
|
|
$
|
74,250
|
|
|
$
|
7,241
|
|
|
$
|
74,250
|
|
Warrants issued pursuant to $21,000 Loan (see Note 9(a))
|
|
5 years
|
|
$
|
1.30
|
|
|
|
40,000
|
|
|
$
|
40,400
|
|
|
$
|
0
|
|
|
$
|
35,350
|
|
Warrants issued pursuant to $15,000 note (see (Note 9(a))
|
|
5 years
|
|
$
|
1.30
|
|
|
|
22,500
|
|
|
$
|
7,575
|
|
|
$
|
7,575
|
|
|
$
|
0
|
|
Warrants
issued as consideration for loans during the year ended December 31, 2011 is summarized as follows:
|
|
|
|
|
|
|
Warrants Issued or
Accrued for issuance
|
|
|
Expense Recognized
|
|
|
|
Warrant
Term
|
|
Exercise
Price
|
|
|
Number
|
|
|
Fair Value
|
|
|
Interest
|
|
|
Debt
Extinguishment
|
|
Warrants issued pursuant to $40,000 Loan (see Note 9(a))
|
|
5 years
|
|
$
|
1.30
|
|
|
|
17,500
|
|
|
$
|
8,643
|
|
|
$
|
1,402
|
|
|
$
|
0
|
|
During the period from August 19, 1999 (inception)
through December 31, 2010, the Company completed two tender offers to holders of certain outstanding warrants that provide consideration
as an incentive for the early exercise of such warrants. Pursuant to the offers, the Company temporarily modified the terms of
certain outstanding warrants so that each holder who tendered them for early exercise received, in addition to the shares of common
stock purchased upon exercise, new three-year warrants to purchase the same number of shares of the Company’s common stock
at an exercise price of $1.30 per share (the “Replacement Warrants”). The Company allowed warrant holders to pay for
their warrant exercises in cash or through the cancellation of existing Company debts with the warrant holders.
In aggregate, warrants to purchase 2,252,358 shares
of common stock were tendered for early exercise, resulting in gross cash proceeds to the Company of $1,838,769 and the cancellation
of $1,089,232 of debt. Upon the closings of the tender offers, the Company issued 2,252,358 shares of common stock and 2,252,358
Replacement Warrants. The $2,727,103 fair value of the Replacement Warrants as determined using the Black-Scholes pricing model
was recorded as incentive for early warrant exercise expense in other expenses on the consolidated statement of operations. The
incentive for early warrant exercise was recorded as other expense rather than as an operating expense, as the Company does not
consider this to be a normal part of its operations.
|
(h)
|
Conversion of convertible debt
|
During the period from August 19, 1999 (inception)
through December 31, 2010, holders of an aggregate $1,043,834 of convertible notes converted their debt, along with $143,815 of
accrued interest thereon, into 845,436 shares of common stock. In addition, the holder of a $600,000 convertible note agreed to
convert the note and $97,546 of accrued interest into 381,173 shares of common stock and 381,173 warrants. The $870,981 fair value
of the warrants was expensed as debt issuance cost. The warrants, which were subsequently exercised pursuant to a cashless exercise
provision, resulting in the issuance of 102,154 shares of common stock.
On December 28, 2012, $29,658 of convertible notes
held by Company Directors, together with $3,941 of accrued interest was converted into 30,544 shares of the Company’s common
stock under the original terms of the note (see Note 13).
|
(i)
|
Warrant exercises and summary of warrant activity
|
During the period from August 19, 1999 (inception)
through December 31, 2010, the Company issued 483,999 shares of common stock upon the exercise of warrants by certain warrant holders
and realized proceeds of $344,631.
The Company issued 366,000 shares of common stock to
certain warrant holders upon their exercise of warrants during the year ended December 31, 2012. Pursuant to these exercises, the
Company realized cash proceeds of $178,000 and applied $5,000 of accrued interest due in lieu of cash. The Company issued 21,398
shares of common stock to certain warrant holders upon their cashless exercise of 70,000 warrants during the year ended December 31,
2011.
Warrant activity was as follows for the years ended
December 31:
|
|
Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Outstanding, January 1
|
|
|
7,876,593
|
|
|
|
7,803,718
|
|
|
$
|
1.33
|
|
|
$
|
1.33
|
|
Granted
|
|
|
182,500
|
|
|
|
187,500
|
|
|
|
1.35
|
|
|
|
1.37
|
|
Exercised
|
|
|
(366,000
|
)
|
|
|
(70,000
|
)
|
|
|
0.50
|
|
|
|
0.75
|
|
Expired
|
|
|
(1,298,163
|
)
|
|
|
(44,625
|
)
|
|
|
1.38
|
|
|
|
2.48
|
|
Outstanding, December 31
|
|
|
6,394,930
|
|
|
|
7,876,593
|
|
|
$
|
1.37
|
|
|
$
|
1.33
|
|
The table above excludes 305,000 warrants that will
be issued as part of Units to be delivered upon exercise of underwriter’s warrants originally issued pursuant to the 2009
Public Offering (see Note 12(d)). Expenses related to warrants issued to non-employees for services provided were $0, $116,334,
and $683,370 for the years ended December 31, 2012 and 2011, and the period from August 17, 1999 (inception) to December 31, 2012,
respectively, or $0.00, $0.01, and $0.14 on a per share basis.
The weighted-average fair value of the warrants granted
during the years ended December 31, 2012 and 2011 was $0.69 and $0.78, respectively, and such warrants were immediately vested
and exercisable on the date of grant. The fair value of stock warrants is the estimated present value at grant date using the Black-Scholes
pricing model with the following weighted average assumptions:
|
|
For the years ended December
31,
|
|
|
|
2012
|
|
|
2011
|
|
Risk-free Interest Rate
|
|
|
0.97
|
%
|
|
|
1.25
|
%
|
Expected Life of Warrants
1
|
|
|
5.2 years
|
|
|
|
4.9 years
|
|
Expected Volatility
|
|
|
122.5
|
%
|
|
|
125.6
|
%
|
Expected Dividend Yield
|
|
|
0
|
|
|
|
0
|
|
1
The contractual term of the warrants.
The expected volatility is based on weekly price data
since the date of the Merger on April 5, 2004. The risk-free rates for the expected terms of the stock warrants are based on the
U.S. Treasury yield curve in effect at the time of grant.
The following table summarizes the amounts expensed
related to warrants issued:
|
|
Expense
|
|
|
Per Share
|
|
|
|
Year Ended
December 31,
|
|
|
August 17, 1999
(Inception) to
|
|
|
Year Ended
December 31,
|
|
|
August 17, 1999
(Inception) to
|
|
|
|
2012
|
|
|
2011
|
|
|
December 31,
2012
|
|
|
2012
|
|
|
2011
|
|
|
December 31,
2012
|
|
Consideration and interest paid to lenders and loan guarantors in the form of warrants
|
|
$
|
114,650
|
|
|
$
|
1,402
|
|
|
$
|
2,608,076
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost related to warrants issued to directors and consultants
|
|
|
0
|
|
|
|
0
|
|
|
$
|
122,575
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost related to warrants issued to directors (in lieu of stock options)
|
|
|
0
|
|
|
|
0
|
|
|
$
|
12,075
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
In April 2002, the Company’s Board of Directors
(the “Board”) passed a resolution adopting the ProUroCare Medical Inc. 2002 Stock Plan (the “2002 Plan”),
reserving 150,000 shares of the Company’s common stock for issuance. The 2002 Stock Plan terminated in April, 2012, and no
more options may be issued under the plan.
In July 2004, the Board passed a
resolution adopting the ProUroCare Medical Inc. 2004 Stock Option Plan (the “2004 Plan”), which was approved by the
Company’s shareholders in July 2005. The Company has reserved 150,000 shares of common stock for issuance under the 2004
Plan.
In August 2009, the Company’s
shareholders approved the ProUroCare Medical Inc. 2009 Stock Option Plan (the “2009 Plan”). The Company has reserved
1,200,000 shares of common stock for issuance under the 2009 Plan.
In August 2012, the Company’s
shareholders approved the ProUroCare Medical Inc. 2012 Stock Option Plan (the “2012 Plan”). The Company has reserved
500,000 shares of common stock for issuance under the 2012 Plan.
The plans permit the Company to grant
incentive and nonqualified options, stock appreciation rights, stock awards, restricted stock awards, performance shares and cash
awards to Company employees and independent contractors. The exercise price for all options granted under the plans shall be determined
by the Board. The term of each stock option and period of exercisability will also be set by the Board, but will not exceed a period
of ten years and one day from grant date. The agreements also include provisions for anti-dilution of options.
Each of the options
granted below were valued using the Black-Scholes pricing model (see Note 1(i)) and are being expensed over the vesting period
as general and administrative expense.
During the period from August 17, 1999 (inception)
to December 31, 2010, the Company issued a total of 1,082,923 options to its employees, directors, and consultants, and recognized
stock-based compensation expense of $2,415,771.
Stock option activity during the years ended December
31, 2012 and 2011 is summarized in the following table. All options issued were seven year options.
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
Year Ended December 31, 2011
|
|
|
|
Exercise
Price
|
|
|
Options
Issued
|
|
|
Fair
Value
Per Share
|
|
|
G&A
Expense
Recognized
|
|
|
Options
Issued
|
|
|
Fair Value
Per Share
|
|
|
G&A
Expense
Recognized
|
|
Incentive options issued to executives May 3, 2011. Performance-based options did not vest, and the expense was reversed in 2012
|
|
$
|
0.98
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
(94,247
|
)
|
|
|
240,000
|
|
|
$
|
0.78
|
|
|
$
|
94,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified options, one year vesting, issued to a director upon election to the Board of Directors June 27, 2011
|
|
$
|
0.92
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
769
|
|
|
|
2,265
|
|
|
$
|
0.68
|
|
|
$
|
771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified options, one year vesting, issued to six non-employee directors pursuant to annual option award program on August 9, 2011
|
|
$
|
0.87
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
78,161
|
|
|
|
172,416
|
|
|
$
|
0.68
|
|
|
$
|
39,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified options, one year vesting, issued to six non-employee directors pursuant to annual option award program on August 9, 2012
|
|
$
|
0.60
|
|
|
|
150,000
|
|
|
$
|
0.46
|
|
|
$
|
34,500
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified options, nine month vesting, issued to a director upon election to the Board of Directors October 30, 2012
|
|
$
|
0.50
|
|
|
|
18,750
|
|
|
$
|
0.38
|
|
|
$
|
1,781
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options issued through December 31, 2010, portion vesting in period
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
$
|
5,048
|
|
|
|
0
|
|
|
|
|
|
|
$
|
64,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
168,750
|
|
|
|
|
|
|
$
|
26,012
|
|
|
|
414,681
|
|
|
|
|
|
|
$
|
198,303
|
|
In determining the compensation cost of the options
granted for the years ended December 31, 2012 and 2011, the fair value of each option grant has been estimated on the date of grant
using the Black-Scholes pricing model and the weighted-average assumptions are summarized as follows:
|
|
For the years ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Risk-free Interest Rate
|
|
|
0.50
|
%
|
|
|
1.14
|
%
|
Expected Life of Options Granted
|
|
|
3.8 years
|
|
|
|
4.1 years
|
|
Expected Volatility
|
|
|
121.2
|
%
|
|
|
125.5
|
%
|
Expected Dividend Yield
|
|
|
0
|
|
|
|
0
|
|
The expected life of the options
is determined using a simplified method, computed as the average of the option vesting periods and the contractual term of the
option, as the company does not have sufficient historical data to estimate the expected term of share-based awards. For performance-based
options that vest upon the occurrence of an event, the Company uses an estimate of when the event will occur as the vesting period
used in the Black-Scholes calculation for each option grant. Expected volatility is based on a simple average of weekly price data
since the date of the Merger. Since the Company has only two employees, management expects and estimates that substantially all
employee stock options will vest, and therefore the forfeiture rate used was zero. The risk-free rates for the expected terms of
the stock options and awards are based on the U.S. Treasury yield curve in effect at the time of grant.
Stock-based compensation expense related to options
and per share basis for the years ended December 31, 2012 and 2011, and the period from August 17, 1999 (inception) to December
31, 2012 is outlined below. The Company estimates the amount of future stock-based compensation expense related to currently outstanding
options to be approximately $35,000 for the years ending December 31, 2013. Shares issued upon the exercise of stock options are
newly issued from the Company’s authorized shares.
|
|
2012
|
|
|
2011
|
|
|
August 17, 1999 (Inception)
to December 31, 2012
|
|
|
|
Expense
|
|
|
Per Share
|
|
|
Expense
|
|
|
Per Share
|
|
|
Expense
|
|
|
Per Share
|
|
Stock-based compensation
|
|
$
|
26,012
|
|
|
$
|
0.00
|
|
|
$
|
198,303
|
|
|
$
|
0.01
|
|
|
$
|
2,640,086
|
|
|
$
|
0.53
|
|
Stock option activity was as follows for the years
ended December 31:
|
|
Options
|
|
|
Weighted-Average Exercise
Price
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Outstanding, January 1
|
|
|
1,343,604
|
|
|
|
933,923
|
|
|
$
|
2.27
|
|
|
$
|
2.90
|
|
Granted
|
|
|
168,750
|
|
|
|
414,681
|
|
|
|
0.59
|
|
|
|
0.93
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Expired
|
|
|
(339,000
|
)
|
|
|
(5,000
|
)
|
|
|
5.11
|
|
|
|
7.50
|
|
Outstanding, December 31
|
|
|
1,173,354
|
|
|
|
1,343,604
|
|
|
$
|
1.21
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31
|
|
|
1,029,395
|
|
|
|
636,633
|
|
|
$
|
1.29
|
|
|
$
|
3.46
|
|
The following tables summarize information about stock
options outstanding as of December 31, 2012:
|
|
Options Vested or Expected to Vest
|
|
|
Options Exercisable
|
|
Range of
Exercise Prices
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
$0.60-$1.25
|
|
|
743,931
|
|
|
$
|
0.87
|
|
|
|
4.48
|
|
|
|
599,972
|
|
|
$
|
0.92
|
|
$1.50 - $1.72
|
|
|
392,675
|
|
|
$
|
1.54
|
|
|
|
3.91
|
|
|
|
392,675
|
|
|
$
|
1.54
|
|
$2.41-$2.90
|
|
|
23,748
|
|
|
$
|
2.47
|
|
|
|
3.82
|
|
|
|
23,748
|
|
|
$
|
2.47
|
|
$5.00-$7.50
|
|
|
10,000
|
|
|
$
|
5.00
|
|
|
|
4.09
|
|
|
|
10,000
|
|
|
$
|
5.00
|
|
$20.00
|
|
|
3,000
|
|
|
$
|
20.00
|
|
|
|
1.09
|
|
|
|
3,000
|
|
|
$
|
20.00
|
|
|
|
|
1,173,354
|
|
|
$
|
1.21
|
|
|
|
3.52
|
|
|
|
1,029,395
|
|
|
$
|
1.29
|
|
|
|
2012
|
|
|
2011
|
|
|
August 17, 1999
(Inception) to
December 31, 2012
|
|
Average Fair Value Per Shares of Options Granted
|
|
$
|
0.45
|
|
|
$
|
0.73
|
|
|
$
|
1.67
|
|
Total Fair Value of Options Vested
|
|
$
|
118,478
|
|
|
$
|
72,366
|
|
|
|
n/a
|
|
Aggregate intrinsic value of options outstanding
|
|
$
|
39,000
|
|
|
$
|
70,679
|
|
|
|
n/a
|
|
Aggregate intrinsic value of options exercisable
|
|
$
|
12,000
|
|
|
$
|
41,958
|
|
|
|
n/a
|
|
The Company considers its directors, executives
and beneficial shareholders of more than five percent of its common stock to be related parties. During the years ended December
31, 2012 and 2011, the following significant transactions were made between the Company and those parties that were related parties
at the time of each transaction:
From time to time certain related parties have made
loans to the Company or provide guarantees of the Company’s debt, for which the Company has paid interest and other consideration
in the form of cash, warrants, or common stock. This consideration is expensed as either related interest expense or related party
debt extinguishment expense, depending on the characteristics of each loan. In total, amounts expensed for related party interest
and related party debt extinguishment costs were $73,452 and $592,004, respectively, during the year ended December 31, 2012, $27,440
and $360,680, respectively, during the year ended December 31, 2011, and $2,406,941 and $1,6661,267, respectively, during the period
from August 17, 1999 (inception) to December 31, 2012.
On February 8, 2011, the Company issued 70,632 shares
to Jack Petersen, a beneficial owner of greater than five percent of its common stock, as consideration and for interest earned
through that date pursuant to the terms of his $300,000 promissory note and consideration agreement with the Company (see Note
12(f)).
On December 1, 2011, the Company issued a total of
$42,558 in convertible notes to the Company’s directors in settlement of cash advances they made to the Company between August
1, 2012 and December 1, 2012 (see Note 9(d)). On December 28, 2012, $29,658 of the convertible notes together with $3,941 of accrued
interest was converted into 30,544 shares of the Company’s common stock under the original terms of the note, and $6,500
of the notes were repaid in cash.
During the years ended December 31, 2012 and 2011,
director David Koenig, performed consulting services for the Company valued at $48,000 and $42,000, respectively. The Company paid
$25,000 and $30,000 of the consulting fees in cash and issued 19,000 and 11,112 shares of common stock to Mr. Koenig in lieu of
cash for $19,000 and $12,000 of fees, respectively, during the same periods. Consulting fees of $4,000 were payable as of December
31, 2012.
During the years ended December 31, 2012 and 2011,
director Lawrence Getlin performed regulatory consulting services for the Company valued at $35,250 and $33,700, respectively.
The Company paid $0 and $4,200 of the consulting fees in cash and issued 17,950 and 23,182 shares of its common stock to Mr. Getlin
in lieu of cash for $17,950 and $25,500 of consulting fees, respectively, during the same periods. Mr. Getlin received $2,700 of
convertible notes in lieu of cash for $2,700 of consulting fees during the year ended December 31, 2011. Consulting fees of $18,600
were payable as of December 31, 2012.
The
Company provides consideration in the form of shares of its common stock to Messrs. Davis and Reiling (together, the “Guarantors”)
as Guarantors of the Crown Bank promissory note (see Note 10(a)). During the years ended December 31, 2012 and 2011, each
Guarantor earned 256,035 and 190,919 shares under these consideration arrangements valued at $257,975 and $217,117, respectively.
The Company borrowed $100,000 from each of the guarantors pursuant to convertible promissory notes on March 31, 2012, using the
proceeds to reduce the principal amount of the Crown Bank promissory note. The notes bear interest at 10% per annum payable on
the maturity date, mature on March 31, 2014, and are collateralized by a subordinated interest in all of the Company’s assets.
Between June 29, 2011 and December 9, 2011, the Company
held closings on the 2011 Convertible Notes (see Note 9(d)). The notes bear interest at 10% per annum payable on the maturity date,
mature on September 20, 2013, and the principal and accrued interest are convertible into shares of the Company’s common
stock at a conversion price of $1.30 per share. Related party participation in the closings included directors Mr. Davis ($150,000)
and Mr. Getlin ($25,000), the spouse of director Scott Smith ($25,000), Mr. Reiling ($100,000) and Mr. Petersen ($50,000).
Between September 26, 2012 and October 29, 2012, the
Company borrowed a total of $250,000 from Jeanne Rudelius, a sister of Director Robert Rudelius, pursuant to secured promissory
notes (see Note 9(b)). The notes matured on December 26, 2012, and are secured by a subordinated security interest in all Company
assets. In lieu of interest or any other consideration, the Company issued a total of 50,000 shares of its common stock to the
lender.
During the year ended December 31, 2012, Robert Rudelius,
a director of the Company, performed consulting services for the Company valued at $60,000, of which $6,000 was paid in cash and
$54,000 were payable as of December 31, 2012.
The Company issued an aggregate of 101,016 and 100,187
shares of its common stock to its directors as payment for $79,500 and $88,000 of directors fees during the years ended December
31, 2012 and 2011, respectively, in lieu of cash.