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EX-32.1 - ProUroCare Medical Inc.v211317_ex32-1.htm
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EX-31.2 - ProUroCare Medical Inc.v211317_ex31-2.htm
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EX-10.36 - ProUroCare Medical Inc.v211317_ex10-36.htm
EX-10.35 - ProUroCare Medical Inc.v211317_ex10-35.htm
EX-10.34 - ProUroCare Medical Inc.v211317_ex10-34.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2010

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________________ to __________________
 
Commission file number: 000-51774

ProUroCare Medical Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
20-1212923
(State or other jurisdiction
(IRS Employer
of incorporation)
Identification No.)
   
6440 Flying Cloud Drive, Suite 101, Eden Prairie, MN
55344
(Address of principal executive offices)
(Zip Code)
   
Registrant’s telephone number, including area code 952-476-9093
 
___________________________________________________________________________________
(Former name or former address, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Exchange Act:  None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock $0.00001 par value; Common Stock Warrants
 
Units, consisting of one share of Common Stock and one Warrant 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes     x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
o Yes     x No
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes     o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes     o No
 
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting 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 a shell company (as defined by Rule 12b-2 of the Exchange Act).
o Yes     x No
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $20,641,344 as of June 30, 2010
 
Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date.
 
15,571,993 common shares and 306,679 Units at February 11, 2011
 



 
INTRODUCTORY CAUTIONARY STATEMENT

This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  These statements are based on management’s current beliefs and assumptions and on information currently available to us. Forward-looking statements include, among others, the information concerning possible or assumed future results of operations of ProUroCare Medical Inc. and its subsidiary (the "Company,” “we,” “us,” or “our”) set forth in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" and elsewhere in this Annual Report.  Forward-looking statements also include statements where the words "may,”" "will,” "should,” "could,” "expect,” "anticipate,” "intend,” "plan,” "believe,” "estimate,” "predict,” "potential,” or similar expressions are used.  Forward-looking statements are not guarantees of future performance. Our future actual results and shareholder values may likely differ materially from those expressed in these forward-looking statements. We caution you not to put undue reliance on any forward-looking statements included in this document.  See Part I, Item 1A, “Risk Factors Associated with our Business, Operations, and Securities.”



TABLE OF CONTENTS
 
     
Page
PART I
     
ITEM 1:
BUSINESS
 
1
ITEM 1A:
RISK FACTORS
 
14
ITEM 1B:
UNRESOLVED STAFF COMMENTS
 
27
ITEM 2:
PROPERTIES
 
27
ITEM 3:
LEGAL PROCEEDINGS
 
27
       
PART II
     
ITEM 4:
RESERVED
 
27
ITEM 5:
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
27
ITEM 6:
SELECTED FINANCIAL DATA
 
28
ITEM 7:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
29
ITEM 7A:
QUANTITATIVE AND QUALITATTIVE DISCLOSURES ABOUT MARKET RISK
 
35
ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
F-1
ITEM 9:
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
 
36
ITEM 9A(T):
CONTROLS AND PROCEDURES
 
36
ITEM 9B:
OTHER INFORMATION
 
37
       
PART III
     
ITEM 10:
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
37
ITEM 11:
EXECUTIVE COMPENSATION
 
40
ITEM 12:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
43
ITEM 13:
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
   
 
AND DIRECTOR INDEPENDENCE
 
45
ITEM 14:
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
46
       
PART IV
     
ITEM 15:
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
48
       
SIGNATURES
 
52
 

 
PART I

 
 
We have developed and intend to market an innovative prostate imaging system known as the ProUroScan™ System.  The ProUroScan System creates images and documents abnormalities of the prostate using our new, proprietary mechanical elasticity imaging technology.  The ProUroScan System is an imaging system designed for use as an aid to the physician in documenting abnormalities in the prostate that have been previously detected by a digital rectal exam (“DRE”). As an adjunct to DRE, the ProUroScan System will be used following an abnormal DRE to generate a real-time image of the prostate.  The final composite image is saved as a permanent electronic record and can be conveniently retrieved to view previous test results.
 
Most abnormalities found in otherwise homogenous organ tissues are less elastic than normal tissues.  The ProUroScan’s unique technology uses mathematical algorithms to interpret measurements of relative prostate tissue elasticity taken by mechanical sensors to render images of the prostate in real time.  Using the system’s specially designed rectal probe, physicians can quickly and cost-effectively visualize the prostate gland and document specific areas of concern.  The real-time image can be saved as a permanent electronic record.
 
Current tools used to detect the presence of an abnormality in the prostate have significant limitations, a fact that has been documented in numerous scientific articles published throughout the world.  Prostate disease patients who receive a positive test result must make numerous decisions, such as whether to biopsy, based on limited, non-specific and sometimes subjective information.  We believe that our ProUroScan System’s ability to produce images of the prostate and objectively document abnormalities will be of significant value to the patient and his physician as an adjunct to the DRE.
 
The ProUroScan System is not currently marketed or sold and has not yet been cleared for marketing by the U.S. Food and Drug Administration (“FDA”). Our goal is to have ProUroScan System regulated by the FDA as a Class II device.  We are implementing a regulatory strategy to obtain FDA clearance of the ProUroScan System for a documentation claim and for the ProUroScan System to serve as an adjunct to a DRE.  The current status of the FDA market clearance process is described below under the caption “ProUroCare System Status.”
 
Once FDA clearance is obtained on our current generation ProUroScan System, the systems will be manufactured by one or more FDA-regulated contract manufacturers and marketed in cooperation with a to-be-determined medical products company with an established worldwide presence in the urology market.
 
Our imaging technology is based on work originally performed by Artann Laboratories Inc. (“Artann”), a scientific technology company based in Trenton, New Jersey, focused on early-stage technology development. In 2002, we licensed the rights to this technology and since then have worked with Artann on its development. In September 2006, Artann was awarded a $3 million Small Business Innovation Research Phase II Competitive Renewal grant from the National Institute of Health and the National Cancer Institute to help advance the development and application for clearance of the ProUroScan System by the FDA.  We have entered into license and development and commercialization agreements with Artann relating to their existing technology and know-how and all future technology developed by Artann in our field of use. After we obtain FDA clearance, it is our intent to expand our working relationship with Artann to include their participation in the development and licensing of additional technologies.
 
We believe the ProUroScan System’s existing technology provides a platform on which to develop multiple future generation systems. In the future, following our initial FDA regulatory clearance, we intend to work with Artann to develop and introduce enhanced versions and additional indications for this technology.  For example, we plan to study and develop enhanced versions of the system that may be able to monitor changes in prostate tissue over time, guide prostate biopsies, do prostate disease screening and assess changes in prostate size following drug treatment for benign prostate hyperplasia (“BPH”).  Future generation systems will require us to obtain regulatory approval or clearance by conducting studies and filing additional submissions with the FDA.
 
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Prostate Disease
 
Prostate cancer is the most common form of cancer and the second leading cause of cancer death in men. According to the National Cancer Institute, more than 217,730 men were expected to be diagnosed with prostate cancer and over 32,000 were expected to die from the disease in 2010. Currently, there are approximately 42 million men in the U.S. over the age of 50. For men in this age category, the standard of care to screen for the presence of prostate cancer is to have a physical exam each year in which two tests are routinely performed: the DRE and the Prostate Specific Antigen (“PSA”) blood test. Although PSA and DRE provide some positive predictive value, many factors limit their accuracy and usefulness, and neither test creates a physical or visual record of the abnormality or its position in the prostate.
 
A patient with a positive DRE or an elevated PSA is typically referred to a urologist for further diagnosis. The urologist will usually perform a prostate biopsy to obtain tissue samples for microscopic analysis. The prostate is biopsied by a needle that is guided by ultrasound into the prostate through the rectal wall. Since the existence and exact location of possible cancerous tissue is not known, the urologist will usually take 10 to 14 samples in a scattered pattern throughout the prostate in an attempt to find the suspect tissue. The tissue samples are then sent to a laboratory for analysis and interpretation, and the results are reported several days later. If the results are negative or indeterminate, the urologist may suggest a second biopsy procedure, or that the patient increase the frequency of future screening examinations.
 
The treatment path for patients who test positive for prostate cancer depends on many variables, including age, location and pathology of the cancerous tissue and general health of the patient. Generally, a younger, otherwise healthy patient will elect to have the prostate removed to eliminate the possibility that it might spread beyond the prostate. Older, less healthy patients may elect not to undergo surgery, and instead monitor the disease closely by semi-annual PSA and DRE exams, and annual biopsies. This monitoring regimen is commonly referred to as “active surveillance.” Some patients may elect radiation or drug treatments, in addition to necessary ongoing active surveillance. The National Cancer Institute estimates that there are approximately 2.3 million men alive who have a history of cancer of the prostate.
 
Limitations of Current Prostate Cancer Screening and Diagnosis
 
The two most common screening tests for identifying prostate cancer are the DRE and the PSA. These tests have been used for years, but have often been criticized for their lack of specificity and selectivity.
 
In a DRE exam, a physician wearing a latex glove inserts a lubricated finger into the rectum to palpate the prostate gland to detect abnormalities. The clinician must rely on his or her experience and sensitivity of touch to estimate the size of the prostate and detect irregularities in shape or hardness. There is significant subjectivity inherent in the DRE exam which can be negatively affected by poor examiner training, lack of experience or poor ability to interpret the results, as well as other patient related limitations including excessive obesity, patient discomfort and unusual anatomical positioning of the prostate.  Data from community-based studies indicate that the positive predictive value of a DRE in detecting cancer is 15% to 30% and varies relatively little with age. In a Scandinavian study, the positive predictive value of DRE was found to be only 22% to 29%. According to the Eighth Edition of Campbell’s Urology, a DRE has only fair reproducibility even with experienced examiners and the test misses a substantial proportion of cancers before they become advanced and less amenable to treatment.
 
A PSA test is a simple blood test that measures the presence of prostate-specific antigens in the blood serum. The advantages offered by PSA testing are its simplicity, objectivity, reproducibility and low level of invasiveness.  In clinical practice, a PSA level greater than 4ng/mL is generally considered an abnormal result.  Community-based studies have shown that PSA levels greater than 4ng/mL are seen in about 15% of men who are older than 50 years of age. The probability, or positive predictive value, that a man who is older than 50 having prostate cancer if his PSA level is elevated is approximately 20% to 30%. However, the likelihood of cancer depends on the degree of elevation in the PSA levels. For levels between 4 and 10ng/mL, the positive predictive value is about 20 percent. This value increases to between 42 percent and 64 percent if the PSA level is greater than 10ng/nL. Although PSA is specific to prostate tissue, it is not specific to prostate cancer. Older men that have benign enlargement of the prostate and acute prostatitis often have elevated PSA levels. Serum levels of PSA can also be elevated for a period of time after transrectal needle biopsy, acute urinary retention, ejaculation and prostate surgery. Because of the prevalence of these conditions in men over the age of 50, the positive predictive value of PSA measurements decreases with age. Despite these variances, PSA testing has increased the detection rate of early-stage prostate cancers, which are more curable than late-stage cancers.
 
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Most clinicians have adopted the strategy of performing both tests in combination, which has been shown to increase the combined predictive value. In fact, in a large study of volunteers, the combination of DRE and PSA detected 26% more cancers than PSA alone. However, because of the significant risk of prostate cancer, prostate biopsy is recommended for all men who have DRE abnormalities, regardless of PSA level, because 25% of men with cancer have PSA levels less than 4mg/nL.
 
Prostate biopsies can cause patient anxiety, pain, bleeding and infection, and can lead to a significant increase in medical and non-medical costs to health care systems and patients. According to Oregon Health and Science University, approximately one million prostate biopsies are performed each year in the United States, but only approximately 25% of biopsy procedures performed detect the presence of cancer, and another 25% are given a false negative, meaning that no cancer is detected even when later it is found that a patient does have cancer.
 
The need for imaging and objective documentation of prostate disease
 
Prostate disease patients who receive a positive test result are asked to make numerous serious decisions based on limited, non-specific and sometimes subjective information.  Should they undergo one or more biopsy procedures, which itself generates 25% false negatives?  Should they have a radical prostatectomy?  Is active surveillance a better course of action?  In all of these scenarios, having a tool that can effectively image the presence of an abnormality will allow physicians and patients to better understand the current status of their disease. We believe that patients facing such decisions will benefit from the information provided by having an objective, readily obtained image of their prostate, both upon the initial imaging and also upon successive imaging if their disease is monitored over time.
 
Our Solution - ProUroScan Prostate Imaging System
 
We believe that the ProUroScan System is an innovative new technology that for the first time offers patients and their physicians the ability to quickly and cost effectively generate images of the abnormalities in the prostate in real-time following a positive DRE, and electronically store them for later retrieval and reference.
 
The ProUroScan System is an imaging system designed for use as an aid to the physician in visualizing and documenting abnormalities in the prostate.  As an adjunctive tool to DRE, it will be used after a physician identifies abnormalities during a DRE examination. The first generation system will provide an image or record of the pressures that are generated from palpation of the posterior surface of the prostate using a sensor probe. The system’s operation is based on measurement of the stress pattern created when the probe is pressed against the prostate through the rectal wall. Temporal and spatial changes in the stress pattern provide information on the elastic structure of the gland and allow two-dimensional reconstruction of prostate anatomy and visualization of prostate mechanical properties. The data acquired allow the calculation of prostate features such as size and shape. The prostate image is displayed on a screen that allows physicians to visualize tissue abnormalities in the prostate gland. In addition to the real time visual image, the results are stored electronically as a digital record.
 
The ProUroScan System consists of arrays of pressure sensors mounted on a probe, a central processing unit, proprietary software and image construction algorithms, and a color monitor. The probe is specially designed for the rectal anatomy to minimize patient discomfort. It is ergonomic for the clinician and similar to a traditional DRE for the patient. The probe utilizes highly sensitive pressure sensors located on the face of the probe head to palpate the prostate. The probe’s positioning system ensures that the person administering the scan examines the entire surface of the prostate, and assists prostate image construction.
 
To perform a scan, the clinician inserts the tip of the probe into the patient’s rectum and palpates the prostate. As the prostate is palpated, an image of the prostate is produced and displayed on the computer monitor, along with indicators of the amount of pressure being applied to help guide the clinician. Differences in tissue density or elasticity will be depicted in real time on a color monitor.  Tissue that can be easily displaced or is soft is represented in a light blue or yellow color where tissue that is less elastic (abnormal tissue) is represented in a dark brown or red color.  The image that is generated during the evaluation shows the physician in real-time where abnormal tissue exists in an otherwise homogeneous soft tissue organ.
 
Our Strategy
 
Our goal is to establish the ProUroScan System as part of the standard of care in the process of detecting and monitoring prostate disease, and to leverage our mechanical imaging technology and intellectual property to create new products both within and outside the urology field.  The key business strategies by which we intend to achieve these objectives include:
 
Obtain Regulatory Clearance for the ProUroScan Prostate Imaging System.  We are actively pursuing FDA clearance under a de novo application for a labeling claim to support use of the ProUroScan System to create an image to aid physicians in documenting abnormalities in the prostate following a suspicious DRE.  The details of our efforts in this regard are outlined under “ProUroScan System Regulatory Status,” below.  We have engaged highly experienced regulatory experts to assist us in this process including Washington D.C. based regulatory attorneys and a consultant with close ties to the FDA.  They both help us monitor the application’s status and provide assistance to achieve our regulatory goals as quickly as possible.
 
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Commercialize Our Products in Collaboration with a Corporate Distribution Partner.  As an effective way to accelerate sales and marketing support for the ProUroScan System, we plan to enter into a distribution agreement with a large urology product, diagnostic or drug company.  We believe that establishing such a relationship would allow us to penetrate markets more quickly and afford us an opportunity to obtain additional financial support in the form of licensing fees, equity investments and “in kind assistance” from key functional groups within the licensing organization.
 
Expand and Protect Our Intellectual Property Position.  We believe that our issued and licensed patents, patent applications and technology provide a strong position from which the company can successfully market the current ProUroScan System and develop new products within the prostate disease market segment.  We will also work to expand coverage for this technology in other market segments and for additional new technologies that may jointly be developed with the support of Artann.  We intend to implement our patent strategy globally because of the significant market opportunities that exist for our products outside the United States.
 
Drive Market Adoption and Establish Prostate Mechanical Imaging as a Standard of Care for Detecting Abnormalities in the Prostate.   Our clinical development strategy is to collaborate closely with leading physicians and scientific experts involved with prostate disease. We have established a high level of awareness and strong working relationships with leading experts and believe that their involvement will allow us to create awareness and scientific validity for the ProUroScan System while assisting in physician training and ongoing clinical studies. These scientific experts will also be important in promoting patient awareness and gaining widespread adoption of the ProUroScan System when approved and commercialized.
 
Drive revenue through a Patient-Pay Model and Eventually Seek Coverage and Payment for the ProUroScan Imaging Procedure.  We expect our primary revenue stream will consist of fees charged per procedure rather than from sales of equipment.  Initially, we anticipate using a “patient pay model” for physicians to receive payment for performing the ProUroScan System procedure. Under a patient pay model, in the absence of coverage from their health insurance, patients pay for the scan out of their own funds.  There is a high incentive for patients to seek additional information so they can make an informed and reasonable decision for themselves and their family. We believe that patients will be willing to pay for the ProUroScan System procedure out of their personal funds in sufficient numbers to support the launch of our product in advance of receiving favorable coverage decisions from third-party insurers.  Over time, we expect to establish the market value of the ProUroScan imaging procedure and pursue government and other third-party reimbursement coverage.
 
Leverage our Imaging Technology for Additional Clinical Applications and Indications.   We intend to continue to conduct research and development through Artann and other development partners that will enable us to expand our indications for use. For example, we plan to study and develop enhanced versions of the system that may be able to monitor changes in prostate tissue over time, guide prostate biopsies, do prostate disease screening and assess changes in prostate size following drug treatment for (“BPH”).  We believe that the underlying technology also has potential applications in other organ systems in addition to the prostate.  We will need to obtain FDA clearance for any such expanded claims or applications.
 
ProUroScan System Regulatory Status
 
The first generation ProUroScan System has been tested in laboratory experiments on prostate models and in a pre-clinical study. In addition, the system was used for over two years on approximately 168 patients at the Robert Wood Johnson Medical Center in New Brunswick, New Jersey.  In 2008, an article authored by Artann scientists and published in the peer- reviewed journal Urology reported that in 84% of the cases in this pre-clinical study, the ProUroScan System was able to construct three-dimensional (3D) and 2D cross-sectional images of the prostate.
 
In 2009, we completed a multi-site clinical study of the ProUroScan imaging system designed to provide documentation to the FDA of the system’s effectiveness in visualizing and documenting abnormalities of the prostate detected by DRE.  The trial included a final patient count of 56 patients assessed at the following medical centers:

 
·
Veterans Affairs Medical Center, Minneapolis, MN;
 
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·
Robert Wood Johnson Medical School Division of Urology, New Brunswick, NJ;
     
 
·
Mayo Clinic, Rochester, MN;
     
 
·
AccuMed Research Associates, Garden City, NY; and
     
 
·
Urological Associates of Lancaster, Lancaster, PA.
 
The ProUroScan System is not currently marketed or sold and has not yet been cleared for marketing by the FDA. Our goal is to have the ProUroScan System regulated by the FDA as a Class II device.  A Class II device is one in which general and specific controls exist to ensure that the device is safe and effective.  In a 510(k) application, applicants must demonstrate that the proposed device is substantially equivalent to an existing approved product, or “predicate device.”  Products that employ new or novel technologies, and for which through the 510(k) review process is found to have no comparable predicate device, may be cleared for marketing under Section 513(f) of the Federal Food, Drug, and Cosmetic Act (“FDCA”).  This path, referred to as a “de novo” application, is intended to allow new or novel technology devices to be cleared for marketing when an appropriate predicate device does not exist.
 
In November 2009, a 510(k) application for market clearance was filed with the FDA that incorporated a basic imaging and documentation claim.  From that submission, the FDA determined that the ProUroScan System is not substantially equivalent (“NSE”) to a device currently being marketed.  As required by Section 513(f)(2) of the FDCA Act, a submission was made in May 2010 to request 510(k) clearance under the de novo process.  This request asked the FDA to define mechanical imaging systems as devices that are intended to produce an elasticity image of the prostate as an aid in documenting abnormalities of the prostate that are initially identified by digital rectal examination and to be used by physicians as a documentation tool.  The de novo submission also recommended that the classification regulation state that a “mechanical imaging system” device consists of a trans-rectal probe with pressure sensor arrays and a motion tracking system that provides real time images of the prostate.  These proprietary components are unique to the ProUroScan System.
 
The de novo application remains under review by the FDA.  To date, we have not received any requests for additional information from FDA regarding the de novo application.
 
Under the terms of its contract with us, Artann is responsible for submitting and obtaining the initial regulatory clearance for the ProUroScan System for the basic imaging and documentation claim.  Once cleared and upon ProUroCare’s first commercial sale of a ProUroScan System, Artann will transfer the 510(k) to ProUroCare. Once cleared, the ProUroScan may serve as a predicate for future filings and expanded indications for use.
 
Physician Advisory Council
 
Our Physician Advisory Council will be made up of urologists from leading medical centers in the U.S., Canada and Europe.  Most of the participating physicians will be those who devote a significant portion of their practice focused on the diagnosis and treatment of prostate disease, primarily prostate cancer, and also participate on scientific committees and other organizations that are attempting to advance the tools and technologies available to physicians and patients fighting prostate disease.
 
Our Physician Advisory Council will play a central role in advancing this technology.  In the short run, council members will contribute to the development of training protocols and in-service education programs.  They will also provide additional support to the company by participating in future clinical studies, serving as principal investigators and authors of scientific articles and meeting presentations.  In the long term they will advise the company on health care trends, unmet clinical needs and new clinical or market opportunities.
 
Marketing and Distribution
 
We believe that the cost of establishing our own direct sales force of sufficient size and with the capability to commercialize the ProUroScan System worldwide would require a considerable period of time and significant funding.  As an effective way to develop our understanding the requirements of international markets and accelerate sales and marketing activities we plan to establish a distribution agreement with a large urology or diagnostic products company.  We believe that establishing such a relationship would allow us to penetrate markets more quickly and afford us an opportunity to obtain additional financial support in the form of licensing fees, equity investments and “in kind assistance” from key functional groups within the licensing organization.  We have begun exploring marketing opportunities with four of the eight to ten potential partner companies we have targeted.
 
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In advance of establishing such a distribution agreement, we plan to hire a small direct sales force in the United States that will focus on large urology practices in major metro markets.  The concentration of large urology group practices in the U.S. enables us to access a disproportionate number of physicians with a highly targeted sales force.  Once a distribution partner has been identified and a distribution agreement put in place, our sales force will be used in business-to-business support to the partnering organization.  They will also be used to assist in the initial analysis and development of other markets.
 
We anticipate that, in time, the majority of our revenue will be generated from testing fees bundled together with the sale of disposable supplies consumed in the scanning process.  Additional revenue will be generated by the sale of ProUroScan Systems, which likely will be placed in clinics under a variety of programs, which may include outright sales, operating leases, financing leases or arrangements where payments are based upon the usage of the system.
 
Patient Pay and Third-Party Reimbursement Strategy
 
Initially, we anticipate using a “patient pay model” for physicians to receive payment for performing the ProUroScan System procedure. Under a patient pay model, in the absence of coverage from their health insurance, patients pay for the scan out of their own funds. Medicare beneficiaries would sign an Advanced Beneficiary Notice (“ABN”) that would allow the provider to collect from the patient. Only one in four biopsies performed based on an abnormal PSA reading reveal prostate cancer, and only 50 percent of suspicious lesions found by DRE presented cancer on prostate biopsy. Given these statistics, in cases where patients have abnormal DRE or PSA test results or when a test result may not be clear, there is a high incentive to seek additional information so that patients can make an informed and reasonable decision for themselves and their family. We believe that a sufficient number of patients will be willing to pay for the ProUroScan System procedure out of their personal funds to support the launch of our product in advance of receiving favorable coverage decisions from third-party insurers. The concept of a patient pay model has been used successfully for other procedures (e.g., computer-aided detection (“CAD”) for mammography), and we expect this to be our approach for generating revenues during the early phases of product rollout.
 
In the U.S., health care providers that use the ProUroScan System will generally rely on third-party payors, including private payors and governmental payors such as Medicare and Medicaid, to cover and reimburse all or part of the cost of using the ProUroScan System. Consequently, sales of the ProUroScan System depend in part on the availability of coverage and reimbursement from third-party payors. The manner in which reimbursement is sought and obtained varies based upon the type of payor involved and the setting in which the procedure is furnished. In general, third-party payors will provide coverage and reimbursement for medically reasonable and necessary procedures and tests.  In determining payment rates, third-party payors increasingly are scrutinizing the amount charged for medical procedures.
 
Current Procedural Terminology (“CPT”) codes are used by physicians and other providers to submit claims.  At the outset, however, there will not be a unique CPT code for the ProUroScan procedure. During this period of time, physicians will have the option of submitting claims under a “miscellaneous” CPT code with proper documentation.  During the initial patient pay phase of our market introduction, we will collect the clinical and economic data necessary in order to apply for a unique CPT code from the American Medical Association (“AMA”).  Our initial commercial rollout will focus on urologists in the United States. By focusing on urologists, we expect to establish the clinical and economic value of the scan for patients, and to demonstrate to both private and government payors the rationale and parameters for establishing a CPT code and that the scan should be covered and adequately reimbursed.
 
We anticipate that the ProUroScan System may be covered by Medicare as a detection test for patients who have clinical signs or symptoms of disease. We anticipate that the first generation of the ProUroScan System will be used to image the prostate and to maintain historical records for future tracking for men who have an abnormal DRE or other signs or symptoms of disease. Thus, providers who perform prostate imaging using the first generation ProUroScan System likely will seek Medicare coverage as a detection, rather than a screening test, presuming that the patient presents with a sign or symptom of disease.
 
We expect that procedures using the ProUroScan System will be reimbursed either based upon the value of their unique billing and procedure code or as part of an office visit. Until a unique billing and procedure code is established, we expect that providers will be able to bill for the procedure using a miscellaneous CPT code. Claims submitted under a miscellaneous code are processed manually and the provider must include additional information to be used by the payor in determining the medical appropriateness of the procedure.
 
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The process of obtaining a new CPT code typically takes one or two years. In order to apply for a new, unique code, an application must be submitted to the AMA’s CPT Editorial Panel.  CMS then takes these recommendations into account when establishing the Medicare Physician Fee Schedule values. The amount of reimbursement the provider receives generally depends on the value assigned to the procedure by the AMA’s Relative Value Scale Update Committee. Most private payors also base their payment rates based on these values.
 
Many private payors look to Medicare as a guideline in setting their coverage policies and payment amounts. Unlike the Medicare program, however, private payors have no statutory impediment to covering screening tests.  The current coverage policies of these private payors may differ from the Medicare program, and the payment rates they make may be higher, lower or the same as the Medicare program. If CMS or other agencies decrease or limit reimbursement payments for physicians, this may affect coverage and reimbursement determinations by private payors. Additionally, some private payors do not follow the Medicare guidelines, and those payors may reimburse only a portion of the costs associated with the use of our products, or not at all.
 
Intellectual Property
 
Our objective as a medical device company is to effectively and aggressively obtain, maintain and enforce patent protection for our products, formulations, processes, methods and other proprietary technologies, preserve our trade secrets and licenses, and operate without infringing the proprietary rights of other parties both in the United States and in all other countries where we may do business. We seek to obtain, where appropriate and financially feasible, the broadest intellectual property protection possible for our products, proprietary information and proprietary technology through a combination of contractual arrangements, licenses, and patents, both in the United States and throughout the rest of the world.
 
We also depend upon the skills, knowledge and experience of scientific and technical personnel that we hire or outside organizations with whom we contract, as well as our advisors and consultants. To help protect our proprietary know-how that is not patentable, and for inventions for which patents may be difficult to enforce, we rely on trade-secret protection and confidentiality agreements. To this end, it is our practice to require employees, consultants, advisors and other contractors, as appropriate, to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.
 
We own patents, patent applications and know-how associated with mechanical prostate-imaging systems. These patents and patent applications include U.S. Patent Nos. 6,569,108 (“Real Time Mechanical Imaging of the Prostate”), 5,785,663 (“Method and Device for Mechanical Imaging of the Prostate”), 5,524,636 (“Method and Device for Elasticity Imaging”), 5,836,894 (“Apparatus for Measuring Mechanical Parameters of the Prostate and for Imaging the Prostate Using Such Parameters”), 6,142,959 (“Device for Palpation and Mechanical Imaging of the Prostate”), and 5,922,018 (“Method for Using a Transrectal Probe to Mechanically Image the Prostate Gland”). Together, our mechanical imaging technology is protected by seven U.S. patents (plus seven foreign patents and two foreign patent applications that are related to the U.S. patents) and, along with the Artann patent and applications discussed below, is the basis for the imaging technology used in our ProUroScan System. We own similar patents, patent applications and know-how associated with breast imaging. However, we do not intend to pursue any such applications within our near-term business plan. Under the Artann License Agreement, we agreed to grant Artann a non-exclusive, fully paid license to make, use or sell any imaging system for the diagnosis or treatment of disorders of the human breast.
 
Additionally, Artann has two U.S. patent and three U.S. patent applications that are licensed to us under the Artann License Agreement.  The patents are U.S. Patent Nos. 7,819,824 (“Method and Dual-Array Transducer Probe for Real Time Imaging of Prostate”) and D609,801 (“Calibration Chamber for Prostate Mechanical Imaging Probe”).  The applications are U.S. Patent Application Nos. 11/123,999; 12/885,688; and 13/005,401.
 
ProUroScan System Development Partner
 
The ProUroScan System is based on work originally performed by Artann and its affiliate, ArMed LLC. In 2002, we licensed the rights to this technology developed by Artann from its owner, Profile LLC (“Profile”), a technology holding company, and since then have worked with Artann and our other technology partners on its development. In April 2008, we acquired the patents, patent applications and other know-how associated with this technology previously licensed from Profile. In July 2008, we entered into two new agreements with Artann relating to this technology, namely, a license agreement (the “Artann License Agreement”) and a development and commercialization agreement (the “Artann Development Agreement”).  In December 2008 and November 2009, we amended these agreements to revise the effective dates of the agreements and alter the timing of certain payments to be made under the agreements.
 
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Under the Artann License Agreement, Artann has granted us an exclusive, worldwide, sub-licensable license to certain patent applications and other know-how needed to make, use and market certain mechanical imaging products for the diagnosis or treatment of urologic disorders of the prostate, kidney or liver. Artann also agreed to transfer to us possession of five clinical prostate imaging systems and grant us full access to all relevant documentation. As an upfront license fee pursuant to the Artann License Agreement, on January 14, 2009 we paid Artann $600,000 in cash and $500,000 in shares of our common stock.  In addition, we have agreed to pay Artann:
 
• 
a royalty fee equal to 4% of the first $30,000,000 of net cumulative sales of licensed products, 3% of the next $70,000,000 of net cumulative sales and 2% of net cumulative sales over $100,000,000; and
 
• 
a technology royalty fee of 1% of net sales of the prostate imaging system products through the earlier of December 31, 2016 or the date of last commercial sale of such products.
 
The combined royalties are subject to a minimum annual royalty equal to $50,000 per year for each of the first two years after FDA clearance for commercial sale and $100,000 per year for each year thereafter until termination or expiration of the Artann License Agreement. We also agreed to grant Artann a non-exclusive, fully paid, sub-licensable, worldwide license to our patents, patent applications and know-how relating to the manufacture, use or sale of any mechanical imaging system for the diagnosis or treatment of disorders of the female breast.
 
Under the Artann Development Agreement, we will collaborate with Artann to develop, commercialize and market prostate imaging systems. Artann will conduct and complete all pre-clinical activities and testing on the prostate imaging system, conduct clinical trials, prepare and submit FDA regulatory submissions and provide hardware and software development, refinement and debugging services to ready the prostate imaging system for commercial sale. For these development services, we paid Artann:
 
• 
$250,000 in cash upon initiation of the clinical study to support the basic imaging and documentation claim;
 
 
$250,000 in cash as a milestone payment upon completion of that study and submission of the 510(k) application to support the basic imaging and documentation claim;
 
• 
fees totaling $360,000 for technical advice and training by Artann personnel; and
 
 
769,231 shares of our common stock as a milestone payment upon submission of the 510(k) application.
 
A future payment of $750,000 is to be made under the Artann Development Agreement upon FDA clearance that allows the ProUroScan System to be commercially sold in the United States.
 
The Artann License Agreement and the Artann Development Agreement each became effective on December 23, 2008. Under the Artann License Agreement, we have a 30-day cure period from the date of receipt of written notice from Artann of a breach of our payment obligations under either the Artann License Agreement or Artann Development Agreement. If we do not cure a breach of our payment obligations by the end of the 30-day cure period, the licenses granted under the Artann License Agreement will terminate. If we have not cured such payment breach within five days of receipt of the Artann notice, the exclusive licenses convert to non-exclusive licenses; however, neither party may sub-license or grant additional licenses for a period of 60 days after receipt of such notice.  Under the Artann Development Agreement, we have a 60-day cure period from the date of receipt of written notice from Artann of a breach of any material obligation, representation, warranty or covenant thereof.  Subject to earlier termination due to breach, bankruptcy and certain other events, the Artann License Agreement will terminate upon expiration of all royalty obligations, and the Artann Development Agreement will terminate on its third anniversary, subject to renewal for additional one year terms upon mutual agreement of us and Artann.
 
Planned Development of the ProUroScan System
 
We believe that the ProUroScan System’s existing technology provides a platform on which to develop multiple future generation systems. Once FDA clearance is obtained for a basic imaging and documentation claim, the 510(k) will be transferred to us from Artann.  In the future, we intend to work with Artann to develop more enhanced labeling claims and product features. Future generation systems will require us to obtain regulatory approval or clearance for use of the ProUroScan System for additional prostate related indications and file additional submissions with the FDA to obtain expanded labeling claims. Such regulatory clearances or approvals may require us to perform additional clinical studies. Future generations of the ProUroScan System may also require us to secure rights to additional intellectual property.
 
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Active Surveillance
 
We believe that one of the more valuable future applications for the ProUroScan System, assuming we obtain any necessary FDA clearance or approval, will be to allow physicians to monitor changes in the prostate over time. The ProUroScan System is designed to produce a digital image of the prostate showing the size and symmetry of the prostate and the location of abnormalities within the prostate. The ProUroScan System creates a digital record of the exam that can be stored and used for comparison to subsequent exams. We believe its ability to digitally store not only the scan results but all of the individual pressure readings taken during the course of the procedure should facilitate a quantitative analysis of the progression of the disease over time. By comparing the data taken in a baseline examination to subsequent examinations during the course of active surveillance, we believe the urologist will gain valuable information about changes in the patient’s condition that can influence their decision to pursue additional treatment or continue surveillance. We believe that this expanded use of the ProUroScan System will provide consistent imaging over time as compared to variations resulting from differences in technique and experience of clinicians performing DREs. We believe this will enable physicians to compare and contrast the patient’s results from exam to exam, and to get second opinions on the patient’s status in regards to the diagnosis without an additional office visit. We believe that comparisons of multiple scans over time will also enable physicians to make longitudinal assessments of the patient’s disease.
 
Three-Dimensional Imaging
 
We believe that another future enhancement of the current generation system may be the capability to identify the specific three-dimensional location of lesions found in the prostate. This can be accomplished by creating a three-dimensional image of the position of the lesions allowing physicians to rotate the image to assist in identifying the actual position of the lesion in the prostate gland. We believe that having this capability may prove helpful in providing a diagnosis of the patient’s condition in conjunction with other commercially available diagnostic tools.
 
Guiding Biopsy
 
We believe that use of three-dimensional imaging may facilitate guiding biopsy needles to specific areas in the prostate where there are suspicious lesions. Having this capability increases the likelihood of finding cancerous tissue while also potentially minimizing the number of biopsies that are taken on an individual patient. According to Oregon Health and Science University, approximately one million prostate biopsies are performed each year in the United States, but only 25 percent of biopsy procedures performed detect the presence of cancer and another 25 percent are given a false negative, meaning that no cancer is detected even when later it is found that a patient does have cancer.
 
Screening Device
 
The first step in identifying men with prostate disease is usually an initial examination by the patient’s general or family physician.  As previously mentioned, this is usually done beginning at age 50 during the patient’s annual physical examination.  There are many deficiencies of existing screening tools (see “Limitations of Current Prostate Cancer Screening and Diagnosis,” above).  We see a major market need to be able to make this process more objective and less prone to error because of the vagaries of the techniques used by physicians performing the exam.
 

We believe that our current mechanical imaging technology platform will enable us to develop a screening test that can be performed using a simple disposable rectal probe.  The test would be conducted in a manner similar to our existing ProUroScan System but employing a simplified prostate assessment technique.  The system would collect data and compare the hardest and softest tissue that is found.   The ratio between the measured elasticity of the hardest and the softest tissue sampled, or “elasticity contrast,” would be a significant indicator of the presence or absence of an abnormality requiring further evaluation.

Evaluating Drug Treatment for BPH Patients
 
For patients who have symptoms of BPH, we believe that future generations of the ProUroScan System may also be used to monitor changes in prostate size before and during the course of drug treatments, allowing physicians to more quickly assess the effectiveness of alternative therapeutic approaches. Assuming future FDA approval or clearance is granted, use of the ProUroScan System in patients diagnosed with BPH will allow physicians to monitor changes in the size and volume of the prostate following treatment with drugs or other tissue reducing technologies. Timely, accurate assessment of prostate volume changes and the effectiveness of treatment should enable physicians to recommend alternative treatments sooner than current assessment methods, and thus provide more immediate relief to patients.
 
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Manufacturing
 
We have contracted with Logic (Minneapolis, MN), a contract engineering and manufacturing firm that is Quality Systems Regulation (“QSR”) compliant, to initiate production on the first commercial ProUroScan Systems. The QSR requires manufacturers, including certain third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process.  In January 2011, Logic successfully completed pre-production manufacturing of three ProUroScan Systems.
 
Because of the unique nature of the two major proprietary components of the ProUroScan System, it is likely that one or more additional third-party manufacturers will be chosen to assemble the certain components or sub-assemblies. Our goal is to reduce the cost of producing systems over the first two years, taking advantage of manufacturing scale and purchasing discounts, as well as engineering changes designed to eliminate components and reduce component costs.
 
Competition
 
Although we expect competition to intensify in the prostate imaging and prostate disease detection market, we are not aware of any competitive product currently being sold based on the same technology platform with comparable real-time color images or other product features that the ProUroScan System provides. In addition, we do not expect to market the ProUroScan System as a general screening tool, and therefore will not be positioning the system to compete directly with currently available screening tests, including the DRE and PSA tests. The ProUroScan System will be positioned as an “adjunctive” tool following an abnormal DRE to create an image and document abnormalities of the prostate detected by a DRE.
 
A majority of the innovation occurring in the prostate disease market can be grouped into two categories, improvements in current blood tests and modification of Magnetic Resonance Imaging (“MRI”) technology.  In the first case, it is likely that improvements in the measurement of antigens or other substance in the blood will result in high sensitivity and specificity for the detection of prostate cancer.  These types of tests are often defined as “derived tests,” meaning that the result is derived by the detection of a factor presumed to be associated with the presence of prostate cancer.  However, these tests do not tell the physician or patient where the lesion or abnormality is, how big it is or how close it is to the wall of the prostate gland.  Better screening tests may prove to be a positive driver in the market for our technology rather than competitive, as more patients may be identified who could benefit from the type of objective documentation the ProUroScan can provide.
 
One such test that uses inferred data to identify prostate cancer, yet to be approved in the United States, is the PCA3 Marker (the “PCA3”). The PCA3 is a non-coding ribonucleic acid (“RNA”) believed to be a more accurate marker of prostate cancer than currently used diagnostics tests. The PCA3 marker was licensed in 2000 by DiagnoCure Inc. of Quebec, Canada. In 2003, DiagnoCure granted a worldwide license to Gen-Probe, based in San Diego, CA, for the development and licensing of a second generation PCA3-based test using their proprietary platform. In 2006, Gen-Probe made the test available in analyte specific reagent format to U.S. laboratories and launched a full CE-marked PCA3 test in Europe. Although this test has not been approved in the United States, it potentially represents a significant advance in the development of more sophisticated and sensitive detection methods for identifying early stage prostate cancer. Gene fusion is another discovery that may lead to a test that potentially will be used to diagnose prostate cancer more accurately than current tests as well as predict prognosis. Gen-Probe has licensed this technology as well.
 
In contrast to the DRE, PSA and PCA3 tests, the ProUroScan System creates a visual and physical record of the prostate gland. We will seek expanded labeling claims on future generations of the ProUroScan System so that it can also be used to conduct ongoing monitoring and surveillance of the status of the abnormalities found by either a DRE or with the ProUroScan System. We believe that the current generation of the ProUroScan System will have several features that are complementary to a traditional DRE examination, such as:
 
 
it is designed to produce a real-time color image of the prostate; and
 
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it is designed to enable physicians to electronically store the images in patient files.
 
Tests using MRI technology have the potential for defining where lesions or abnormalities exist but have a significant disadvantage in that the underlying technology used to perform these tests is very expensive and access to MRI technology for this type of application is limited.  The current approaches also require the use of other components like liquid nitrogen making the overall test significantly more complicated.  Aside from MRI and other large-scale imaging modalities such as computed tomography and nuclear medicine, which due to their cost and limited availability will not be direct competitors of the ProUroScan System, the only imaging system in common use for prostates is the transrectal ultrasound (“TRUS”). TRUS is employed by urologists following the referral of a patient that has had a positive result from a DRE or PSA test, primarily to guide the placement of prostate biopsy needles. We believe that the ProUroScan System will be easier to operate and require less training than TRUS.  We also believe it will be less costly to acquire and maintain in a traditional medical office setting.
 
Subject to FDA clearance or approval, we believe that future uses of the ProUroScan System will include providing a permanent record of the prostate that can be used to identify changes over time. Nevertheless, technology is rapidly changing in the prostate imaging and the prostate disease diagnostic market, and other technology could come to market potentially displacing the ProUroScan System.
 
Government Regulation
 
The ProUroScan System is subject to the FDCA as implemented and enforced by the FDA and by comparable agencies in various states and various foreign countries. To ensure that medical products distributed domestically and internationally are safe and effective for their intended use, FDA and comparable authorities in other countries have imposed regulations that govern, among other things, the following activities that we or our third-party manufacturers and suppliers perform or will perform:
 
 
product design and development;
 
 
product testing;
 
 
product manufacturing;
 
 
product labeling;
 
 
product storage;
 
 
premarket clearance or approval;
 
 
advertising and promotion;
 
 
product marketing, sales and distribution; and
 
 
post-market surveillance reporting death or serious injuries and medical device reporting.
 
Pervasive and Continuing Regulation
 
After a device is placed on the market, numerous regulatory requirements apply. These include:
 
 
product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
 
 
QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
 
 
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
 
 
clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of our cleared devices;
 
 
approval of product modifications that affect the safety or effectiveness of our approved devices;
 
 
medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur;
 
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post-approval restrictions or conditions, including post-approval study commitments;
 
 
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and
 
 
the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations.
 
Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, promotional activities for FDA-regulated products of other companies have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims.
 
The FDA has broad post-market and regulatory enforcement powers. Our facilities and the manufacturing facilities of our subcontractors will be subject to unannounced inspections by the FDA to determine our level of compliance with the QSR and other regulations. Failure by us or by our third-party manufacturers and suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or other regulatory authorities, which may result in sanctions including, but not limited to:
 
 
warning letters or untitled letters;
 
 
fines, injunctions and civil penalties;
 
 
withdrawal or suspension of approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies;
 
 
product recall or seizure;
 
 
orders for physician notification or device repair, replacement or refund;
 
 
interruption of production;
 
 
operating restrictions, partial suspension or total shutdown of production or clinical trials;
 
 
criminal prosecution.
 
Fraud and Abuse Laws
 
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a number of laws whose purpose is to eliminate fraud and abuse in federal health care programs. Once we commercialize the ProUroScan System, our business is subject to compliance with these laws.
 
The federal healthcare programs Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid.  Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs.
 
Another development affecting the healthcare industry is the increased use of the Federal Civil False Claims Act (the “False Claims Act”) and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government and to share in any monetary recovery. In recent years, the number of suits brought against healthcare providers by private individuals has increased dramatically. In addition, various states have enacted false claim laws analogous to the False Claims Act, although many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program.  We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly affect our financial performance.
 
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HIPAA and Other Fraud and Privacy Regulations
 
Among other things, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The HIPAA health care fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment.
 
In addition to creating the two new federal healthcare crimes, regulations implementing HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses, which are referred to as “covered entities.” Although we are not a covered entity and therefore not directly subject to these standards, we expect that our customers generally will be covered entities and may ask us to contractually comply with certain aspects of these standards, particularly because we expect that the ProUroScan System will store patient information and scan results. The government intended this legislation to reduce administrative expenses and burdens for the healthcare industry; however, our compliance with certain provisions of these standards entails significant costs for us.
 
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
 
Corporate Information
 
ProUroCare Inc. (“PUC”) was incorporated in 1999 as a Minnesota corporation.  In January 2002, PUC licensed the rights to certain advanced prostate mechanical imaging technology, and became engaged in the business of developing this technology for assessing characteristics of the prostate.  In 2004, through a reverse merger transaction with Global Internet Communications (“Global”), a Nevada corporation, PUC became the wholly owned and sole operating subsidiary of Global, which was then renamed ProUroCare Medical Inc.
 
Our executive offices are located at 6440 Flying Cloud Drive, Suite 101, Eden Prairie, Minnesota 55344. Our telephone number is (952) 476-9093, and our Internet site is www.prourocare.com.  The information contained in our Internet site is not a part of this annual report.
 
Employees
 
We currently have two full-time employees, and to date have conducted much of our research and development, market research, clinical and regulatory function, and other business operations through the use of a variety of consultants and medical-device development contractors. We have found that using consultants and contractors to perform these functions during our development stage has allowed us to engage specialized talent and capabilities as needed by the business while providing the flexibility to engage them as our financial resources have permitted.  Upon receipt of FDA clearance of the ProUroScan System, we anticipate hiring employees in the areas of marketing, sales and sales training, quality assurance, engineering, software development and administration.  Some or all of these functions may be performed by contracted individuals or consultants as management deems most effective. We are conducting our research and development activities related to our acquired technologies and proposed products on a contract basis with Artann and Logic.
 
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Important Notices to Investors; Safe Harbor Statement

Statements in this Annual Report on Form 10-K which are not purely historical are forward-looking statements.  These statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of our Company, including, without limitation: (i) our ability to successfully complete all clinical trials and commercial development of our products and secure all necessary federal and other regulatory approvals to introduce and market our products in the United States and around the world; (ii) our ability to fund our working capital needs over the next 12 to 24 months; (iii) our ability to successfully introduce our products into the medical device markets; and (iv) all statements preceded by, followed by or that include the words "may," "would," "could," "should," "expects," "projects," "anticipates," "believes," "estimates," "plans," "intends," "targets" or similar expressions. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, in addition to those contained in our Company's reports on file with the Securities and Exchange Commission: general economic or industry conditions, nationally and in the physician, urology and medical device communities in which we intend to do business; our ability to fund our working capital needs over the next 12 to 24 months; our ability to complete the development of our existing and proposed products on a timely basis if at all; legislation or regulatory requirements, including our securing all FDA and other regulatory approvals on a timely basis, if at all, prior to being able to market and sell our products in the United States; competition from larger and more well established medical device and other competitors; the development of products that may be superior to the products offered by us; securing and protecting our intellectual property and assets and enforcing breaches of the same; clinical results not anticipated by management of the Company; the quality or composition of our products and the strength and reliability of our contract vendors and partners; ability to raise capital to fund our working capital needs and launch our products into the marketplace in subsequent years; changes in accounting principles, policies or guidelines; financial or political instability; acts of war or terrorism; and other economic, competitive, governmental, regulatory and technical factors affecting our operations, proposed products and prices.

Accordingly, results actually achieved may differ materially from expected results in these statements.  Forward-looking statements speak only as of the date they are made.  We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
 
Risks Related to our Financial Condition and Capital Requirements
 
We are a development stage company with limited operating history and our business plan has not yet been fully tested. We anticipate incurring future losses and may continue incurring losses after our products are completed, regulatory clearance or approval is secured and our products are introduced and accepted in the United States and worldwide markets.
 
We are a development stage company. We have just begun to produce pre-commercial systems and have yet to sell any products associated with the proprietary urology-based imaging technologies that we intend to market. We have no prior operating history from which to evaluate our likelihood of success in operating our business, generating any revenues or achieving profitability. As of December 31, 2010, we have generated no revenue and have recorded losses since inception of approximately $33.9 million. There can be no assurance that our plans for developing and marketing our urology-based products will be successful, or that we will ever attain significant sales or profitability. We anticipate that we will incur losses in the near future.
 
We have a history of operating losses and have received a “going-concern” qualification from our independent registered public accounting firm.
 
We have incurred operating losses and negative cash flows from operations since inception. As of December 31, 2010, we had an accumulated deficit of approximately $33.9 million. We have not yet generated any revenues. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements included in this Annual Report on Form 10-K do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
 
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Our independent registered public accounting firm included an explanatory paragraph in their report on our financial statements for the year ended December 31, 2010 indicating that such deficit accumulated during the development stage raises substantial doubt as to our ability to continue as a going concern. The likelihood of our success must be considered in light of the expenses, difficulties and delays frequently encountered in connection with development stage businesses and the competitive environment in which we will operate. Our ability to achieve profitability is dependent in large part on obtaining FDA clearance or approval for the ProUroScan System, implementing a “patient pay” sales model, achieving third-party coverage and reimbursement, establishing distribution channels, forming relationships with third-party manufacturers and gaining market acceptance of the ProUroScan System. There can be no assurance that the Company will successfully market the ProUroScan System or operate profitably.
 
We will need additional financing, and any such financing will likely be dilutive to our existing shareholders.
 
We will need additional financing to fund operations while we ramp up production of the ProUroScan System and begin to enter the market.  We will also need funding to pay, for example, the $750,000 payment due to Artann upon achieving the FDA market clearance milestone.  If we fail to secure a distribution partner on terms acceptable to us, or at all, we could be required to undertake distribution activity at our expense, which could significantly increase our capital requirements and may delay the commercialization of our products.
 
As of December 31, 2010, we had approximately $419,000 of cash on hand.  In addition, on that date we had 3,590,894 currently redeemable warrants outstanding.  These warrants have an exercise price of $1.30 per share.  Upon our exercise of our right to redeem the warrants, holders of the warrants will have a period of 30 days to exercise their warrants. We could realize up to approximately $4.7 million depending on the number of shares actually exercised. We may call these warrants in 2011 to meet our financing needs outlined above.  In addition, we will gain the ability to redeem 2,840,412 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 we were to subsequently exercise our redemption right on these warrants, we could realize up to an additional $3.7 million depending on the number of shares actually exercised pursuant to such redemption.  There can be no assurance that we will be able to redeem the warrants, or how much would be realized if such redemption were made.
 
On September 28, 2010, the Company entered into a $3.125 million Securities Purchase Agreement (the “SPA”) with Seaside 88, LP (“Seaside”).  Concurrent with the execution of the SPA, the Company closed on an $875,000 first tranche of the funding, selling 1,400,000 unregistered shares of its common stock to Seaside at $0.625 per share.  Under the terms of the SPA, the remaining $2.250 million funding is to be provided in six tranches.  At each of the future closings, the Company will sell unregistered shares of its common stock to Seaside at a cost that is 50 percent of the stock’s volume weighted average selling price (“VWASP”) during the 10 trading days preceding each closing date, subject to a floor VWASP of $2.50 per share below which the parties are not obligated to close.
 
We plan to identify a distribution partner during 2011 to help market our products.  We expect such a distribution 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 us to gain access to downstream marketing, manufacturing and sales support.  There can be no assurance that a distribution partner can be successfully identified and engaged during 2011, if at all.
 
In addition to these actions, we may pursue additional public or private funding in 2011 and 2012 to finance additional product development and operations pursuant to a commercial market launch.  The amounts of such additional funding will depend, in part, upon the amount of funding we receive from exercise of the outstanding warrants and the amount of support we receive from a corporate partner.  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.  If any of these funding events should occur, existing shareholders will likely experience dilution in their ownership interest.
 
If adequate funds are not available on a timely basis, we could potentially be forced to cease operations.
 
If adequate funds are not available on a timely basis, or are not available on acceptable terms, we may be unable to repay our existing debt, to fund expansion, or to develop or enhance our products. Until such time as we are able to enter the market and achieve positive cash flow from operations, we will continue to depend on our ability to obtain additional new investment to fund operations.  Ultimately, if adequate financing is not obtained, we could potentially be forced to cease operations.
 
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Our assets are pledged to secure $900,000 of senior bank notes and $400,000 of notes issued to an investor and a bank and, as a result, are not available to secure other senior debt financing. Upon the occurrence of an event of default, the bank’s security interests in our assets will be assigned to guarantors of the bank notes and the holders of such $400,000 of promissory notes.
 
Our $900,000 senior debt financing through Crown Bank, Minneapolis, Minnesota, has required us to pledge all of our assets and certain licenses, as well as to provide personal guarantees of certain shareholders. In addition, we have issued a total of $400,000 of promissory notes to an individual investor and a bank that have subordinated interests in all of our assets and certain licenses.  Due to such security interests, we will not be in a position in the future to pledge our assets to secure any debt or lending facility, in the event we desire or need to borrow such funds on a secured lending basis. It may be difficult for us to obtain significant additional debt financing on an unsecured basis.
 
Moreover, under the terms and conditions of the Crown Bank facility and our agreement with the facility’s guarantors, in the event of any default by us with our senior lender that causes the personal guarantees to be called and honored, all of the bank’s security interests in our assets shall be assigned to such guarantors, pro rata, in consideration of such breach and obligation to pay under the respective guarantees. In addition, the holders and guarantor of $400,000 of promissory notes have a subordinated security interest in our assets in the event of a default under the note. Thus, our common shareholders, and any existing and future investors in our common stock, would, if the foregoing breach and circumstances occurred, not have access or recourse to the assets and collateral, and thus, would likely face a complete loss of their investment in the Company.
 
There is no assurance that we will be able to close on $2.250 million of committed funding from Seaside
 
Under the terms of our September 28, 2010 SPA with Seaside, the remaining $2.250 million of funding is to be provided in six tranches:
 
-$750,000 within 30 days following FDA clearance of the Company’s ProUroScan System,
 
-$1.5 million provided in five subsequent closings of $300,000 in 30-day increments following the previous closing.
 
At each of the future closings, the Company will sell unregistered shares of its common stock to Seaside at a cost that is 50 percent of the stock’s volume weighted average selling price (“VWASP”) during the 10 trading days preceding each closing date, subject to a floor VWASP of $2.50 per share below which the parties are not obligated to close.  There can be no assurance that our stock’s VWASP will be above the $2.50 floor at the time of the future closings.  In addition, The SPA provides that Seaside will purchase only the number of shares that will cause its beneficial ownership to remain below 9.9% of the Company’s outstanding shares.  After the first closing, Seaside now holds approximately 8.8% of our outstanding stock.  Although Seaside has indicated their willingness to propose an alternative investment vehicle to provide the financing in the event that a subsequent closing would otherwise cause Seaside to exceed this ownership level, as they have in other transactions, there can be no assurance that such an alternative investment vehicle will be available or acceptable to us.
 
Risks Associated with Development and Commercialization of Our ProUroScan System
 
There is no guarantee that the FDA will grant timely market clearance of the ProUroScan System, if at all, and failure to obtain such timely clearance would adversely affect our ability to market that product in the United States.
 
Our goal is to have the ProUroScan System regulated by the FDA as a Class II device.  A Class II classification is designed for low risk devices in which sufficient information exists to establish general and specific controls that provide reasonable assurance of safety and effectiveness.  In November 2009, Artann filed a 510(k) application for market clearance.  In a 510(k) application, applicants must demonstrate that the proposed device is substantially equivalent to an existing approved product, or “predicate device.”  If a product employs new or novel technology such that no predicate device exists, the FDA will so notify the applicant and automatically classify the device as a Class III device under regulatory statute.  The applicant may then request that a risk-based classification determination be made for the device under Section 513(f)(2) of the Food, Drug and Cosmetic Act (the “FDCA”).  This process is also known as a “de novo” or “risk based” classification.
 
In April 2010, the FDA determined that a predicate device did not exist for the ProUroScan System.  In response, on May 21, 2010 Artann submitted a request for FDA clearance under the de novo protocol as required by the Section 513(f)(2) guidance document.  This request asked the FDA to define mechanical imaging systems as devices that are intended to produce an elasticity image of the prostate as an aid in documenting abnormalities of the prostate that are initially identified by digital rectal examination and to be used by physicians as a documentation tool.
 
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The review of the de novo submission has experienced delays attributed to staffing limitations and workload prioritization within the FDA.  In addition, recent, widely-publicized events concerning the safety of certain drug, food and medical device products have raised concerns among members of Congress, medical professionals, and the public regarding the FDA’s handling of these events and its perceived lack of oversight over regulated products. The increased attention to safety and oversight issues could result in a more cautious approach by the FDA to clearances and approvals for devices such as ours.
 
There is no guarantee that the FDA will grant market clearance or designate the ProUroScan System as a Class II device in a timely manner, if at all.  Even if FDA clearance is received, Artann may encounter significant delays in receiving such clearance.  If unexpected clearance delays occur, it could have a material adverse effect on our business, requiring additional financing or potential discontinuance of our operations.
 
Even if clearance from the FDA is obtained, our products may not be commercially viable or may not be accepted by the marketplace.
 
The ProUroScan System and our future products may not prove to be as effective as currently available medical or diagnostic products or those developed in the future. The inability to successfully complete development of a product or application or a determination by us, for financial, technical or other reasons not to complete development of any product or application, particularly in instances in which we have made sufficient capital expenditures, could have a material adverse effect on our business. With respect to the ProUroScan System, under our current Artann Development Agreement, Artann is to transfer the 510(k) to us once we make the first commercial sale of the ProUroScan System. If we are not able to procure a commercial sale of at least one ProUroScan System, Artann would not be obligated to transfer the 510(k) to us and might not do so, thus inhibiting our ability to develop future generations of the product.
 
Even if successfully developed, the ProUroScan System and our future products will be competing against other imaging and diagnostic products in the medical device marketplace, including those developed in the future that may render the ProUroScan System obsolete. The digital rectal examination (“DRE”), in combination with a Prostate Specific Antigen (“PSA”) test, is part of today’s “standard of care” to evaluate patients over the age of 50 for prostate cancer or other ailments relating to the prostate. In addition, other modalities that can be used for diagnostic imaging include transrectal ultrasound, magnetic resonance imaging, computed tomography and nuclear medicine. Therefore, there can be no assurance that physicians, providers, patients, third-party payors or the medical device market, in general, will accept our products.
 
Our reliance upon Artann to obtain regulatory clearance of the ProUroScan System could result in delays.
 
The ProUroScan System is subject to regulation by the FDA and by comparable agencies in various foreign countries. The process of complying with the requirements of the FDA and comparable agencies is costly, time consuming and burdensome. Under the terms of its contract with us, Artann is responsible for submitting and obtaining initial FDA regulatory clearance for the ProUroScan System.  Once cleared and upon ProUroCare’s first commercial sale of a ProUroScan System, Artann will transfer the clearance to ProUroCare.
 
Our reliance on Artann to obtain regulatory clearance of the ProUroScan System means that we do not have sole control of the timing and content of FDA submissions and interactions.  If Artann fails to obtain market clearance of the ProUroScan System, or if Artann encounters significant delays in receiving such clearance, it could have a material adverse effect on our business, requiring additional financing or potential discontinuance of our operations.
 
We will depend upon others for the manufacturing of our products, which will subject our business to the risk that we will be unable to fully control the supply of our products to the market.
 
Our ability to develop, manufacture and successfully commercialize our future products depends upon our ability to enter into and maintain contractual and collaborative arrangements with others. We do not intend to establish any of our own manufacturing facilities for the ProUroScan System or any of our future products. Instead, we intend to retain QSR-compliant and FDA-registered contract manufacturers. We may also have to rely on a sole supplier for certain critical components of our ProUroScan System. There can be no assurance that such manufacturers will be able to supply our products in the required quantities, at appropriate quality levels or at acceptable costs. We may be adversely affected by any difficulties encountered by such third-party manufacturers that result in product defects, production delays or the inability to fulfill orders on a timely basis. If a manufacturer cannot meet our quality standards and delivery requirements in a cost-efficient manner, we could suffer interruptions of delivery while we arrange for alternative manufacturing sources. Any extended disruption in the delivery of our products could result in our inability to satisfy customer demand for our products. Consequently, our inability to obtain alternative sources on a timely basis may have a material adverse effect on our business.
 
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A failure to successfully implement a “patient pay” sales model prior to establishing third-party reimbursement could have a material adverse effect on our product sales and financial results.
 
Until third-party reimbursement coverage for the ProUroScan System procedure is established, if at all, we anticipate using a “patient pay model” for physicians to receive payment. Under a patient pay model, in the absence of coverage from their health insurance, patients pay for the scan out of their own funds. Any failure to successfully establish a patient pay model could have a material adverse effect on our product sales and financial results.
 
Rapid technological change in our competitive marketplace may render the ProUroScan System obsolete or may diminish our ability to compete in the marketplace.
 
The prostate cancer detection, imaging and medical device markets are extremely competitive, dominated by large and well financed competition and are subject to rapid technological advances and changes. The discovery of new technologies and advances in the application of such technologies to the medical marketplace in general, and the market for urology-based imaging products in particular, may render our products obsolete or non-competitive. Any such changes and advances could force us to abandon our currently proposed products, which would have a material adverse effect on our business.
 
There is no guarantee that the FDA will grant 510(k) clearance or PMA approval of our future products and claims and failure to obtain necessary clearances or approvals for our future products and claims would adversely affect our ability to expand utilization of the technology in other prostate applications or in other soft tissue organs in the body, which may affect our ability to grow our business.
 
In the future, we may seek to obtain additional indications for use of the ProUroScan System beyond the basic imaging and documentation claim, as well as clearance and approval of new products. Some of these expanded claims and future products may require FDA clearance of a 510(k). Other claims and future products may require FDA approval of a PMA. Moreover, some of our future products and the additional claims on the ProUroScan System we may seek may require clinical trials to support regulatory approval, and we may not successfully complete these clinical trials. The FDA may not approve or clear these future products, or future generations of the ProUroScan System for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or PMA approval of new products. Failure to receive clearance or approval for additional claims for the ProUroScan System, or for our future products, would have an adverse effect on our ability to expand our business.
 
Clinical trials necessary to support our future products and claims will be expensive and may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. These trials may require the submission of an investigational device exemption, for which there is no guarantee that the FDA will approve. Delays or failures in our clinical trials will prevent us from commercializing any modified or new products and will adversely affect our business, operating results and prospects.
 
Initiating and completing clinical trials necessary to support 510(k)s or PMAs for future generations of the ProUroScan System will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials.
 
Conducting successful clinical studies may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depend on many factors, including: the size of the patient population; the number of patients to be enrolled; the nature of the trial protocol; the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects; the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites; and the patients’ ability to meet the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.
 
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Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required, and we may not adequately develop such protocols to support clearance and approval. Significant risk trials will require the submission and approval of an investigational device exemption (“IDE”) from the FDA. There is no guarantee that the FDA will approve our future IDE submissions. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
 
We have no manufacturing experience, and will rely on third parties to manufacture the ProUroScan System in an efficient manner. If design specification changes are needed to develop an efficient manufacturing process, those changes may require FDA clearance of a new 510(k) or approval of a PMA, which we may not be able to obtain in a timely manner, if at all.
 
To be successful, the ProUroScan System will need to be manufactured in sufficient quantities, in compliance with regulatory requirements and at an acceptable cost. We have no manufacturing experience. We have identified a third-party manufacturer to produce commercial units of the ProUroScan System for distribution after 510(k) clearance or PMA approval is obtained. This third-party manufacturer is in the process of developing and optimizing the manufacturing process to produce commercial ProUroScan Systems. If device design changes are required to implement an efficient manufacturing process, these design changes will need to be evaluated and implemented in accordance with applicable Quality Systems Regulation (“QSR”) requirements. If we implement design changes after the FDA has cleared the ProUroScan System, we will need to assess whether those design changes could significantly affect the safety or effectiveness of the device, and require the submission and clearance of a new 510(k), or even require the submission of a PMA. If we determine that these modifications require a new 510(k) clearance or PMA approval, we may not be able to obtain this additional clearance in a timely manner, or at all. In general, obtaining additional clearances can be a time consuming process, and delays in obtaining required future clearances would adversely affect our ability to market the ProUroScan System in a timely manner, which in turn would harm our potential for future growth.
 
If we or our third-party manufacturers or suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
 
Any product for which we obtain FDA clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our third-party manufacturers and certain of our suppliers will be required to comply with the FDA’s QSR, regulations for the manufacture of our products and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain clearance or approval. Regulatory bodies, such as the FDA, enforce the QSR and other regulations through periodic inspections. The failure by us or one of our third-party manufacturers or suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:
 
• 
warning letters or untitled letters;
 
• 
fines and civil penalties;
 
• 
unanticipated expenditures to address or defend such actions;
 
• 
delays in clearing or approving, or refusal to clear or approve, our products;
 
 
withdrawal or suspension of approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies;
 
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• 
product recall or seizure;
 
• 
orders for physician notification or device repair, replacement or refund;
 
• 
interruption of production;
 
• 
operating restrictions;
 
• 
injunctions; and
 
• 
criminal prosecution.
 
If any of these actions were to occur it would harm our reputation and cause our product sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our third-party manufacturers and suppliers may not be in compliance with all applicable regulatory requirements which could result in failure to supply our products in required quantities, if at all.
 
Even if regulatory clearance or approval of a product is granted, such clearance or approval may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product. If the FDA determines that our promotional materials, labeling, training or other marketing or educational activities constitute promotion of an unapproved use, it could request that we cease or modify our training or promotional materials or subject us to serious regulatory enforcement actions, including some of those listed above. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.
 
In addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market or regulatory enforcement actions.
 
Our products may in the future be subject to product recalls that could harm our reputation, business and financial results.
 
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a mandatory recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, initiate a field correction or removal, known as a recall, for a product if any material deficiency in a device is found. A government mandated or voluntary recall by us or one of our third-party manufacturers or suppliers could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
 
If our marketed products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
 
Under the FDA medical device reporting regulation, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
 
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We may incur significant liability if it is determined that we are promoting off-label use of our products in violation of federal and state regulations in the United States or elsewhere.
 
Artann initially intends to seek clearance of the ProUroScan System from the FDA as a device that is intended to produce an image to aid in documenting abnormalities initially identified by digital rectal examination (“DRE”). We believe that seeking clearance for this prostate indication is the most applicable definition for how physicians will use the device in clinical practice.  Once clearance is obtained the ProUroScan System approval status will be transferred to us from Artann, allowing us to begin active commercialization.  Other applications of this technology in the prostate will require additional regulatory submissions and clearances.  Some of these clearances may require submission of a PMA and significantly larger or more costly clinical studies.  Unless and until we receive regulatory clearance or approval for use of the ProUroScan System in these applications, use of the ProUroScan System for other than basic imaging and documentation will be considered off-label use.  Under the FDCA and other similar laws, we are prohibited from labeling or promoting our products, or training physicians, for such off-label uses.
 
The FDA and other regulatory agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. Due to these legal constraints, our sales and marketing efforts will focus only on the general technical attributes and benefits of the ProUroScan System and the FDA cleared indications for use.
 
Federal regulatory reforms may adversely affect our ability to sell our products profitably.
 
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a medical device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
 
The Food and Drug Administration Amendments Act of 2007 (the “FDA Amendments Act”) requires, among other things, that the FDA propose, and ultimately implement, regulations that will require manufacturers to label medical devices with unique identifiers unless a waiver is received from the FDA. Once implemented, compliance with those regulations may require us to take additional steps in the manufacture of our products and labeling. These steps may require additional resources and could be costly. In addition, the FDA Amendments Act will require us to, among other things, comply with clinical trial registration requirements once our clinical trials are initiated.
 
The financial success of the ProUroScan System and other future medical device products will materially depend on our ability to obtain coverage and reimbursement for them.
 
The financial success of the ProUroScan System and other medical device products will materially depend on the scope of coverage for each device and the ability of medical service providers to obtain third-party reimbursement from private and public insurance sources, such as Medicare, Medicaid and private payors. It is difficult to predict the timing and outcome of coverage and reimbursement decisions. There can be no assurance that coverage and reimbursement will be obtained or will be obtained at a level that will provide a suitable return to providers of services using our technology.
 
Because the incidence of prostate cancer increases with age, we expect that a significant percentage of our patients will be Medicare beneficiaries. Obtaining Medicare coverage and reimbursement will be critical to our success. Ensuring adequate Medicare coverage and reimbursement, however, can be a lengthy and expensive endeavor and we cannot provide assurances that we will be successful.
 
Significantly, the U.S. Congress may pass laws that impact coverage and reimbursement for healthcare services, including Medicare reimbursement to physicians and hospitals. Furthermore, many private payors look to Medicare’s coverage and reimbursement policies in setting their coverage policies and reimbursement amounts. If the Centers for Medicare and Medicaid Services (“CMS”), the federal agency that administers the Medicare program, or Medicare contractors limit coverage or payments to physicians for the ProUroScan System, private payors may similarly limit coverage or payments. In addition, state legislatures may enact laws limiting or otherwise affecting the level of Medicaid reimbursement for procedures using the ProUroScan System. As a result, physicians may not purchase our ProUroScan System, and, consequently, our business and financial results would be adversely affected.
 
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We do not currently receive coverage and reimbursement from any party for the use of our products because we have no products fully developed and currently available for sale in the marketplace. As a result, we have not taken any steps to obtain approval for coverage and reimbursement for the use of the ProUroScan System.
 
Our failure to receive the third-party coverage for our products could result in diminished marketability of our products.
 
Medicare only covers and pays for items and services that are reasonable or necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member. This means that Medicare does not usually cover and pay for preventative services, including routine screening tests for patients who do not present with any signs or symptoms of disease.  We anticipate that the first generation of the ProUroScan System will be used to image the prostate and to maintain historical records for future tracking for men who have an abnormal DRE. Thus, providers who perform prostate imaging using the first generation ProUroScan System likely will seek Medicare coverage and payment as a detection test, rather than a screening test.  Even as a detection test, however, CMS or its contractors could determine that procedures using the ProUroScan System are not medically necessary and therefore decide not to cover them.
 
Even if covered, our failure to receive appropriate reimbursement from third-party payors could slow market uptake of our products.
 
In order for physicians and providers who perform procedures using the ProUroScan System to receive separate reimbursement, they must bill a Current Procedure Terminology (“CPT”) code that appropriately describes the service performed. Although initially physicians and providers will be able to bill a miscellaneous code to submit claims for ProUroScan System procedures, eventually we will want to apply for a unique CPT code. The CPT application process is lengthy, and there is no guarantee that we will receive a unique CPT code or that we will receive a unique CPT code in a timely manner. Should we receive a unique CPT code, the code is then valued for purposes of receiving reimbursement by the American Medical Association’s Relative Value Scale Update Committee. The valuation process depends on the amount of time the procedure takes and difficulty of work involved, the practice expense and the malpractice expense associated with using the ProUroScan System. CMS then takes the recommendation of this committee into account when establishing the reimbursement amount. The amount of reimbursement the physician will receive generally depends on the values assigned to the various components of the procedure multiplied by a conversion factor. This value is updated annually as part of the Medicare Physician Fee Schedule. There is no guarantee that this process will result in an appropriate level of reimbursement or an amount that supports the price and revenues we have projected.
 
Even if a unique CPT code is obtained for the test, the level of reimbursement established may not provide adequate economic incentive to physicians, which could deter them from using our products and limit our sales growth.
 
At this time, we do not know the extent to which physicians or providers would consider third-party reimbursement levels adequate to cover the cost of our products. Failure by physicians or providers to receive an amount that they consider to be adequate reimbursement could deter them from using our products and limit our sales growth. In addition, Medicare Physician Fee Schedule payments may decline over time, which could deter physicians from using the ProUroScan System. If physicians or providers are unable to justify the costs of the ProUroScan System or they are not adequately compensated for using our product, they may experience an economic disincentive to purchase or use them, which would significantly harm our business.
 
Notwithstanding current or future FDA clearances, if granted, third-party payors may deny reimbursement if the payor determines that the ProUroScan System is unnecessary, inappropriate, not cost-effective or experimental, or is used for a non-approved indication. Further, all third-party payors, whether governmental or private, whether domestic or international, are developing increasingly sophisticated methods of controlling healthcare costs. These cost control methods include prospective payment systems, capitated rates, benefit redesigns, or pre-authorization requirements. Increased scrutiny particularly is being placed on medical imaging. Additionally, payors are emphasizing and covering wellness and healthier lifestyle interventions and other cost-effective methods of delivering healthcare in exchange for covering more procedures. These cost control methods also potentially limit the amount that healthcare providers may be willing to pay for medical technology which could, as a result, adversely affect our business and financial results. In addition, in the U.S., no uniform policy of coverage and reimbursement for medical technology exists among all third-party payors. Therefore, coverage and reimbursement for medical technology can differ significantly from payor to payor. There also can be no assurance that current levels of reimbursement will not be decreased or eliminated in the future, or that future legislation, regulation or reimbursement policies of third-party payors will not otherwise adversely affect the demand for the ProUroScan System or our ability to sell the ProUroScan System on a profitable basis.
 
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If we commercialize the ProUroScan System, we will be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully comply with such laws.
 
Although we do not control referrals of healthcare services or directly bill Medicare, Medicaid or other third-party payors, many healthcare laws and regulations will apply to our business. For example, we could be subject to healthcare fraud and abuse and patient privacy regulation and enforcement by both the federal government and the states in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include:
 
 
the federal healthcare programs’ Anti-Kickback Law, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or service for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs;
 
 
federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or are for items or services not provided as claimed, and which may apply to entities like us to the extent that our interactions with customers may affect their billing or coding practices;
 
 
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, as well as leading to regulations imposing certain requirements relating to the privacy, security and transmission of individually identifiable health information; and
 
 
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
 
The healthcare sector is, and in recent years has been, under heightened scrutiny as the subject of government investigations and enforcement actions involving manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business, including specifically arrangements with physician consultants. We may have arrangements with physicians and other entities which may be subject to scrutiny. For example, we may lease the ProUroScan System to physicians or others through consulting agreements. Payment for these consulting services sometimes may be in the form of cash, stock options or royalties. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If the physicians or other providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.
 
Any failure in our efforts or our contractor’s efforts to train physicians or other medical staff could result in lower than expected product sales.
 
A critical component of our sales and marketing efforts is the training of a sufficient number of physicians and other medical staff to properly use the ProUroScan System. We rely on physicians and other medical staff to devote adequate time to learn to use our products. Ensuring that physicians and other medical staff will dedicate the time and energy for adequate training in the use of our system may be challenging, and we cannot guarantee that this will occur. If physicians and other medical staff are not properly trained, they may misuse or ineffectively use our products. Insufficient training may result in unsatisfactory patient outcomes, patient injury and related liability or negative publicity, which could have an adverse effect on our product sales or create substantial potential liabilities.
 
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We may not be able to enter into manufacturing agreements or other collaborative agreements on terms acceptable to us, if at all, which could have a material adverse effect on our business.
 
We cannot be sure that we will be able to enter into manufacturing or other collaborative arrangements with third parties on terms acceptable to us, if at all. If we fail to establish such arrangements when, and as necessary, we could be required to undertake these activities at our own expense, which would significantly increase our capital requirements and may delay the development, manufacturing and commercialization of our products. If we are unable to address these capital requirements, it may have a material adverse effect on our business.
 
We expect to rely materially on Artann and other consultants and contractors, some of whom may be partially or wholly paid through issuances of common stock dilutive to our shareholders.
 
We materially rely on consultants and contractors to perform a significant amount of research and development, pre-manufacturing, clinical, regulatory and marketing activities. Specifically, we issued 769,231 shares of our common stock to Artann on March 15, 2010 related to the FDA 510(k) filing milestone. We expect that certain other consultants and contractors will also accept payment of a portion of their compensation in the form of our equity securities. Any such issuances would be dilutive to shareholders.
 
We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.
 
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations result in increased legal and financial compliance costs and will make some activities more time-consuming and costly.
 
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal controls for financial reporting and disclosure. In particular, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. We have incurred and continue to expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. Moreover, if we do not comply with the requirements of Section 404, or if we identify deficiencies in our internal controls that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.
 
We are highly dependent on the services provided by certain key personnel.
 
We are highly dependent upon the services of our executive officers, Richard Carlson and Richard Thon. We have not obtained “key-man” life insurance policies insuring the lives of either of these persons. We also do not have employment agreements with either of these persons.  If the services of either of these persons become unavailable to us, for any reason, our business could be adversely affected.
 
We may not be able to successfully compete against companies in our industry with greater resources, or with any competition.
 
If our development plan is successful, we expect to experience significant competition in the medical device market. Although we believe that we may currently have a niche in the prostate imaging marketplace, many factors beyond our control will likely encourage new competitors. In particular, there are several large companies that have indicated an interest in the prostate imaging business. Therefore, no assurance can be given that we will be able to successfully compete with these, or any other companies in the marketplace, if at all.
 
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Our ability to use operating loss carryforwards to offset income in future years may be limited.
 
As of December 31, 2010, the Company had generated net operating loss carryforwards of approximately $8.2 million which, if not used, will begin to expire in 2021.  Federal and state tax laws impose significant restrictions on the utilization of net operating loss carryforwards 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”).  The Company has analyzed its equity ownership changes and believes that such an ownership change occurred upon the completion of its 2009 public offering.  The Company’s use of its net operating loss carryforwards of approximately $5.3 million and built-in loss incurred prior to the closing of the 2009 public offering will be limited as a result of this change; however, the amount of limitation will not be known until a full Section 382 study can be completed.
 
Our business and products subject us to the risk of product liability claims.
 
The manufacture and sale of medical products and the conduct of clinical trials using new technology involve customary risks of product liability claims. There can be no assurance that our insurance coverage limits will be adequate to protect us from any liabilities which we might incur in connection with the clinical trials or the commercialization of any of our products. Product liability insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against us in excess of our insurance coverage would have a material adverse effect on our business. In addition, any claims, even if not ultimately successful, could have a material adverse effect on the marketplace’s acceptance of our products.
 
Risks Associated with Our Intellectual Property
 
If we lose our right to license and use from Artann certain critical intellectual property for any reason, our entire business would be in jeopardy.
 
If we breach or fail to perform the material conditions including payment obligations of, or fail to extend the term of, the agreement with Artann that licenses critical intellectual property, we may lose all or some of our rights to such critical intellectual property and our license may terminate. If we should lose our right to license and use technology covered by such license that is critical to our business, such loss would have a materially adverse effect on our business. In such a case, the viability of the Company would be in question. Our only alternatives would be to find existing and non-infringing technology to replace that lost, if any exists, or develop new technology ourselves. The pursuit of any such alternative would likely cause significant delay in the development and introduction of our proposed products.
 
The protections for our key intellectual property may be successfully challenged by third parties.
 
We own various key intellectual properties. No assurance can be given that any intellectual property claims will not be successfully challenged by third parties. Any challenge to our intellectual property, regardless of merit, would likely involve costly litigation which could have a material adverse effect on our business. If a successful challenge were made to intellectual property that is critical to our proposed products, the pursuit of any such alternative would likely cause significant delay in the development and introduction of such products. Moreover, a successful challenge could call into question the validity of our business.
 
As we lose patent protection on our critical technologies, it may have a material adverse effect on our business.
 
We rely on certain patents to provide us with exclusive rights for our technology. The first of our primary patents on our core technology will expire in December 2012. As we begin to lose certain patent protections on our prostate imaging systems and related critical patented technologies, we may face strong competition as a result, which could have a material adverse effect our business.
 
The government has rights to certain of our patents.
 
Certain of our patents emanated from work performed by Artann under grants from the National Institutes of Health (“NIH”). As a result, certain standard NIH grant obligations apply, which are designed to ensure that the U.S. investment is used in the interest of U.S. industry and labor and that inventions are reported to NIH. Additionally, the U.S. government retains a non-exclusive license to these patents. As a non-exclusive licensee of certain of these patents, the U.S. government, in addition to utilizing the inventions itself, could in certain limited circumstances, request additional licenses to the patents be granted to other parties and, if such license request is refused, grant the licenses itself. Any actions by the U.S. government to require the grant of additional licenses could materially and adversely affect our business.
 
25

 
Risks Associated with Ownership of Our Securities
 
We do not meet the criteria to list our securities on an exchange such as The NASDAQ Capital Market and our common stock is illiquid and may be difficult to sell.
 
Our common stock is quoted on the OTC Bulletin Board (“OTCBB”). Generally, securities that are quoted on the OTCBB lack liquidity and analyst coverage. This may result in lower prices for our common stock than might otherwise be obtained if we met the criteria to list our securities on a larger or more established exchange, such as The NASDAQ Capital Market and could also result in a larger spread between the bid and asked prices for our common stock.
 
In addition, there has been only limited trading activity in our common stock. The relatively small trading volume will likely make it difficult for our stockholders to sell their common stock as, and when, they choose. As a result, investors may not always be able to resell shares of our common stock publicly at the time and prices that they feel are fair or appropriate.
 
Because our stock is deemed a “penny stock,” you may have difficulty selling shares of our common stock.
 
Our common stock is a “penny stock” and is therefore subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934, as amended. Under this rule, broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. The penny stock rules severely limit the liquidity of securities in the secondary market, and many brokers choose not to participate in penny stock transactions. As a result, there is generally less trading in penny stocks and you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate. Under applicable regulations, our common stock will generally remain a penny stock until such time as its per-share price is $5.00 or more (as determined in accordance with SEC regulations), or until we meet certain net asset or revenue thresholds. These thresholds include the possession of net tangible assets (that is, total assets less intangible assets and liabilities) in excess of $5,000,000, and the recognition of average revenues equal to at least $6,000,000 for each of the last three years. We do not anticipate meeting any of the thresholds in the foreseeable future.
 
Our outstanding options and warrants may have an adverse effect on the market price of our common stock and increase the difficulty of effecting a future business combination.
 
At December 31, 2010, we had outstanding options and warrants to purchase 9,042,641 shares of common stock. The potential for the issuance of substantial numbers of additional shares of common stock upon exercise of these warrants and options could make us a less attractive acquisition target in the eyes of a prospective business partner. Such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants and options could have an adverse effect on the market price for our securities or on our ability to obtain future financing.
 
The price of our common stock may fluctuate significantly, which may make it difficult for stockholders to resell common stock when they want or at a price they find attractive.
 
We expect that the market price of our common stock will fluctuate. Our common stock price can fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include:
 
 
·
actual or anticipated variations in our quarterly operating results;
 
 
·
changes in interest rates and other general economic conditions;
 
 
·
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
 
 
·
operating and stock price performance of other companies that investors deem comparable to us;
 
 
·
news reports relating to trends, concerns, litigation, regulatory changes and other issues in our industry;
 
 
·
geopolitical conditions such as acts or threats of terrorism or military conflicts; and
 
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·
relatively low trading volume.
 
There is no assurance that our 2010 Replacement Warrants will be quoted on the Pink Sheets or the OTCBB, and they may be illiquid and difficult to sell.
 
The replacement warrants (the “2010 Replacement Warrants”) issued pursuant to our tender offer that closed on August 2, 2010 (the 2010 Warrant Tender Offer”) are not currently quoted on the Pink Sheets or the OTCBB, and there is no assurance that they will be quoted in the future.  If the 2010 Replacement Warrants are not quoted on the Pink Sheets or the OTCBB, it will likely be difficult for our warrant holders to sell their 2010 Replacement Warrants.
 
In addition, generally, securities that are quoted on the Pink Sheets lack liquidity and analyst coverage. This may result in lower prices for the 2010 Replacement Warrants than might otherwise be obtained if we met the criteria to list them on a larger or more established exchange, such as The NASDAQ Capital Market and could also result in a larger spread between the bid and asked prices for such warrants.
 
In addition, there has been only limited trading activity in the 2009 Replacement Warrants. It is likely that there will be relatively small trading volume in the 2010 Replacement Warrants, if they are quoted, and this will likely make it difficult for our stockholders to sell their 2010 Replacement Warrants as, and when, they choose. As a result, investors may not always be able to resell such warrants publicly at the time and prices that they feel are fair or appropriate.
 
We have never paid dividends and do not expect to pay dividends in the foreseeable future.
 
We have never paid dividends on our capital stock and do not anticipate paying any dividends for the foreseeable future. Future debt covenants may prohibit payment of dividends.
 
 
Not applicable.
 
 
 
 
Although we are subject to litigation or other legal proceedings from time to time in the ordinary course of our business, we are not a party to any pending legal proceedings and are not aware of any threatened legal proceeding.
 
 


General
 
Price Range of Common Stock

We currently have four equity securities that are quoted on the OTC Bulletin Board (the “OTCBB”) or the Pink Sheets: common stock, Units, and two warrant issues.  Our common stock is quoted under the symbol “PUMD” on the OTCBB.  The Units, consisting of one share of common stock and one five-year warrant to purchase a share of common stock at $1.30 per share, are quoted under the symbol “PUMDU” on the Pink Sheets.  Upon their separation from the Units, the Public Warrants are separately quoted under the symbol “PUMDW” (the “Public Warrants”) on the Pink Sheets.  Finally, the 2009 Replacement Warrants are quoted under the symbol “PUMWW” on the Pink Sheets.  The 2010 Replacement Warrants are not quoted on the OTCBB or Pink Sheets.

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The following table lists the high and low bid information for our common stock as quoted on the OTCBB, by quarter from January 1, 2009 through December 31, 2010.  Our common stock began trading in December 2003.  On February 10, 2011, the last reported sale price of our common stock was $1.10.  No active market exits for our Units, Public Warrants, 2009 Replacement Warrants and 2010 Replacement Warrants.

   
High
   
Low
 
2009
           
First Quarter
  $ 1.21     $ 0.20  
Second Quarter
  $ 0.70     $ 0.50  
Third Quarter
  $ 1.45     $ 0.55  
Fourth Quarter
  $ 4.00     $ 1.10  
2010
               
First Quarter
  $ 2.85     $ 1.90  
Second Quarter
  $ 2.10     $ 0.95  
Third Quarter
  $ 1.70     $ 0.95  
Fourth Quarter
  $ 1.40     $ 0.75  
 
The quotations listed above reflect interdealer prices, without retail markup, markdown or commission, and may not necessarily represent actual transactions. As of December 31, 2010, there were approximately 143 stockholders of record of our common stock.
 
Dividend Policy
 
We have never declared or paid any cash dividends on our capital stock and do not expect to pay any dividends for the foreseeable future. We intend to use future earnings, if any, in the operation and expansion of our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors, based on our financial condition, results of operations, contractual restrictions, capital requirements, business properties, restrictions imposed by applicable law and other factors our board of directors may deem relevant. Future debt covenants may prohibit payment of dividends.
 
Recent Sales of Unregistered Securities
 
 
Sales of the securities described above were made in compliance with the requirements of Rule 506 of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”) and the exemption from registration provided under Section 4(2) of the Securities Act.  In qualifying for such exemption, the Company relied upon representations from the investors regarding their status as “accredited investors” under Regulation D and the limited manner of the offering.
 
ITEM 6:
SELECTED FINANCIAL DATA
 
 
Not applicable.
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, and notes thereto, included in this Annual Report on Form 10-K. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.
 
Overview
 
ProUroCare Medical Inc. (“ProUroCare,” the “Company,” “we” or “us,” which terms include reference to our wholly owned subsidiary, ProUroCare Inc. (“PUC”)) is an emerging medical device company that is in the process of obtaining FDA clearance for its first product, an innovative prostate imaging system known as the ProUroScan™ System.  The ProUroScan System is an imaging system designed for use as an aid to the physician in documenting abnormalities in the prostate that have been previously detected by a digital rectal exam (“DRE”). As an adjunct to DRE, the ProUroScan System will be used following an abnormal DRE to generate a real-time image of the prostate.  The final composite image is saved as a permanent electronic record and can be conveniently retrieved to view previous test results.
 
We own patents and exclusively license patents and patent applications and know-how related to the creation in real-time of two- and three-dimensional images of soft tissue using special software to process data acquired by probes that incorporate arrays of sensitive mechanical force sensors.  The ProUroScan System is our first embodiment of this technology, to be used to image the prostate.  We believe that this technology can be applied to other soft tissue organs in the future.
 
The ProUroScan System was developed over the past several years under agreements with our development partner, Artann Laboratories, Inc. (“Artann”), a scientific technology company focused on early-stage technology development.  During 2008 and 2009, our research and development activities conducted through Artann were primarily directed toward completion of the final configuration of the ProUroScan System and conducting clinical trials for submission of a 510(k) application to the FDA.  By agreement, Artann is responsible for submission of the 510(k) and all follow-on activities required to obtain FDA clearance in the United States.   Once cleared and upon ProUroCare’s first commercial sale of a ProUroScan System, Artann will transfer the 510(k) to ProUroCare.
 
The ProUroScan System is not currently marketed or sold and has not yet been cleared for marketing by the FDA. Our goal is to have the ProUroScan System regulated by the FDA as a Class II device.  A Class II device is one in which general and specific controls exist to ensure that the device is safe and effective.  In a 510(k) application, applicants must demonstrate that the proposed device is substantially equivalent to an existing approved product, or “predicate device.”  Products that employ new or novel technologies, and for which through the 510(k) review process are found to have no comparable predicate device, may be cleared for marketing under Section 513(f) of the Food, Drug and Cosmetic Act (“FDCA”).  This path, referred to as a “de novo” application, is intended to allow new or novel technology devices to be cleared for marketing when an appropriate predicate device does not exist.
 
In November 2009, a 510(k) application for market clearance was filed with the FDA that incorporated a basic documentation claim.  From that submission, the FDA determined that the ProUroScan System was not substantially equivalent (“NSE”) to a device currently being marketed.  Therefore, as required by Section 513(f)(2) of the FDCA, a submission was made on May 21, 2010 to request 510(k) clearance under the de novo process.  This request asked the FDA to define mechanical imaging systems as devices that are intended to produce an elasticity image of the prostate as an aid in documenting abnormalities of the prostate that are initially identified by digital rectal examination and to be used by physicians as a documentation tool.
 
The de novo submission also recommended that the classification regulation state that a “mechanical imaging system” device consists of a trans-rectal probe with pressure sensor arrays and a motion tracking system that provides real time images of the prostate.  These proprietary components are unique to the ProUroScan System.  Once cleared, the ProUroScan can serve as a predicate for future filings and expanded indications for use.
 
We expect to market the system in cooperation with a yet-to-be-determined medical device company that has an established worldwide presence in the urology market.  We are actively engaged in discussions with several such companies and intend to identify the final marketing partner in 2011.  As we move into production and begin marketing our products, we expect to add internal resources in the areas of sales and marketing, engineering and quality control.
 
During this pre-revenue stage, in addition to work performed by Artann, we have conducted our development and clinical activities primarily through the use of contracted resources that specialize in developing regulatory strategies, managing the clinical trial process and counseling on FDA matters.  We have found that using consultants and contractors to perform these functions during our development stage has allowed us to engage specialized talent and capabilities as needed by the business while providing the flexibility to engage them as our financial resources have permitted.  For manufacturing, we have identified a highly qualified company, Logic (Minneapolis, MN), to produce the first commercial ProUroScan Systems.  Logic has recently completed the production of three pre-commercial systems to establish and validate the manufacturing process.
 
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An important initiative for 2011 will be to produce additional pre-commercial ProUroScan Systems and place them in the facilities of physicians on our physician advisory council following FDA clearance.  We believe that the insights gained from the participation of these influential physicians will prove invaluable to our success.  We have identified the key opinion leaders who will expand our base of clinical reference while evaluating physician training and in-service programs.
 
In addition to the research and development work, we incur ongoing expenses that are directly related to being a public company, including professional audit and legal fees, public and investor relations, financial printing, press releases and transfer agent fees.  We also incur costs associated with the prosecution and maintenance of our intellectual property.  Other expenses incurred include executive officer compensation, travel, insurance, telephone, supplies and other miscellaneous expenses.
 
Results of Operations
 
The following presents an analysis of the Company’s financial results for the years ended December 31, 2010 and 2009.
 
Net Loss
 
Our net loss for 2010 decreased 13 percent to $6,019,000 compared to $6,944,000 for 2009.  Operating expenses comprised of research and development expenses and general and administrative expenses, as described below, decreased by 47 percent to $2,113,000 in 2010 compared to $3,951,000 in 2009.  Interest and other expense increased 31 percent to $3,911,000 in 2010 from $2,994,000 in 2009.
 
Research and Development Expense
 
Research and development expense for  2010 decreased 90 percent to $235,000 compared to $2,240,000 for  2009.  The high expense level in 2009 related to work done by Artann and others leading to the FDA 510k application in November of that year, and milestone payments under the Artann contracts.  The FDA 510(k) application triggered a cash milestone payment of $250,000, and an accrual of the issuance of 769,231 shares of common stock valued on the submission date at approximately $1,565,000.  In addition, we expensed $235,000 for development work by Artann.  During 2009 we also incurred approximately $137,000 of regulatory and clinical consulting fees and contracted engineering fees of approximately $34,000.  In 2010, our clinical and regulatory work decreased substantially as we waited for FDA review of the 510k submission.  Our regulatory and clinical consulting fees declined to $41,000, and work performed under the Artann development agreement declined to $75,000.  Contracted engineering fees increased to approximately $65,000 in 2010, and $49,000 was expensed related to the cost of systems produced for clinical purposes.
 
General and Administrative Expense
 
General and administrative expenses for 2010 increased by 10 percent, or $167,000, to $1,878,000 compared to $1,711,000 for 2009.
 
Our only employees are our two executive officers.  Cash-based compensation expenses (salary, bonus, benefits and related payroll taxes) totaled $402,000 in 2010, including a total of approximately $38,000 paid to our officers to reimburse them for additional income taxes they incurred when significant amounts of their salary earned in 2006 and 2007 were deferred to 2008 and 2009.  In 2009, we incurred $359,000 of compensation expense, which included $40,000 of bonus expense. Stock options expense related to options granted to our directors, officers and consultants in 2010 were valued at $293,000 compared to $481,000 in 2009.
 
In 2010, we engaged consulting resources to help us establish contract manufacturing in Minneapolis and transfer know-how from Artann to the contract manufacturer, Logic.  The cost of the consulting resources used in this effort was approximately $312,000.
 
We incur costs related to being a public reporting company, including fees for securities attorneys and our independent registered public accounting firm, proxy services, transfer agent services, investor relations and directors and officer’s (“D&O”) insurance costs.  In 2010, we had fewer SEC registration statement filings and, in response to resource constraints resulting from the extended period of FDA 510k review, we reduced discretionary investor relations expenses.  Consequently, public company costs totaled $226,000 in 2010, representing a decrease of $99,000 compared to $325,000 incurred in 2009.  In addition, directors’ fees increased from $41,000 in 2009 to $81,000 in 2010, as the number of outside directors increased from three to five, and we implemented a new director compensation program.  The directors elected to take all of their 2010 compensation in the form of Company common stock.
 
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We increased our spending on patent related legal work from $62,000 in 2009 to $107,000 in 2010 as we continue to maintain and strengthen our current patent portfolio, both domestic and foreign, and expand our intellectual property rights related to our current technology platform.
 
Interest and Other Expense
 
Interest expense for 2010 was $1,368,000, an increase of $147,000, or 12 percent, compared to $1,221,000 in 2009.  Our interest expense consists of the interest charged by lenders on amounts we have borrowed plus the cost of stock-based consideration we provided to lenders and loan guarantors, including related parties.  Interest charged by lenders totaled $98,000 in 2010, a 49 percent reduction from $193,000 in 2009 following a reduction in interest bearing loans outstanding.  Additional interest expense in 2010 resulted from the recording of the Black-Scholes pricing model valuation of warrants issued as interest pursuant to our June 11, 2010 private placement of $885,000 debt.  Under the debt terms, a total of 680,770 warrants valued at $1,028,000 were issued on July 11, 2010.  See “Liquidity and Capital Resources- Recent Financing Activity” below for a more complete description of the debt and warrants.
 
The cost of consideration provided to lenders and loan guarantors in the form of stock, warrants or beneficial conversion features of convertible debt, is generally recorded as original issue discount and amortized over the term of the associated debt.  The amortized cost is recorded either as interest or debt extinguishment expense, according to the specifics of each transaction. Debt extinguishment expense is incurred when the cost to refinance existing loans, including changes in interest rates and the cost of consideration provided to lenders and loan guarantors, in the form of stock, warrants or beneficial conversion features of convertible debt, is significant enough that we deem it to be a retirement of existing debt and creation of a new loan.  In 2010, $242,000 of such consideration was amortized as interest, a decrease of $787,000, or 76 percent from the $1,028,000 recorded in 2009.  Consideration amortized as debt extinguishment expense for 2010 was $302,000, a decrease of $114,000, or 27 percent, compared to $416,000 in 2009.  Additional debt extinguishment expense was recognized upon the conversion of a $600,000 loan from an individual investor and $97,546 of accrued interest thereon into 381,173 equity units, with each unit consisting of one share of the Company’s common stock and one warrant to purchase one share of Company’s common stock.  We recognized debt extinguishment expense of $870,981 in this conversion, representing the excess fair value of the securities issued over the carrying value of the debt and interest at the time of the conversion.
 
Pursuant to our 2010 Warrant Tender Offering that closed in August 2010 (see “Liquidity and Capital Resources- Recent Financing Activity,” below), we issued 1,007,529 2010 Replacement Warrants.  The $1,370,000 fair market value of the 2010 Replacement Warrants, determined using the Black-Scholes pricing model, was expensed as an incentive for early warrant exercise in 2010.  Pursuant to our 2009 Warrant Tender Offering that closed in November 2009, we issued 1,244,829 2009 Replacement Warrants.  The $1,357,000 fair market value of the 2009 Replacement Warrants, determined using the Black-Scholes pricing model, was expensed as an incentive for early warrant exercise in 2009.
 
Liquidity and Capital Resources
 
Assets; Property Acquisitions and Dispositions
 
Our primary assets are our intellectual property rights, including patents, patent applications and our license and commercialization and development agreements with Artann, which are the foundation for our proposed product offerings. These assets secure $900,000 of senior bank notes and $400,000 of subordinated notes, and as a result, are not available to secure additional senior debt financing.
 
Recent Financing Activity
 
On June 11, 2010, we closed on the sale of $885,000 of unsecured promissory notes (the “June 2010 Notes”) in a private placement.  During the first 30 days of the June 2010 Notes’ terms, 10,000 warrants were accrued as interest for each $13,000 of original principal amount outstanding.  The warrants have an exercise price of $1.30 per share, a three-year term and are immediately exercisable.  The Company may elect to redeem the warrants at any time after the last sales price of the Company’s common stock equals or exceeds $4.00 for 10 consecutive trading days.  Following the initial 30 days of the June 2010 Notes’ terms, each June 2010 Note bore interest at a 6% annual rate, payable in cash at maturity.  Holders of $808,982 of the June 2010 Notes subsequently paid for their exercise of warrants in the 2010 Warrant Tender Offer by the cancellation of the notes.  On February 4, 2011 we repaid a $65,000 June 2010 Note and on February 11, 2011, we refinanced the remaining $11,018 June 2010 Note.
 
31

 
On June 28, 2010, we renewed a total of $1.0 million of our $1.2 million secured debt with Crown Bank, and on July 6, 2010 we repaid the remaining $200,000.  $100,000 of the remaining $1.0 million debt was repaid on October 6, 2010 and $900,000 is scheduled to mature on March 28, 2011.
 
On August 2, 2010, the Company closed a tender offer to holders of certain outstanding warrants to provide additional consideration for the exercise of such warrants (the “2010 Warrant Tender Offer”).  The Company offered to holders of the subject warrants the opportunity to exercise their existing warrants and receive, in addition to the shares of common stock purchased upon exercise, new, three-year replacement warrants.  The replacement warrants have an exercise price of $1.30 per share and will be redeemable at the Company’s discretion at any time after the last sales price of its common stock equals or exceeds $4.00 for ten consecutive trading days.  A total of approximately 1.0 million warrants were tendered by warrant holders and accepted by us.  Holders of approximately 809,000 warrants paid for their warrant exercise by the cancellation of $1.1 million of amounts due them pursuant to promissory notes from ProUroCare.  Warrants to purchase approximately 192,000 shares of common stock were exercised for cash, resulting in gross proceeds to the Company of approximately $258,000.
 
On September 28, 2010, the Company entered into a $3.125 million Securities Purchase Agreement (the “SPA”) with Seaside 88, LP (“Seaside”).  Concurrent with the execution of the SPA, the Company closed on an $875,000 first tranche of the funding, selling 1,400,000 unregistered shares of its common stock to Seaside at $0.625 per share.  Under the terms of the SPA, the remaining $2.250 million funding is to be provided in six tranches:
 
 
·
$750,000 within 30 days following FDA clearance of the Company’s ProUroScan System, currently in FDA review.
 
 
·
$1.5 million provided in five subsequent closings of $300,000 in 30-day increments following the previous closing.
 
At each of the future closings, the Company will sell unregistered shares of its common stock to Seaside at a cost that is 50 percent of the stock’s volume weighted average selling price (“VWASP”) during the 10 trading days preceding each closing date, subject to a floor VWASP of $2.50 per share below which the parties are not obligated to close.
 
The SPA provides that Seaside will purchase only the number of shares that will cause its beneficial ownership to remain below 9.9% of the Company’s outstanding shares.  Seaside has indicated their willingness to propose an alternative investment vehicle to provide the financing, as they have in other transactions, should a subsequent closing otherwise cause Seaside to exceed this ownership level.  After the first closing, Seaside holds approximately 8.9% of our outstanding stock.
 
On January 14, 2011, the Company renewed its $100,025 promissory note with Central Bank.  The renewed note bears interest at the prime rate plus one percent, with a minimum rate of 6.0 percent and matures on January 17, 2012.  The renewed promissory note remains guaranteed by an individual guarantor, whose guaranty was collateralized by Company assets.   As consideration for providing the 2011 guaranty, the Company issued to the guarantor 6,667 shares of stock and will accrue for issuance 1,111 shares of its common stock for each month or portion thereof that the principal amount of the loan remains outstanding beginning July 17, 2011.
 
On February 8, 2011, the Company refinanced its $300,000 note payable with an individual lender.  The replacement note bears interest at 6.0 percent per year, matures on August 8, 2012, and is convertible into shares of the Company’s common stock at $1.30 per share.  The company may prepay the note at any time with 30-days’ notice, during which time the lender may exercise his conversion rights under the terms of the convertible note.  The convertible note provides the lender with a subordinated security interest in the Company’s assets.
 
On February 10, 2011, the Company issued a $65,698 unsecured convertible promissory note to a service provider in settlement of a $65,698 payable.  The unsecured promissory note bears interest at 6.0 percent per year, matures on August 8, 2012, and is convertible into shares of the Company’s common stock at $1.30 per share. 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.
 
32

 
Balance Sheet Changes
 
In addition to the financing activities detailed above, the following transactions resulted in material changes to our balance sheet during the year ended December 31, 2010:
 
On March 15, 2010, we issued 769,231 shares of common stock to Artann pursuant to a development agreement.  The $1,565,385 value of the shares had been recorded as an accrued development fee as of December 31, 2009.
 
On March 26, 2010, we converted a $600,000 loan from the Smith Trust and $97,546 of accrued interest thereon into 381,173 shares of our common stock and 381,173 warrants to purchase our common stock.  As a result, notes payable and accrued expenses were reduced accordingly.
 
Sources and Uses of Cash
 
Net cash used in operating activities was $2.2 million during the year ended December 31, 2010 compared to $3.1 million in 2009.  In addition to operating expenses, other uses of cash during the year ended December 31, 2010 included payments that reduced accounts payable by $233,000 and an $86,000 prepayment of the production of probe sensors to be used in future clinical work.  Cash used during the year ended December 31, 2009 included payments to Artann totaling $1.1 million for licensing fees and milestone achievements pursuant to our licensing and development agreements and payments of $205,000 to Artann for development work.
 
Net cash provided by financing activities was $1.6 million during the year ended December 31, 2010, resulting from the $885,000 proceeds of a private debt offering, $735,000 of net proceeds from the SPA equity offering and proceeds of $510,000 from the exercise of warrants by certain warrant holders, including the 2010 Warrant Tender Offer.  These financing sources were offset by $400,000 of bank debt repayments and $138,000 of offering costs.  Proceeds from the 2009 Public Offering less underwriter’s commissions and other payments for expenses of the offering were $2.3 million, while net proceeds from warrant exercises was $1.7 million.  In addition, we borrowed a total of $200,025 pursuant to two bank loans and $543,000 pursuant to two loans from investors.  Offsetting this was our retirement of a $400,000 bank debt in March 2009.
 
Cash Requirements
 
The timing for market launch of the ProUroScan System is dependent upon receipt of FDA market clearance and the time and resources required to scale-up manufacturing, quality assurance, sales and marketing activities.  Prior to receiving market clearance, we are conserving cash by incurring only expenses essential to obtain FDA clearance, to transfer and validate manufacturing processes and to prepare detailed commercialization scale-up plans.  Once FDA clearance is obtained, we will implement all phases of the commercialization plans as quickly as our available funding will allow.  We believe that it will take approximately four to five months to complete these activities and begin commercial sales depending primarily on funding availability.
 
As we achieve our financing goals (see “Current Financing Plans,” below) we expect to accelerate the development of a compact version of the ProUroScan System, which will eventually become our primary commercial product.  We will also use incremental funding to enhance and expand our patent positions on the current ProUroScan System and potential future products and line extensions.  In the interim, we plan to begin placing clinical systems and training physicians who will serve as members of our physician advisory council.
 
 Our ability to achieve these goals is dependent upon the amount and timing of funding available to us both before and after FDA clearance is received.  Prior to receiving FDA clearance, we estimate that our cash needs will average less than $100,000 per month.  Following FDA clearance, as we scale up operations for our commercial launch, we expect our cash requirements to increase significantly.  We estimate that we will spend approximately $4.5 million during the nine months following FDA clearance to accomplish the goals outlined above.  In addition, we are required to make a cash payment of $750,000 pursuant to the terms of the Artann development agreement upon receipt of FDA regulatory clearance.  Our $900,000 secured promissory note with Crown Bank matures in March 2011.  This note is guaranteed by shareholders that have been instrumental in financing our funding needs over the past few years.  We anticipate we will be able to renew or refinance a significant portion of this note if required.
 
33

 
Current Financing Plans
 
Our near-term financing goal is to raise a sufficient amount of capital prior to receipt of FDA clearance of the ProUroScan System to fund existing operations and certain activities in preparation for market entry.  The amount of such financing we will require is dependent upon when FDA clearance is received.  Interim financing may be in the form of private loans, guaranteed bank loans, or private sales of our debt or equity securities.  Following FDA clearance, we expect to fund operations and market entry through the calling of currently redeemable warrants, follow-on financing arrangements pursuant to the Seaside SPA, potential support from a corporate distribution partner and potential further private sale or public offering of our debt or equity securities.
 
As of December 31, 2010, we had approximately $419,000 of cash on hand.  In addition, on that date we had 3,590,894 currently redeemable warrants outstanding.  These warrants have an exercise price of $1.30 per share.  Upon our exercise of our right to redeem the warrants, holders of the warrants will have a period of 30 days to exercise their warrants. We could realize up to approximately $4.7 million depending on the number of shares actually exercised. We may call these warrants in 2011 to meet our financing needs outlined above.  In addition, we will gain the ability to redeem 2,840,412 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 we were to subsequently exercise our redemption right on these warrants, we could realize up to an additional $3.7 million depending on the number of shares actually exercised pursuant to such redemption.  There can be no assurance that we will be able to redeem the warrants, or how much would be realized if such redemption were made.
 
As a result of the Seaside SPA, we expect to close on $2.25 million of additional financing during the six months following FDA clearance of the ProUroScan System (see “Recent Financing Activity”, above).
 
We plan to identify a distribution partner to help market our products.  We expect such a distribution partner may provide financial support in the form of loans, licensing fees, equity investment or a combination of these.  In addition to financial support, a successful collaboration with such a partner would allow us to gain access to downstream marketing, manufacturing and sales support.
 
In addition to warrant exercises, the Seaside SPA and possible corporate partner funding, we will likely pursue additional funding in 2011 following FDA clearance to more aggressively scale up manufacturing and marketing activities associated with our market launch, accelerate development of a portable system and low cost sensors and expand clinical studies with our physician advisory council.  The additional funding may be from the issuance of equity securities, convertible debt, private debt or debt guarantees for which stock-based consideration is paid.  If any of these funding events occur, existing shareholders will likely experience dilution in their ownership interest.  If additional funds are raised by the issuance of debt or certain equity instruments, we may become subject to certain operational limitations, and such securities may have rights senior to those of our existing holders of common stock. The Company intends to negotiate with Crown Bank and loan guarantors and expects to refinance a majority of our $900,000 loan that is due on March 28, 2011.
 
If our funding from warrants or other private funding initiatives is delayed or proves insufficient to allow an aggressive ramp-up toward market launch, or if FDA clearance of the ProUroScan System is delayed, we will be forced to delay U.S. commercialization activities.
 
Off-Balance Sheet Arrangements
 
None.
 
Going Concern
 
We have incurred operating losses, accumulated deficit and negative cash flows from operations since inception. As of December 31, 2010, we had an accumulated deficit of approximately $33.9 million. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements included in this Annual Report on Form 10-K do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
 
Critical Accounting Policies
 
Our critical accounting policies are policies which have a high impact on the reporting of our financial condition and results, and require significant judgments and estimates. Our critical accounting policies relate to (a) the valuation of stock-based compensation awarded to employees, directors, loan guarantors and consultants, (b) the valuation of warrants issued as an incentive for early-exercise of outstanding warrants and (c) the accounting for debt with beneficial conversion features.
 
34

 
Valuation of Stock-Based Compensation
 
Since inception, we have measured and recognized compensation expense for all share-based payment awards made to employees and directors including employee stock options based on fair value. Our 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 expected volatility of our stock price and estimates regarding projected employee stock option exercise behaviors and forfeitures. We recognize 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 have completed two tender offers 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.
 
Accounting for Debt with Beneficial Conversion Features
 
The beneficial conversion features of the promissory notes were valued using the Black-Scholes pricing model. The resulting original issue discount is amortized over the life of the promissory notes using the straight-line method, which approximates the interest method.
 
 
 
Not applicable.
 
35

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are included:
 
    F-2  
         
Audited Financial Statements:
       
         
Consolidated Balance Sheets
    F-3  
         
Consolidated Statements of Operations
    F-4  
         
Consolidated Statement of Shareholders’ Equity (Deficit)
    F- 5  
         
Consolidated Statements of Cash Flows
    F- 15  
         
Notes to Consolidated Financial Statements
    F- 17  

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit Committee and Board of Directors
ProUroCare Medical Inc.
Eden Prairie, MN

We have audited the accompanying consolidated balance sheets of ProUroCare Medical Inc. (a development stage company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the years then ended and the period from August 17, 1999 (inception) to December 31, 2010.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ProUroCare Medical Inc. as of December 31, 2010 and 2009 and the results of their operations and their cash flows for the years then ended and the period from August 17, 1999 (inception) to December 31, 2010, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 3 to the consolidated financial statements, the Company has recurring operating losses, negative cash flows from operations and requires additional working capital to support future operations, which raises substantial doubt about its ability to continue as a going concern.  Management's plans in regards to these matters are also described in Note 3.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Baker Tilly Virchow Krause, LLP

Minneapolis, Minnesota
February 15, 2011
 
F-2

 
ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Balance Sheets

   
December 31,
   
December 31,
 
   
2010
   
2009
 
Assets
           
Current assets:
           
Cash
  $ 419,136     $ 1,000,874  
Other current assets
    136,437       58,200  
Total current assets
    555,573       1,059,074  
Equipment and furniture, net
    15,232       1,470  
Debt issuance costs, net
    4,400       27,383  
    $ 575,205     $ 1,087,927  
Liabilities and Shareholders’ Deficit
               
Current liabilities:
               
Notes payable, bank
  $ 900,000     $ 1,300,000  
Notes payable
    24,902       624,865  
Accounts payable
    614,234       985,560  
Accrued license and development fees
          1,595,385  
Accrued expenses
    186,343       269,230  
Total current liabilities
    1,725,479       4,775,040  
                 
Commitments and contingencies (Note 8):
               
Long-term note payable, bank
    100,025       100,025  
Long-term note payable
    376,018       300,000  
Long-term note payable - related party
          243,000  
Total liabilities
    2,201,522       5,418,065  
Shareholders’ deficit:
               
Common stock, $0.00001 par. Authorized 50,000,000 shares; issued and outstanding 15,777,883 and 11,326,283 shares on December 31, 2010 and 2009, respectively
    158       113  
Additional paid-in capital
    32,272,782       23,549,626  
Deficit accumulated during development stage
    (33,899,257 )     (27,879,877 )
Total shareholders’ deficit
    (1,626,317 )     (4,330,138 )
    $ 575,205     $ 1,087,927  

See accompanying notes to consolidated financial statements.

F-3


ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Operations

   
Year ended 
December 31,
 2010
   
Year ended 
December 31,
 2009
   
Period from 
August 17,
 1999 
(inception) to 
December 31,
 2010
 
Operating expenses:
                 
Research and development
  $ 235,398     $ 2,239,590     $ 7,930,295  
General and administrative
    1,877,664       1,711,075       13,419,912  
Total operating expenses
    2,113,062       3,950,665       21,350,207  
Operating loss
    (2,113,062 )     (3,950,665 )     (21,350,207 )
Incentive for early warrant exercise
    (686,313 )     (1,313,309 )     (1,999,622 )
Incentive for early warrant exercise - related parties
    (683,926 )     (43,555 )     (727,481 )
Interest income
    4,609       158       23,062  
Interest expense
    (721,049 )     (909,481 )     (5,445,004 )
Interest expense - related parties
    (646,826 )     (311,230 )     (2,306,049 )
Debt extinguishment expense
    (887,092 )     (68,162 )     (1,385,373 )
Debt extinguishment expense - related parties
    (285,721 )     (347,820 )     (708,583 )
Net loss
  $ (6,019,380 )   $ (6,944,064 )   $ (33,899,257 )
                         
Net loss per common share:
                       
Basic and diluted
  $ (0.44 )   $ (0.73 )   $ (11.71 )
                         
Weighted average number of shares outstanding:
                       
Basic and diluted
    13,558,591       9,574,914       2,894,652  

F-4


ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders’ Equity (Deficit)

   
Common stock
   
Additional
paid-in
   
Deficit
accumulated
during the
development
   
Total
shareholders’ 
equity
 
   
Shares
   
Amount
   
capital
   
stage
   
(deficit)
 
Balance at inception, August 17, 1999
                             
Net loss for the period from inception to December 31, 1999
        $     $     $     $  
Balance, December 31, 1999
                             
                                         
Net loss for the year ended December 31, 2000
                             
Balance, December 31, 2000
                             
                                         
Issuance of common stock to founders at $33.33 per share on March 1, 2001
    1.0             20             20  
Cancellation of founders’ shares, March 6, 2001
    (1.0 )           (20 )           (20 )
Recapitalization and transfer of common stock to Clinical Network, Inc. July 6, 2001
    300,000       3       (3 )            
Issuance of common stock to CS Medical Technologies, LLC as consideration for technology license agreement on July 6, 2001, valued at $1.58 per share
    300,000       3       474,997             475,000  
Net loss for the year ended December 31, 2001
                      (612,533 )     (612,533 )
Balance, December 31, 2001
    600,000       6       474,994       (612,533 )     (137,533 )
                                         
Issuance of common stock valued at $4.29 per share to Profile LLC for technology license, January 14, 2002
    400,000       4       1,713,596             1,713,600  
Issuance of common stock at $23.33 per share for services rendered, November 14, 2002
    4,421             103,166             103,166  
Issuance of common stock for cash at $23.33 per share on November 22, 2002, net of costs of $193,386
    45,335       1       — 864,418             864,419  
Options to purchase 90,000 shares issued to officers and directors, valued at $4.60 per share, granted March 19, 2002; portion vested in 2002
                124,583             124,583  
Options to purchase 6,000 shares issued to consultants for services rendered, valued at $4.60 per share, granted March 19, 2002; portion vested in 2002
                18,400             18,400  
Warrant for 3,000 shares valued at $4.60 per share, issued to a director on April 19, 2002; portion vested in 2002
                4,025             4,025  
Warrant for 150 shares valued at $3.33 per share issued for services rendered, November 11, 2002
                490             490  
Net loss for the year ended December 31, 2002
                      (3,613,003 )     (3,613,003 )
Balance, December 31, 2002
    1,049,756       11       3,303,672       (4,225,536 )     (921,853 )
                                         
Stock issued in lieu of cash for accounts payable, valued at $23.33 per share, February 25, 2003
    545             12,705             12,705  
Warrants for 19,286 shares valued at $3.00 per share, issued to bank line of credit guarantors, March 1, 2003
                57,858             57,858  
Warrant for 2,143 shares valued at $3.00 per share, issued to director as a bank line of credit guarantor, March 1, 2003
                6,429             6,429  
Warrant for 9,215 shares issued for services rendered, valued at $20.30 per share, June 30, 2003
                187,060             187,060  
Warrants for 22,501 shares valued at $3.60 per share, issued to bank line of credit guarantors, August 5, 2003
                81,003             81,003  
Warrant for 2,143 shares valued at $3.60 per share, issued to director as a bank line of credit guarantor, August 5, 2003
                7,714             7,714  
Warrants for 6,429 shares valued at $3.40 per share, issued to bank line of credit guarantors, September 11, 2003
                21,858             21,858  
Warrant for 11,789 shares valued at $3.50 per share, issued to bank line of credit guarantor, December 22, 2003
                41,250             41,250

F-5


ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders’ Equity (Deficit) (Continued)

   
Common stock
   
Additional
paid-in
   
Deficit
accumulated
during the
development
   
Total
shareholders’ 
equity
 
   
Shares
   
Amount
   
capital
   
stage
   
(deficit)
 
Options to purchase 90,000 shares issued to officers and directors, valued at $4.60 per share, granted March 19, 2002; portion vested in 2003
                133,400             133,400  
Options to purchase 6,000 shares issued to consultants for services rendered, valued at $4.60 per share, granted March 19, 2002; portion vested in 2003
                6,900             6,900  
Warrant for 3,000 shares valued at $4.60 per share, issued to a director on April 19, 2002; portion vested in 2003
                6,900             6,900  
Net loss for the year ended December 31, 2003
                      (1,632,457 )     (1,632,457 )
Balance, December 31, 2003
    1,050,301       11       3,866,749       (5,857,993 )     (1,991,233 )
                                         
Options to purchase 3,000 shares issued to a consultant valued at $6.70 per share, granted February 1, 2004, portion vested in 2004
                10,100             10,100  
Options to purchase 45,000 shares issued to officer valued at $6.70 per share, granted February 1, 2004; portion vested in 2004
                84,173             84,173  
Repurchase of 90,000 shares pursuant to the exercise of dissenters' rights at time of merger, April 5, 2004 in connection with $750,000 note payable
    (90,000 )     (1 )     (749,999 )           (750,000 )
Issuance of shares to shareholders of Global Internet Communications, Inc. pursuant to merger April 5, 2004
    209,700       2       (2 )            
Issuance of common stock for cash at $20.00 per share during 2004, net of costs of $139,493
    220,500       2       4,270,505             4,270,507  
Cost associated with Global Internet Communications, Inc. reverse merger effective April 5, 2004
                (162,556 )           (162,556 )
Effect of anti-dilution and price-protection provisions of warrants issued to loan guarantors in 2003, triggered by April 5, 2004 closing of private placement; shares subject to warrants increased by 37,501; exercise price reduced from $23.33 to $16.67 per share (see Note 14(g))
                320,974             320,974  
Issuance of common stock valued at $20.00 per share for accrued expenses in lieu of cash, May 21, 2004
    3,861             77,225             77,225  
Warrants for 10,000 shares issued for services rendered valued at $11.50 per share on July 19, 2004
                114,914             114,914  
Options to purchase 20,000 shares issued to officer valued at $15.00 per share, granted July 21, 2004; portion vested in 2004
                41,670             41,670  
Issuance of common stock valued at $20.00 per share for accrued interest in lieu of cash, October 12, 2004
    4,444             88,882             88,882  
Warrants for 20,000 shares issued for services rendered valued at $8.30 per share on December 2, 2004
                166,172             166,172  
Options to purchase 90,000 shares issued to officers and directors, valued at $4.60 per share, granted March 19, 2002; portion vested in 2004
                82,452             82,452  
Warrant for 3,000 shares valued at $4.60 per share, issued to a director on April 19, 2002; portion vested in 2004
                1,150             1,150  
Net loss for the year ended December 31, 2004
                      (2,318,896 )     (2,318,896 )
Balance, December 31, 2004
    1,398,806       14       8,212,409       (8,176,889 )     35,534

F-6


ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders’ Equity (Deficit) (Continued)

   
Common stock
   
Additional
paid-in
   
Deficit
accumulated
during the
development
   
Total
shareholders’ 
equity
 
   
Shares
   
Amount
   
capital
   
stage
   
(deficit)
 
                               
Options to purchase 90,000 shares issued to officers and directors, valued at $4.60 per share, granted March 19, 2002; portion vested in 2005
                5,734             5,734  
Options to purchase 45,000 shares issued to officer valued at $6.70 per share, granted February 1, 2004; portion vested in 2005
                111,108             111,108  
Options to purchase 20,000 shares issued to officer valued at $15.00 per share, granted July 21, 2004; portion vested in 2005
                100,008             100,008  
Options to purchase 15,000 shares issued to officer valued at $16.20 per share, granted January 3, 2005; portion vested in 2005
                74,256             74,256  
Options to purchase 15,000 shares issued to officer valued at $6.70 per share, granted September 6, 2005; portion vested in 2005
                6,625             6,625  
Issuance of common stock for services rendered at $10.20 per share on May 13, 2005
    5,000             51,000             51,000  
Issuance of common stock for cash at $7.60 per share on June 15, 2005
    6,579             50,001             50,001  
Issuance of common stock for deferred offering costs at $7.10 per share on September 1, 2005
    2,500             17,750             17,750  
Issuance of common stock in lieu of cash for accrued expenses at $8.90 per share on December 31, 2005
    4,541             40,418             40,418  
Warrants for 2,500 shares valued at $6.30 per share, issued to bank loan guarantor, September 14, 2005
                15,750             15,750  
Warrants for 2,500 shares valued at $5.30 per share, issued in connection with notes payable on September 21, 2005
                13,250             13,250  
Warrants for 20,000 shares valued at $4.80 per share, issued to bank loan guarantors, October 19, 2005
                106,000             106,000  
Net loss for the year ended December 31, 2005
                      (2,028,056 )     (2,028,056 )
Balance, December 31, 2005
    1,417,426       14       8,804,309       (10,204,945 )     (1,400,622 )
                                         
Options to purchase 45,000 shares issued to officer valued at $6.70 per share, granted February 1, 2004; portion vested in 2006
                101,008             101,008  
Options to purchase 20,000 shares issued to officer valued at $15.00 per share, granted July 21, 2004; portion vested in 2006
                100,008             100,008  
Options to purchase 15,000 shares issued to officer valued at $16.20 per share, granted January 3, 2005; portion vested in 2006
                81,006             81,006  
Options to purchase 15,000 shares issued to officer valued at $6.70 per share, granted September 6, 2005; portion vested in 2006
                8,834             8,834  
Options to purchase 17,500 shares issued to officers and an employee valued at $5.60 per share, granted March 1, 2006; portion vested in 2006
                48,215             48,215
 
F-7


ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders’ Equity (Deficit) (Continued)

   
Common stock
   
Additional
paid-in
   
Deficit
accumulated
during the
development
   
Total
shareholders’ 
equity
 
   
Shares
   
Amount
   
capital
   
stage
   
 (deficit)
 
Options to purchase 3,000 shares issued to a director valued at $5.90 per share, granted May 30, 2006; portion vested in 2006
                5,163             5,163  
Original issue discount on convertible debt issued on February 16, 2006
                400,000             400,000  
Warrants for 5,000 shares valued at $4.60 per share, issued in connection with notes payable on January 25, 2006
                23,000             23,000  
Issuance of common stock for deferred offering costs at $9.10 per share on February 22, 2006
    2,500             22,750             22,750  
Original issue discount on convertible debt issued on February 29, 2006
                333,334             333,334  
Issuance of common stock for services rendered at $6.40 per share on April 21, 2006
    7,000             44,800             44,800  
Warrants for 3,750 shares valued at $6.80 per share, issued in connection with notes payable on June 1, 2006
                25,500             25,500  
Warrants for 375 shares valued at $5.40 per share, issued in connection with notes payable on July 21, 2006
                2,025             2,025  
Warrants for 500 shares valued at $4.60 per share, issued in connection with notes payable on August 30, 2006
                2,300             2,300  
Issuance of common stock for cash at $4.30 per share on September 7, 2006
    11,628             50,000             50,000  
Issuance of common stock for services rendered at $6.30 per share on September 8, 2006
    1,415             8,938             8,938  
Warrants for 5,000 shares valued at $4.50 per share, issued in connection with notes payable on November 30, 2006
                22,500             22,500  
Warrants for 5,171 shares valued at $5.40 per share, accrued for issuance in connection with a note payable as of December 31, 2006
                27,922             27,922  
Net loss for the year ended December 31, 2006
                      (2,959,853 )     (2,959,853 )
Balance, December 31, 2006
    1,439,969       14       10,111,612       (13,164,798 )     (3,053,172 )
                                         
Options to purchase 45,000 shares issued to officer valued at $6.70 per share, granted February 1, 2004; portion vested in 2007
                16,811             16,811  
Options to purchase 20,000 shares issued to officer valued at $15.00 per share, granted July 21, 2004; portion vested in 2007
                58,314             58,314  
Warrants for 5,000 shares valued at $4.50 per share, issued in connection with debt extinguishment on January 3, 2007
                22,500             22,500  
Options to purchase 15,000 shares issued to officer valued at $16.20 per share, granted January 3, 2005; portion vested in 2007
                81,007             81,007  
Options to purchase 17,500 shares issued to officers and an employee valued at $5.60 per share, granted March 1, 2006; portion vested in 2007
                33,245             33,245  
Issuance of investment units consisting of common stock and warrants for 62,500 shares issued for cash at $4.00 per share on January 18, January 23, February 28 and May 1, 2007, net of costs of $52,388
    125,000       2       447,610             447,612  
 
F-8


ProUroCare Medical Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders’ Equity (Deficit) (Continued)

   
Common stock
   
Additional
paid-in
   
Deficit
accumulated
during the
development
   
Total
shareholders’ 
equity
 
   
Shares
   
Amount
   
capital
   
stage
   
(deficit)
 
Options to purchase 20,000 shares issued to officer valued at $3.40 per share, granted February 1, 2007; portion vested in 2007
                32,857             32,857  
Warrants for 5,000 shares valued at $3.60 per share, issued in connection with debt extinguishment on February 1, 2007
                18,000             18,000  
Issuance of common stock in lieu of cash for a loan from a director at $4.10 per share on February 9, 2007
    1,707             7,000             7,000  
Modification of warrant term of warrant to purchase 30,000 shares pursuant to separation agreement of employee dated March 15, 2007, valued at $3.20 per share
                96,000             96,000  
Issuance of common stock in lieu of cash for accrued expenses at $4.00 per share on March 21, 2007
    12,478             49,911             49,911  
Warrants for 6,240 shares issued pursuant to amendment of convertible debt valued at $4.30 per share on March 21, 2007
                26,829             26,829  
Issuance of common stock for accounts payable $5.00 per share on April 2, 2007
    4,141             20,704             20,704  
Warrants for 20,000 shares issued for services rendered valued at $3.60 per share on April 16, 2007
                    72,000             72,000  
Modification of option term to purchase 45,000 shares pursuant to separation agreement of officer dated May 11, 2007, valued at $2.30 per share
                103,500             103,500  
Modification of option term to purchase 45,000 shares pursuant to separation agreement of officer dated May 11, 2007, valued at $2.60 per share
                117,000             117,000  
Options to purchase 3,000 shares issued to a director valued at $5.90 per share, granted May 30, 2006; portion vested in 2007
                8,850             8,850  
Options to purchase 3,000 shares issued to a director valued at $2.40 per share, granted June 14, 2007; portion vested in 2007
                1,800             1,800  
Issuance of common stock in lieu of cash for director's fees at $3.00 per share on September 10, 2007
    20,694             62,082             62,082  
Issuance of common stock in lieu of cash for loans from directors at $3.00 per share on September 10, 2007
    1,100             3,300