NAVIDEA BIOPHARMACEUTICALS, INC. - Quarter Report: 2009 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________________
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31,
2009
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from to _________________ to _________________
Commission
File Number:
0-26520
NEOPROBE
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
31-1080091
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification
No.)
|
425
Metro Place North, Suite 300, Dublin, Ohio
|
43017-1367
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(614)
793-7500
(Registrant’s
telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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.
Yes x 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).
Yes ¨ No
¨
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
¨
|
Accelerated filer ¨
|
Non-accelerated filer
¨
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.)
Yes ¨ No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 72,229,237 shares of common
stock, par value $.001 per share (as of the close of business on May 8,
2009).
NEOPROBE
CORPORATION and SUBSIDIARIES
INDEX
PART
I – Financial Information
|
|||||
Item
1.
|
Financial
Statements
|
3 | |||
Consolidated
Balance Sheets as of March 31, 2009 (unaudited) and December 31,
2008
|
3 | ||||
Consolidated
Statements of Operations for the Three-Month Periods Ended March 31, 2009
and March 31, 2008 (unaudited)
|
5 | ||||
Consolidated
Statement of Stockholders’ Deficit for the Three-Month Period Ended March
31, 2009 (unaudited)
|
6 | ||||
Consolidated
Statements of Cash Flows for the Three-Month Periods Ended March 31, 2009
and March 31, 2008 (unaudited)
|
7 | ||||
Notes
to the Consolidated Financial Statements (unaudited)
|
8 | ||||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21 | |||
Forward-Looking
Statements
|
21 | ||||
The
Company
|
21 | ||||
Product
Line Overview
|
21 | ||||
Results
of Operations
|
23 | ||||
Liquidity
and Capital Resources
|
25 | ||||
Recent
Accounting Developments
|
27 | ||||
Critical
Accounting Policies
|
29 | ||||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
31 | |||
Item
4T.
|
Controls
and Procedures
|
31 | |||
PART
II – Other Information
|
|||||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
33 | |||
Item
6.
|
Exhibits
|
33 |
2
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
Neoprobe
Corporation and Subsidiaries
Consolidated
Balance Sheets
ASSETS
|
March 31,
2009
(unaudited)
|
December 31,
2008
|
||||||
Current
assets:
|
||||||||
Cash
|
$ | 3,549,057 | $ | 3,565,837 | ||||
Available-for-sale
securities
|
- | 495,383 | ||||||
Accounts
receivable, net
|
1,685,209 | 1,644,070 | ||||||
Inventory
|
976,138 | 961,861 | ||||||
Prepaid
expenses and other
|
546,162 | 573,573 | ||||||
Total
current assets
|
6,756,566 | 7,240,724 | ||||||
Property
and equipment
|
2,082,459 | 2,060,588 | ||||||
Less
accumulated depreciation and amortization
|
1,696,304 | 1,669,796 | ||||||
386,155 | 390,792 | |||||||
Patents
and trademarks
|
3,032,667 | 3,020,001 | ||||||
Acquired
technology
|
237,271 | 237,271 | ||||||
3,269,938 | 3,257,272 | |||||||
Less
accumulated amortization
|
1,909,871 | 1,863,787 | ||||||
1,360,067 | 1,393,485 | |||||||
Other
assets
|
568,019 | 594,449 | ||||||
Total
assets
|
$ | 9,070,807 | $ | 9,619,450 |
Continued
3
Neoprobe
Corporation and Subsidiaries
Consolidated
Balance Sheets, continued
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
March 31,
2009
(unaudited)
|
December 31,
2008
|
||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 692,302 | $ | 731,220 | ||||
Accrued
liabilities and other
|
942,210 | 917,676 | ||||||
Capital
lease obligations, current portion
|
7,417 | 9,084 | ||||||
Deferred
revenue, current portion
|
511,776 | 526,619 | ||||||
Notes
payable to finance companies
|
86,865 | 137,857 | ||||||
Total
current liabilities
|
2,240,570 | 2,322,456 | ||||||
Capital
lease obligations, net of current portion
|
9,341 | 11,095 | ||||||
Deferred
revenue, net of current portion
|
474,193 | 490,165 | ||||||
Notes
payable to CEO, net of discounts of $71,012 and
$76,294, respectively
|
928,988 | 923,706 | ||||||
Notes
payable to investors, net of discounts of $4,909,630 and
$5,001,149, respectively
|
5,090,370 | 4,998,851 | ||||||
Derivative
liabilities
|
12,345,006 | 853,831 | ||||||
Other
liabilities
|
42,320 | 45,071 | ||||||
Total
liabilities
|
21,130,788 | 9,645,175 | ||||||
Commitments
and contingencies
|
||||||||
Preferred
stock; $.001 par value; 5,000,000 shares authorized;
|
||||||||
3,000
Series A shares, par value $1,000, issued and outstanding
|
||||||||
at
March 31, 2009 and December 31, 2008
|
3,000,000 | 3,000,000 | ||||||
Stockholders’
deficit:
|
||||||||
Common
stock; $.001 par value; 150,000,000 shares authorized;
|
||||||||
71,555,707
and 70,862,641 shares issued and outstanding at
|
||||||||
March
31, 2009 and December 31, 2008, respectively
|
71,556 | 70,863 | ||||||
Additional
paid-in capital
|
136,967,308 | 145,742,044 | ||||||
Accumulated
deficit
|
(152,098,845 | ) | (148,840,015 | ) | ||||
Unrealized
gain on available-for-sale securities
|
- | 1,383 | ||||||
Total
stockholders’ deficit
|
(15,059,981 | ) | (3,025,725 | ) | ||||
Total
liabilities and stockholders’ deficit
|
$ | 9,070,807 | $ | 9,619,450 |
See
accompanying notes to consolidated financial statements
4
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Operations
(unaudited)
Three Months Ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues:
|
||||||||
Net
sales
|
$ | 2,700,036 | $ | 1,782,792 | ||||
License
and other revenue
|
25,000 | - | ||||||
Total
revenues
|
2,725,036 | 1,782,792 | ||||||
Cost
of goods sold
|
848,534 | 660,007 | ||||||
Gross
profit
|
1,876,502 | 1,122,785 | ||||||
Operating
expenses:
|
||||||||
Research
and development
|
1,238,058 | 563,703 | ||||||
Selling,
general and administrative
|
902,048 | 875,408 | ||||||
Total
operating expenses
|
2,140,106 | 1,439,111 | ||||||
Loss
from operations
|
(263,604 | ) | (316,326 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income
|
9,949 | 10,608 | ||||||
Interest
expense
|
(457,134 | ) | (331,779 | ) | ||||
Change
in derivative liabilities
|
1,525,365 | (386,746 | ) | |||||
Other
|
(455 | ) | (1,748 | ) | ||||
Total
other income (expense), net
|
1,077,725 | (709,665 | ) | |||||
Net
income (loss)
|
814,121 | (1,025,991 | ) | |||||
Preferred
stock dividends
|
(60,000 | ) | - | |||||
Income
(loss) attributable to common stockholders
|
$ | 754,121 | $ | (1,025,991 | ) | |||
Income
(loss) per common share:
|
||||||||
Basic
|
$ | 0.01 | $ | (0.02 | ) | |||
Diluted
|
$ | 0.01 | $ | (0.02 | ) | |||
Weighted
average shares outstanding:
|
||||||||
Basic
|
71,387,438 | 67,284,589 | ||||||
Diluted
|
96,346,846 | 67,284,589 |
See
accompanying notes to consolidated financial statements.
5
Neoprobe
Corporation and Subsidiaries
Consolidated
Statement of Stockholders’ Deficit
(unaudited)
Common Stock
|
Additional
Paid-in
|
Accumulated
|
Accumulated
Other
Comprehensive
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Income (Loss)
|
Total
|
|||||||||||||||||||
Balance,
December 31, 2008
|
70,862,641 | $ | 70,863 | $ | 145,742,044 | $ | (148,840,015 | ) | $ | 1,383 | $ | (3,025,725 | ) | |||||||||||
Effect
of adopting EITF 07-5
|
- | - | (8,948,089 | ) | (4,012,951 | ) | - | (12,961,040 | ) | |||||||||||||||
Issued
restricted stock
|
500,000 | 500 | - | - | - | 500 | ||||||||||||||||||
Cancelled
restricted stock
|
(9,000 | ) | (9 | ) | 9 | - | - | - | ||||||||||||||||
Issued
stock upon exercise of warrants
and other
|
50,000 | 50 | 25,950 | - | - | 26,000 | ||||||||||||||||||
Issued
stock as payment of interest
on convertible debt
|
152,066 | 152 | 83,181 | - | - | 83,333 | ||||||||||||||||||
Stock
compensation expense
|
- | - | 70,536 | - | - | 70,536 | ||||||||||||||||||
Paid
preferred stock issuance costs
|
- | - | (6,323 | ) | - | - | (6,323 | ) | ||||||||||||||||
Preferred
stock dividends
|
- | - | - | (60,000 | ) | - | (60,000 | ) | ||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||
Net
income
|
- | - | - | 814,121 | - | 814,121 | ||||||||||||||||||
Unrealized
loss on available-for-sale
securities
|
- | - | - | - | (1,383 | ) | (1,383 | ) | ||||||||||||||||
Total
comprehensive income
|
812,738 | |||||||||||||||||||||||
Balance,
March 31, 2009
|
71,555,707 | $ | 71,556 | $ | 136,967,308 | $ | (152,098,845 | ) | $ | - | $ | (15,059,981 | ) |
See
accompanying notes to consolidated financial statements.
6
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 814,121 | $ | (1,025,991 | ) | |||
Adjustments
to reconcile net income (loss) to net cash
|
||||||||
used
in operating activities:
|
||||||||
Depreciation
and amortization
|
100,896 | 95,815 | ||||||
Amortization
of debt discount and debt offering costs
|
179,730 | 129,373 | ||||||
Provision
for bad debts
|
- | 4,558 | ||||||
Issuance
of common stock in payment of interest
|
83,333 | - | ||||||
Stock
compensation expense
|
70,536 | 48,211 | ||||||
Change
in derivative liabilities
|
(1,525,365 | ) | 386,746 | |||||
Other
|
4,581 | 32,795 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(41,139 | ) | 404,655 | |||||
Inventory
|
(28,794 | ) | 123,057 | |||||
Prepaid
expenses and other assets
|
33,955 | 64,041 | ||||||
Accounts
payable
|
(38,918 | ) | 36,996 | |||||
Accrued
liabilities and other liabilities
|
(38,217 | ) | (312,631 | ) | ||||
Deferred
revenue
|
(30,815 | ) | (29,976 | ) | ||||
Net
cash used in operating activities
|
(416,096 | ) | (42,351 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Maturities
of available-for-sale securities
|
494,000 | - | ||||||
Purchases
of property and equipment
|
(40,491 | ) | (15,572 | ) | ||||
Proceeds
from sales of property and equipment
|
251 | 120 | ||||||
Patent
and trademark costs
|
(12,665 | ) | (487 | ) | ||||
Net
cash provided by (used in) investing activities
|
441,095 | (15,939 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of common stock
|
25,500 | 114,200 | ||||||
Payment
of common stock offering costs
|
(6,544 | ) | - | |||||
Payment
of preferred stock offering costs
|
(6,322 | ) | - | |||||
Payment
of debt issuance costs
|
- | (11,406 | ) | |||||
Payment
of notes payable
|
(50,992 | ) | (52,887 | ) | ||||
Payments
under capital leases
|
(3,421 | ) | (3,656 | ) | ||||
Net
cash (used in) provided by financing activities
|
(41,779 | ) | 46,251 | |||||
Net
decrease in cash
|
(16,780 | ) | (12,039 | ) | ||||
Cash,
beginning of period
|
3,565,837 | 1,540,220 | ||||||
Cash,
end of period
|
$ | 3,549,057 | $ | 1,528,181 |
See
accompanying notes to consolidated financial statements.
7
Notes
to Consolidated Financial Statements
(unaudited)
1.
|
Summary
of Significant Accounting Policies
|
|
a.
|
Basis of
Presentation: The information presented as of March 31,
2009 and for the three-month periods ended March 31, 2009 and March 31,
2008 is unaudited, but includes all adjustments (which consist only of
normal recurring adjustments) that the management of Neoprobe Corporation
(Neoprobe, the Company, or we) believes to be necessary for the fair
presentation of results for the periods presented. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. The
results for the interim periods are not necessarily indicative of results
to be expected for the year. The consolidated financial
statements should be read in conjunction with Neoprobe’s audited
consolidated financial statements for the year ended December 31, 2008,
which were included as part of our Annual Report on Form
10-K.
|
Our
consolidated financial statements include the accounts of Neoprobe, our
wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix), and our 90%-owned
subsidiary, Cira Biosciences, Inc. (Cira Bio). All significant
inter-company accounts were eliminated in consolidation.
|
b.
|
Financial Instruments and Fair
Value: We adopted Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements, for financial assets and liabilities as of January 1,
2008. SFAS No. 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described
below:
|
Level 1 – Unadjusted quoted
prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in
markets that are not active or financial instruments for which all significant
inputs are observable, either directly or indirectly; and
Level 3 – Prices or
valuations that require inputs that are both significant to the fair value
measurement and unobservable.
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement. In determining the appropriate levels, we perform a
detailed analysis of the assets and liabilities that are subject to SFAS No.
157. At each reporting period, all assets and liabilities for which
the fair value measurement is based on significant unobservable inputs or
instruments which trade infrequently and therefore have little or no price
transparency are classified as Level 3. In estimating the fair value
of our derivative liabilities, we used the Black-Scholes option pricing model
and, where necessary, other macroeconomic, industry and Company-specific
conditions. See Note 2.
We
adopted the remaining provisions of SFAS No. 157 for non-financial assets and
liabilities beginning January 1, 2009. Financial Accounting Standards
Board (FASB) Staff Position (FSP) FAS 157-2 deferred the effective date of SFAS
No. 157 for one year relative to nonfinancial assets and liabilities that are
measured at fair value, but are recognized or disclosed at fair value on a
nonrecurring basis. This deferral applied to such items as
indefinite-lived intangible assets and nonfinancial long-lived asset groups
measured at fair value for impairment assessments. The adoption of
the remaining provisions of SFAS No. 157 did not have a material impact on our
consolidated results of operations or financial condition.
8
2.
|
Fair
Value Hierarchy
|
The
following tables set forth by level liabilities measured at fair value on a
recurring basis.
Liabilities
Measured at Fair Value on a Recurring Basis as of March 31, 2009
Quoted Prices
in
Active
Markets for
Identical
Liabilities
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
Balance as of
March 31,
|
|||||||||||||
Description
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
2009
|
||||||||||||
Liabilities:
|
||||||||||||||||
Derivative
liabilities related
to warrants
|
$ | - | $ | 6,743,325 | $ | - | $ | 6,743,325 | ||||||||
Derivative
liabilities
related to conversion and
put options
|
- | - | 5,601,681 | 5,601,681 | ||||||||||||
Total
derivative liabilities
|
$ | - | $ | 6,743,325 | $ | 5,601,681 | $ | 12,345,006 |
Assets
and Liabilities Measured at Fair Value on a Recurring Basis as of December 31,
2008
Quoted Prices
in
Active
Markets for
Identical
Assets
and Liabilities
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
Balance as of
December 31,
|
|||||||||||||
Description
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
2008
|
||||||||||||
Assets:
|
||||||||||||||||
Available-for-sale
securities
|
$ | 495,383 | $ | - | $ | - | $ | 495,383 | ||||||||
Liabilities:
|
||||||||||||||||
Derivative
liabilities related
to conversion and
put options
|
$ | - | $ | - | $ | 853,831 | $ | 853,831 |
The
following table sets forth a summary of changes in the fair value of our Level 3
liabilities for the three months ended March 31, 2009:
Description
|
Balance at
December 31,
2008
|
Unrealized
Gains
|
Transfers In
and/or (Out)
(See Note 10)
|
Balance at
March 31,
2009
|
||||||||||||
Liabilities:
|
||||||||||||||||
Derivative
liabilities related
to conversion and
put options
|
$ | 853,831 | $ | (556,637 | ) | $ | 5,304,487 | $ | 5,601,681 |
The
unrealized gains and losses on the derivatives are classified in other expenses
as a change in derivative liabilities in the statement of
operations. Fair value of available-for-sale securities is determined
based on a discounted cash flow analysis using current market
rates. Fair value of warrant liabilities is determined based on a
Black-Scholes option pricing model calculation. Fair value of
conversion and put option liabilities is determined based on a
probability-weighted Black-Scholes option pricing model
calculation.
9
3.
|
Stock-Based
Compensation
|
We
account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based
Payment. At March 31, 2009, we have three stock-based
compensation plans. Under the Amended and Restated Stock Option and
Restricted Stock Purchase Plan (the Amended Plan), the 1996 Stock Incentive Plan
(the 1996 Plan), and the Second Amended and Restated 2002 Stock Incentive Plan
(the 2002 Plan), we may grant incentive stock options, nonqualified stock
options, and restricted stock awards to full-time employees, and nonqualified
stock options and restricted awards may be granted to our consultants and
agents. Total shares authorized under each plan are 2 million shares,
1.5 million shares and 7 million shares, respectively. Although
options are still outstanding under the Amended Plan and the 1996 Plan, these
plans are considered expired and no new grants may be made from
them. Under all three plans, the exercise price of each option is
greater than or equal to the closing market price of our common stock on the day
prior to the date of the grant.
Options
granted under the Amended Plan, the 1996 Plan and the 2002 Plan generally vest
on an annual basis over one to three years. Outstanding options under
the plans, if not exercised, generally expire ten years from their date of grant
or 90 days from the date of an optionee’s separation from employment with the
Company. We issue new shares of our common stock upon exercise of
stock options.
Compensation
cost arising from stock-based awards is recognized as expense using the
straight-line method over the vesting period. As of March 31, 2009,
there was approximately $356,000 of total unrecognized compensation cost related
to unvested stock-based awards, which we expect to recognize over remaining
weighted average vesting terms of 0.8 years. For the three-month
periods ended March 31, 2009 and 2008, our total stock-based compensation
expense was approximately $71,000 and $48,000, respectively. We have
not recorded any income tax benefit related to stock-based compensation in
either of the three-month periods ended March 31, 2009 and 2008.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model to value share-based
payments. Expected volatilities are based on the Company’s historical
volatility, which management believes represents the most accurate basis for
estimating expected volatility under the current
circumstances. Neoprobe uses historical data to estimate forfeiture
rates. The expected term of options granted is based on the vesting
period and the contractual life of the options. The risk-free rate is based on
the U.S. Treasury yield in effect at the time of the grant.
A summary
of stock option activity under our stock option plans as of March 31, 2009, and
changes during the three-month period then ended is presented
below:
Three Months Ended March 31, 2009
|
|||||||||||||
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding
at beginning of period
|
5,619,500 | $ | 0.40 | ||||||||||
Granted
|
283,000 | 0.59 | |||||||||||
Exercised
|
(80,000 | ) | 0.30 | ||||||||||
Forfeited
|
- | - | |||||||||||
Expired
|
(79,000 | ) | 1.25 | ||||||||||
Outstanding
at end of period
|
5,743,500 | $ | 0.40 |
5.4 years
|
$ | 938,200 | |||||||
Exercisable
at end of period
|
4,914,500 | $ | 0.39 |
4.8 years
|
$ | 847,700 |
10
A summary
of the status of our unvested restricted stock as of March 31, 2009, and changes
during the three-month period then ended is presented below:
Three Months Ended
March 31, 2009
|
||||||||
Number of
Shares
|
Weighted
Average
Grant-Date
Fair Value
|
|||||||
Unvested
at beginning of period
|
473,000 | $ | 0.37 | |||||
Granted
|
500,000 | 0.60 | ||||||
Vested
|
- | - | ||||||
Forfeited
|
(9,000 | ) | 0.68 | |||||
Unvested
at end of period
|
964,000 | $ | 0.49 |
Restricted
shares generally vest upon occurrence of a specific event or achievement of
goals as defined in the grant agreements. As a result, we have
recorded compensation expense related to grants of restricted stock based on
management’s estimates of the probable dates of the vesting events.
4. Comprehensive
Income (Loss)
Due to
our net operating loss carryforwards, there are no income tax effects on
comprehensive income (loss) components for the three-month period ended March
31, 2009.
Three Months
Ended
March 31, 2009
|
||||
Net
income
|
$ | 814,121 | ||
Unrealized
losses on available-for-sale securities
|
(1,383 | ) | ||
Other
comprehensive income
|
$ | 812,738 |
We had no
accumulated other comprehensive income (loss) activity during the three-month
period ended March 31, 2008; therefore, our total comprehensive loss was equal
to our net loss for that period.
5. Earnings
Per Share
Basic
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted-average number of common shares and participating securities
outstanding during the period. Diluted earnings (loss) per share
reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued. Potential common shares that
may be issued by the Company include unvested restricted stock, convertible
securities, options and warrants, if dilutive.
11
The
following table sets forth the reconciliation of the weighted average number of
common shares outstanding to those used to compute basic and diluted earnings
(loss) per share for the three-month periods ended March 31, 2009 and
2008:
Three Months Ended
March 31, 2009
|
Three Months Ended
March 31, 2008
|
|||||||||||||||
Basic
Earnings
Per Share
|
Diluted
Earnings
Per Share
|
Basic
Earnings
Per Share
|
Diluted
Earnings
Per Share
|
|||||||||||||
Outstanding
shares
|
71,555,707 | 71,555,707 | 68,950,821 | 68,950,821 | ||||||||||||
Effect
of weighting changes in
outstanding shares
|
(168,269 | ) | (168,269 | ) | (1,216,232 | ) | (1,216,232 | ) | ||||||||
Unvested
restricted stock
|
- | - | (450,000 | ) | (450,000 | ) | ||||||||||
Stock
options
|
- | 1,803,941 | - | - | ||||||||||||
Warrants
|
- | 5,596,328 | - | - | ||||||||||||
Convertible
debt
|
- | 11,559,139 | - | - | ||||||||||||
Convertible
preferred stock
|
- | 6,000,000 | - | - | ||||||||||||
Adjusted
shares
|
71,387,438 | 96,346,846 | 67,284,589 | 67,284,589 |
Earnings
(loss) per common share for the periods ended March 31, 2009 and 2008 excludes
the effects of 14,163,538 and 33,959,645 common share equivalents, respectively,
since such inclusion would be anti-dilutive. The excluded shares
consist of common shares issuable upon exercise of outstanding stock options and
warrants, or upon the conversion of convertible debt and convertible preferred
stock.
Effective
January 1, 2009, we were required to adopt FASB FSP Emerging Issues Task Force
(EITF) 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities. FSP EITF 03-6-1 requires that
unvested stock awards which contain nonforfeitable rights to dividends or
dividend equivalents, whether paid or unpaid (referred to as “participating
securities”), be included in the number of shares outstanding for both basic and
diluted earnings per share calculations. Under FSP EITF 03-6-1, the
Company’s unvested restricted stock is considered a participating
security. All prior period earnings per share data presented is
required to be adjusted retrospectively to conform to the provisions of the
FSP. In the event of a net loss, the participating securities are
excluded from the calculation of both basic and diluted earnings per
share. Due to our net loss, 450,000 shares of unvested restricted
stock were excluded in determining basic and diluted loss per share for the
three-month period ended March 31, 2008.
12
The
following table presents the key factors considered in the calculation of basic
and diluted net earnings per common share for the three-month period ended March
31, 2009. There was no difference in basic and diluted loss per share
for the three-month period ended March 31, 2008.
Three Months Ended
March 31, 2009
|
||||||||||||
Earnings
(Numerator)
|
Weighted
Average
Shares
(Denominator)
|
Per Share
Amount
|
||||||||||
Net
income
|
$ | 814,121 | ||||||||||
Preferred
stock dividends
|
(60,000 | ) | ||||||||||
Basic
EPS:
|
||||||||||||
Income
available to common stockholders
|
754,121 | 71,387,438 | $ | 0.01 | ||||||||
Effect
of Dilutive Securities:
|
||||||||||||
Stock
options
|
- | 1,803,941 | ||||||||||
Warrants
|
- | 5,596,328 | ||||||||||
Convertible
debt
|
105,315 | 11,559,139 | ||||||||||
Convertible
preferred stock
|
60,000 | 6,000,000 | ||||||||||
Diluted
EPS:
|
||||||||||||
Income
available to common stockholders, including assumed
conversions
|
$ | 919,436 | 96,346,846 | $ | 0.01 |
6. Inventory
From time
to time, we capitalize certain inventory costs associated with our
Lymphoseek® product
prior to regulatory approval and product launch based on management’s judgment
of probable future commercial use and net realizable value of the
inventory. We could be required to permanently write down previously
capitalized costs related to pre-approval or pre-launch inventory upon a change
in such judgment, due to a denial or delay of approval by regulatory bodies, a
delay in commercialization, or other potential factors. Conversely,
our gross margins may be favorably impacted if some or all of the inventory
previously written down becomes available and is used for commercial
sale. During the three-month periods ended March 31, 2009 and 2008,
we did not capitalize any inventory costs associated with our Lymphoseek
product.
The
components of net inventory are as follows:
March 31,
2009
(unaudited)
|
December 31,
2008
|
|||||||
Materials
and component parts
|
$ | 301,667 | $ | 380,912 | ||||
Finished
goods
|
674,471 | 580,949 | ||||||
Total
|
$ | 976,138 | $ | 961,861 |
7.
|
Intangible
Assets
|
The major
classes of intangible assets are as follows:
March 31, 2009
|
December 31, 2008
|
|||||||||||||||||
Wtd
Avg
Life
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
||||||||||||||
Patents
and trademarks
|
7.5
yrs
|
$ | 3,032,667 | $ | 1,672,600 | $ | 3,020,001 | $ | 1,626,516 | |||||||||
Acquired
technology
|
0
yrs
|
237,271 | 237,271 | 237,271 | 237,271 | |||||||||||||
Total
|
$ | 3,269,938 | $ | 1,909,871 | $ | 3,257,272 | $ | 1,863,787 |
13
The
estimated amortization expenses for the next five fiscal years are as
follows:
Estimated
Amortization
Expense
|
||||
For
the year ended 12/31/2009
|
$ | 170,957 | ||
For
the year ended 12/31/2010
|
170,341 | |||
For
the year ended 12/31/2011
|
169,224 | |||
For
the year ended 12/31/2012
|
168,885 | |||
For
the year ended 12/31/2013
|
168,675 |
8. Product
Warranty
We
warrant our products against defects in design, materials, and workmanship
generally for a period of one year from the date of sale to the end customer,
except in cases where the product has a limited use as designed. Our
accrual for warranty expenses is adjusted periodically to reflect actual
experience and is included in accrued liabilities on the consolidated balance
sheets. Our primary marketing partner, Ethicon Endo-Surgery, Inc.
(EES), a Johnson & Johnson company, also reimburses us for a portion of
warranty expense incurred based on end customer sales they make during a given
fiscal year. Payments charged against the reserve are disclosed net
of EES’ estimated reimbursement.
The
activity in the warranty reserve account, included in accrued liabilities and
other, for the three-month periods ended March 31, 2009 and 2008 is as
follows:
Three Months Ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Warranty
reserve at beginning of period
|
$ | 72,643 | $ | 115,395 | ||||
Provision
for warranty claims and changes
in reserve for warranties
|
37,109 | (14,036 | ) | |||||
Payments
charged against the reserve
|
(30,380 | ) | (19,846 | ) | ||||
Warranty
reserve at end of period
|
$ | 79,372 | $ | 81,513 |
9. Convertible
Securities
In July
2007, David C. Bupp, our President and CEO, and certain members of his family
(the Bupp Investors) purchased a $1.0 million convertible note (the Bupp Note)
and warrants. The note bears interest at 10% per annum, had an
original term of one year and is repayable in whole or in part with no
penalty. The note is convertible, at the option of the Bupp
Investors, into shares of our common stock at a price of $0.31 per share, a 25%
premium to the average closing market price of our common stock for the 5 days
preceding the closing of the transaction. As part of this
transaction, we issued the Bupp Investors Series V Warrants to purchase 500,000
shares of our common stock at an exercise price of $0.31 per share, expiring in
July 2012. The value of the beneficial conversion feature of the note
was estimated at $86,000 based on the effective conversion price at the date of
issuance. The fair value of the warrants issued to the investors was
approximately $80,000 on the date of issuance and was determined using the
Black-Scholes option pricing model with the following assumptions: an
average risk-free interest rate of 4.95%, volatility of 105% and no expected
dividend rate. The value of the beneficial conversion feature and the
fair value of the warrants issued to the investors were recorded as discounts on
the note. We incurred $43,000 of costs related to completing the Bupp
financing, which were recorded in other assets. The discounts and the
deferred debt issuance costs were being amortized over the term of the note
using the effective interest method.
14
In
December 2007, we executed a Securities Purchase Agreement (SPA) with
Platinum Montaur Life Sciences, LLC (Montaur), pursuant to which we issued
Montaur: (1) a 10% Series A Convertible Senior Secured Promissory Note
in the principal amount of $7,000,000, due December 26, 2011 (the
Series A Note); and (2) a Series W Warrant to purchase 6,000,000
shares of our common stock at an exercise price of $0.32 per share, expiring in
December 2012 (the Series W Warrant). Additionally, pursuant to the
terms of the SPA: (1) upon commencement of the Phase 3 clinical studies of
Lymphoseek, in April 2008, we issued Montaur a 10% Series B Convertible
Senior Secured Promissory Note, due December 26, 2011 (the Series B
Note, and hereinafter referred to collectively with the Series A Note as
the Montaur Notes), and a five-year warrant to purchase an amount of common
stock equal to the number of shares into which Montaur may convert the
Series B Note, at an exercise price of 115% of the conversion price of the
Series B Note (the Series X Warrant), for an aggregate purchase price
of $3,000,000; and (2) upon obtaining 135 vital blue dye lymph nodes from
patients with breast cancer or melanoma who completed surgery with the injection
of the drug in a Phase 3 clinical trial of Lymphoseek in December 2008, we
issued Montaur 3,000 shares of our 8% Series A Cumulative Convertible
Preferred Stock (the Preferred Stock) and a five-year warrant to purchase an
amount of common stock equal to the number of shares into which Montaur may
convert the Preferred Stock, at an exercise price of 115% of the conversion
price of the Preferred Stock (the Series Y Warrant, and hereinafter
referred to collectively with the Series W Warrant and Series X
Warrant as the Montaur Warrants), also for an aggregate purchase price of
$3,000,000.
In
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the conversion option and two put
options associated with the Series A Note were considered derivative instruments
and were required to be bifurcated from the Series A Note and accounted for
separately. In addition, in accordance with SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, the
Series W Warrant was accounted for as a liability due to the existence of
certain provisions in the instrument. As a result, we recorded a
total aggregate derivative liability of $2.6 million on the date of issuance of
the Series A Note and Series W Warrant. The fair value of the
bifurcated conversion option and put options was approximately $1.45 million on
the date of issuance. The fair value of the Series W Warrant was
approximately $1.15 million on the date of issuance and was determined using the
Black-Scholes option pricing model with the following assumptions: an
average risk-free interest rate of 3.7%, volatility of 94% and no expected
dividend rate.
On March
14, 2008, Neoprobe and Montaur executed amendments to the Series A Note and the
Series W Warrant. The amendments eliminated certain minor cash-based
penalty provisions in the Series A Note and Series W Warrant which entitled the
holders to different compensation than our common shareholders under certain
circumstances and qualifying Triggering Events. The provisions that
were eliminated and/or modified were the provisions that led to the derivative
accounting treatment for the embedded conversion option in the Series A Note and
the Series W Warrant. The effect of marking the conversion option and
warrant liabilities to “market” at March 14, 2008 resulted in an increase in the
estimated fair value of the conversion option and warrant liabilities of
$381,000 which was recorded as non-cash expense during the first quarter of
2008. The estimated fair value of the conversion option and warrant
liabilities of $2.9 million was reclassified to additional paid-in capital
during the first quarter of 2008 as a result of the amendments. The
estimated fair value of the put option liabilities related to the Series A Note
of $360,000 remained classified as derivative liabilities. The
initial aggregate fair value of the conversion option and the put options
related to the Series A Note and the fair value of the Series W Warrant of $2.6
million were recorded as a discount on the note and are being amortized over the
term of the note using the effective interest method.
In April
2008, we completed the second closing under the December 2007 Montaur SPA, as
amended, pursuant to which we issued Montaur a 10% Series B
Convertible Senior Secured Promissory Note in the principal amount of
$3,000,000, due December 26, 2011; and a Series X Warrant to purchase
8,333,333 shares of our common stock at an exercise price of $0.46 per share,
expiring in April 2013. The two put options related to the Series B
Note were considered derivative instruments and were required to be bifurcated
from the Series B Note and accounted for separately. The fair value
of the bifurcated put options was approximately $258,000 on the date of
issuance. The value of the beneficial conversion feature of the
Series B Note was estimated at $1.44 million based on the effective conversion
price at the date of issuance. The fair value of the Series X Warrant
was approximately $1.28 million on the date of issuance and was determined using
the Black-Scholes option pricing model with the following
assumptions: an average risk-free interest rate of 2.6%, volatility
of 95% and no expected dividend rate. The initial aggregate fair
value of the beneficial conversion feature and put options related to the Series
B Note, and the fair value of the Series X Warrant of $2.98 million were
recorded as discounts on the note and are being amortized over the term of the
note using the effective interest method. We incurred $188,000 of
costs related to completing the second Montaur financing, which were recorded in
other assets on the consolidated balance sheet. The deferred
financing costs are being amortized using the effective interest method over the
term of the note.
15
In
December 2008, after we obtained 135 vital blue dye lymph nodes from patients
who had completed surgery and the injection of Lymphoseek in a Phase 3 clinical
trial in patients with breast cancer or melanoma, we issued Montaur 3,000 shares
of our 8% Preferred Stock and a five-year Series Y warrant to purchase 6,000,000
shares of our common stock, at an exercise price of $0.575 per share, for an
aggregate purchase price of $3,000,000. The “Liquidation Preference
Amount” for the Preferred Stock is $1,000 and the “Conversion Price” of the
Preferred Stock was set at $0.50 on the date of issuance, thereby making the
shares of Preferred Stock convertible into an aggregate 6,000,000 shares of our
common stock, subject to adjustment as described in the Certificate of
Designations. The value of the beneficial conversion feature of the
Preferred Stock was estimated at $1.55 million based on the effective conversion
price at the date of issuance. The put option was considered a
derivative instrument and was required to be bifurcated from the Preferred Stock
and accounted for separately. The fair value of the bifurcated put
option was approximately $216,000 on the date of issuance. The fair
value of the Series Y warrant was approximately $2.07 million on the date of
issuance and was determined using the Black-Scholes option pricing model with
the following assumptions: an average risk-free interest rate of
1.7%, volatility of 74% and no expected dividend rate. The relative
fair value of the warrant, the amount recorded to equity in accordance with
Accounting Principles Board Opinion No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants, was $1.13 million.
In
accordance with EITF Topic D-98, Classification and Measurement of
Redeemable Securities, the Preferred Stock was classified as temporary
equity as the shares are subject to redemption under the contingent put
option. The initial intrinsic value of the beneficial conversion
feature and put option related to the Preferred Stock and the initial relative
fair value of the Series Y warrant of $1.13 million were recorded as deemed
distributions and added to the accumulated deficit. We incurred
$180,000 of costs related to completing the third Montaur financing, which were
recorded as a reduction of additional paid-in capital on the consolidated
balance sheet.
In
connection with the SPA, Montaur requested that the term of the $1.0 million
Bupp Note be extended until at least one day following the maturity date of the
Montaur Notes. In consideration for the Bupp Investors’ agreement to
extend the term of the Bupp Note pursuant to an Amendment to the Bupp Purchase
Agreement, dated December 26, 2007, we agreed to provide security for
the obligations evidenced by the Amended 10% Convertible Note in the principal
amount of $1,000,000, due December 31, 2011, executed by Neoprobe in favor
of the Bupp Investors (the Amended Bupp Note), under the terms of a Security
Agreement, dated December 26, 2007, by and between Neoprobe and the Bupp
Investors (the Bupp Security Agreement). As further consideration for
extending the term of the Bupp Note, we issued the Bupp Investors Series V
Warrants to purchase 500,000 shares of our common stock at an exercise price of
$0.32 per share, expiring in December 2012. The fair value of the
warrants issued to the Bupp Investors was approximately $96,000 on the date of
issuance and was determined using the Black-Scholes option pricing model with
the following assumptions: an average risk-free interest rate of
3.72%, volatility of 94% and no expected dividend rate. The fair
value of the warrants was recorded as a discount on the note and is being
amortized over the term of the note using the effective interest
method. We treated the amendment to the Bupp Note as an
extinguishment of debt for accounting purposes. As such, the
remaining discount resulting from the value of the beneficial conversion feature
and the fair value of the warrants and the remaining unamortized deferred
financing costs associated with the original note were written off as a loss on
extinguishment of debt in December 2007.
16
Effective
January 1, 2009, we were required to adopt new accounting guidance that
clarified the determination of whether equity-linked instruments (or embedded
features), such as our convertible securities and warrants to purchase our
common stock, are considered indexed to our own stock. As a result of
adopting such guidance, certain embedded features of our convertible securities,
as well as warrants to purchase our common stock, that were previously treated
as equity are now considered derivative liabilities. See Note
10.
During
the three-month periods ended March 31, 2009 and 2008, we recorded interest
expense of $151,000 and $104,000, respectively, related to amortization of the
debt discount related our convertible notes. During the three-month
periods ended March 31, 2009 and 2008, we recorded interest expense of $29,000
and $26,000, respectively, related to amortization of the deferred financing
costs related to our convertible notes.
10. Derivative
Instruments
We
account for
derivative instruments in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which provides accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. We do not use derivative
instruments for hedging of market risks or for trading or speculative
purposes. Effective January 1, 2009, we were required to adopt EITF
Issue No. 07-5, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock. EITF Issue No. 07-5 clarified the determination of
whether equity-linked instruments (or embedded features), such as our
convertible securities and warrants to purchase our common stock, are considered
indexed to our own stock, which would qualify as a scope exception under SFAS
No. 133. As a result of adopting EITF Issue No. 07-5, certain
embedded features of our convertible securities, as well as warrants to purchase
our common stock, that were previously treated as equity are now considered
derivative liabilities.
The
impact of adopting EITF Issue No. 07-5 is summarized in the following
table:
December 31,
2008
|
Impact of
Adopting
EITF Issue
No. 07-5
|
January 1,
2009
|
||||||||||
Other
assets
|
$ | 594,449 | $ | 2,104 | $ | 596,553 | ||||||
Total
assets
|
$ | 9,619,450 | $ | 9,621,554 | ||||||||
Notes
payable to investors,
net
of discounts
|
$ | 4,998,851 | (54,396 | ) | $ | 4,944,455 | ||||||
Derivative
liabilities
|
853,831 | 13,017,540 | 13,871,371 | |||||||||
Total
liabilities
|
$ | 9,645,175 | $ | 22,608,319 | ||||||||
Additional
paid-in capital
|
$ | 145,742,044 | (8,948,089 | ) | $ | 136,793,955 | ||||||
Accumulated
deficit
|
(148,840,015 | ) | (4,012,951 | ) | (152,852,966 | ) | ||||||
Total
stockholders’ deficit
|
$ | (3,025,725 | ) | $ | (15,986,765 | ) |
Convertible Notes – other
assets increased $2,104, notes payable to investors, net of discount, increased
$518,229, derivative liabilities increased $4,146,392, additional paid-in
capital decreased $2,843,781, and accumulated deficit increased
$1,818,736.
Convertible Preferred Stock –
derivative liabilities increased $1,158,095, additional paid-in capital
decreased $1,550,629, and accumulated deficit decreased $392,534.
Warrants – notes payable to
investors, net of discount, decreased $572,625, derivative liabilities increased
$7,713,053, additional paid-in capital decreased $4,553,679, and accumulated
deficit increased $2,586,749.
The
estimated fair values of the derivative liabilities are recorded as non-current
liabilities on the consolidated balance sheet. Changes in the
estimated fair values of the derivative liabilities are recorded in the
consolidated statement of operations. The effect of marking
the derivative liabilities to “market” at March 31, 2009 resulted in a net
decrease in the estimated fair values of the derivative liabilities of $1.5
million which was recorded as non-cash income during the first quarter of
2009. The total estimated fair value of the derivative liabilities
was $12.3 million as of March 31, 2009. See Note
9.
17
11. Stock
Warrants
During
the first quarter of 2009, David C. Bupp, our President and CEO, exercised
50,000 Series Q Warrants in exchange for issuance of 50,000 shares of our common
stock, resulting in gross proceeds of $25,000. The remaining 325,000
Series Q Warrants expired during the quarter.
At March
31, 2009, there are 23.1 million warrants outstanding to purchase our common
stock. The warrants are exercisable at prices ranging from $0.31 to
$0.85 per share with a weighted average exercise price of $0.45 per
share.
12.
|
Income
Taxes
|
We
account for uncertainty in income taxes in accordance with Financial
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a recognition threshold and
measurement model for the financial statement recognition of a tax position
taken, or expected to be taken, and provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. No adjustment was made to the beginning
retained earnings balance as the ultimate deductibility of all tax positions is
highly certain, although there is uncertainty about the timing of such
deductibility. As a result, no liability for uncertain tax positions
was recorded as of March 31, 2009. Should we need to accrue interest
or penalties on uncertain tax positions, we would recognize the interest as
interest expense and the penalties as a selling, general and administrative
expense.
13. Segment
and Subsidiary Information
We report
information about our operating segments using the “management approach” in
accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This information is based
on the way management organizes and reports the segments within the enterprise
for making operating decisions and assessing performance. Our
reportable segments are identified based on differences in products, services
and markets served. There were no inter-segment sales. We
own or have rights to intellectual property involving two primary types of
medical device products, including oncology instruments currently used primarily
in the application of sentinel lymph node biopsy, and blood flow measurement
devices. We also own or have rights to intellectual property related
to several drug and therapy products.
18
The
information in the following table is derived directly from each reportable
segment’s financial reporting.
($ amounts in thousands)
Three Months Ended March 31, 2009
|
Oncology
Devices
|
Blood
Flow
Devices
|
Drug and
Therapy
Products
|
Corporate
|
Total
|
|||||||||||||||
Net
sales:
|
||||||||||||||||||||
United
States1
|
$ | 2,553 | $ | 29 | $ | - | $ | - | $ | 2,582 | ||||||||||
International
|
104 | 14 | - | - | 118 | |||||||||||||||
Research
and development expenses
|
294 | 16 | 928 | - | 1,238 | |||||||||||||||
Selling,
general and administrative expenses,
excluding depreciation and
amortization2
|
34 | 15 | - | 752 | 801 | |||||||||||||||
Depreciation
and amortization
|
37 | 48 | 1 | 15 | 101 | |||||||||||||||
Income
(loss) from operations
|
1,491 | (58 | ) | (929 | ) | (768 | ) | (264 | ) | |||||||||||
Other
income (expenses)4
|
- | - | - | 1,078 | 1,078 | |||||||||||||||
Total
assets, net of depreciation and
amortization:
|
||||||||||||||||||||
United
States operations
|
2,526 | 411 | 24 | 4,793 | 7,754 | |||||||||||||||
Israeli
operations (Cardiosonix Ltd.)
|
- | 1,317 | - | - | 1,317 | |||||||||||||||
Capital
expenditures
|
- | - | - | 40 | 40 |
($ amounts in thousands)
Three Months Ended March 31, 2008
|
Oncology
Devices
|
Blood
Flow
Devices
|
Drug and
Therapy
Products
|
Corporate
|
Total
|
|||||||||||||||
Net
sales:
|
||||||||||||||||||||
United
States1
|
$ | 1,732 | $ | 3 | $ | - | $ | - | $ | 1,735 | ||||||||||
International
|
11 | 37 | - | - | 48 | |||||||||||||||
Research
and development expenses
|
164 | 69 | 331 | - | 564 | |||||||||||||||
Selling,
general and administrative expenses,
excluding depreciation and
amortization2
|
- | - | - | 779 | 779 | |||||||||||||||
Depreciation
and amortization
|
23 | 64 | - | 9 | 96 | |||||||||||||||
Income
(loss) from operations3
|
932 | (128 | ) | (331 | ) | (789 | ) | (316 | ) | |||||||||||
Other
income (expenses)4
|
- | - | - | (710 | ) | (710 | ) | |||||||||||||
Total
assets, net of depreciation and
amortization:
|
||||||||||||||||||||
United
States operations
|
1,751 | 664 | 186 | 2,247 | 4,848 | |||||||||||||||
Israeli
operations (Cardiosonix Ltd.)
|
- | 1,510 | - | - | 1,510 | |||||||||||||||
Capital
expenditures
|
2 | - | - | 14 | 16 |
|
1
All sales to EES are made in the United States. EES
distributes the product globally through its international
affiliates.
|
|
2
General and administrative costs, excluding depreciation and
amortization, represent costs that relate to the general administration of
the Company and as such are not currently allocated to our individual
reportable segments. Beginning in the third quarter of 2008,
marketing and selling costs are allocated to our individual reportable
segments.
|
|
3
Income (loss) from operations does not reflect the allocation of selling,
general and administrative expenses, excluding depreciation and
amortization, to the operating
segments.
|
|
4
Amounts consist primarily of interest income, interest expense and changes
in derivative liabilities which are not currently allocated to our
individual reportable segments.
|
19
14. Supplemental
Disclosure for Statements of Cash Flows
During
the three-month periods ended March 31, 2009 and 2008, we paid interest
aggregating $111,000 and $144,000, respectively. During the
three-month periods ended March 31, 2009 and 2008, we transferred $15,000 and
$31,000, respectively, of inventory to fixed assets related to the creation and
maintenance of a pool of service loaner equipment. During the
three-month period ended March 31, 2009, we issued 152,066 shares of our common
stock as payment of interest on our convertible debt. During the
three-month period ended March 31, 2008, we issued 114,921 shares of our common
stock as a matching contribution to our 401(k) plan.
20
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
From
time to time, our representatives and we may make written or verbal
forward-looking statements, including statements contained in this report and
other Company filings with the SEC and in our reports to
stockholders. Statements that relate to other than strictly
historical facts, such as statements about our plans and strategies,
expectations for future financial performance, new and existing products and
technologies, anticipated clinical and regulatory pathways, and markets for our
products are forward-looking statements. Generally, the words
“believe,” “expect,” “intend,”
“estimate,” “anticipate,” “will” and other similar expressions
identify forward-looking statements. The forward-looking statements
are and will be based on our then-current views and assumptions regarding future
events and operating performance, and speak only as of their
dates. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors including, but not limited
to, our continuing operating losses, uncertainty of market acceptance of our
products, reliance on third party manufacturers, accumulated deficit, future
capital needs, uncertainty of capital funding, dependence on limited product
line and distribution channels, competition, limited marketing and manufacturing
experience, risks of development of new products, regulatory risks, and other
risks detailed in our most recent Annual Report on Form 10-K and other SEC
filings. We undertake no obligation to publicly update or revise any
forward-looking statements.
The
Company
Neoprobe
Corporation is a biomedical technology company that provides innovative surgical
and diagnostic products that enhance patient care. We currently
market two lines of medical devices; our neo2000®
and neoprobe®
GDS gamma detection systems and the Quantix®
line of blood flow measurement devices of our wholly-owned subsidiary,
Cardiosonix Ltd. (Cardiosonix). In addition to our medical device
products, we have two radiopharmaceutical products, Lymphoseek®
and RIGScan®
CR, in the advanced phases of clinical development. We are also
exploring the development of our activated cellular therapy (ACT) technology for
patient-specific disease treatment through our majority-owned subsidiary, Cira
Biosciences, Inc. (Cira Bio).
Product
Line Overview
This
Overview section contains a number of forward-looking statements, all of which
are based on current expectations. Actual results may differ
materially. Our financial performance is highly dependent on our
ability to continue to generate income and cash flow from our medical device
product lines. We cannot assure you that we will achieve the volume
of sales anticipated, or if achieved, that the margin on such sales will be
adequate to produce positive operating cash flow.
We
believe that the future prospects for Neoprobe continue to improve as we make
progress in all of our key growth areas. Despite the current global
economic downturn, we continue to expect our gamma device line to provide a
strong revenue base during 2009, although sales levels for the remainder of 2009
may be lower than historical levels. We also do not expect sales of
our blood flow measurement devices to increase in 2009 over 2008. We
believe we have minimized the potential negative cash flow impact of the blood
flow line on our ongoing business as we evaluate other strategic options for the
product line. Our primary development efforts over the last few years
have been focused on our oncology drug development initiatives: Lymphoseek and
RIGScan CR. We continue to make progress with both initiatives;
however, neither Lymphoseek nor RIGScan CR are anticipated to generate any
significant revenue for us during 2009.
Our
operating expenses during the first three months of 2009 were focused primarily
on support of Lymphoseek product development. In addition, we
continued to modestly invest in our gamma detection device line related to
product line expansion and innovation. We expect our drug-related
development expenses to increase significantly over the remainder of 2009 as we
continue the multi-center Phase 3 clinical evaluations of Lymphoseek and support
the other drug stability and production validation activities related to
supporting the potential marketing registration of Lymphoseek. We
expect to continue to incur modest development expenses to support our device
product lines as well as we work with our marketing partners to expand our
product offerings in the gamma device arena. We expect to continue to
limit our financial support for our blood flow measurement products during the
remainder of 2009.
21
Our
efforts thus far in 2009 have resulted in the following research and development
milestone achievements:
|
·
|
Achievement
of target enrollment in a Phase 3 (NEO3-05) clinical evaluation of
Lymphoseek in patients with breast cancer or
melanoma
|
|
·
|
Assessment
of preliminary data that the NEO3-05 clinical study achieved its primary
efficacy end-point
|
In June
2008, we initiated the NEO3-05 study, which was the first of two Phase 3 studies
to support the filing of a new drug application for Lymphoseek. This
first trial was conducted in patients with either breast cancer or melanoma and
was designed to monitor the concordance of Lymphoseek uptake in lymph nodes with
the uptake of vital blue dye in the same lymph nodes. In March 2009,
we announced that we had reached the original patient accrual target and, based
on a review of preliminary data, achieved the efficacy endpoint for the
trial.
In
addition, we have provided the U.S. Food and Drug Administration (FDA) and the
centralized European Medicinal Evaluation Agency (EMEA) with the full protocol
and associated materials for a second Phase 3 study to be conducted in patients
with head and neck squamous cell carcinoma. This second Phase 3 study
is designed to validate Lymphoseek as a sentinel lymph node targeting
agent. Our discussions with FDA and EMEA have also suggested that the
Phase 3 trials will support an intended use of Lymphoseek in sentinel lymph node
biopsy procedures. We believe such an indication would be beneficial
to the marketing and commercial adoption of Lymphoseek in the U.S. and European
Union (EU). We plan to use the safety and efficacy results from the
Phase 3 clinical evaluations of Lymphoseek, which will include sites in the EU,
to support the drug registration application process in the EU as well as in the
U.S. We plan to have approximately 25 – 35 participating institutions
in the trial, which we hope will enable us to enroll patients at a fairly rapid
rate. The trial protocol is currently under review at a number of
these institutions. We expect to receive our first institutional
review board clearance at a participating institution shortly and expect patient
accrual to commence during the second quarter of 2009. Our goal is to
file the new drug application for Lymphoseek in early 2010; however, this will
be dependent upon our ability to commence and successfully conclude the second
Phase 3 clinical study in a timely fashion. Depending on the timing
and outcome of the FDA regulatory review cycle, we believe that Lymphoseek can
be commercialized by early- to mid-2011. We cannot assure you,
however, that this product will achieve regulatory approval, or if approved,
that it will achieve market acceptance.
Over the
past few years, we have made progress in advancing our RIGScan CR development
program while incurring minimal research expenses. Our RIGS®
technology, which had been essentially inactive since failing to gain approval
following our original license application in 1997, has been the subject of
renewed interest due primarily to the analysis of survival data related to
patients who participated in the original Phase 3 clinical studies that were
completed in 1996. After a successful pre-submission meeting with
EMEA in July 2008, we submitted a plan during the third quarter on how we would
propose to complete clinical development plan for RIGScan CR. The
clinical protocol we submitted to EMEA involves approximately 400 patients in a
randomized trial of patients with colorectal cancer. The participants
in the trial would be randomized to either a control or RIGS treatment
arm. Patients randomized to the RIGS arm would have their disease
status evaluated at the end of their cancer surgery to determine the presence or
absence of RIGS-positive tissue. Patients in both randomized arms
would be followed to determine if patients with RIGS-positive status have a
lower overall survival rate and/or a higher occurrence of disease
recurrence. The hypothesis for the trial is based upon the data from
the earlier NEO2-13 and NEO2-14 trial results.
22
We
continue to believe it will be necessary for us to identify a development
partner or an alternative funding source in order to prepare for and fund the
pivotal clinical testing that will be necessary to gain marketing clearance for
RIGScan CR. In the past, we have engaged in discussions with various
parties regarding such a partnership. We believe the recently
clarified regulatory pathway approved by EMEA will assist us in those
efforts. However, even if we are able to make such arrangements on
satisfactory terms, we believe that the time required for continued development,
regulatory approval and commercialization of a RIGS product would likely be a
minimum of five years before we receive any significant product-related
royalties or revenues. We cannot assure you that we will be able to
complete definitive agreements with a development partner or obtain financing to
fund development of the RIGS technology and do not know if such arrangements
could be obtained on a timely basis on terms acceptable to us, or at
all. We also cannot assure you that FDA or EMEA will clear our RIGS
products for marketing or that any such products will be successfully introduced
or achieve market acceptance.
In 2005,
we formed a new subsidiary, Cira Bio, to explore the development of
ACT. Neoprobe owns approximately 90% of the outstanding shares of
Cira Bio with the remaining shares being held by the principals of a private
holding company, Cira LLC. In conjunction with the formation of Cira
Bio, an amended technology license agreement also was executed with The Ohio
State University, from whom both Neoprobe and Cira LLC had originally licensed
or optioned the various cellular therapy technologies. As a result of
the cross-license agreements, Cira Bio has the exclusive development and
commercialization rights to three issued U.S. patents that cover the oncology
and autoimmune applications of its technology. In addition, Cira Bio
has exclusive licenses to several pending patent applications. We
hope to identify a funding source to continue Cira Bio’s development
efforts. If we are successful in identifying a funding source, we
expect that any funding would likely be accomplished by an investment directly
into Cira Bio, so that the funds raised would not dilute current Neoprobe
shareholders. Obtaining this funding would likely dilute Neoprobe’s
ownership interest in Cira Bio; however, we believe that moving forward such a
promising technology will only yield positive results for the Neoprobe
stockholders and the patients who could benefit from these
treatments. However, we do not know if we will be successful in
obtaining funding on terms acceptable to us, or at all. In the event
we fail to obtain financing for Cira Bio, the technology rights for the oncology
applications of ACT may revert back to Neoprobe and the technology rights for
the viral and autoimmune applications may revert back to Cira LLC upon notice by
either party.
We expect
that sales from our medical devices will result in a net profit in 2009 for
those lines of business, excluding general and administrative costs, interest
and other financing-related charges. Our overall operating results
for 2009 will also be greatly affected by the amount of development of our
radiopharmaceutical products. Primarily as a result of the
significant development costs we expect to incur related to the continued
clinical development of Lymphoseek, we do not expect to achieve operating profit
during 2009. In addition, our net loss and loss per share will likely
be significantly impacted by the non-cash expense we expect to record due to the
accounting treatment for the derivative liabilities related to the convertible
debt we issued in December 2007 and April 2008 and the convertible preferred
stock we issued in December 2008. We cannot assure you that our
current or potential new products will be successfully commercialized, that we
will achieve significant product revenues, or that we will achieve or be able to
sustain profitability in the future.
Results
of Operations
Revenue
for the first quarter of 2009 increased to $2.7 million from $1.8 million for
the same period in 2008. Research and development expenses, as a
percentage of net sales, increased to 46% during the first quarter of 2009 from
32% during the same period in 2008. Selling, general and
administrative expenses, as a percentage of net sales, decreased to 33% during
the first quarter of 2009 from 49% during the same period in
2008. Due to the ongoing development activities of the Company,
research and development expenses as a percentage of sales are expected to be
higher in 2009 than they were in 2008.
23
Three
Months Ended March 31, 2009 and 2008
Net Sales and
Margins. Net sales, comprised primarily of sales of our gamma
detection systems, increased $917,000, or 51%, to $2.7 million during the first
quarter of 2009 from $1.8 million during the same period in
2008. Gross margins on net sales increased to 69% of net sales for
the first quarter of 2009 compared to 63% of net sales for the same period in
2008.
The
increase in net sales was primarily the result of increased gamma detection
device sales of $890,000 due to increased prices and unit sales of our control
units. The price at which we sell our gamma detection products to our
primary marketing partner, Ethicon Endo-Surgery, Inc. (EES), a Johnson &
Johnson company, is based on a percentage of the global average selling price
(ASP) received by EES on sales of Neoprobe products to end customers, subject to
a minimum floor price. Beginning in January 2009, Neoprobe is
receiving an increased percentage of ASP for certain products under the terms of
our amended distribution agreement with EES. In addition, the
increase in unit sales can in large part be attributed to inventory restocking
by EES following depletion of their stock to below normal levels at the end of
2008.
The
increase in gross margins on net product sales was due to a combination of
factors including the increased percentage of ASP received by Neoprobe from
EES. Gross margins in 2008 were also positively affected by four
percentage points due to better than expected warranty experience during the
post-launch period of our new wireless probes, and decreased production-related
costs of wireless probes.
License and Other
Revenue. License and other revenue for the first quarter of
2009 included $25,000 from the pro-rata recognition of license fees related to
the renewed distribution agreement with EES. No license or other
revenue was recognized during the first quarter of 2008.
Research and Development
Expenses. Research and development expenses increased
$674,000, or 120%, to $1.2 million during the first quarter of 2009 from
$564,000 during the same period in 2008. Research and development
expenses in the first quarter of 2009 included approximately $928,000 in drug
and therapy product development costs, $294,000 in gamma detection device
development costs, and $16,000 in product design and support activities for the
Quantix products. This compares to expenses of $331,000, $164,000 and
$69,000 in these segment categories during the same period in
2008. The changes in each category were primarily due to (i)
increased clinical activities related to Lymphoseek due to costs related to the
Phase 3 clinical trials in the first quarter of 2009 being higher than costs of
preparation for Phase 3 clinical trials in the first quarter of 2008, (ii)
development costs of our new high energy detection probe in the first quarter of
2009, and (iii) decreased product refinement activities related to our Quantix
devices, respectively.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
increased $27,000, or 3%, to $902,000 during the first quarter of 2009 from
$875,000 during the same period in 2008. The net difference was due
primarily to increases in investor relations costs and utilities offset by
decreases in consulting services and amortization of intangible
assets.
Other Income
(Expenses). Other income, net, was $1.1 million during the
first quarter of 2009 as compared to other expenses, net of $710,000 during the
same period in 2008. During the first quarter of 2009, we recorded a
$1.5 million decrease in derivative liabilities resulting from the accounting
treatment for the convertible debt agreements we executed in December 2007 and
April 2008, the convertible preferred stock we issued in December 2008, and the
related warrants to purchase our common stock, which contained certain
provisions that resulted in their being treated as derivative liabilities under
new accounting guidance effective January 1, 2009. During the first
quarter of 2008, we recorded a $387,000 decrease in derivative
liabilities. Interest expense, primarily related to the convertible
debt agreements we completed in December 2007 and April 2008, increased $125,000
to $457,000 during the first quarter of 2009 from $332,000 for the same period
in 2008. Of this interest expense, $180,000 and $129,000 in the first
quarters of 2008 and 2007, respectively, was non-cash in nature related to the
amortization of debt issuance costs and discounts resulting from the warrants
and conversion features of the convertible debt. An additional
$167,000 of interest expense in the first quarter of 2009 was non-cash in nature
due to the payment or accrued payment of interest on our convertible debt with
shares of our common stock.
24
Liquidity
and Capital Resources
Cash and
investment balances decreased to $3.5 million at March 31, 2009 from $4.1
million at December 31, 2008. The net decrease was primarily due to
cash used to fund our operations, mainly for research and development
activities, and to service our outstanding debt. The current ratio
decreased slightly to 3.0:1 at March 31, 2009 from 3.1:1 at December 31,
2008.
Operating
Activities. Cash used in operations increased $374,000 to
$416,000 during the first quarter of 2009 compared to $42,000 during the same
period in 2008.
Accounts
receivable increased to $1.7 million at March 31, 2009 from $1.6 million at
December 31, 2008. The increase was primarily a result of normal
fluctuations in timing of purchases and payments by EES. We expect
overall receivable levels will continue to fluctuate during 2009 depending on
the timing of purchases and payments by EES.
Inventory
levels increased slightly to $976,000 at March 31, 2009 from $962,000 at
December 31, 2008. Gamma detection device materials decreased as
materials were converted into finished devices resulting in higher finished
device inventory levels to support increased sales activity. Blood
flow measurement device materials decreased as they were sold to our contract
manufacturer in preparation for building finished devices in the second quarter
of 2009. Blood flow finished device inventory also decreased as a
result of sales. We expect inventory levels to increase during 2009
as a result of the planned production of a commercial-grade inventory of
Lymphoseek.
Investing Activities.
Investing activities provided $441,000 during the first quarter of 2009
compared to $16,000 used during the same period in
2008. Available-for-sale securities of $494,000 matured during the
first quarter of 2009. Capital expenditures of $40,000 during the
first quarter of 2009 were primarily for software, computers, and office
furniture. Capital expenditures of $16,000 during the first quarter
of 2008 were primarily for computers and software. We expect our
overall capital expenditures for 2009 will be higher than 2008 as we prepare for
the commercial production of Lymphoseek. Payments for patent and
trademark costs were $13,000 during the first quarter of 2009.
Financing
Activities. Financing activities used $42,000 during the first
quarter of 2009 compared to $46,000 provided during the first quarter of
2008. Proceeds from the issuance of common stock were $26,000 and
$114,000 during the first quarter of 2009 and 2008,
respectively. Payments of notes payable were $51,000 and $53,000
during the first quarter of 2009 and 2008, respectively. Payments of
common stock offering costs and preferred stock offering costs were $7,000 and
$6,000, respectively, during the first quarter of 2009. Payments of
debt issuance costs were $11,000 during the first quarter of 2008.
In
December 2006, we entered into a common stock purchase agreement with Fusion
Capital, an Illinois limited liability company, to sell $6.0 million of our
common stock to Fusion Capital over a 24-month period which ended on November
21, 2008. Through November 21, 2008, we sold to Fusion Capital under
the agreement 7,568,671 shares for proceeds of $1.9 million. In
December 2008, we entered into an amendment to the agreement which gave us a
right to sell an additional $6.0 million of our common stock to Fusion Capital
before March 1, 2011, along with the $4.1 million of the unsold balance of the
$6.0 million we originally had the right to sell to Fusion Capital under the
original agreement. After giving effect to this amendment, the
remaining aggregate amount of our common stock we can sell to Fusion Capital is
$10.1 million. We have reserved a total of 10,654,000 shares of our
common stock in respect to potential sales of common stock we may make to Fusion
Capital in the future under the amended agreement.
25
In
December 2006, we issued to Fusion Capital 720,000 shares of our common stock as
a commitment fee upon execution of the original agreement. As sales
of our common stock were made under the original agreement, we issued an
additional 234,000 shares of our common stock to Fusion Capital as an additional
commitment fee. In connection with entering into the amendment, we
issued an additional 360,000 shares in consideration for Fusion Capital’s
entering into the amendment. Also, as an additional commitment fee,
we have agreed to issue to Fusion Capital an additional 486,000 shares of our
common stock pro rata as we sell the first $4.1 million of our common stock to
Fusion Capital under the amended agreement.
In July
2007, David C. Bupp, our President and CEO, and certain members of his family
(the Bupp Investors) purchased a $1.0 million convertible note (the Bupp Note)
and warrants. The note bears interest at 10% per annum, had an
original term of one year and is repayable in whole or in part with no
penalty. The note is convertible into shares of our common stock at a
price of $0.31 per share, a 25% premium to the average closing market price of
our common stock for the 5 days preceding the closing of the
transaction. As part of this transaction, we issued the Bupp
Investors Series V Warrants to purchase 500,000 shares of our common stock at an
exercise price of $0.31 per share, expiring in July 2012.
In
December 2007, we entered into a Securities Purchase Agreement (SPA) with
Platinum Montaur Life Sciences, LLC (Montaur), pursuant to which we issued
Montaur a 10% Series A Convertible Senior Secured Promissory Note in the
principal amount of $7,000,000, due December 26, 2011 (the Series A Note) and a
five-year Series W Warrant to purchase 6,000,000 shares of our common stock,
$.001 par value per share, at an exercise price of $0.32 per
share. Montaur may convert $3.5 million of the Series A Note into
shares of our common stock at the conversion price of $0.26 per
share. The SPA also provided for two further tranches of financing, a
second tranche of $3 million in exchange for a 10% Series B Convertible Senior
Secured Promissory Note along with a five-year Series X Warrant to purchase
shares of our common stock, and a third tranche of $3 million in exchange for
3,000 shares of our 8% Series A Cumulative Convertible Preferred Stock and a
five-year Series Y Warrant to purchase shares of our common
stock. Closings of the second and third tranches were subject to the
satisfaction by the Company of certain milestones related to the progress of the
Phase 3 clinical trials of our Lymphoseek radiopharmaceutical
product.
In April
2008, following receipt by the Company of clearance by FDA to commence a Phase 3
clinical trial for Lymphoseek in patients with breast cancer or melanoma, we
amended the SPA related to the second tranche and issued Montaur a 10% Series B
Convertible Senior Secured Promissory Note in the principal amount of
$3,000,000, also due December 26, 2011 (the Series B Note, and hereinafter
referred to collectively with the Series A Note as the Montaur Notes), and a
five-year Series X Warrant to purchase 8,333,333 shares of our common stock at
an exercise price of $0.46 per share. Montaur may convert the Series
B Note into shares of our common stock at the conversion price of $0.36 per
share. Provided we have satisfied certain conditions stated therein,
we may elect to make payments of interest due under the Montaur Notes in
registered shares of our common stock. If we choose to make interest
payments in shares of common stock, the number of shares of common stock to be
applied against any such interest payment will be determined by reference to the
quotient of (a) the applicable interest payment divided by (b) 90% of the
average daily volume weighted average price of our common stock on the OTCBB (or
national securities exchange, if applicable) as reported by Bloomberg Financial
L.P. for the five days upon which our common stock is traded on the OTCBB
immediately preceding the date of the interest payment.
In
December 2008, after we obtained 135 vital blue dye lymph nodes from patients
who had completed surgery and the injection of the drug in a Phase 3 clinical
trial of Lymphoseek in patients with breast cancer or melanoma, we issued
Montaur 3,000 shares of our 8% Series A Cumulative Convertible Preferred Stock
(the Preferred Stock) and a five-year Series Y Warrant (hereinafter referred to
collectively with the Series W Warrant and Series X Warrant as the Montaur
Warrants) to purchase 6,000,000 shares of our common stock, at an exercise price
of $0.575 per share, also for an aggregate purchase price of
$3,000,000. Montaur may convert each share of the Preferred Stock
into a number of shares of our common stock equal to the quotient of (a) the
Liquidation Preference Amount of the shares of Preferred Stock by (b) the
Conversion Price. The “Liquidation Preference Amount” for the Preferred Stock is
$1,000 and the “Conversion Price” of the Preferred Stock was set at $0.50 on the
date of issuance, thereby making the shares of Preferred Stock convertible into
an aggregate 6,000,000 shares of our common stock, subject to adjustment as
described in the Certificate of Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series A 8% Cumulative
Convertible Preferred Stock. We may elect to pay dividends due
to Montaur on the shares of Preferred Stock in registered shares of our common
stock. The number of shares of common stock to be applied against any
such dividend payment will be determined by reference to the quotient of (a) the
applicable dividend payment by (b) 90% of the average daily volume weighted
average price of our common stock on the OTCBB (or national securities exchange,
if applicable) as reported by Bloomberg Financial L.P. for the five days upon
which our common stock is traded on the OTCBB immediately preceding the date of
the dividend payment.
26
In
connection with the Montaur SPA, the term of the $1.0 million Bupp Note was
extended to December 27, 2011, one day following the maturity date of the
Montaur Notes. In consideration for the Bupp Investors’ agreement to
extend the term of the Bupp Note pursuant to an Amendment to the Bupp Purchase
Agreement, dated December 26, 2007, we agreed to provide security for the
obligations evidenced by the Amended 10% Convertible Note in the principal
amount of $1,000,000, due December 31, 2011, executed by Neoprobe in favor of
the Bupp Investors (the Amended Bupp Note), under the terms of a Security
Agreement, dated December 26, 2007, by and between Neoprobe and the Bupp
Investors (the Bupp Security Agreement). This security interest is
subordinate to the Security interest of Montaur. As further
consideration for extending the term of the Bupp Note, we issued the Bupp
Investors Series V Warrants to purchase 500,000 shares of our common stock at an
exercise price of $0.32 per share, expiring in December 2012. The
Amended Bupp Note had an outstanding principal amount of $1.0 million on March
31, 2009, and an outstanding principal amount of $1.0 million as of May 8,
2009. During the first quarter of 2009, we paid none of the
outstanding principal and paid $25,000 in interest due under the Amended Bupp
Note.
Our
future liquidity and capital requirements will depend on a number of factors,
including our ability to expand market acceptance of our current products, our
ability to complete the commercialization of new products, our ability to
monetize our investment in non-core technologies, our ability to obtain
milestone or development funds from potential development and distribution
partners, regulatory actions by FDA and international regulatory bodies, and
intellectual property protection. Our most significant near-term
development priority is to initiate the second Phase 3 trial. We
believe our current funds and available capital resources will be adequate to
complete our Lymphoseek development efforts and sustain our operations at
planned levels through 2009. We are also in the process of
determining the total development cost necessary to commercialize RIGScan CR but
believe that it will require commitments of between $3 million to $5 million to
restart manufacturing and other activities necessary to prepare for the Phase 3
clinical trial contemplated in the recent EMEA scientific advice
response. We may be able to raise additional funds through a stock
purchase agreement with Fusion Capital to supplement our capital
needs. However, the extent to which we rely on Fusion Capital as a
source of funding will depend on a number of factors, including the prevailing
market price of our common stock and the extent to which we are able to secure
working capital from other sources. Specifically, Fusion Capital does
not have the right or the obligation to purchase any shares of our common stock
on any business day that the market price of our common stock is less than $0.20
per share. We cannot assure you that we will be successful in raising
additional capital through Fusion Capital or any other sources at terms
acceptable to the Company, or at all. We also cannot assure you that
we will be able to successfully commercialize products, that we will achieve
significant product revenues from our current or potential new products or that
we will achieve or sustain profitability in the future.
Recent
Accounting Developments
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS No. 157
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. Accordingly, SFAS No. 157 does not require any new fair
value measurements. SFAS No. 157 was initially effective for Neoprobe
beginning January 1, 2008. In February 2008, the FASB approved the
issuance of FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2
allowed entities to electively defer the effective date of SFAS No. 157 until
January 1, 2009 for nonfinancial assets and nonfinancial liabilities except
those items recognized or disclosed at fair value on at least an annual
basis. We began applying the fair value measurement and disclosure
provisions of SFAS No. 157 to nonfinancial assets and liabilities effective
January 1, 2009. The application of such was not material to our
consolidated results of operations or financial condition. See Note
1(b) and Note 2.
27
In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business
Combinations. SFAS No. 141(R) retains the fundamental
requirements of the original pronouncement requiring that the acquisition method
(formerly called the purchase method) of accounting be used for all business
combinations and for an acquirer to be identified for each business
combination. SFAS No. 141(R) defines the acquirer as the entity that
obtains control of one or more businesses in the business combination,
establishes the acquisition date as the date that the acquirer achieves control
and requires the acquirer to recognize the assets and liabilities assumed and
any noncontrolling interest at their fair values as of the acquisition
date. SFAS No. 141(R) requires, among other things, that the
acquisition-related costs be recognized separately from the
acquisition. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and was
adopted by Neoprobe beginning January 1, 2009. The effect the
adoption of SFAS No. 141(R) will have on us will depend on the nature and size
of acquisitions we complete in the future, if any.
Also in
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No.
51. SFAS No. 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB No.
51’s consolidation procedures for consistency with the requirements of SFAS No.
141(R), Business
Combinations. SFAS No. 160 is effective for fiscal years and
interim periods within those fiscal years beginning on or after December 15,
2008, and was adopted by Neoprobe beginning January 1, 2009. SFAS No.
160 is being applied prospectively as of the beginning of the fiscal year in
which it was adopted, except for the presentation and disclosure
requirements. The presentation and disclosure requirements are being
applied retrospectively for all periods presented. The adoption of
SFAS No. 160 did not have a material effect on our consolidated results of
operations or financial condition.
In
December 2007, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) on EITF Issue No. 07-1, Accounting for Collaborative
Arrangements. EITF Issue No. 07-1 focuses on defining a
collaborative arrangement as well as the accounting for transactions between
participants in a collaborative arrangement and between the participants in the
arrangement and third parties. The EITF concluded that both types of
transactions should be reported in each participant’s respective income
statement. We adopted EITF Issue No. 07-1 beginning January 1,
2009. The adoption of EITF Issue No. 07-1 did not have a material
effect on our consolidated results of operations or financial
condition.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an Amendment of FASB Statement No.
133. SFAS No. 161 amends and expands the disclosure
requirements of Statement No. 133 to provide a better understanding of how and
why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for, and their effect on an entity’s
financial position, financial performance, and cash flows. We adopted
SFAS No. 161 beginning January 1, 2009. The adoption of SFAS No. 161
did not have a material impact on our derivative disclosures. See
Note 10.
28
In June
2008, the FASB ratified the consensus reached by the EITF on EITF Issue No.
07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock. EITF Issue No. 07-5 clarifies the determination of
whether equity-linked instruments (or embedded features), such as our
convertible notes or warrants to purchase our common stock, are considered
indexed to our own stock, which would qualify as a scope exception under SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities. We adopted EITF
Issue No. 07-5 beginning January 1, 2009. The adoption of EITF Issue
No. 07-5 had a material impact on our consolidated financial
statements. See Note 10.
Also in
June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities. FSP EITF 03-6-1 provides that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents, whether paid or unpaid, are participating securities and are
required to be included in the computation of earnings per share pursuant to the
two-class method described in SFAS No. 128, Earnings Per
Share. The two-class method of computing earnings per share
includes an earnings allocation formula that determines earnings per share for
common stock and any participating securities according to dividends declared,
whether paid or unpaid, and participation rights in undistributed
earnings. All prior period earnings per share data presented is
required to be adjusted retrospectively to conform with the provisions of FSP
EITF 03-6-1. We adopted FSP EITF 03-6-1 beginning January 1,
2009. Adoption of FSP EITF 03-6-1 had no material impact on our first
quarter 2009 or 2008 earnings per share.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value
of Financial Instruments, which amends SFAS No. 107, Disclosures About Fair Value of
Financial Instruments, and APB Opinion 28, Interim Financial Reporting,
respectively, to require disclosure about fair value of financial instruments
for interim reporting periods of publicly traded companies in addition to annual
financial statements. FSP FAS 107-1 and APB 28-1 will be required for
interim periods ending after June 15, 2009. As FSP FAS 107-1 and APB
28-1 provide only disclosure requirements, the adoption of this standard will
not have a material impact on our consolidated financial position, results of
operations or cash flows, but will result in increased disclosures in the second
quarter of 2009.
Critical
Accounting Policies
The
following accounting policies are considered by us to be critical to our results
of operations and financial condition.
Revenue Recognition Related to Net
Sales. We currently generate revenue primarily from sales of
our gamma detection products; however, sales of blood flow measurement products
constituted approximately 2% of total revenues for the first quarter of
2009. Our standard shipping terms are FOB shipping point, and title
and risk of loss passes to the customer upon delivery to a common
carrier. We generally recognize sales revenue related to sales of our
products when the products are shipped and the earnings process has been
completed. However, in cases where product is shipped but the
earnings process is not yet completed, revenue is deferred until it has been
determined that the earnings process has been completed. Our
customers have no right to return products purchased in the ordinary course of
business.
The
prices we charge our primary customer, EES, related to sales of products are
subject to retroactive annual adjustment based on a fixed percentage of the
actual sales prices achieved by EES on sales to end customers made during each
fiscal year. To the extent that we can reasonably estimate the
end-customer prices received by EES, we record sales to EES based upon these
estimates. If we are unable to reasonably estimate end customer sales
prices related to certain products sold to EES, we record revenue related to
these product sales at the minimum (i.e., floor) price provided for under our
distribution agreement with EES.
We also
generate revenue from the service and repair of out-of-warranty
products. Fees charged for service and repair on products not covered
by an extended service agreement are recognized on completion of the service
process when the serviced or repaired product has been returned to the
customer. Fees charged for service or repair of products covered by
an extended warranty agreement are deferred and recognized as revenue ratably
over the life of the extended service agreement.
Use of
Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. We base these
estimates and assumptions upon historical experience and existing, known
circumstances. Actual results could differ from those
estimates. Specifically, management may make significant estimates in
the following areas:
29
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·
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Stock-Based
Compensation. We
account for stock-based compensation in accordance with SFAS No. 123(R),
Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their estimated fair
values. Compensation cost arising from stock-based awards is
recognized as expense using the straight-line method over the vesting
period. We use the Black-Scholes option pricing model to value
share-based payments. The valuation assumptions used have not
changed from those used under SFAS No.
123.
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·
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Inventory
Valuation. We value our inventory at the lower of cost
(first-in, first-out method) or market. Our valuation reflects
our estimates of excess, slow moving and obsolete inventory as well as
inventory with a carrying value in excess of its net realizable
value. Write-offs are recorded when product is removed from
saleable inventory. We review inventory on hand at least
quarterly and record provisions for excess and obsolete inventory based on
several factors, including current assessment of future product demand,
anticipated release of new products into the market, historical experience
and product expiration. Our industry is characterized by rapid
product development and frequent new product
introductions. Uncertain timing of product approvals,
variability in product launch strategies, regulations regarding use and
shelf life, product recalls and variation in product utilization all
impact the estimates related to excess and obsolete
inventory.
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·
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Impairment or Disposal of
Long-Lived Assets. We account for long-lived assets in
accordance with the provisions of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. As of
March 31, 2009, the most significant long-lived assets on our balance
sheet relate to assets recorded in connection with the acquisition of
Cardiosonix. The recoverability of these assets is based on the
financial projections and models related to the future sales success of
Cardiosonix’ products. As such, these assets could be subject
to significant adjustment should the Cardiosonix technology not be
successfully commercialized or the sales amounts in our current
projections not be realized.
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·
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Product
Warranty. We warrant our products against defects in
design, materials, and workmanship generally for a period of one year from
the date of sale to the end customer. Our accrual for warranty
expenses is adjusted periodically to reflect actual
experience. EES also reimburses us for a portion of warranty
expense incurred based on end customer sales they make during a given
fiscal year.
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·
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Fair Value of Derivative
Instruments. We account for derivative
instruments in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which provides accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts. We do not
use derivative instruments for hedging of market risks or for trading or
speculative purposes. Effective January 1, 2009, we were
required to adopt EITF Issue No. 07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock. EITF Issue No. 07-5 clarified the determination
of whether equity-linked instruments (or embedded features), such as our
convertible securities and warrants to purchase our common stock, are
considered indexed to our own stock, which would qualify as a scope
exception under SFAS No. 133. As a result of adopting EITF
Issue No. 07-5, certain embedded features of our convertible securities,
as well as warrants to purchase our common stock, that were previously
treated as equity are now considered derivative
liabilities.
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30
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable.
Item
4T. Controls and Procedures
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Exchange Act is recorded,
processed, summarized, and reported within the specified time
periods. As a part of these controls, our management is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under the Exchange
Act.
Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:
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·
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pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
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·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the Company
are being made only in accordance with authorization of management and
directors of the Company; and
|
|
·
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provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial
statements.
|
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Exchange Act) as of March 31,
2009. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Based on our evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures are adequately designed and effective.
31
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures will prevent all
errors and all improper conduct. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute assurance that
the objectives of the control systems are met. Further, a design of a
control system must reflect the fact that there are resource constraints, and
the benefit of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of improper conduct, if any, have been detected. These
inherent limitations include the realities that judgments and decision-making
can be faulty, and that breakdowns can occur because of a simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more persons, or by management
override of the control. Further, the design of any system of
controls is also based in part upon assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations of a cost-effective
control system, misstatements due to error or fraud may occur and may not be
detected.
Changes
in Control Over Financial Reporting
During
the quarter ended March 31, 2009, there were no changes in our internal control
over financial reporting that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
32
PART
II - OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
|
During
the three-month period ended March 31, 2009, we issued 152,066 shares of
our common stock in payment of January 2009 interest of $83,333 on the 10%
Series A and Series B Convertible Senior Secured Promissory Notes held by
Platinum Montaur Life Sciences, LLC. Also during the
three-month period ended March 31, 2009, our President and CEO, David C.
Bupp, exercised a portion of his Series Q Warrant and we issued 50,000
shares of our common stock in exchange for gross proceeds of
$25,000. The issuances of the shares to the noteholder and Mr.
Bupp were exempt from registration under Sections 4(2) and 4(6) of the
Securities Act and Regulation D.
|
Item
6. Exhibits
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
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|
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31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
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|
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32.1
|
Certification
of Chief Executive Officer of Periodic Financial Reports pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.*
|
32.2
|
Certification
of Chief Financial Officer of Periodic Financial Reports pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.*
|
|
*
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Filed
herewith.
|
Items
1, 3, 4 and 5 are not applicable and have been omitted. There are no
material changes in Item 1A from the corresponding item reported in the
Company’s Form 10-K for the year ended December 31, 2008, and this item has
therefore been omitted.
33
SIGNATURES
In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NEOPROBE
CORPORATION
|
(the
Company)
|
Dated:
May 15, 2009
|
By:/s/
David
C.
Bupp
|
David
C. Bupp
|
President
and Chief Executive Officer
|
(duly
authorized officer; principal executive
officer)
|
By:
/s/ Brent
L.
Larson
|
Brent
L. Larson
|
Vice
President, Finance and Chief Financial Officer
|
(principal
financial and accounting
officer)
|
34