NAVIDEA BIOPHARMACEUTICALS, INC. - Quarter Report: 2010 September (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 September 30,
2010
| o |
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 o No o
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 o Accelerated
filer o
Non-accelerated filer o Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b-2 of the Act.)
Yes o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 82,573,372 shares of common
stock, par value $.001 per share (as of the close of business on November 8,
2010).
NEOPROBE CORPORATION and
SUBSIDIARIES
INDEX
|
PART
I – Financial Information
|
||||
|
Item
1.
|
Financial
Statements
|
3
|
||
|
Consolidated
Balance Sheets as of
|
||||
|
September
30, 2010 (unaudited) and December 31, 2009
|
3
|
|||
|
Consolidated
Statements of Operations for the Three-Month and
Nine-Month
|
||||
|
Periods
Ended September 30, 2010 and September 30, 2009
(unaudited)
|
5
|
|||
|
Consolidated
Statement of Stockholders’ Equity (Deficit) for the
Nine-Month
|
||||
|
Period
Ended September 30, 2010 (unaudited)
|
6
|
|||
|
Consolidated
Statements of Cash Flows for the Nine-Month Periods Ended
|
||||
|
September
30, 2010 and September 30, 2009 (unaudited)
|
7
|
|||
|
Notes
to the Consolidated Financial Statements (unaudited)
|
8
|
|||
|
Item
2.
|
Management’s
Discussion and Analysis of
|
|||
|
Financial
Condition and Results of Operations
|
24
|
|||
|
Forward-Looking
Statements
|
24
|
|||
|
The
Company
|
24
|
|||
|
Product
Line Overview
|
24
|
|||
|
Results
of Operations
|
29
|
|||
|
Liquidity
and Capital Resources
|
31
|
|||
|
Recent
Accounting Developments
|
33
|
|||
|
Critical
Accounting Policies
|
34
|
|||
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
35
|
||
|
Item
4T.
|
Controls
and Procedures
|
35
|
||
|
PART
II – Other Information
|
||||
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
37
|
|||
|
Item
6. Exhibits
|
37
|
|||
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
Neoprobe
Corporation and Subsidiaries
Consolidated
Balance Sheets
|
ASSETS
|
September
30,
2010
(unaudited)
|
December
31,
2009
|
||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 2,611,210 | $ | 5,639,842 | ||||
|
Accounts
receivable, net
|
1,382,017 | 1,331,908 | ||||||
|
Inventory
|
1,974,762 | 1,143,697 | ||||||
|
Prepaid
expenses and other
|
374,338 | 474,243 | ||||||
|
Assets
associated with discontinued operations
|
1,629 | 27,475 | ||||||
|
Total
current assets
|
6,343,956 | 8,617,165 | ||||||
|
Property
and equipment
|
2,373,580 | 1,990,603 | ||||||
|
Less
accumulated depreciation and amortization
|
1,822,579 | 1,693,290 | ||||||
| 551,001 | 297,313 | |||||||
|
Patents
and trademarks
|
532,561 | 524,224 | ||||||
|
Less
accumulated amortization
|
447,397 | 445,650 | ||||||
| 85,164 | 78,574 | |||||||
|
Other
assets
|
7,421 | 24,707 | ||||||
|
Total
assets
|
$ | 6,987,542 | $ | 9,017,759 | ||||
Continued
3
Neoprobe
Corporation and Subsidiaries,
Consolidated
Balance Sheets, continued
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
September
30,
2010
(unaudited)
|
December
31,
2009
|
||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,962,762 | $ | 763,966 | ||||
|
Accrued
liabilities and other
|
1,270,210 | 1,048,304 | ||||||
|
Capital
lease obligations, current portion
|
10,305 | 11,265 | ||||||
|
Deferred
revenue, current portion
|
619,422 | 560,369 | ||||||
|
Liabilities
associated with discontinued operations
|
9,250 | 18,743 | ||||||
|
Total
current liabilities
|
3,871,949 | 2,402,647 | ||||||
|
Capital
lease obligations
|
12,190 | 19,912 | ||||||
|
Deferred
revenue
|
576,130 | 534,119 | ||||||
|
Note
payable to Bupp Investors, net of discount of $54,093
|
-- | 945,907 | ||||||
|
Notes
payable to investor
|
-- | 10,000,000 | ||||||
|
Derivative
liabilities
|
1,377,406 | 1,951,664 | ||||||
|
Other
liabilities
|
34,050 | 33,362 | ||||||
|
Total
liabilities
|
5,871,725 | 15,887,611 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Preferred
stock; $.001 par value; 5,000,000 shares authorized;
|
||||||||
|
3,000
Series A shares, $1,000 face value, issued and
|
||||||||
|
outstanding
at December 31, 2009
|
-- | 3,000,000 | ||||||
|
Stockholders’
equity (deficit):
|
||||||||
|
Preferred
stock; $.001 par value; 5,000,000 shares authorized;
|
||||||||
|
10,000
Series B shares and 1,000 Series C shares issued
|
||||||||
|
and
outstanding at September 30, 2010
|
11 | -- | ||||||
|
Common
stock; $.001 par value; 200,000,000 shares authorized;
|
||||||||
|
82,446,872
and 80,936,711 shares outstanding at
|
||||||||
|
September
30, 2010 and December 31, 2009, respectively
|
82,447 | 80,937 | ||||||
|
Additional
paid-in capital
|
249,825,422 | 182,747,897 | ||||||
|
Accumulated
deficit
|
(248,792,063 | ) | (192,698,686 | ) | ||||
|
Total
stockholders’ equity (deficit)
|
1,115,817 | (9,869,852 | ) | |||||
|
Total
liabilities and stockholders’ equity (deficit)
|
$ | 6,987,542 | $ | 9,017,759 | ||||
See
accompanying notes to consolidated financial statements
4
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Operations
(unaudited)
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Net
sales
|
$ | 2,128,942 | $ | 2,562,079 | $ | 7,300,690 | $ | 6,998,299 | ||||||||
|
License
and grant revenue
|
174,588 | 25,000 | 224,588 | 75,000 | ||||||||||||
|
Total
revenues
|
2,303,530 | 2,587,079 | 7,525,278 | 7,073,299 | ||||||||||||
|
Cost
of goods sold
|
626,630 | 927,587 | 2,327,251 | 2,330,032 | ||||||||||||
|
Gross
profit
|
1,676,900 | 1,659,492 | 5,198,027 | 4,743,267 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Research
and development
|
2,569,975 | 1,204,811 | 6,709,148 | 3,730,361 | ||||||||||||
|
Selling,
general and administrative
|
1,355,235 | 778,658 | 3,401,779 | 2,417,622 | ||||||||||||
|
Total
operating expenses
|
3,925,210 | 1,983,469 | 10,110,927 | 6,147,983 | ||||||||||||
|
Loss
from operations
|
(2,248,310 | ) | (323,977 | ) | (4,912,900 | ) | (1,404,716 | ) | ||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
2,398 | 2,360 | 6,159 | 16,068 | ||||||||||||
|
Interest
expense
|
(832 | ) | (330,806 | ) | (553,821 | ) | (1,249,525 | ) | ||||||||
|
Change
in derivative liabilities
|
(87,753 | ) | (6,334,479 | ) | (671,360 | ) | (18,539,318 | ) | ||||||||
|
Loss
on extinguishment of debt
|
-- | (16,240,592 | ) | (41,717,380 | ) | (16,240,592 | ) | |||||||||
|
Other
|
(90 | ) | (585 | ) | (2,668 | ) | (2,216 | ) | ||||||||
|
Total
other expense, net
|
(86,277 | ) | (22,904,102 | ) | (42,939,070 | ) | (36,015,583 | ) | ||||||||
|
Loss
from continuing operations
|
(2,334,587 | ) | (23,228,079 | ) | (47,851,970 | ) | (37,420,299 | ) | ||||||||
|
Discontinued
operations:
|
||||||||||||||||
|
Impairment
loss
|
-- | (1,728,887 | ) | -- | (1,728,887 | ) | ||||||||||
|
Loss
from operations
|
(47,072 | ) | (52,303 | ) | (59,662 | ) | (162,896 | ) | ||||||||
|
Net
loss
|
(2,381,659 | ) | (25,009,269 | ) | (47,911,632 | ) | (39,312,082 | ) | ||||||||
|
Preferred
stock dividends
|
(25,000 | ) | (60,000 | ) | (8,181,745 | ) | (180,000 | ) | ||||||||
|
Loss
attributable to common stockholders
|
$ | (2,406,659 | ) | $ | (25,069,269 | ) | $ | (56,093,377 | ) | $ | (39,492,082 | ) | ||||
|
Loss
per common share (basic and diluted):
|
||||||||||||||||
|
Continuing
operations
|
$ | (0.03 | ) | $ | (0.31 | ) | $ | (0.70 | ) | $ | (0.53 | ) | ||||
|
Discontinued
operations
|
$ | -- | $ | (0.03 | ) | $ | -- | $ | (0.03 | ) | ||||||
|
Attributable
to common stockholders
|
$ | (0.03 | ) | $ | (0.34 | ) | $ | (0.70 | ) | $ | (0.56 | ) | ||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
and diluted
|
80,605,072 | 74,380,714 | 80,149,302 | 70,915,204 | ||||||||||||
See
accompanying notes to consolidated financial statements.
5
Neoprobe
Corporation and Subsidiaries
Consolidated
Statement of Stockholders’ Equity (Deficit)
(unaudited)
|
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
|||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
|
Balance,
December 31, 2009
|
-- | $ | -- | 80,936,711 | $ | 80,937 | $ | 182,747,897 | $ | (192,698,686 | ) | $ | (9,869,852 | ) | ||||||||||||||
|
Issued
stock in payment of
interest
on convertible debt
and
dividends on convertible
preferred
stock
|
-- | -- | 347,832 | 348 | 476,319 | -- | 476,667 | |||||||||||||||||||||
|
Issued
stock upon exercise
of
options, net of issuance
costs
|
-- | -- | 230,511 | 230 | (1,138 | ) | -- | (908 | ) | |||||||||||||||||||
|
Issued
stock in connection with
stock
purchase agreement,
net
of costs
|
-- | -- | 660,541 | 661 | 776,797 | -- | 777,458 | |||||||||||||||||||||
|
Issued
stock to 401(k) plan
at
$0.76
|
-- | -- | 53,499 | 53 | 40,570 | -- | 40,623 | |||||||||||||||||||||
|
Issued
Series B and Series C
convertible
preferred stock,
net
of issuance costs
|
11,000 | 11 | -- | -- | 64,636,810 | -- | 64,636,821 | |||||||||||||||||||||
|
Issued
warrants in connection
with
consulting agreement
|
-- | -- | -- | -- | 279,367 | -- | 279,367 | |||||||||||||||||||||
|
Issued
restricted stock
|
-- | -- | 60,000 | 60 | -- | -- | 60 | |||||||||||||||||||||
|
Issued
stock upon exercise of
warrants
and other
|
-- | -- | 157,778 | 158 | 316,660 | -- | 316,818 | |||||||||||||||||||||
|
Stock
compensation expense
|
-- | -- | -- | -- | 552,140 | -- | 552,140 | |||||||||||||||||||||
|
Preferred
stock dividends,
including
deemed dividends
|
-- | -- | -- | -- | -- | (8,181,745 | ) | (8,181,745 | ) | |||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
-- | -- | -- | -- | -- | (47,911,632 | ) | (47,911,632 | ) | |||||||||||||||||||
|
Balance,
September 30, 2010
|
11,000 | $ | 11 | 82,446,872 | $ | 82,447 | $ | 249,825,422 | $ | (248,792,063 | ) | $ | 1,115,817 | |||||||||||||||
See
accompanying notes to consolidated financial statements.
6
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
(unaudited)
|
Nine
Months Ended
September
30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (47,911,632 | ) | $ | (39,312,082 | ) | ||
|
Adjustments
to reconcile net loss to net cash
|
||||||||
|
used
in operating activities:
|
||||||||
|
Depreciation
and amortization
|
162,028 | 284,219 | ||||||
|
Amortization
of debt discount and debt offering costs
|
16,109 | 420,063 | ||||||
|
Issuance
of common stock in payment of interest and dividends
|
476,667 | 554,667 | ||||||
|
Stock
compensation expense
|
552,140 | 271,554 | ||||||
|
Non-cash
inventory adjustment
|
351,000 | -- | ||||||
|
Change
in derivative liabilities
|
671,360 | 18,539,318 | ||||||
|
Loss
on extinguishment of debt
|
41,717,380 | 16,240,592 | ||||||
|
Issuance
of warrants in connection with consulting agreement
|
279,367 | -- | ||||||
|
Impairment
loss on discontinued operations
|
-- | 1,728,887 | ||||||
|
Other
|
42,931 | 48,697 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(35,718 | ) | 226,510 | |||||
|
Inventory
|
(1,228,943 | ) | (550,816 | ) | ||||
|
Prepaid
expenses and other assets
|
(122,639 | ) | 260,470 | |||||
|
Accounts
payable
|
1,194,196 | 47,063 | ||||||
|
Accrued
liabilities and other liabilities
|
161,034 | 53,104 | ||||||
|
Deferred
revenue
|
101,064 | (49,013 | ) | |||||
|
Net
cash used in operating activities
|
(3,573,656 | ) | (1,236,767 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Maturities
of available-for-sale securities
|
-- | 494,000 | ||||||
|
Purchases
of equipment
|
(354,076 | ) | (74,554 | ) | ||||
|
Proceeds
from sales of equipment
|
-- | 251 | ||||||
|
Patent
and trademark costs
|
(12,202 | ) | (66,317 | ) | ||||
|
Net
cash (used in) provided by investing activities
|
(366,278 | ) | 353,380 | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of common stock
|
1,092,161 | 3,625,250 | ||||||
|
Payment
of stock offering costs
|
(85,788 | ) | (110,996 | ) | ||||
|
Payment
of preferred stock dividends
|
(86,389 | ) | -- | |||||
|
Payment
of debt issuance costs
|
-- | (20,183 | ) | |||||
|
Payment
of notes payable
|
-- | (137,857 | ) | |||||
|
Payments
under capital leases
|
(8,682 | ) | (7,366 | ) | ||||
|
Net
cash provided by financing activities
|
911,302 | 3,348,848 | ||||||
|
Net
(decrease) increase in cash
|
(3,028,632 | ) | 2,465,461 | |||||
|
Cash,
beginning of period
|
5,639,842 | 3,565,837 | ||||||
|
Cash,
end of period
|
$ | 2,611,210 | $ | 6,031,298 | ||||
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 September
30, 2010 and for the three-month and nine-month periods ended September
30, 2010 and September 30, 2009 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
accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission. The balances as of
September 30, 2010 and 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, 2009, 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.
In August
2009, the Company’s Board of Directors decided to discontinue the operations of
Cardiosonix and to attempt to divest our Cardiosonix subsidiary. This
decision was based on the determination that the blood flow measurement device
segment was no longer considered a strategic initiative of the Company, due in
large part to positive events in our other development
initiatives. Our consolidated statements of operations have been
reclassified, as required, for all prior periods presented to reflect
Cardiosonix as a discontinued operation. Cash flows associated with
the operation of Cardiosonix have been combined within operating, investing and
financing cash flows, as appropriate, in our consolidated statements of cash
flows. See Note 2.
|
b.
|
Financial Instruments and Fair
Value: The fair value hierarchy prioritizes the inputs
to valuation techniques used to measure fair value, giving 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 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 whose fair value is measured on
a recurring basis. 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 3.
8
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
|
(1)
|
Cash,
accounts receivable, accounts payable, and accrued
liabilities: The carrying amounts approximate fair value
because of the short maturity of these
instruments.
|
|
(2)
|
Note
payable to Bupp Investors: The carrying value of our debt is
presented as the face amount of the note less the unamortized discount
related to the initial estimated fair value of the warrants to purchase
common stock issued in connection with the note. At December
31, 2009, the note payable to the Bupp Investors had an estimated fair
value of $3.9 million, based on the closing market price of our common
stock. During June 2010, the Bupp Investors exchanged their
note for preferred stock, resulting in extinguishment of the
debt. See Note 10.
|
|
(3)
|
Notes
payable to investor: The carrying value of our debt is
presented as the face amount of the notes. At December 31,
2009, the notes payable to investors had an estimated fair value of $31.0
million, based on the closing market price of our common
stock. During June 2010, the investor exchanged their notes for
preferred stock, resulting in extinguishment of the debt. See
Note 10.
|
|
(4)
|
Derivative
liabilities: Derivative liabilities are recorded at fair
value. Fair value of warrant liabilities is determined based on
a Black-Scholes option pricing model calculation. Fair value of
put option liabilities is determined based on a probability-weighted
Black-Scholes option pricing model calculation. Unrealized
gains and losses on the derivatives are classified in other expenses as a
change in derivative liabilities in the statements of
operations. During June 2010, certain investors exchanged their
notes for preferred stock, resulting in extinguishment of our remaining
put option liabilities. See Note
10.
|
|
c.
|
Recent Accounting
Developments: In January 2010, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-6,
Improving Disclosures
about Fair Value Measurements. ASU 2010-6 amends FASB
ASC Topic 820, Fair
Value Measurements and Disclosures. ASU 2010-6 requires
new disclosures as follows: (1) Transfers in and out of Levels 1 and 2 and
(2) Activity in Level 3 fair value measurements. An entity
should disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons
for the transfers. In the reconciliation of fair value
measurements using significant unobservable inputs (Level 3), an entity
should present separately information about purchases, sales, issuances,
and settlements (that is, on a gross basis rather than as one net
number). ASU 2010-6 also clarifies existing disclosures as
follows: (1) Level of disaggregation and (2) Disclosures about
inputs and valuation techniques. An entity should provide fair
value measurement disclosures for each class of assets and
liabilities. A class is often a subset of assets or liabilities
within a line item in the statement of financial position. An
entity needs to use judgment in determining the appropriate classes of
assets and liabilities. An entity should provide disclosures
about the valuation techniques and inputs used to measure fair value for
both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. ASU 2010-6 is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
separate disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those
fiscal years. We adopted the initial provisions of ASU 2010-6
beginning January 1, 2010. As the new provisions of ASU 2010-6
provide only disclosure requirements, the adoption of this standard did
not impact our consolidated financial position, results of operations or
cash flows, but did result in increased
disclosures.
|
9
2. Discontinued
Operations
In August
2009, the Company’s Board of Directors decided to discontinue the operations of
Cardiosonix and to attempt to sell our Cardiosonix subsidiary. This
decision was based on the determination that the blood flow measurement device
segment was no longer considered a strategic initiative of the Company, due in
large part to positive events in our other device product and drug development
initiatives. We are in the process of identifying potential buyers,
but our efforts thus far have not resulted in any definitive
offers.
As a
result of our decision to hold Cardiosonix for sale, we reclassified certain
assets and liabilities as assets and liabilities associated with discontinued
operations and reduced them to their estimated fair value at that
time. The following assets and liabilities have been segregated and
included in assets associated with discontinued operations or liabilities
associated with discontinued operations, as appropriate, in the consolidated
balance sheets:
|
September
30,
2010
|
December
31,
2009
|
|||||||
|
Accounts
receivable, net
|
$ | 958 | $ | 15,349 | ||||
|
Inventory
|
671 | 12,126 | ||||||
|
Current
assets associated with discontinued operations
|
$ | 1,629 | $ | 27,475 | ||||
|
Accounts
payable
|
$ | 800 | $ | 5,400 | ||||
|
Accrued
expenses
|
8,450 | 13,343 | ||||||
|
Current
liabilities associated with discontinued operations
|
$ | 9,250 | $ | 18,743 | ||||
We
recorded an impairment loss of $1.7 million related to the assets of Cardiosonix
during the third quarter of 2009 and have reclassified all related revenues and
expenses to discontinued operations for all periods presented. Until
a sale is completed, we expect to continue to generate minimal revenues and
incur minimal expenses related to our blood flow measurement device
business. The following amounts have been segregated from continuing
operations and included in discontinued operations in the consolidated
statements of operations:
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
sales
|
$ | 5,312 | $ | 9,345 | $ | 41,547 | $ | 81,904 | ||||||||
|
Cost
of goods sold
|
3,180 | 2,432 | 14,796 | 36,156 | ||||||||||||
|
Gross
profit
|
2,132 | 6,913 | 26,751 | 45,748 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Research
and development
|
42,101 | 2,642 | 52,909 | 23,128 | ||||||||||||
|
Selling,
general and administrative
|
7,067 | 56,659 | 33,589 | 185,506 | ||||||||||||
|
Total
operating expenses
|
49,168 | 59,301 | 86,498 | 208,634 | ||||||||||||
|
Other
income (expense)
|
(36 | ) | 85 | 85 | (10 | ) | ||||||||||
|
Loss
from discontinued operations
|
$ | (47,072 | ) | $ | (52,303 | ) | $ | (59,662 | ) | $ | (162,896 | ) | ||||
10
3. Fair Value Hierarchy
The
following tables set forth, by level, financial liabilities measured at fair
value on a recurring basis:
|
Liabilities
Measured at Fair Value on a Recurring Basis as of September 30,
2010
|
|
Quoted
Prices in Active Markets for Identical Liabilities
|
Significant
Other Observable Inputs
|
Significant
Unobservable
Inputs
|
Balance
as of
September
30,
|
|||||||||||||
|
Description
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
2010
|
||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative
liabilities related
to warrants
|
$ | -- | $ | 1,377,406 | $ | -- | $ | 1,377,406 | ||||||||
|
Liabilities
Measured at Fair Value on a Recurring Basis as of December 31,
2009
|
|
Quoted
Prices in Active Markets for Identical Liabilities
|
Significant
Other Observable Inputs
|
Significant
Unobservable
Inputs
|
Balance
as of
December
31,
|
|||||||||||||
|
Description
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
2009
|
||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative
liabilities related
to warrants
|
$ | -- | $ | 985,664 | $ | -- | $ | 985,664 | ||||||||
|
Derivative
liabilities related
to put options
|
-- | -- | 966,000 | 966,000 | ||||||||||||
|
Total
derivative liabilities
|
$ | -- | $ | 985,664 | $ | 966,000 | $ | 1,951,664 | ||||||||
There was
no Level 3 liability activity during the three-month period ended September 30,
2010. The following table sets forth a summary of changes in the fair
value of our Level 3 liabilities for the three-month period ended September 30,
2009:
|
Three Months Ended September 30,
2009
|
||||||||||||||||||||
|
Description
|
Balance
at
June
30,
2009
|
Unrealized
Losses
|
Purchases,
Issuances and Settlements
|
Transfers
In
and/or
(Out)
|
Balance
at
September
30,
2009
|
|||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Derivative
liabilities related
to conversion and
put options
|
$ | 11,289,422 | $ | 2,465,225 | $ | -- | $ | (12,788,647 | ) | $ | 966,000 | |||||||||
11
The
following tables set forth a summary of changes in the fair value of our Level 3
liabilities for the nine-month periods ended September 30, 2010 and
2009:
|
Nine Months Ended September 30,
2010
|
||||||||||||||||||||
|
Description
|
Balance
at
December
31,
2009
|
Unrealized
Losses
|
Purchases,
Issuances and Settlements
|
Transfers
In and/or (Out)
|
Balance
at
September
30,
2010
|
|||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Derivative
liabilities related
to put options
|
$ | 966,000 | $ | -- | $ | (966,000 | ) | $ | -- | $ | -- | |||||||||
|
Nine Months Ended September 30,
2009
|
||||||||||||||||||||
|
Description
|
Balance
at
December
31,
2008
|
Unrealized
Losses
|
Adoption
of New Accounting Standard (Note 10)
|
Transfers
In
and/or
(Out)
|
Balance
at
September
30,
2009
|
|||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Derivative
liabilities related
to conversion and
put options
|
$ | 853,831 | $ | 7,596,329 | $ | 5,304,487 | $ | (12,788,647 | ) | $ | 966,000 | |||||||||
There
were no transfers in or out of our Level 1 and Level 2 fair value measurements
during the nine-month period ended September 30, 2010. During the
nine-month period ended September 30, 2009, we transferred $7.7 million into our
Level 2 liabilities. The transfer was a result of the required
January 1, 2009 adoption of a new accounting standard which clarified the
determination of whether equity-linked instruments, such as warrants to purchase
our common stock, are considered indexed to our own stock. As a
result of adopting the new standard, certain warrants to purchase our common
stock that were previously treated as equity were reclassified as derivative
liabilities.
4.
Stock-Based
Compensation
At
September 30, 2010, we have instruments outstanding under three stock-based
compensation plans; 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). Currently, under the 2002 Plan, we may grant
incentive stock options, nonqualified stock options, and restricted stock awards
to full-time employees and directors, and nonqualified stock options and
restricted stock 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
instruments 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 stock 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.
Stock
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 stock 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.
Stock-based
payments to employees and directors, including grants of stock options, are
recognized in the statement of operations based on their estimated fair
values. The fair value of each stock 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 stock 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.
12
Compensation
cost arising from stock-based awards is recognized as expense using the
straight-line method over the vesting period. For the three-month
periods ended September 30, 2010 and 2009, our total stock-based compensation
expense was approximately $249,000 and $126,000, respectively. For
the nine-month periods ended September 30, 2010 and 2009, our total stock-based
compensation expense was approximately $552,000 and $272,000,
respectively. We have not recorded any income tax benefit related to
stock-based compensation in either of the three-month or nine-month periods
ended September 30, 2010 and 2009.
A summary
of the status of our stock options as of September 30, 2010, and changes during
the nine-month period then ended, is presented below:
|
Nine
Months Ended September 30, 2010
|
|||||||||||||
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Life
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
at beginning of period
|
5,689,500 | $ | 0.44 | ||||||||||
|
Granted
|
20,000 | 1.72 | |||||||||||
|
Exercised
|
(301,667 | ) | 0.44 | ||||||||||
|
Forfeited
|
(18,333 | ) | 0.74 | ||||||||||
|
Expired
|
(60,000 | ) | 0.75 | ||||||||||
|
Outstanding
at end of period
|
5,329,500 | $ | 0.44 |
4.8
years
|
$ | 7,695,000 | |||||||
|
Exercisable
at end of period
|
4,649,167 | $ | 0.37 |
4.2
years
|
$ | 6,998,210 | |||||||
A summary
of the status of our unvested restricted stock as of September 30, 2010, and
changes during the nine-month period then ended, is presented
below:
|
Nine
Months Ended
September
30, 2010
|
||||||||
|
Number
of
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
|||||||
|
Unvested
at beginning of period
|
1,719,000 | $ | 0.76 | |||||
|
Granted
|
60,000 | 1.92 | ||||||
|
Vested
|
-- | -- | ||||||
|
Forfeited
|
-- | -- | ||||||
|
Unvested
at end of period
|
1,779,000 | $ | 0.80 | |||||
Restricted
shares 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.
As of
September 30, 2010, there was approximately $720,000 of total unrecognized
compensation cost related to unvested stock-based awards, which we expect to
recognize over the estimated remaining weighted average vesting terms of 0.8
years.
13
5. Comprehensive
Income (Loss)
We had no
accumulated other comprehensive income (loss) activity during the three-month
and nine-month periods ended September 30, 2010, or for the three-month period
ended September 30, 2009; therefore, our total comprehensive loss was equal to
our net loss for those periods. Due to our net operating loss
carryforwards, there are no income tax effects on comprehensive income (loss)
components for the nine-month period ended September 30, 2009.
|
Nine
Months
Ended
September
30,
2009
|
||||
|
Net
loss
|
$ | (39,312,082 | ) | |
|
Unrealized
losses on available-for-sale securities
|
(1,383 | ) | ||
|
Other
comprehensive income
|
$ | (39,313,465 | ) | |
6. Earnings
(Loss) Per Share
Basic
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted-average number of common shares and, except for periods with a loss
from operations, 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 convertible securities, options and warrants.
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 and nine-month periods ended September 30,
2010 and 2009:
|
Three
Months Ended
September
30, 2010
|
Three
Months Ended
September
30, 2009
|
|||||||||||||||
|
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
|||||||||||||
|
Outstanding
shares
|
82,446,872 | 82,446,872 | 79,363,787 | 79,363,787 | ||||||||||||
|
Effect
of weighting changes in
outstanding shares
|
(62,800 | ) | (62,800 | ) | (4,019,073 | ) | (4,019,073 | ) | ||||||||
|
Unvested
restricted stock
|
(1,779,000 | ) | (1,779,000 | ) | (964,000 | ) | (964,000 | ) | ||||||||
|
Adjusted
shares
|
80,605,072 | 80,605,072 | 74,380,714 | 74,380,714 | ||||||||||||
|
Nine
Months Ended
September
30, 2010
|
Nine
Months Ended
September
30, 2009
|
|||||||||||||||
|
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
|||||||||||||
|
Outstanding
shares
|
82,446,872 | 82,446,872 | 79,363,787 | 79,363,787 | ||||||||||||
|
Effect
of weighting changes in
outstanding shares
|
(518,570 | ) | (518,570 | ) | (7,484,583 | ) | (7,484,583 | ) | ||||||||
|
Unvested
restricted stock
|
(1,779,000 | ) | (1,779,000 | ) | (964,000 | ) | (964,000 | ) | ||||||||
|
Adjusted
shares
|
80,149,302 | 80,149,302 | 70,915,204 | 70,915,204 | ||||||||||||
Earnings
(loss) per common share for the three-month and nine-month periods ended
September 30, 2010 and 2009 excludes the effects of 60,277,500 and 58,660,844
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.
14
The
Company’s unvested stock awards contain nonforfeitable rights to dividends or
dividend equivalents, whether paid or unpaid (referred to as “participating
securities”). Therefore, the unvested stock awards are included in
the number of shares outstanding for both basic and diluted earnings per share
calculations, except in the event of a net loss from operations. Due
to our net loss, 1,779,000 and 964,000 shares of unvested restricted stock were
excluded in determining basic and diluted loss per share for the three-month and
nine-month periods ended September 30, 2010 and 2009, respectively.
7. 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 nine-month periods ended September 30, 2010 and
2009, we capitalized $741,000 and $525,000, respectively, of inventory costs
associated with our Lymphoseek drug product. During the nine-month
period ended September 30, 2010, we expensed $351,000 of previously capitalized
pharmaceutical materials to research and development as they were no longer
considered to be usable in the production of future saleable final drug product
inventory.
The
components of net inventory are as follows:
|
September
30,
2010
(unaudited)
|
December
31,
2009
|
|||||||
|
Pharmaceutical
materials
|
$ | 777,000 | $ | 525,000 | ||||
|
Gamma
detection device materials
|
221,926 | 137,695 | ||||||
|
Pharmaceutical
work-in-process
|
138,000 | -- | ||||||
|
Gamma
detection device finished goods
|
837,836 | 481,002 | ||||||
|
Total
|
$ | 1,974,762 | $ | 1,143,697 | ||||
8.
Intangible
Assets
The major
classes of intangible assets are as follows:
|
September
30, 2010
|
December
31, 2009
|
|||||||||||||||||
|
Weighted
Average
Remaining
Life1
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
||||||||||||||
|
Patents
and trademarks
|
3.2
yrs
|
$ | 532,561 | $ | 447,397 | $ | 524,224 | $ | 445,650 | |||||||||
1 The
weighted average remaining life is calculated for issued patents and does not
include pending patent applications or trademarks which are not currently being
amortized.
15
The
estimated amortization expenses, related to those patents and trademarks
currently being amortized, for the next five fiscal years are as
follows:
|
Estimated
Amortization Expense
|
||||
|
For
the year ended 12/31/2010
|
$ | 2,755 | ||
|
For
the year ended 12/31/2011
|
1,256 | |||
|
For
the year ended 12/31/2012
|
980 | |||
|
For
the year ended 12/31/2013
|
263 | |||
|
For
the year ended 12/31/2014
|
244 | |||
9. 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 and other on the consolidated
balance sheets. Our primary marketing partner, Devicor Medical
Products, Inc. (Devicor), 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
Devicor’s estimated reimbursement.
The
activity in the warranty reserve account for the three-month and nine-month
periods ended September 30, 2010 and 2009 is as follows:
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Warranty
reserve at beginning
of period
|
$ | 73,817 | $ | 63,441 | $ | 61,400 | $ | 62,261 | ||||||||
|
Provision
for warranty claims and changes
in reserve for warranties
|
781 | 12,250 | 51,352 | 69,606 | ||||||||||||
|
Payments
charged against the
reserve
|
(16,578 | ) | (21,254 | ) | (54,732 | ) | (77,430 | ) | ||||||||
|
Warranty
reserve at end of period
|
$ | 58,020 | $ | 54,437 | $ | 58,020 | $ | 54,437 | ||||||||
10. 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 Bupp Note bore interest at 10% per annum, had an
original term of one year and was repayable in whole or in part with no
penalty. The note was convertible, at the option of the Bupp
Investors, into shares of our common stock at a price of $0.31 per
share. 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. See Note
12.
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, $3.5 million of which was convertible into
shares of our common stock at the conversion price of $0.26 per share, 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 at an exercise price of $0.32 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.
16
In
connection with the SPA, Montaur requested that the term of the $1.0 million
Bupp Note be extended approximately 42 months or until at least one day
following the maturity date of the Series A Note. 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 additional 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.
In April
2008, following receipt by the Company of clearance from the United States Food
and Drug Administration 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, which was convertible
into shares of our common stock at the conversion price of $0.36 per share, 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.
In
December 2008, after we obtained 135 vital blue dye lymph nodes from patients
who had completed the injection of the drug and surgery 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 Series A 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
(hereinafter referred to collectively with the Series W Warrant and Series X
Warrant as the Montaur Warrants), for an aggregate purchase price of
$3,000,000. The “Liquidation Preference Amount” for the Series A
Preferred Stock was $1,000 and the “Conversion Price” of the Series A Preferred
Stock was set at $0.50 on the date of issuance, thereby making the shares of
Series A Preferred Stock convertible into an aggregate 6,000,000 shares of our
common stock, subject to adjustment as described in the Certificate of
Designations.
In July
2009, we entered into a Securities Amendment and Exchange Agreement with
Montaur, pursuant to which Montaur agreed to the amendment and restatement of
the terms of the Montaur Notes, the Series A Preferred Stock, and the Montaur
Warrants. The Series A Note was amended to grant Montaur conversion
rights with respect to the $3.5 million portion of the Series A Note that was
previously not convertible. The newly convertible portion of the
Series A Note was convertible into 3,600,000 shares of our common stock at
$0.9722 per share. The amendments also eliminated certain price reset
features of the Montaur Notes, the Series A Preferred Stock and the Montaur
Warrants that had created significant non-cash derivative liabilities on the
Company’s balance sheet. See Note 11. In conjunction with
this transaction, we issued Montaur a Series AA Warrant to purchase 2.4 million
shares of our common stock at an exercise price of $0.97 per share, expiring in
July 2014. The change in terms of the Montaur Notes, the Series A
Preferred Stock and the Montaur Warrants were treated as an extinguishment of
debt for accounting purposes. Following the extinguishment, the
Company’s balance sheet reflected the face value of the $10 million due to
Montaur pursuant to the Montaur Notes, which approximated fair value at the date
of the extinguishment.
On June
25, 2010, we entered into a Securities Exchange Agreement with Montaur, pursuant
to which Montaur exchanged the Montaur Notes and the Series A Preferred Stock
for 10,000 shares of Series B Convertible Preferred Stock (the Series B
Preferred Stock), convertible into 32,700,000 shares of common
stock. The Series B Preferred Stock is convertible at the option of
Montaur, carries no dividend requirements and participates equally with our
common stock in liquidation proceeds based upon the number of common shares into
which the Series B Preferred Stock is then convertible. As
consideration for the exchange, Neoprobe issued additional Series B Preferred
Stock which is convertible into 1.3 million shares of common
stock. Also on June 25, 2010, we entered into a Securities Exchange
Agreement with the Bupp Investors, pursuant to which the Bupp Investors
exchanged the Amended Bupp Note for 1,000 shares of Series C Convertible
Preferred Stock (the Series C Preferred Stock), convertible into 3,226,000
shares of common stock. The Series C Preferred Stock has a 10%
dividend rate, payable quarterly until December 31, 2011, and participates
equally with our common stock in liquidation proceeds based upon the number of
common shares into which the Series C Preferred Stock is then
convertible. The exchange of the Montaur Notes, the Series A
Preferred Stock and the Amended Bupp Note were treated as extinguishments for
accounting purposes. As a result, the Company recognized a loss on
extinguishment of debt of $47.1 million, recorded a deemed dividend of $8.0
million, and wrote off $966,000 in put option derivative liabilities during the
second quarter of 2010. As a result of these exchange transactions,
all security interests in the Company’s assets held by Montaur and the Bupp
Investors were extinguished.
17
During
the three-month periods ended September 30, 2010 and 2009, we recorded interest
expense of $0 and $47,000, respectively, related to amortization of the debt
discount related to our convertible notes. During the nine-month
periods ended September 30, 2010 and 2009, we recorded interest expense of
$12,000 and $353,000, respectively, related to amortization of the debt discount
related to our convertible notes. During the three-month periods
ended September 30, 2010 and 2009, we recorded interest expense of $0 and
$9,000, respectively, related to amortization of the deferred financing costs
related to our convertible notes. During the nine-month periods ended
September 30, 2010 and 2009, we recorded interest expense of $4,000 and $67,000,
respectively, related to amortization of the deferred financing costs related to
our convertible notes.
11. Derivative
Instruments
Effective
January 1, 2009, we adopted a new accounting standard which 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 the new
standard, certain embedded features of our convertible securities which were
extinguished in the second quarter of 2010, as well as warrants to purchase our
common stock, that were previously treated as equity are now considered
derivative liabilities. We do not use derivative instruments for
hedging of market risks or for trading or speculative purposes.
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. On July 24, 2009, we
entered into a Securities Amendment and Exchange Agreement with Montaur,
pursuant to which Montaur agreed to the amendment and restatement of the terms
of the Montaur Notes, the Series A Preferred Stock, and the Montaur
Warrants. As a result, the Company reclassified $27.0 million in
derivative liabilities related to the Montaur Notes, the Series A Preferred
Stock, and the Montaur Warrants to additional paid-in capital. Also
on July 24, 2009, Montaur exercised 2,844,319 of their Series Y Warrants, which
resulted in a decrease in the related derivative liability of $2.2
million. The net effect of marking the Company’s derivative
liabilities to market during the three-month and nine-month periods ended
September 30, 2009 resulted in net increases in the estimated fair values of the
derivative liabilities of $6.3 million and $18.5 million, respectively which
were recorded as non-cash expense.
On June
25, 2010, we entered into a Securities Exchange Agreement with Montaur, pursuant
to which Montaur exchanged the Montaur Notes and the Series A Preferred Stock
for 10,000 shares of Series B Convertible Preferred Stock. As a
result of this exchange transaction, the Company wrote off $966,000 in put
option derivative liabilities during the second quarter of
2010. During the third quarter of 2010, 120,000 Series V Warrants and
60,000 Series Z Warrants were exercised. The Company reclassified
$280,000 in derivative liabilities related to these warrants to additional
paid-in capital. The net effect of marking the Company’s derivative
liabilities to market during the three-month and nine-month periods ended
September 30, 2010 resulted in net increases in the estimated fair values of the
derivative liabilities of $88,000 and $671,000, respectively, which were
recorded as non-cash expense. The total estimated fair value of the
remaining derivative liabilities was $1.4 million as of September 30,
2010. See Note 10.
18
12. Stock
Warrants
During
the first nine months 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 held by Mr. Bupp expired during the period. During
the same period, another Bupp Investor exercised 50,000 Series V Warrants in
exchange for issuance of 50,000 shares of our common stock, resulting in gross
proceeds of $16,000. Also during the first nine months of 2009,
certain outside investors exercised a total of 1,010,000 Series U Warrants on a
cashless basis in exchange for issuance of 541,555 shares of our common
stock.
In July
2009, in conjunction with entering into a Securities Amendment and Exchange
Agreement, Montaur exercised 2,844,319 Series Y Warrants in exchange for
issuance of 2,844,319 shares of our common stock, resulting in gross proceeds of
$1.6 million. In September 2009, Montaur exercised their remaining
3,155,681 Series Y Warrants in exchange for issuance of 3,155,681 shares of our
common stock, resulting in additional gross proceeds of $1.8
million. See Note 10.
During
the first nine months of 2010, a Bupp Investor exercised 120,000 Series V
Warrants in exchange for issuance of 120,000 shares of our common stock,
resulting in gross proceeds of $37,200. Also during the first nine
months of 2010, certain outside investors exercised a total of 60,000 Series Z
Warrants on a cashless basis in exchange for issuance of 37,778 shares of our
common stock.
In July
2010, we issued five-year Series BB Warrants to purchase 300,000 shares of our
common stock at an exercise price of $2.00 per share to an investment advisory
firm in connection with a consulting agreement.
At
September 30, 2010, there are 17.9 million warrants outstanding to purchase our
common stock. The warrants are exercisable at prices ranging from
$0.31 to $2.00 per share with a weighted average exercise price of $0.50 per
share.
13.
Common
Stock Purchase Agreement
Under a
previously existing agreement, in March 2010, we sold to Fusion Capital Fund II,
LLC (Fusion Capital), an Illinois limited liability company, 540,541 shares for
proceeds of $1.0 million under a common stock purchase agreement, as
amended. In connection with this sale, we issued 120,000 shares of
our common stock to Fusion Capital as an additional commitment
fee. Subsequent to this sale, the remaining aggregate amount of
our common stock we can sell to Fusion Capital under the amended agreement is
$9.1 million.
14.
Income
Taxes
We
account for income taxes in accordance with current accounting standards, which
include guidance on the accounting for uncertainty in income taxes recognized in
the financial statements. Such standards also prescribe a recognition
threshold and measurement model for the financial statement recognition of a tax
position taken, or expected to be taken, and provide guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. As a result, no liability for uncertain
tax positions was recorded as of September 30, 2010. Should we need
to accrue interest or penalties on uncertain tax positions, we would recognize
the interest as interest expense and the penalties as a selling, general and
administrative expense.
19
15. Segment
and Subsidiary Information
We report
information about our operating segments using the “management approach” in
accordance with current accounting standards. This information is
based on the way management organizes and reports the segments within the
enterprise for making operating decisions and assessing
performance. Our reportable segments are identified based on
differences in products, services and markets served. There were no
inter-segment sales. We own or have rights to intellectual property
involving two primary types of medical device products, including oncology
instruments currently used primarily in the application of sentinel lymph node
biopsy, and blood flow measurement devices. We also own or have
rights to intellectual property related to several drug and therapy
products.
20
The
information in the following table is derived directly from each reportable
segment’s financial reporting.
|
($
amounts in thousands)
Three
Months Ended September 30, 2010
|
Oncology
Devices
|
Drug
and
Therapy
Products
|
Corporate
|
Total
|
||||||||||||
|
Net
sales:
|
||||||||||||||||
|
United
States1
|
$ | 2,092 | $ | -- | $ | -- | $ | 2,092 | ||||||||
|
International
|
37 | -- | -- | 37 | ||||||||||||
|
License
and other revenue
|
25 | 150 | -- | 175 | ||||||||||||
|
Research
and development expenses
|
113 | 2,457 | -- | 2,570 | ||||||||||||
|
Selling,
general and administrative expenses,
excluding
depreciation and amortization2
|
51 | -- | 1,255 | 1,306 | ||||||||||||
|
Depreciation
and amortization
|
26 | 1 | 22 | 49 | ||||||||||||
|
Income
(loss) from operations3
|
1,337 | (2,308 | ) | (1,277 | ) | (2,248 | ) | |||||||||
|
Other
income (expense)4
|
-- | -- | (86 | ) | (86 | ) | ||||||||||
|
Income
(loss) from continuing operations
|
1,337 | (2,308 | ) | (1,363 | ) | (2,334 | ) | |||||||||
|
Loss
from discontinued operations
|
-- | -- | (47 | ) | (47 | ) | ||||||||||
|
Total
assets, net of depreciation and amortization:
|
||||||||||||||||
|
United
States operations
|
2,655 | 1,153 | 3,178 | 6,986 | ||||||||||||
|
Discontinued
operations
|
-- | -- | 2 | 2 | ||||||||||||
|
Capital
expenditures
|
1 | -- | 99 | 100 | ||||||||||||
|
($
amounts in thousands)
Three
Months Ended September 30, 2009
|
Oncology
Devices
|
Drug
and
Therapy
Products
|
Corporate
|
Total
|
||||||||||||
|
Net
sales:
|
||||||||||||||||
|
United
States1
|
$ | 2,477 | $ | -- | $ | -- | $ | 2,477 | ||||||||
|
International
|
85 | -- | -- | 85 | ||||||||||||
|
License
revenue
|
25 | -- | -- | 25 | ||||||||||||
|
Research
and development expenses
|
220 | 985 | -- | 1,205 | ||||||||||||
|
Selling,
general and administrative expenses,
excluding
depreciation and amortization2
|
26 | -- | 705 | 731 | ||||||||||||
|
Depreciation
and amortization
|
32 | 1 | 15 | 48 | ||||||||||||
|
Income
(loss) from operations3
|
1,382 | (986 | ) | (720 | ) | (324 | ) | |||||||||
|
Other
income (expense)4
|
-- | -- | (22,904 | ) | (22,904 | ) | ||||||||||
|
Income
(loss) from continuing operations
|
1,382 | (986 | ) | (23,624 | ) | (23,228 | ) | |||||||||
|
Loss
from discontinued operations
|
-- | -- | (1,781 | ) | (1,781 | ) | ||||||||||
|
Total
assets, net of depreciation and amortization:
|
||||||||||||||||
|
United
States operations
|
2,148 | 555 | 6,481 | 9,184 | ||||||||||||
|
Discontinued
operations
|
-- | -- | 31 | 31 | ||||||||||||
|
Capital
expenditures
|
12 | -- | 4 | 16 | ||||||||||||
21
|
($
amounts in thousands)
Nine
Months Ended September 30, 2010
|
Oncology
Devices
|
Drug
and
Therapy
Products
|
Corporate
|
Total
|
||||||||||||
|
Net
sales:
|
||||||||||||||||
|
United
States1
|
$ | 7,208 | $ | -- | $ | -- | $ | 7,208 | ||||||||
|
International
|
93 | -- | -- | 93 | ||||||||||||
|
License
and other revenue
|
75 | 150 | -- | 225 | ||||||||||||
|
Research
and development expenses
|
368 | 6,341 | -- | 6,709 | ||||||||||||
|
Selling,
general and administrative expenses,
excluding
depreciation and amortization2
|
165 | -- | 3,075 | 3,240 | ||||||||||||
|
Depreciation
and amortization
|
91 | 16 | 55 | 162 | ||||||||||||
|
Income
(loss) from operations3
|
4,425 | (6,208 | ) | (3,130 | ) | (4,913 | ) | |||||||||
|
Other
income (expense)4
|
-- | -- | (42,939 | ) | (42,939 | ) | ||||||||||
|
Income
(loss) from continuing operations
|
4,425 | (6,208 | ) | (46,069 | ) | (47,852 | ) | |||||||||
|
Loss
from discontinued operations
|
-- | -- | (60 | ) | (60 | ) | ||||||||||
|
Total
assets, net of depreciation and amortization:
|
||||||||||||||||
|
United
States operations
|
2,655 | 1,153 | 3,178 | 6,986 | ||||||||||||
|
Discontinued
operations
|
-- | -- | 2 | 2 | ||||||||||||
|
Capital
expenditures
|
1 | 220 | 133 | 354 | ||||||||||||
|
($
amounts in thousands)
Nine
Months Ended September 30, 2009
|
Oncology
Devices
|
Drug
and
Therapy
Products
|
Corporate
|
Total
|
||||||||||||
|
Net
sales:
|
||||||||||||||||
|
United
States1
|
$ | 6,745 | $ | -- | $ | -- | $ | 6,745 | ||||||||
|
International
|
253 | -- | -- | 253 | ||||||||||||
|
License
revenue
|
75 | -- | -- | 75 | ||||||||||||
|
Research
and development expenses
|
857 | 2,873 | -- | 3,730 | ||||||||||||
|
Selling,
general and administrative expenses,
excluding
depreciation and amortization2
|
95 | -- | 2,167 | 2,262 | ||||||||||||
|
Depreciation
and amortization
|
108 | 3 | 45 | 156 | ||||||||||||
|
Income
(loss) from operations3
|
3,683 | (2,876 | ) | (2,212 | ) | (1,405 | ) | |||||||||
|
Other
income (expense)4
|
-- | -- | (36,016 | ) | (36,016 | ) | ||||||||||
|
Income
(loss) from continuing operations
|
3,683 | (2,876 | ) | (38,228 | ) | (37,420 | ) | |||||||||
|
Loss
from discontinued operations
|
-- | -- | (1,892 | ) | (1,892 | ) | ||||||||||
|
Total
assets, net of depreciation and amortization:
|
||||||||||||||||
|
United
States operations
|
2,148 | 555 | 6,481 | 9,184 | ||||||||||||
|
Discontinued
operations
|
-- | -- | 31 | 31 | ||||||||||||
|
Capital
expenditures
|
13 | -- | 62 | 75 | ||||||||||||
|
|
1
All sales to Devicor are made in the United
States. Devicor distributes the product globally through its
international affiliates.
|
|
|
2
General and administrative expenses, 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. Marketing and selling expenses 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 our individual reportable
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.
|
16.
Supplemental Disclosure for Statements of Cash Flows
During
the nine-month periods ended September 30, 2010 and 2009, we paid interest
aggregating $135,000 and $163,000, respectively. During the
nine-month periods ended September 30, 2010 and 2009, we transferred $58,000 and
$33,000, respectively, of inventory to fixed assets related to the creation and
maintenance of a pool of service loaner equipment. During the
nine-month periods ended September 30, 2010 and 2009, we issued 347,832 and
957,708, respectively, shares of our common stock as payment of interest on our
convertible debt and dividends on our convertible preferred
stock. During the nine-month periods ended September 30, 2010, we
issued 53,499 and 80,883 shares of our common stock, respectively, as a matching
contribution to our 401(k) plan. During the nine-month period ended
September 30, 2010, we reclassified $223,000 of deferred stock offering costs to
additional paid-in capital related to the issuance of our common stock to Fusion
Capital. See Note 13. Also during the nine-month period
ended September 30, 2010, we recorded a deemed dividend of $8.0 million related
to the exchange of the Series A Preferred Stock for Series B Preferred
Stock. See Note 10.
22
17.
Subsequent
Event
On
November 10, 2010, Neoprobe completed a direct placement with institutional
investors of 3,157,896 shares of our common stock at $1.90 per share for gross
proceeds of $6.0 million. In addition to the common stock, Neoprobe
issued one-year Series CC Warrants to purchase 1,578,948 shares of our common
stock at an exercise price of $2.11 per share, and two-year Series DD Warrants
to purchase 1,578,948 shares of our common stock at an exercise price of $2.11
per share. The common stock, warrants, and shares of common stock
underlying the warrants were issued pursuant to a shelf registration statement
on Form S-3 that was declared effective by the Securities and Exchange
Commission in August 2010.
23
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 oncology products that enhance patient care and improve patient
outcome. We currently market a line of medical devices, our
neoprobe® GDS
gamma detection systems that are used in a cancer staging procedure called
intraoperative lymphatic mapping. In addition to our medical device
products, we have two radiopharmaceutical products, Lymphoseek® and
RIGScanTM CR, in
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
We
believe Neoprobe’s prospects continue to be bright as we accomplish
developmental milestones in our key growth areas, especially related to our
Lymphoseek initiative. Our gamma detection device line continues to
provide a strong revenue base. Revenue from our gamma detection
device product line for the first nine months of 2010 exceeded our original
expectations, and while we expect overall revenue from our gamma detection
device products to continue to be strong for 2010 as a whole, we expect revenue
from this line during the fourth quarter of 2010 to be relatively consistent
with the fourth quarter of 2009. We expect to continue to incur
modest development expenses to support our gamma detection device product line
as well as we work with our marketing partners to expand our product offerings
in the gamma detection device arena. 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 is anticipated
to generate any significant revenue for us during 2010.
In August
2009, our Board of Directors decided to discontinue operations of Cardiosonix
and to attempt to divest our Cardiosonix subsidiary. This decision
was based on the determination that the blood flow measurement device segment
was no longer considered a strategic initiative of the Company, due in large
part to positive events in our other development initiatives. Until a
sale is completed, we expect to continue to generate modest revenues and incur
minimal expenses related to our blood flow measurement device
business.
24
Our
efforts thus far in 2010 have resulted in the following milestone
achievements:
|
·
|
Completed
a successful meeting with the United States Food and Drug Administration
(FDA) to review the Phase 3 (NEO3-05) clinical study results and
development plan discussion to support a New Drug Application (NDA)
submission for Lymphoseek as a lymphatic tissue tracing
agent;
|
|
·
|
Completed
successful pre-NDA dialogue with FDA on Lymphoseek pre-clinical
data;
|
|
·
|
Completed
successful pre-NDA dialogue with FDA on Lymphoseek chemistry,
manufacturing and control data;
|
|
·
|
Initiated
a third Lymphoseek Phase 3 clinical study in subjects with breast cancer
or melanoma (NEO3-09) to support the NDA filing with the potential to
expand Lymphoseek’s product
labeling;
|
|
·
|
Completed
a pre-NDA meeting for Lymphoseek clarifying the regulatory pathway for
Lymphoseek approval;
|
|
·
|
Election
of two new directors to Neoprobe’s Board, bringing significant drug
industry and corporate development expertise to the Company’s
leadership;
|
|
·
|
Completed
exchange transactions that converted all of the Company’s outstanding debt
to equity;
|
|
·
|
Received
notice of grant awards of over $1.2 million to support future Lymphoseek
development through non-dilutive
funding;
|
|
·
|
Filed
a shelf registration on Form S-3 to allow the Company to raise capital as
necessary through the sale of up to $20 million in a primary offering of
securities to provide us with additional financial planning flexibility
and to support the diversification of our share ownership to new
institutions;
|
|
·
|
Completed
an offering and sale of common stock and warrants under the shelf
registration statement resulting in approximately $5.5 million in net
proceeds to the Company;
|
|
·
|
Completed
preliminary RIGS®
development activities including transfer of the biologic license
application (BLA) from the Center for Biologics Evaluation and Research
(CBER) to the Division of Medical Imaging Products in the Center for Drug
Evaluation and Research (CDER) at FDA and preparation of an
investigational new drug (IND) request for the biologic product;
and
|
|
·
|
Filed
a complete response to the open BLA for RIGScan
CR.
|
Our
operating expenses during the first nine months of 2010 were focused primarily
on support of Lymphoseek product development and on efforts to re-qualify the
manufacturing process for our RIGScan CR product initiative. Our
drug-related development expenses for the first nine months of 2010 have been
considerably higher than 2009 as we prepared for the planned filing of a NDA for
Lymphoseek and as we continue the other clinical evaluations of Lymphoseek to
support post-marketing amendments to the NDA.
Lymphoseek
During
2008, we initiated patient enrollment in a Phase 3 clinical study in subjects
with either breast cancer or melanoma (NEO3-05). In March 2009, we
announced that this study had reached the accrual of 203 lymph nodes, the
study’s primary accrual objective. The NEO3-05 Phase 3 clinical study
was an open label trial of node-negative subjects with either breast cancer or
melanoma. It was designed to evaluate the safety and the accuracy of
Lymphoseek while identifying the lymph nodes draining from the subject’s tumor
site. To demonstrate the accuracy of Lymphoseek, each subject
consenting to participate in the study was injected in proximity to the tumor
with Lymphoseek and one of the vital blue dyes that are commonly used in
lymphatic mapping procedures. The primary efficacy objective of the
study was to identify lymph nodes that contained the vital blue dye and to
demonstrate a statistically acceptable concordance rate between the
identification of lymph nodes with the vital blue dye and
Lymphoseek. To be successful, the study needed to achieve a
statistical p-value of at least 0.05. In addition, the secondary
endpoint of the study was to pathologically examine lymph nodes identified by
either the vital blue dyes or Lymphoseek to determine if cancer was present in
the lymph nodes.
In June
2009, we initiated a Phase 3 clinical trial to be conducted in subjects with
head and neck squamous cell carcinoma (NEO3-06). The NEO3-06 clinical
study was designed to expand the potential labeling for Lymphoseek as a sentinel
lymph node targeting agent after the initial marketing clearance for the
product. Our discussions with FDA and the European Medicinal
Evaluation Agency (EMEA) have also suggested that the NEO3-06 clinical trial
will further support the use of Lymphoseek in sentinel lymph node biopsy
procedures. We believe the outcome of the trial will be beneficial to
the marketing and commercial adoption of Lymphoseek in the U.S. and European
Union (EU). Based on the discussion with FDA regarding NEO3-05 in
March 2010, we expanded the scope of NEO3-06 and we now plan to have
approximately 20 participating institutions in the NEO3-06 clinical
trial. Subject recruitment and enrollment is actively underway at a
number of institutions and the trial protocol is currently under review at
several other institutions. The accrual rate for trials of this
nature is highly dependent on the timing of institutional review board approvals
of the NEO3-06 protocol. Our experience in the NEO3-05 trial has
shown that this process may be lengthening due to risk management concerns on
the part of hospitals participating in clinical trials, as well as other
factors.
25
In March
2010, Neoprobe met with FDA to review the clinical outcomes of
NEO3-05. The meeting included a review of the efficacy and safety
results of the NEO3-05 clinical study and Neoprobe’s plans for the submission of
a NDA for Lymphoseek based on the results of NEO3-05 and other previously
completed clinical studies. During the meeting, Neoprobe provided FDA
with the clinical results of the protocol-compliant clinical sites that
participated in the NEO3-05 clinical study that contributed 136 intent-to-treat
subjects who provided 215 lymph nodes containing the vital blue
dye. 210 of the vital blue dye positive lymph nodes contained
Lymphoseek for an overall concordance rate of 98%, achieving a very high level
of statistical correlation (p-value = 0.0001) for the primary endpoint of the
clinical study. Prior to the meeting, FDA requested that Neoprobe
conduct a “reverse concordance” assessment of the clinical study where
Lymphoseek might identify lymph nodes missed by the vital blue
dyes. This assessment showed that Lymphoseek was able to identify 85
additional lymph nodes that did not contain the vital blue dye, and 18% of these
nodes were found by pathology to contain cancer. There were no
significant reported safety events related to Lymphoseek. FDA
indicated that the clinical data from the NEO3-05 clinical study and other
completed clinical evaluations of Lymphoseek would be supportive of a NDA
submission for Lymphoseek. FDA also encouraged Neoprobe to request a
series of pre-NDA meetings to review the non-clinical and chemistry,
manufacturing and control (CMC) components of the NDA prior to its formal
submission. Neoprobe completed successful non-clinical and CMC
pre-NDA reviews with FDA during the second quarter of 2010.
In July
2010, Neoprobe initiated enrollment in another Phase 3 clinical evaluation of
Lymphoseek in subjects with either breast cancer or melanoma
(NEO3-09). This trial was originally intended as a supplement to the
primary NDA for Lymphoseek for safety evaluation purposes and to support
expanded product labeling claims. NEO3-09 is currently enrolling
patients at eight study sites across the U.S. Neoprobe expects this
study to be completed in the first quarter of 2011.
In
October 2010, Neoprobe met with FDA for a pre-NDA assessment for
Lymphoseek. As a result of the pre-NDA assessment, FDA requested that
data from both the completed NEO3-05 study and the NEO3-09 study currently in
progress be included in the Company’s primary NDA for Lymphoseek rather than
submitting the NEO3-09 study data as a planned major amendment to the ongoing
NDA review. The pre-NDA assessment resulted in no modification to the
NEO3-09 trial design or endpoints or to any of the other previously agreed-to
clinical or regulatory components of the Lymphoseek NDA. As such,
NEO3-09 will now be one of two adequate and well-controlled trials included in
the primary NDA submission for a first-cycle review.
The
Lymphoseek NDA submission will be based on the clinical results of NEO3-05,
NEO3-09, and other already completed clinical evaluations of
Lymphoseek. The request for the total data package from two clinical
trials is consistent with FDA’s ongoing initiative to push for more complete
primary submissions and to limit major amendments made to NDAs. This
ongoing initiative to shorten drug review cycle times was re-emphasized by FDA’s
Office of New Drug Development in late 2009 and enables more successful
first-cycle reviews which ultimately shortens overall drug approval
timelines. We believe the earlier than originally planned inclusion
of the NEO3-09 study data may support stronger product labeling as an outcome of
a first-cycle review of the Lymphoseek NDA and may also positively impact market
adoption.
26
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 to amend the filing in the U.S. for
expanded product labeling. Neoprobe expects to submit the NDA for
Lymphoseek during the first half of 2011. Depending on the timing of
the final pre-NDA meeting with FDA and the outcome of the FDA regulatory review
cycle, we believe that Lymphoseek could be commercialized in early
2012. We cannot assure you, however, that this product will achieve
regulatory approval, or if approved, that it will achieve market
acceptance.
RIGScan
CR
Over the
past few years, we have also 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. During 2008, we submitted and received
approval from EMEA for a plan to continue the clinical development 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.
Our
desire has been, and continues to be, to develop a clinical development plan
which is harmonized between the U.S. and the EU. To that end, during
December 2009 we submitted an IND amendment to FDA which included the design of
a proposed Phase 3 clinical trial of RIGScan CR. The IND amendment
included a Special Protocol Assessment (SPA) request in accordance with the
Prescription Drug User Fee Act of 1992 and current regulatory guidelines, and a
commitment to register on the clinicaltrials.gov website following discussions
with FDA regarding the SPA. Since filing the IND amendment and SPA
request, we have determined that due to differences in the current manufacturing
process from the process used in the 1990’s, a further amendment to the IND
should be filed addressing the differences. In addition, in October
2010, we filed a response letter to FDA related to the Agency’s complete
response letter to the open BLA from 1997. The review responsibility
for the RIGS BLA was recently transferred from CBER to the Division of Medical
Imaging Products in CDER at FDA. The submission of the BLA response
letter is the first of several near-term activities that Neoprobe intends to
complete with FDA to reactivate the development of the RIGS
technology. We intend to file a new IND request for the biologic
component of the RIGS technology. The IND request will be accompanied
by a synopsis of a revised proposed Phase 3 clinical trial
design. Once FDA has assigned a new IND, we will file the complete
protocol for FDA evaluation under the provisions of a SPA. A SPA
review of the prospective protocol is expected to provide a clear development
pathway for RIGS in 2011. As a result, we do not expect to receive
feedback from FDA on a RIGS SPA request until sometime in the first quarter of
2011.
The Phase
3 clinical study as currently envisioned would be a randomized clinical study
that would evaluate the ability of RIGScan CR to identify tumor-associated
tissue in a group of patients as compared to a group of patients provided with
traditional surgical care. Based on our current statistical analysis, we now
believe the sample size for the proposed Phase 3 clinical study would be
approximately 300 patients including both the RIGScan CR and traditional
treatment groups. The primary endpoint of the trial as proposed is the
assessment of the diagnostic ability of RIGScan CR to identify tumor-associated
tissue, with a secondary endpoint of the change of the treatment paradigm of the
RIGScan CR treated patients compared to patients treated with conventional
treatment modalities.
It should
also be noted that the RIGScan CR biologic drug has not been produced for
several years. We are in the process of performing drug
characterization work to ensure the drug cell line is still viable and submit
this data to EMEA and possibly FDA for their evaluation in connection with
preparations to restart pivotal clinical trials. During the third
quarter of 2009, we announced that we had executed a Biopharmaceutical
Development and Supply Agreement with Laureate Pharma, Inc. This
agreement will support the initial evaluation of the viability of the CC49
master working cell bank as well as the initial steps in re-validating the
commercial production process for the biologic agent used in RIGScan
CR. Laureate has made progress in the re-validation of the
manufacturing process and has completed preliminary biologic characterization
activities. They are expected to provide Neoprobe with GMP-produced
material to support non-clinical and clinical evaluation within the next few
months. In addition, we will need to re-establish radiolabeling
capabilities for the CC49 antibody in order to meet the regulatory needs for the
RIGScan CR product. We have also begun discussions with parties
capable of supporting such activities.
27
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 is very valuable, but we believe
clarifying the regulatory pathway in the U.S. is important for us and our
potential partners in assessing the full potential for RIGScan
CR. 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.
Activated
Cellular Therapy
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 which 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. We have been encouraged by recent media speculation
regarding the potential connection of a retrovirus with chronic fatigue syndrome
and the potential use of ACT to develop a treatment, which may stimulate some
interest in our ACT platform. 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
our gamma detection device products to contribute a net profit in 2010 for that
line of business, excluding general and administrative costs, interest and other
financing-related charges. Our overall operating results for 2010
will also be greatly affected by the increased level of development activity we
have conducted in 2010 to support our radiopharmaceutical
products. Primarily as a result of the significant development costs
we expect to incur related to the continued clinical development of Lymphoseek
and RIGScan CR, we do not expect to achieve overall operating profitability
during 2010. 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.
28
Results
of Operations
Revenue
for the first nine months of 2010 increased to $7.5 million from $7.1 million
for the same period in 2009. Research and development expenses, as a
percentage of net sales, increased to 92% during the first nine months of 2010
from 53% during the same period in 2009. Due to the ongoing
Lymphoseek and RIGScan CR development activities of the Company, research and
development expenses as a percentage of sales are expected to be higher in 2010
than they were in 2009. Selling, general and administrative expenses,
as a percentage of net sales, increased to 47% during the first nine months of
2010 compared to 35% during the same period in 2009.
Three
Months Ended September 30, 2010 and 2009
Net Sales and
Margins. Net sales, comprised primarily of sales of our gamma
detection systems, decreased $433,000, or 17%, to $2.1 million during the third
quarter of 2010 from $2.6 million during the same period in
2009. Gross margins on net sales increased to 71% of net sales for
the third quarter of 2010 compared to 64% of net sales for the same period in
2009.
Gamma
detection device sales decreased by $464,000, offset by increases of $23,000 and
$8,000 in extended warranty and service revenue, respectively. Of the
$464,000 decrease in gamma detection device sales, approximately $699,000 was
attributable to decreased sales volumes as sales volumes returned to a more
normal level in the third quarter of 2010 compared to unseasonably high sales
volumes that included initial stocking orders for new products in the third
quarter of 2009, offset by $235,000 attributable to increased sales
prices. The price at which we sold our gamma detection products to
our primary marketing partner, Devicor Medical Products, Inc. (Devicor), is
based on a percentage of the global average selling price (ASP) received by
Devicor and its affiliates on sales of Neoprobe products to end customers,
subject to a minimum floor price. Decreased unit sales volumes of our
wireless probes, high energy probes, corded probes, and accessories were offset
by increased sales prices of our control units, wireless probes, and corded
probes. The increase in gross margins on net product sales was due to
net changes in the product mix coupled with the impact of the increase in
control unit and wireless probe sales prices.
License and Grant
Revenue. License and other revenue for the third quarter of
both 2010 and 2009 included $25,000 from the pro-rata recognition of license
fees related to our distribution agreement with Devicor. License and
other revenue for the third quarter of 2010 also included $150,000 of grant
revenue related to grants awarded by the State of Ohio’s Third Frontier
program.
Research and Development
Expenses. Research and development expenses increased $1.4
million, or 113%, to $2.6 million during the third quarter of 2010 from $1.2
million during the same period in 2009. Research and development
expenses in the third quarter of 2010 included approximately (i) $2.5 million in
drug and therapy product development costs and (ii) $113,000 in gamma detection
device development costs. This compares to expenses of $985,000 and
$220,000 in these segment categories during the same period in
2009. The changes in drug and therapy product development costs were
primarily due to increased clinical activity costs of $480,000, process
development costs of $422,000, and regulatory consulting costs of $203,000
related to Lymphoseek; increased compensation costs of $144,000 related to
increased headcount; and increased license fees of $79,000, process development
costs of $31,000, and regulatory consulting costs of $19,000 related to RIGScan
CR. The changes in gamma detection device development costs were
primarily due to lower development costs related to our new high energy
detection probe which was launched in 2009 of $52,000 and lower compensation
costs of $24,000 related to decreased headcount and less time spent on device
development projects, offset by higher development costs related to other
product improvements of $7,000.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
increased $577,000, or 74%, to $1.4 million during the third quarter of 2010
from $779,000 during the same period in 2009. The increase was
primarily due to non-cash financial advisory fees related to the exchange of our
outstanding debt for preferred stock, and increased investor relations fees,
compensation costs, and space costs.
29
Other Income
(Expense). Other expense, net, was $86,000 during the third
quarter of 2010 compared to $22.9 million during the same period in
2009. During the third quarter of 2009, we recorded a $16.2 million
non-cash loss on extinguishment of debt related to changes in the terms of our
convertible debt, convertible preferred stock and the related warrants to
purchase our common stock. During the third quarters of 2010 and
2009, we recorded charges of $88,000 and $6.3 million, respectively, related to
the increase in the fair value of our derivative liabilities resulting from the
requirement to mark our derivative liabilities to market. Interest
expense, primarily related to the convertible debt agreements we completed in
December 2007 and April 2008 and extinguished in June 2010, decreased $330,000
to $1,000 during the third quarter of 2010 from $331,000 for the same period in
2009. Of this interest expense, $55,000 in the third quarter of 2009
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 $250,000 of interest expense in the third quarter
2009 was non-cash in nature due to the payment or accrual of interest on our
convertible debt with shares of our common stock.
Discontinued
Operations. During the third quarter of 2009, we made the
decision to discontinue operations of the blood flow measurement device segment
of our business as the segment was no longer considered a strategic initiative
to the Company. This determination was based in large part on
positive events in our other development initiatives. As a result, we
recorded an impairment loss related to discontinued operations of $1.7 million
during the third quarter of 2009. Total revenues from discontinued
operations were $5,000 and $9,000 in the third quarter of 2010 and 2009,
respectively. The net loss from discontinued operations was $47,000
and $52,000 for the third quarter of 2010 and 2009, respectively.
Nine
Months Ended September 30, 2010 and 2009
Net Sales and
Margins. Net sales, comprised primarily of sales of our gamma
detection systems, increased $302,000, or 4%, to $7.3 million during the first
nine months of 2010 from $7.0 million during the same period in
2009. Gross margins on net sales increased slightly to 68% of net
sales for the first nine months of 2010 compared to 67% of net sales for the
same period in 2009.
Gamma
detection device sales increased by $187,000 along with increases of $67,000 and
$49,000 in service and extended warranty revenue, respectively. Of
the $187,000 increase in gamma detection device sales, approximately $143,000
was attributable to increased sales prices and $44,000 was attributable to
increased sales volumes. The price at which we sell our gamma
detection products to Devicor is based on a percentage of the global ASP
received by Devicor and its affiliates on sales of Neoprobe products to end
customers, subject to a minimum floor price. Increased sales prices
and unit sales volumes of our wireless probes and control units, coupled with
increased unit prices of our corded probes, were offset by decreased unit sales
volumes of our high energy probes, corded probes, and
accessories. The slight increase in gross margins on net product
sales was due to net changes in the product mix coupled with the impact of the
increase in wireless probe and control unit sales prices.
License and Grant
Revenue. License and other revenue for the first nine months
of both 2010 and 2009 included $75,000 from the pro-rata recognition of license
fees related to the renewed distribution agreement with
Devicor. License and other revenue for the first nine months of 2010
also included $150,000 of grant revenue related to grants awarded by the State
of Ohio’s Third Frontier program.
Research and Development
Expenses. Research and development expenses increased $3.0
million, or 80%, to $6.7 million during the first nine months of 2010 from $3.7
million during the same period in 2009. Research and development
expenses in the first nine months of 2010 included approximately (i) $6.3
million in drug and therapy product development costs and (ii) $368,000 in gamma
detection device development costs. This compares to expenses of $2.9
million and $857,000 in these segment categories during the same period in
2009. The changes in drug and therapy product development costs were
primarily due to increased process development costs of $950,000, clinical
activity costs of $567,000, regulatory consulting costs of $299,000, and market
analysis costs of $217,000 related to Lymphoseek; increased compensation costs
of $463,000 related to increased headcount and incentive-based compensation; and
increased process development costs of $438,000, market analysis costs of
$108,000, license fees of $62,000, and regulatory consulting costs of $26,000
related to RIGScan CR. The changes in gamma detection device
development costs were primarily due to higher compensation costs of $46,000
related to increased incentive-based compensation, offset by lower development
costs related to our new high energy detection probe which was launched in 2009
of $119,000 and lower development costs related to various other product
improvements of $18,000.
30
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
increased $984,000, or 41%, to $3.4 million during the first nine months of 2010
from $2.4 million during the same period in 2009. The increase was
primarily due to non-cash financial advisory fees related to the exchange of our
outstanding debt for preferred stock, and increased investor relations fees,
compensation costs, and space costs.
Other Income
(Expense). Other expense, net, was $42.9 million during the
first nine months of 2010 compared to $36.0 million during the same period in
2009. During the first nine months of 2010, we recorded a loss on the
extinguishment of debt of $41.7 million related to the exchange of our
outstanding convertible debt for convertible preferred stock. During
the first nine months of 2009, we recorded a $16.2 million non-cash loss on
extinguishment of debt related to changes in the terms of our convertible debt,
convertible preferred stock and the related warrants to purchase our common
stock. During the first nine months of 2010 and 2009, we recorded
charges of $671,000 and $18.5 million, respectively, related to the increase in
the fair value of our derivative liabilities resulting from the requirement to
mark our derivative liabilities to market. Interest expense,
primarily related to the convertible debt agreements we completed in December
2007 and April 2008 and extinguished in June 2010, decreased $696,000 to
$554,000 during the first nine months of 2010 from $1.2 million for the same
period in 2009. Of this interest expense, $16,000 and $420,000 in the
first nine months of 2010 and 2009, respectively, were 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 $403,000 and $667,000 of interest expense in the first nine months of
2010 and 2009, respectively, was non-cash in nature due to the payment or
accrual of interest on our convertible debt with shares of our common
stock.
Discontinued
Operations. During the third quarter of 2009, we made the
decision to discontinue operations of the blood flow measurement device segment
of our business as the segment was no longer considered a strategic initiative
to the Company. This determination was based in large part on
positive events in our other development initiatives. As a result, we
recorded an impairment loss related to discontinued operations of $1.7 million
during the third quarter of 2009. Total revenues from discontinued
operations were $42,000 and $82,000 in the first nine months of 2010 and 2009,
respectively. The net loss from discontinued operations was $60,000
and $163,000 for the first nine months of 2010 and 2009,
respectively.
Liquidity
and Capital Resources
Cash
balances decreased to $2.6 million at September 30, 2010 from $5.6 million at
December 31, 2009. The net decrease was primarily due to cash used to
fund our operations, mainly for research and development activities, partially
offset by cash received for the issuance of common stock related to a stock
purchase agreement.
Operating
Activities. Cash used in operations increased $2.4 million to
$3.7 million during the first nine months of 2010 compared to $1.2 million
during the same period in 2009.
Accounts
receivable increased slightly to $1.4 million at September 30, 2010 from $1.3
million at December 31, 2009. The increase was primarily a result of
normal fluctuations in timing of purchases and payments by our primary
customers. We expect overall receivable levels will continue to
fluctuate during the remainder of 2010 depending on the timing of purchases and
payments by our customers.
31
Inventory
levels increased to $2.0 million at September 30, 2010 from $1.1 million at
December 31, 2009. Gamma detection device materials and finished
goods inventory levels increased as we have increased our product safety stock
levels to ensure efficient and uninterrupted supply of our products to our
distribution partners. During the first nine months of 2010, we
capitalized $741,000 of pharmaceutical materials related to our Lymphoseek
product. During the first nine months of 2010, we expensed $351,000
of previously capitalized pharmaceutical materials to research and development
as they were no longer considered to be usable in the production of future
saleable drug product inventory. We expect inventory levels to
decrease somewhat over the remainder of 2010.
Accounts
payable increased to $2.0 million at September 30, 2010 from $764,000 at
December 31, 2009. The increase was primarily due to increased
clinical, regulatory, and manufacturing activities related to advancing our
Lymphoseek and RIGScan initiatives.
Investing Activities.
Investing activities used $366,000 of cash during the first nine months
of 2010 compared to providing $353,000 during the same period in
2009. Available-for-sale securities of $494,000 matured during the
first nine months of 2009. Capital expenditures of $354,000 during
the first nine months of 2010 were primarily for equipment to be used in the
production of Lymphoseek, office furniture, software, and
computers. Capital expenditures of $75,000 during the first nine
months of 2009 were primarily for computers, software, and production and
laboratory equipment. We expect our overall capital expenditures for
2010 will be higher than 2009 as we continue to build our commercial production
capability for Lymphoseek. Payments for patent and trademark costs
decreased to $12,000 during the first nine months of 2010 compared to $66,000
during the same period in 2009.
Financing
Activities. Financing activities provided $998,000 of cash
during the first nine months of 2010 compared to $3.3 million provided during
the same period in 2009. The $998,000 provided by financing
activities in the first nine months of 2010 consisted primarily of proceeds from
the issuance of common stock of $1.1 million, offset by payments of stock
offering costs of $86,000 and payments of capital leases of
$9,000. The $3.3 million provided by financing activities in the
first nine months of 2009 consisted primarily of proceeds from the issuance of
common stock of $3.6 million, offset by payments of notes payable of $138,000,
payments of stock offering costs of $111,000, payments of debt issuance costs of
$20,000, and payments of capital leases of $7,000. We do not rely to
any material extent on short-term borrowings for working capital or to fund our
operations.
In
December 2006, we entered into a common stock purchase agreement with Fusion
Capital Fund II, LLC (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. Upon execution of the agreement, we
issued to Fusion Capital 720,000 shares of our common stock as a commitment
fee. Through November 2008, we sold to Fusion Capital under the
agreement 7,568,671 shares for proceeds of $1.9 million. 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 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. 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 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 March
2010, we sold to Fusion Capital under the amended agreement 540,541 shares for
proceeds of $1.0 million and issued an additional 120,000 shares of our common
stock to Fusion Capital as an additional commitment fee related to the
sale. Subsequent to this sale, the remaining aggregate amount of our
common stock we can sell to Fusion Capital is $9.1 million, and we have reserved
a total of 10,113,459 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.
On June
25, 2010, we entered into a Securities Exchange Agreement with Montaur, pursuant
to which Montaur exchanged the Montaur Notes and the Series A Preferred Stock
for 10,000 shares of Series B Convertible Preferred Stock (the Series B
Preferred Stock), convertible into 32,700,000 shares of common
stock. The Series B Preferred Stock is convertible at the option of
Montaur, carries no dividend requirements and participates equally with our
common stock in liquidation proceeds based upon the number of common shares into
which the Series B Preferred Stock is then convertible. As
consideration for the exchange, Neoprobe issued additional Series B Preferred
Stock which is convertible into 1.3 million shares of common
stock. Also on June 25, 2010, we entered into a Securities Exchange
Agreement with the Bupp Investors, pursuant to which the Bupp Investors
exchanged the Amended Bupp Note for 1,000 shares of Series C Convertible
Preferred Stock (the Series C Preferred Stock), convertible into 3,226,000
shares of common stock. The Series C Preferred Stock has a 10%
dividend rate, payable quarterly until December 31, 2011, and participates
equally with our common stock in liquidation proceeds based upon the number of
common shares into which the Series C Preferred Stock is then
convertible. The exchange of the Montaur Notes, the Series A
Preferred Stock and the Amended Bupp Note were treated as extinguishments for
accounting purposes. As a result of these exchange transactions, all
security interests in the Company’s assets held by Montaur and the Bupp
Investors were extinguished.
32
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 complete additional clinical testing for Lymphoseek
and to file the NDA shortly after completion of the trial. We believe
our current funds, including $5.5 million in net proceeds from our recently
completed financing and including grant awards totaling over $1.2 million
expected to be received during the remainder of 2010 and 2011, will be adequate
to sustain our operations at planned levels for the foreseeable
future. We are in the process of determining the total development
cost necessary to commercialize RIGScan CR but believe that it will require
total additional 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 our EMEA scientific advice response. We expect
to use currently available funds to continue the initial steps of restarting
manufacturing of RIGScan CR; however, we still intend to involve a partner in
the longer-term development of RIGScan CR. In August 2010, we filed a
shelf registration on Form S-3 registering the potential sale of up to $20
million in a primary offering of common stock and/or warrants of the Company,
and recently closed on the sale of common stock and warrants pursuant
to the shelf registration resulting in approximately $5.5 million in net
proceeds to the Company. We may also be able to raise additional
funds under the shelf registration or through our stock purchase agreement
with Fusion Capital to supplement our capital needs. However, the
extent to which we sell any additional securities under the shelf registration
or 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 obtain regulatory approval for and commercialize new 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
January 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2010-6, Improving Disclosures about Fair
Value Measurements. ASU 2010-6 amends FASB ASC Topic 820,
Fair Value Measurements and
Disclosures. ASU 2010-6 requires new disclosures as follows:
(1) Transfers in and out of Levels 1 and 2 and (2) Activity in Level 3 fair
value measurements. An entity should disclose separately the amounts
of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. In the
reconciliation of fair value measurements using significant unobservable inputs
(Level 3), an entity should present separately information about purchases,
sales, issuances, and settlements (that is, on a gross basis rather than as one
net number). ASU 2010-6 also clarifies existing disclosures as
follows: (1) Level of disaggregation and (2) Disclosures about inputs
and valuation techniques. An entity should provide fair value
measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. An entity needs to use judgment in
determining the appropriate classes of assets and liabilities. An
entity should provide disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value
measurements that fall in either Level 2 or Level 3. ASU 2010-6 is
effective for interim and annual reporting periods beginning after December 15,
2009, except for the separate disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. We adopted the initial provisions of ASU 2010-6 beginning
January 1, 2010. As the new provisions of ASU 2010-6 provide only
disclosure requirements, the adoption of this standard did not impact our
consolidated financial position, results of operations or cash flows, but did
result in increased disclosures.
33
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. 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. Our customers
have no right to return products purchased in the ordinary course of
business.
The
prices we charge our primary customer, Devicor, related to sales of products are
subject to retroactive annual adjustment based on a fixed percentage of the
actual sales prices achieved by Devicor on sales to end customers made during
each fiscal year. To the extent that we can reasonably estimate the
end-customer prices received by Devicor, we record sales to Devicor based upon
these estimates. If we are unable to reasonably estimate end customer
sales prices related to certain products sold to Devicor, we record revenue
related to these product sales at the minimum (i.e., floor) price provided for
under our distribution agreement with Devicor.
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.
Revenue Recognition Related to
Grants. We generate additional revenue from grants to support
various product development initiatives. We generally recognize grant
revenue when expenses reimbursable under the grants have been incurred and
payments under the grants become contractually due.
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:
34
|
·
|
Stock-Based
Compensation. Stock-based payments to employees and
directors, including grants of stock options, are recognized in the
statement of operations based on their estimated fair
values. 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. Compensation cost arising from
stock-based awards is recognized as expense using the straight-line method
over the vesting period.
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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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·
|
Impairment or Disposal of
Long-Lived Assets. Long-lived assets and certain
identifiable intangibles are 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.
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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. Devicor 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. Derivative instruments embedded in
contracts, to the extent not already a free-standing contract, are
bifurcated from the debt instrument and accounted for
separately. All derivatives are recorded on the consolidated
balance sheet at fair value in accordance with current accounting
guidelines for such complex financial instruments. 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. Unrealized
gains and losses on the derivatives are classified in other expenses as a
change in derivative liabilities in the statements of
operations. We do not use derivative instruments for hedging of
market risks or for trading or speculative
purposes.
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable.
Item
4T. Controls and Procedures
Disclosure
Controls and Procedures
35
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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pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
·
|
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
|
|
·
|
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 September 30,
2010. 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.
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 September 30, 2010, 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.
36
PART
II - OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
|
(a)
|
During
the three-month period ended September 30, 2010, a Bupp Investor exercised
120,000 Series V Warrants in exchange for issuance of 120,000 shares of
our common stock, resulting in gross proceeds of $37,200. Also
during the three-month period ended September 30, 2010, certain outside
investors exercised a total of 60,000 Series Z Warrants on a cashless
basis in exchange for issuance of 37,778 shares of our common
stock. The issuances of the
shares were exempt from registration under Sections 4(2) and 4(6) of the
Securities Act and Regulation D. The
Bupp Investor and outside investors referred to above are each accredited
investors as defined in Rule 501(a) of Regulation D, and each was fully
informed regarding the investment. In addition, neither the
Company, nor anyone acting on its behalf, offered or sold these securities
by any form of general solicitation or general
advertising.
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|
(b)
|
During
the three-month period ended September 30, 2010, we issued five-year
Series BB Warrants to purchase 300,000 shares of our common stock at an
exercise price of $2.00 per share to an investment advisory firm in
connection with a consulting agreement. The
issuance of the warrants was exempt from registration under Sections 4(2)
and 4(6) of the Securities Act and Regulation D. The
investment advisory firm is an accredited investor as defined in Rule
501(a) of Regulation D, and was fully informed regarding the
investment. In addition, neither the Company, nor anyone acting
on its behalf, offered or sold these securities by any form of general
solicitation or general
advertising.
|
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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31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
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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.*
|
|
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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, 2009, and this item has
therefore been omitted.
37
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:
November 15, 2010
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|||
|
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)
|
|||
38