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EX-5.1 - NAVIDEA BIOPHARMACEUTICALS, INC. | v170098_ex5-1.htm |
EX-24.1 - NAVIDEA BIOPHARMACEUTICALS, INC. | v170098_ex24-1.htm |
EX-21.1 - NAVIDEA BIOPHARMACEUTICALS, INC. | v170098_ex21-1.htm |
EX-23.1 - NAVIDEA BIOPHARMACEUTICALS, INC. | v170098_ex23-1.htm |
As filed
with the Securities and Exchange Commission on December 29, 2009
Registration
No. 333-_________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
NEOPROBE
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
2835
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31-1080091
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
standard industrial
classification
code number)
|
(IRS
employer
identification
number)
|
425 Metro Place North, Suite 300
Dublin,
Ohio 43017-1367
(614)
793-7500
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Brent L.
Larson, Vice President, Finance and
Chief
Financial Officer
Neoprobe
Corporation
425 Metro
Place North, Suite 300
Dublin,
Ohio 43017-1367
(614)
793-7500
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
William
J. Kelly, Jr., Esq.
Porter,
Wright, Morris & Arthur LLP
41 South
High Street
Columbus,
Ohio 43215
Telephone
No. (614) 227-2136
Telecopier
No. (614) 227-2100
wjkelly@porterwright.com
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after this Registration Statement is declared effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. x
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of “large 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
|
(Do
not check if a smaller reporting company)
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities to be
Registered
|
Amount to be
Registered
|
Proposed Maximum
Offering Price Per Unit
(1)
|
Proposed Maximum
Offering Price (1)
|
Amount of Registration
Fee
|
||||||||||||
Common
Stock, par
value $.001 per share |
15,500,000 | $ | 1.07 | $ | 16,585,000 | $ | 1,183.00 |
(1)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(c) under the Securities Act of 1933, using the average of the
high and low price as reported on the OTC Bulletin Board on December 28,
2009, which was $1.07 per share.
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT
TO COMPLETION, DATED DECEMBER 29, 2009.
The
information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and we are not soliciting offers to buy
these securities in any state where the offer or sale is not
permitted.
PROSPECTUS
NEOPROBE
CORPORATION
15,500,000
Shares of Common Stock
This
prospectus relates to the sale of up to 15,500,000 shares of our common stock by
a person who has purchased shares of our common stock or who may purchase shares
of our common stock through the conversion of debt, the conversion of shares of
our preferred stock or the exercise of warrants as more fully described
herein. The aforementioned person is sometimes referred to in this
prospectus as the selling stockholder. The prices at which the
selling stockholder may sell the shares will be determined by the prevailing
market price for the shares or in negotiated transactions. We will
not receive proceeds from the sale of our shares by the selling
stockholder.
Our
common stock is quoted on the OTC Bulletin Board under the symbol
NEOP. On December 28, 2009, the last reported sale price for our
common stock as reported on the OTC Bulletin Board was $1.05 per
share.
THE
SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CONSIDER THE RISK FACTORS BEGINNING ON PAGE 5 BEFORE
PURCHASING OUR COMMON STOCK.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
[The date
of this prospectus is December __, 2009.]
Table
of Contents
2
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|
Risk
Factors
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5
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Cautionary
Note Regarding Forward-Looking Statements
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16
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Use
of Proceeds
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16
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Market
for Common Equity and Related Stockholder Matters
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17
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Description
of Business
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18
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Description
of Property
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33
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Management’s
Discussion and Analysis of Financial Condition and
Results of Operations
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33
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Our
Management
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47
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Security
Ownership of Certain Beneficial Owners and Management
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56
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Certain
Relationships and Related Transactions
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58
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Description
of Capital Stock
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59
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Acquisition
of Common Stock by Selling Stockholder
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61
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Selling
Stockholder
|
69
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Plan
of Distribution
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70
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Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
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71
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Legal
Opinion
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72
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Experts
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72
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72
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Index
to Financial Statements
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F-1
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Unless
otherwise specified, the information in this prospectus is set forth as of
December 29, 2009, and we anticipate that changes in our affairs will occur
after such date. We have not authorized any person to give any
information or to make any representations, other than as contained in this
prospectus, in connection with the offer contained in this
prospectus. If any person gives you any information or makes
representations in connection with this offer, do not rely on it as information
we have authorized. This prospectus is not an offer to sell our
common stock in any state or other jurisdiction to any person to whom it is
unlawful to make such offer.
1
PROSPECTUS
SUMMARY
The
following summary highlights selected information from this prospectus and may
not contain all the information that is important to you. To understand our
business and this offering fully, you should read this entire prospectus
carefully, including the financial statements and the related notes beginning on
page F-1. When we refer in this prospectus to the “company,” “we,” “us,” and
“our,” we mean Neoprobe Corporation, a Delaware corporation, together with our
subsidiaries. This prospectus contains forward-looking statements and
information relating to Neoprobe Corporation. See Cautionary Note
Regarding Forward Looking Statements on page 17.
Our
Company
Neoprobe
Corporation (Neoprobe, the company or we) is a biomedical company that develops
and commercializes innovative oncology products that enhance patient care and
improve patient outcome. We were originally incorporated in Ohio in
1983 and reincorporated in Delaware in 1988. Our executive offices
are located at 425 Metro Place North, Suite 300, Dublin, Ohio
43017. Our telephone number is (614) 793-7500.
From our
inception through 1998, we devoted substantially all of our efforts and
resources to the research and clinical development of radiopharmaceutical and
medical device technologies related to the intraoperative diagnosis and
treatment of cancers, including our proprietary radioimmunoguided surgery
(RIGS®)
technology. In 1998, U.S. and European regulatory agencies completed
an evaluation of the status of the regulatory pathway for our RIGS products,
which coupled with our limited financial resources at the time, caused us to
suspend our radiopharmaceutical development activities and refocus our operating
strategy on our medical device business. After achieving
profitability in the fourth quarter of 1999 following this retrenchment, we
expanded our medical device offerings in 2002 through the acquisition of an
Israeli company that was developing a line of blood flow measurement
devices.
Although
we had expanded our strategic focus with the addition of medical devices outside
the oncology field, we continued to look for other avenues to reinvigorate our
radiopharmaceutical development portfolio. In 2004, our efforts
resulted in a number of positive events that caused us to take steps to
re-activate our radiopharmaceutical and therapeutic initiatives. As a
result of our efforts since 2004, we now have submitted data from a Phase 3
clinical trial of one of our radiopharmaceutical products, Lymphoseek®, to the
U.S. Food and Drug Administration (“FDA”) for review and we are enrolling
patients in a second Phase 3 clinical trial intended to further support and
expand our proposed product labeling for Lymphoseek. Interest in, and
activity related to, our second radiopharmaceutical product, RIGScan® CR, has
also increased significantly in recent years as we sought, and subsequently
received, formal scientific advice in 2008 from the European Medicinal
Evaluation Agency (“EMEA”) regarding our regulatory and clinical development
plans for RIGScan CR. We have taken steps during the fourth quarter
of 2009 to obtain similar feedback from FDA through the submission of a
pre-Phase 3 meeting request and Special Protocol Assessment (SPA)
request. Our subsidiary, Cira Biosciences, Inc. (“Cira Bio”)is
evaluating the market opportunities for yet another technology platform,
activated cellular therapy (“ACT”). The success we have been
experiencing in recent years related to our drug development activities caused
us, during 2009, to re-evaluate our product initiatives and
strategies. As a result of this evaluation, we made the decision during the
third quarter of 2009 to discontinue the operations of our blood flow
measurement device product line and to attempt to divest our Cardiosonix Ltd.
subsidiary. We believe this decision will allow us to better focus on
our oncology-related development platforms as we approach several key milestones
in the coming twelve to eighteen months.
We
believe that our virtual business model is unique within our industry as we
combine revenue generation from medical devices covering our public company
overhead while we devote capital raised through financing efforts to the
development of products such as Lymphoseek which possess even greater potential
for shareholder return. In addition, we have sought to maintain a
development pipeline with additional longer-term return potential such as
RIGScan CR and ACT that provide the opportunity for incremental return on the
achievement of key development and funding milestones.
2
The
Offering
On
December 26, 2007, we entered into a Securities Purchase Agreement (“SPA”) with
Platinum-Montaur Life Sciences, LLC (“Montaur”), pursuant to which we issued
Montaur a 10% Series A Convertible Senior Secured Promissory Note in the
principal amount of $7,000,000, due December 26, 2011 (the “Series A Note”) and
a five-year Series W warrant to purchase 6,000,000 shares of our common stock,
$.001 par value per share (“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. Closing of the second and third tranches were subject to the
satisfaction by the Company of certain milestones related to the progress of the
Company’s Phase 3 clinical trials of the Company’s Lymphoseek
radiopharmaceutical product.
On April
16, 2008, following receipt by the Company of clearance by the FDA to commence a
Phase 3 clinical trial for Lymphoseek in patients with breast cancer or
melanoma, we amended the SPA related to the second tranche and issued Montaur a
10% Series B Convertible Senior Secured Promissory Note in the principal amount
of $3,000,000, also due December 26, 2011 (the “Series B Note,” and hereinafter
referred to collectively with the Series A Note as the “Montaur Notes”), and a
five-year Series X warrant to purchase 8,333,333 shares of our Common Stock at
an exercise price of $0.46 per share.
On
December 5, 2008, after the Company obtained 135 vital blue dye lymph nodes from
patients who had completed surgery and the injection of the drug in a Phase 3
clinical trial of Lymphoseek in patients with breast cancer or melanoma, we
issued Montaur 3,000 shares of our 8% Series A Cumulative Convertible Preferred
Stock (the “Preferred Stock”) and a five-year Series Y warrant (hereinafter
referred to collectively with the Series W warrant and Series X warrant as the
“Montaur Warrants”) to purchase 6,000,000 shares of our Common Stock, at an
exercise price of $0.575 per share, also for an aggregate purchase price of
$3,000,000.
On July
24, 2009, we entered into a Securities Amendment and Exchange Agreement (the
“Amendment Agreement”) with Montaur, pursuant to which Montaur agreed to the
amendment and restatement of the terms of the Montaur Notes, the Montaur
Warrants and the Preferred Stock, to remove price-based anti-dilution adjustment
provisions that had created a significant non-cash derivative liability on the
Company’s balance sheet. Upon the surrender of the Montaur Notes and the Montaur
Warrants, the Company issued to Montaur: (a) the Company’s Amended and Restated
10% Series A Convertible Senior Secured Promissory Note in the principal amount
of $7,000,000, due December 26, 2011 (the “Amended Series A Note”); (b) the
Company’s Amended and Restated 10% Series B Convertible Senior Secured
Promissory Note in the principal amount of $3,000,000, due December 26, 2011
(the “Amended Series B Note,” and together with the Amended Series A Note, the
“Amended Montaur Notes”); (c) the Company’s Amended and Restated
Series W Warrant to purchase shares of common stock of the Company (the “Amended
Series W Warrant”); (d) the Company’s Amended and Restated Series X Warrant to
purchase shares of common stock of the Company (the “Amended Series X Warrant”);
(e) the Company’s Amended and Restated Series Y Warrant to purchase shares of
common stock of the Company (the “Amended Series Y Warrant”); and (f) in consideration for the
agreement of Montaur to enter into the Amendment Agreement, a Series AA Warrant
to purchase 2,400,000 shares of our common stock at an exercise price of $0.97
per share (the “Series AA Warrant,” and together with the Amended Series
W Warrant, the Amended Series X Warrant, and the Amended Series Y Warrant, the
“Amended Montaur Warrants”).
3
Montaur
may convert the full $7,000,000 principal amount of the Amended Series A Note
into shares of Common Stock in two tranches. Montaur may convert the first
tranche of up to $3,500,000 of the outstanding principal balance of the Amended
Series A Note at the conversion price of $0.26 per share, and a second tranche
of the remaining $3,500,000 of the outstanding principal balance of the Amended
Series A Note at the conversion price of $0.9722 per share. Montaur may convert
the Amended Series B Note into shares of Common Stock at the conversion price of
$0.36 per share. Provided we have satisfied certain conditions stated therein,
we may elect to make payments of interest due under the Amended Montaur Notes in
registered shares of Common Stock. If we choose to make interest payments in
shares of Common Stock, the number of shares of Common Stock to be applied
against any such interest payment will be determined by reference to the
quotient of (a) the applicable interest payment divided by (b) 90% of the
average daily volume weighted average price of our Common Stock on the OTC
Bulletin Board (or national securities exchange, if applicable) as reported by
Bloomberg Financial L.P. for the five days upon which our Common Stock is traded
on the OTC Bulletin Board immediately preceding the date of the interest
payment.
Montaur
may convert each share of the Preferred Stock into a number of shares of our
common stock equal to the quotient of: (1) the Liquidation Preference Amount of
the shares of Preferred Stock by; (2) the Conversion Price. The “Liquidation
Preference Amount” for the Preferred Stock is $1,000 and the “Conversion Price”
of the Preferred Stock was set at $0.50 on the date of issuance, thereby making
the shares of Preferred Stock convertible into an aggregate 6,000,000 shares of
our Common Stock, subject to adjustment as
described in the Certificate of Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series A 8% Cumulative
Convertible Preferred Stock. We may elect to pay dividends due to Montaur
on the shares of Preferred Stock in registered shares of Common Stock. The
number of shares of Common Stock to be applied against any such dividend payment
will be determined by reference to the quotient of (a) the applicable dividend
payment by (b) 90% of the average daily volume weighted average price of our
Common Stock on the OTC Bulletin Board (or national securities exchange, if
applicable) as reported by Bloomberg Financial L.P. for the five days upon which
our Common Stock is traded on the OTC Bulletin Board immediately preceding the
date of the dividend payment.
Pursuant
to the terms of a Registration Rights Agreement, dated December 26, 2007, as
amended by the Amendment to Registration Rights Agreement, dated February 7,
2008, Second Amendment to Registration Rights Agreement, dated April 16, 2008,
Third Amendment to Registration Rights Agreement, dated July 10, 2008, Fourth
Amendment to Registration Rights Agreement, dated December 5, 2008, and Fifth
Amendment to Registration Rights Agreement, dated December 21, 2009, we have
agreed to register the resale of: (i) up to 3,600,000 shares issuable upon the
conversion of a portion of the Amended Series A Note; (ii) the 6,000,000 shares
of Common Stock issued upon exercise of the Amended Series Y Warrant; (iii)
3,500,000 shares of Common Stock issuable as interest or dividends on the
Amended Montaur Notes and the Preferred Stock; and (iv) 2,400,000 shares
issuable upon exercise of the Series AA Warrant, provided that the total number
of shares of Common Stock registered does not exceed 15,500,000. Additionally,
we have agreed that within thirty-five days of receipt from Montaur of written
request therefor, we will prepare and file an additional “resale” registration
statement providing for the resale of: (i) the remaining shares of Common Stock
issuable upon the conversion of the Amended Series A Note; (ii) the shares of
Common Stock issuable upon the exercise of the Amended Series W Warrant; (iii)
the shares of Common Stock issuable upon the conversion of the Amended Series B
Note; (iv) the shares of Common Stock issuable upon the exercise of the Amended
Series X Warrant; and (v) the shares of Common Stock issuable upon conversion of
the Preferred Stock, provided, however, that we are not required to file such
additional registration statement, or may exclude shares from such additional
registration statement, if we believe in good faith, based upon advice from the
Securities and Exchange Commission’s Staff, that application of Rule 415 would
not permit registration of all or the excluded portion of such shares. This
prospectus covers the resale of up to: (i) 3,600,000 shares issuable upon the
conversion of a portion of the Amended Series A Note; (ii) 6,000,000 shares of
Common Stock issued upon exercise of the Amended Series Y Warrant; (iii)
3,500,000 shares of Common Stock issued or issuable as interest or dividends on
the Amended Montaur Notes and the Preferred Stock; and (iv) 2,400,000 shares
issuable upon exercise of the Series AA Warrant, for a total of
15,500,000 shares.
An
investment in our common stock is highly speculative and involves a high degree
of risk. See Risk Factors beginning on page 5.
4
RISK
FACTORS
An
investment in our common stock is highly speculative, involves a high degree of
risk, and should be made only by investors who can afford a complete
loss. You should carefully consider the following risk factors,
together with the other information in this prospectus, including our financial
statements and the related notes, before you decide to buy our common
stock. Our most significant risks and uncertainties are described
below; however, they are not the only risks we face. If any of the
following risks actually occur, our business, financial condition, or results of
operations could be materially adversely affected, the trading of our common
stock could decline, and you may lose all or part of your investment
therein.
We
have suffered significant operating losses for several years in our history and
we may not be able to again achieve profitability.
We had an
accumulated deficit of approximately $192 million and had an overall deficit in
stockholders’ equity as of September 30, 2009. Although we were
profitable in 2000 and 2001, we incurred substantial losses in the years prior
to that, and again in subsequent years. The deficit resulted because
we expended more money in the course of researching, developing and enhancing
our technology and products and establishing our marketing and administrative
organizations than we generated in revenues. We expect to continue to
incur significant expenses in the foreseeable future, primarily related to the
completion of development and commercialization of Lymphoseek, but also
potentially related to RIGS and our device product lines. As a
result, we are sustaining substantial operating and net losses, and it is
possible that we will never be able to sustain or develop the revenue levels
necessary to again attain profitability.
Our
products and product candidates may not achieve the broad market acceptance they
need in order to be a commercial success.
Widespread
use of our handheld gamma detection devices is currently limited to one surgical
procedure, sentinel lymph node biopsy (SLNB), used in the diagnosis and
treatment of two primary types of cancer: melanoma and breast
cancer. While the adoption of SLNB within the breast and melanoma
indications appears to be widespread, we believe expansion of SLNB to other
indications such as head and neck, colorectal and prostate cancers is likely
dependent on a better lymphatic tissue targeting agent than is currently
available. Without expanded indications in which to apply SLNB, it is
likely that gamma detection devices will eventually reach market
saturation. Our efforts and those of our marketing and distribution
partners may not result in significant demand for our products, and the current
demand for our products may decline.
Our
radiopharmaceutical product candidates, Lymphoseek and RIGScan CR, are still in
the process of development, and even if we are successful in commercializing
them, we cannot assure you that they will obtain significant market
acceptance.
We
may have difficulty raising additional capital, which could deprive us of
necessary resources.
We expect
to continue to devote significant capital resources to fund research and
development and to maintain existing and secure new manufacturing
capacity. In order to support the initiatives envisioned in our
business plan, we may need to raise additional funds through the sale of assets,
public or private debt or equity financing, collaborative relationships or other
arrangements. Our ability to raise additional financing depends on
many factors beyond our control, including the state of capital markets, the
market price of our common stock and the development or prospects for
development of competitive technology by others. Because our common
stock is not listed on a major stock market, many investors may not be willing
or allowed to purchase it or may demand steep discounts. Sufficient
additional financing may not be available to us or may be available only on
terms that would result in further dilution to the current owners of our common
stock.
We
believe that we have access to sufficient financial resources with which to fund
our operations or those of our subsidiaries for the foreseeable
future. We expect to raise additional capital during 2009 through
existing financing facilities already available to us in order to continue
executing on our current business plan. The continuation of the
current worldwide financial crisis and depressed stock market valuations may
adversely affect our ability to raise additional capital, either under
facilities in place or from new sources of capital. If we are
unsuccessful in raising additional capital, closing on financing under already
agreed to terms, or the terms of raising such capital are unacceptable, we may
have to modify our business plan and/or significantly curtail our planned
development activities and other operations.
5
In
December 2006, we entered into a common stock purchase agreement with Fusion
Capital, an Illinois limited liability company, to sell $6.0 million of our
common stock over a 24-month period which ended on November 21,
2008. Through November 21, 2008, we sold Fusion Capital under the
agreement 7,568,671 shares for proceeds of $1.9 million. In December
2008, we entered into an amendment to the agreement which gave us a right to
sell an additional $6.0 million of our common stock to Fusion Capital before
March 1, 2011, along with the $4.1 million of the unsold balance of the $6.0
million we originally had the right to sell to Fusion Capital under the original
agreement. After giving effect to this amendment, the remaining
aggregate amount of our common stock we can sell to Fusion Capital is $10.1
million, and we have reserved a total of 10,654,000 shares of our common stock
for sale under the amended agreement. Our right to make sales under
the agreement is limited to $50,000 every two business days, unless our stock
price equals or exceeds $0.30 per share, in which case we can sell greater
amounts to Fusion Capital as the price of our common stock
increases. Fusion Capital does not have the right or any obligation
to purchase any shares on any business day that the market price of our common
stock is less than $0.20 per share. Assuming all 10,654,000 shares
are sold, the selling price per share would have to average approximately $0.94
for us to receive the full $10.1 million remaining proceeds under the agreement
as amended. Assuming we sell to Fusion Capital all 10,654,000 shares
at a sale price of $1.05 per share (the closing sale price of the common stock
on December 28, 2009), we would receive the full remaining $10.1 million under
the agreement. Under the agreement, we have the right but not the
obligation to sell more than the 10,654,000 shares to Fusion
Capital. As of the date hereof, we do not currently have any plans or
intent to sell to Fusion Capital any shares beyond the 10,654,000
shares. However, if we elect to sell more than the 10,654,000 shares,
we must first register any additional shares we may elect to sell to Fusion
Capital under the Securities Act before we can sell such additional
shares.
The
extent to which we rely on Fusion Capital as a source of funding will depend on
a number of factors, including the prevailing market price of our common stock
and the extent to which we are able to secure working capital from other
sources, such as through the sale of our products. To the extent that
we are unable to make sales to Fusion Capital to meet our capital needs, or to
the extent that we decide not to make such sales because of excessive dilution
or other reasons, and if we are unable to generate sufficient revenues from
sales of our products, we will need to secure another source of funding in order
to satisfy our working capital needs. Even if we are able to access
the full $10.1 million potentially remaining under the agreement with Fusion
Capital, we may still need additional capital to fully implement our business,
operating and development plans. Should the financing we require to
sustain our working capital needs be unavailable or prohibitively expensive when
we require it, the consequences could be a material adverse effect on our
business, operating results, financial condition and prospects.
Clinical
trials for our radiopharmaceutical product candidates will be lengthy and
expensive and their outcome is uncertain.
Before
obtaining regulatory approval for the commercial sale of any product candidates,
we must demonstrate through preclinical testing and clinical trials that our
product candidates are safe and effective for use in
humans. Conducting clinical trials is a time consuming, expensive and
uncertain process and may take years to complete. During 2009, we
successfully completed a Phase 3 clinical trial in patients with breast cancer
or melanoma for our most advanced radiopharmaceutical product candidate,
Lymphoseek. We are in the process of completing a second Phase 3
trial for this product in patients with head and neck squamous cell
carcinoma. In late 2008, we obtained approval from EMEA for a Phase 3
clinical protocol for our next radiopharmaceutical candidate, RIGScan CR, and
are preparing to approach FDA to obtain similar
clearance. Historically, the results from preclinical testing and
early clinical trials have often not been predictive of results obtained in
later clinical trials. Frequently, drugs that have shown promising
results in preclinical or early clinical trials subsequently fail to establish
sufficient safety and efficacy data necessary to obtain regulatory
approval. At any time during the clinical trials, we, the
participating institutions, FDA or EMEA might delay or halt any clinical trials
for our product candidates for various reasons, including:
6
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·
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ineffectiveness
of the product candidate;
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·
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discovery
of unacceptable toxicities or side
effects;
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·
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development
of disease resistance or other physiological
factors;
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·
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delays
in patient enrollment; or
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·
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other
reasons that are internal to the businesses of our potential collaborative
partners, which reasons they may not share with
us.
|
While we
have achieved some level of success in our recent Phase 2 and Phase 3 clinical
trials for Lymphoseek, the results of these clinical trials, as well as pending
and future trials, are subject to review and interpretation by various
regulatory bodies during the regulatory review process and may ultimately fail
to demonstrate the safety or effectiveness of our product candidates to the
extent necessary to obtain regulatory approval or such that commercialization of
our product candidates is worthwhile. Any failure or substantial
delay in successfully completing clinical trials and obtaining regulatory
approval for our product candidates could severely harm our
business.
If
we fail to obtain collaborative partners, or those we obtain fail to perform
their obligations or discontinue clinical trials for particular product
candidates, our ability to develop and market potential products could be
severely limited.
Our
strategy for the development and commercialization of our product candidates
depends, in large part, upon the formation of collaborative
arrangements. Collaborations may allow us to:
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generate
cash flow and revenue;
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offset
some of the costs associated with our internal research and development,
preclinical testing, clinical trials and
manufacturing;
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seek
and obtain regulatory approvals faster than we could on our own;
and,
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successfully
commercialize existing and future product
candidates.
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We have
an agreement in place with Cardinal Health for the distribution of Lymphoseek in
the United States. We do not currently have collaborative agreements
covering Lymphoseek in other areas of the world or for RIGScan CR or
ACT. We cannot assure you that we will be successful in securing
collaborative partners for other markets or radiopharmaceutical products, or
that we will be able to negotiate acceptable terms for such
arrangements. The development, regulatory approval and
commercialization of our product candidates will depend substantially on the
efforts of collaborative partners, and if we fail to secure or maintain
successful collaborative arrangements, or if our partners fail to perform their
obligations, our development, regulatory, manufacturing and marketing activities
may be delayed, scaled back or suspended.
We
rely on third parties for the worldwide marketing and distribution of our gamma
detection devices, who may not be successful in selling our
products.
We
currently distribute our gamma detection devices in most global markets through
two partners who are solely responsible for marketing and distributing these
products. The partners assume direct responsibility for business
risks related to credit, currency exchange, foreign tax laws or tariff and trade
regulation. While we believe that our distribution partners intend to
continue to aggressively market our products, we cannot assure you that the
distribution partners will succeed in marketing our products on a global
basis. We may not be able to maintain satisfactory arrangements with
our marketing and distribution partners, who may not devote adequate resources
to selling our products. If this happens, we may not be able to
successfully market our products, which would decrease our
revenues.
7
Our
radiopharmaceutical product candidates are subject to extensive government
regulations and we may not be able to obtain necessary regulatory
approvals.
We may
not receive the regulatory approvals necessary to commercialize our Lymphoseek
and RIGScan product candidates, which could cause our business to be severely
harmed. Our product candidates are subject to extensive and rigorous
government regulation. FDA regulates, among other things, the
development, testing, manufacture, safety, record-keeping, labeling, storage,
approval, advertising, promotion, sale and distribution of pharmaceutical
products. If our potential products are marketed abroad, they will
also be subject to extensive regulation by foreign governments. None
of our radiopharmaceutical product candidates have been approved for sale in the
United States or in any foreign market. The regulatory review and
approval process, which includes preclinical studies and clinical trials of each
product candidate, is lengthy, complex, expensive and
uncertain. Securing FDA clearance to market requires the submission
of extensive preclinical and clinical data and supporting information to FDA for
each indication to establish the product candidate's safety and
efficacy. Data obtained from preclinical and clinical trials are
susceptible to varying interpretation, which may delay, limit or prevent
regulatory approval. The approval process may take many years to
complete and may involve ongoing requirements for post-marketing
studies. In light of the limited regulatory history of monoclonal
antibody-based therapeutics, regulatory approvals for our products may not be
obtained without lengthy delays, if at all. Any FDA or other
regulatory approvals of our product candidates, once obtained, may be
withdrawn. The effect of government regulation may be
to:
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delay
marketing of potential products for a considerable period of
time;
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limit
the indicated uses for which potential products may be
marketed;
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impose
costly requirements on our activities;
and
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provide
competitive advantage to other pharmaceutical and biotechnology
companies.
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We may
encounter delays or rejections in the regulatory approval process because of
additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Failure to comply with
applicable FDA or other regulatory requirements may result in criminal
prosecution, civil penalties, recall or seizure of products, total or partial
suspension of production or injunction, as well as other regulatory action
against our product candidates or us. Outside the United States, our
ability to market a product is contingent upon receiving clearances from the
appropriate regulatory authorities. This foreign regulatory approval
process includes risks similar to those associated with FDA approval
process.
Our
radiopharmaceutical product candidates will remain subject to ongoing regulatory
review even if they receive marketing approval. If we fail to comply
with continuing regulations, we could lose these approvals and the sale of our
products could be suspended.
Even if
we receive regulatory clearance to market a particular product candidate, the
approval could be conditioned on us conducting additional costly post-approval
studies or could limit the indicated uses included in our
labeling. Moreover, the product may later cause adverse effects that
limit or prevent its widespread use, force us to withdraw it from the market or
impede or delay our ability to obtain regulatory approvals in additional
countries. In addition, the manufacturer of the product and its
facilities will continue to be subject to FDA review and periodic inspections to
ensure adherence to applicable regulations. After receiving marketing
clearance, the manufacturing, labeling, packaging, adverse event reporting,
storage, advertising, promotion and record-keeping related to the product will
remain subject to extensive regulatory requirements. We may be slow
to adapt, or we may never adapt, to changes in existing regulatory requirements
or adoption of new regulatory requirements.
If we
fail to comply with the regulatory requirements of FDA and other applicable U.S.
and foreign regulatory authorities or previously unknown problems with our
products, manufacturers or manufacturing processes are discovered, we could be
subject to administrative or judicially imposed sanctions,
including:
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restrictions
on the products, manufacturers or manufacturing
processes;
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warning
letters;
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civil
or criminal penalties;
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fines;
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injunctions;
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product
seizures or detentions;
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import
bans;
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voluntary
or mandatory product recalls and publicity
requirements;
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suspension
or withdrawal of regulatory
approvals;
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total
or partial suspension of production;
and
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refusal
to approve pending applications for marketing approval of new drugs or
supplements to approved
applications.
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8
Our
existing products are highly regulated and we could face severe problems if we
do not comply with all regulatory requirements in the global markets in which
these products are sold.
FDA
regulates our gamma detection products in the United States. Foreign
countries also subject these products to varying government
regulations. In addition, these regulatory authorities may impose
limitations on the use of our products. FDA enforcement policy
strictly prohibits the marketing of FDA cleared medical devices for unapproved
uses. Within the European Union, our products are required to display
the CE Mark in order to be sold. We have obtained FDA clearance to
market and European certification to display the CE Mark on our current line of
gamma detection systems. We may not be able to obtain clearance to
market any new products in a timely manner, or at all. Failure to
comply with these and other current and emerging regulatory requirements in the
global markets in which our products are sold could result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant pre-market clearance for devices, withdrawal of clearances,
and criminal prosecution.
We
rely on third parties to manufacture our medical device products and our
business will suffer if they do not perform.
We rely
on independent contract manufacturers for the manufacture of our current
neoprobe GDS line of gamma detection systems. Our business will
suffer if our contract manufacturers have production delays or quality
problems. Furthermore, medical device manufacturers are subject to
the quality system regulations of FDA, international quality standards, and
other regulatory requirements. If our contractors do not operate in
accordance with regulatory requirements and quality standards, our business will
suffer. We use or rely on components and services used in our devices
that are provided by sole source suppliers. The qualification of
additional or replacement vendors is time consuming and costly. If a
sole source supplier has significant problems supplying our products, our sales
and revenues will be hurt until we find a new source of supply. In
addition, our distribution agreement with Ethicon Endo-Surgery, Inc., a Johnson
& Johnson company, (EES) for gamma detection devices contains failure to
supply provisions, which, if triggered, could have a significant negative impact
on our business.
We
may be unable to establish the pharmaceutical manufacturing capabilities
necessary to develop and commercialize our potential products.
We do not
have our own manufacturing facility for the manufacture of the
radiopharmaceutical compounds necessary for clinical testing or commercial
sale. We intend to rely on third-party contract manufacturers to
produce sufficiently large quantities of drug materials that are and will be
needed for clinical trials and commercialization of our potential
products. Third-party manufacturers may not be able to meet our needs
with respect to timing, quantity or quality of materials. We are in
the process of finalizing supply contracts with third-party manufacturers for
our Lymphoseek product. However, if we are unable to contract for a
sufficient supply of needed materials on acceptable terms, or if we should
encounter delays or difficulties in our relationships with manufacturers, our
clinical trials may be delayed, thereby delaying the submission of product
candidates for regulatory approval and the market introduction and subsequent
commercialization of our potential products. Any such delays may
lower our revenues and potential profitability.
We and
any third-party manufacturers that we may use must continually adhere to current
Good Manufacturing Practices regulations enforced by FDA through its facilities
inspection program. If our facilities or the facilities of
third-party manufacturers cannot pass a pre-approval plant inspection, FDA will
not grant approval to our product candidates. In complying with these
regulations and foreign regulatory requirements, we and any of our third-party
manufacturers will be obligated to expend time, money and effort on production,
record-keeping and quality control to assure that our potential products meet
applicable specifications and other requirements. If we or any
third-party manufacturer with whom we may contract fail to maintain regulatory
compliance, we or the third party may be subject to fines and/or manufacturing
operations may be suspended.
9
Unfavorable
pricing regulations, third-party reimbursement practices or healthcare reform
initiatives applicable to our radiopharmaceutical products and product
candidates could limit our potential product revenue.
The
regulations governing drug pricing and reimbursement vary widely from country to
country. Some countries require approval of the sale price of a drug
before it can be marketed and, in many of these countries, the pricing review
period begins only after approval is granted. In some countries,
prescription pharmaceutical pricing remains subject to continuing governmental
control even after initial approval is granted. Although we monitor
these regulations, our product candidates are currently in the development stage
and we will not be able to assess the impact of price regulations for at least
several years. As a result, we may obtain regulatory approval for a
product in a particular country, but then be subject to price regulations that
may delay the commercial launch of the product and may negatively impact the
revenues we are able to derive from sales in that country.
The
healthcare industry is undergoing fundamental changes resulting from political,
economic and regulatory influences. In the United States,
comprehensive programs have been proposed that seek to increase access to
healthcare for the uninsured, to control the escalation of healthcare
expenditures within the economy and to use healthcare reimbursement policies to
balance the federal budget.
We expect
that Congress and state legislatures will continue to review and assess
healthcare proposals, and public debate of these issues will likely
continue. We cannot predict which, if any, of such reform proposals
will be adopted and when they might be adopted. Other countries also
are considering healthcare reform. Significant changes in healthcare
systems could have a substantial impact on the manner in which we conduct our
business and could require us to revise our strategies.
The
sale of our common stock to Fusion may cause dilution and the sale of common
stock acquired by Fusion could cause the price of our common stock to
decline.
In
connection with our agreement with Fusion Capital, we have authorized the sale
of up to 18,222,671 shares of our common stock and the issuance of 1,800,000
shares in commitment fees, and we have filed a registration statement with the
SEC for the sale to the public of 11,500,000 shares issuable to Fusion Capital
pursuant to the agreement. Through December 29, 2009, we have sold
Fusion Capital 7,568,671 shares of common stock and issued 1,314,000 shares of
stock as commitment fees to Fusion Capital. The number of shares
ultimately offered for sale to the public will be dependent upon the number of
shares purchased by Fusion Capital under the agreement. It is
anticipated that these shares will be sold over a period of up to 26 months from
the date of the December 24, 2008 amendment to the agreement, at prices that
will fluctuate based on changes in the market price of our common stock over
that period. Depending upon market liquidity at the times sales are
made, these sales could cause the market price of our common stock to
decline. Consequently, sales to Fusion Capital may result in
substantial dilution to the interests of other holders of our common
stock. The sale of a substantial number of shares of our common stock
by Fusion Capital, or anticipation of such sales, could make it more difficult
for us to sell equity or equity-related securities in the future at a time and
at a price that we might otherwise wish to effect sales. However, we
have the right to control the timing and amount of any sales of our shares to
Fusion Capital and the agreement may be terminated by us at any time at our
discretion without any cost to us.
The
sale of the shares of common stock acquired in private placements could cause
the price of our common stock to decline.
Over the
past few years, we completed various financings in which we issued common stock,
convertible notes, warrants and other securities convertible into common stock
to certain private investors. The terms of these transactions require
that we file registration statements with the Securities and Exchange Commission
under which the investors may resell to the public common stock acquired in
these transactions, as well as common stock acquired on the exercise of the
warrants and convertible securities held by them. Further, some or
all of the common stock sold in these transactions may become eligible for
resale without registration under the provisions of Rule 144, upon satisfaction
of the holding period and other requirements of the Rule.
10
As
required by our financing arrangements with Fusion Capital, we have filed a
registration statement registering for resale a total of 11,500,000 common
shares, consisting of (i) 10,654,000 shares which we may sell to Fusion Capital
pursuant to the amended common stock purchase agreement, (ii) 360,000 shares
issued to Fusion Capital in consideration for its agreement to the amendment;
and (iii) 486,000 commitment fee shares to be issued pro rata as we sell the
first $4.1 million of common stock under the amended agreement. The
number of shares ultimately sold under the registration statement will be
dependent upon the number of shares purchased by Fusion Capital under the
amended agreement. It is anticipated that these shares will be sold
from time to time over a period ending on March 1, 2011, at prices that will
fluctuate based on changes in the market price of our common stock over that
period. We have the right to control the timing and amount of any
sales of our shares to Fusion Capital and the agreement may be terminated by us
at any time at our discretion without any cost to us.
On
December 26, 2007, we entered into a Securities Purchase Agreement (“SPA”) with
Platinum-Montaur Life Sciences, LLC (“Montaur”), pursuant to which we issued
Montaur a 10% Series A Convertible Senior Secured Promissory Note in the
principal amount of $7,000,000, due December 26, 2011 (the “Series A Note”) and
a five-year Series W warrant to purchase 6,000,000 shares of our common stock at
an exercise price of $0.32 per share. On April 16, 2008, following
receipt by the Company of clearance by the FDA to commence a Phase 3 clinical
trial for Lymphoseek in patients with breast cancer or melanoma, we amended the
SPA and issued Montaur a 10% Series B Convertible Senior Secured Promissory Note
in the principal amount of $3,000,000, also due December 26, 2011 (the “Series B
Note,” and hereinafter referred to collectively with the Series A Note as the
“Montaur Notes”), and a five-year Series X warrant to purchase 8,333,333 shares
of our common stock at an exercise price of $0.46 per share. On
December 5, 2008, after the Company had obtained 135 vital blue dye lymph nodes
from patients who had completed surgery and the injection of the drug in the
Phase 3 clinical trial of Lymphoseek in patients with breast cancer or melanoma,
we issued Montaur 3,000 shares of our 8% Series A Cumulative Convertible
Preferred Stock (the “Preferred Stock”) and a five-year Series Y warrant
(hereinafter referred to collectively with the Series W warrant and Series X
warrant as the “Montaur Warrants”) to purchase 6,000,000 shares of our common
stock, at an exercise price of $0.575 per share, also for an aggregate purchase
price of $3,000,000. On July 24, 2009, we entered into a Securities Amendment
and Exchange Agreement (“Amendment Agreement”) with Montaur, pursuant to which
Montaur agreed to the amendment and restatement of the terms of the Montaur
Notes, the Montaur Warrants and the Preferred Stock, to remove price-based
anti-dilution adjustment provisions that had created a significant non-cash
derivative liability on the Company’s balance sheet, and upon the surrender of
the Montaur Notes and the Montaur warrants we issued Montaur an Amended and
Restated 10% Series A Convertible Senior Secured Promissory Note in the
principal amount of $7,000,000, due December 26, 2011 (the “Amended Series A
Note”), an Amended and Restated 10% Series B Convertible Senior Secured
Promissory Note in the principal amount of $3,000,000, due December 26, 2011
(the “Amended Series B Note,” and together with the Amended Series A Note the
“Amended Montaur Notes”), an Amended and Restated Series W Warrant (the “Amended
Series W Warrant”), an Amended and Restated Series X Warrant (the Amended Series
X Warrant), an Amended and Restated Series Y Warrant (the “Amended Series Y
Warrant”), and in consideration for the agreement of Montaur to enter into the
Amendment Agreement, a Series AA Warrant to purchase 2,400,000 shares of our
common stock at an exercise price of $0.97 per share (the “Series AA Warrant,”
and together with the Amended Series W Warrant, Amended Series X Warrant and
Amended Series Y Warrant, the “Amended Montaur Warrants”).
The
Amended Series A Note bears interest at a rate per annum equal to 10%, and
Montaur may convert the full $7,000,000 principal amount of the Amended Series A
Note into shares of Common Stock in two tranches. Montaur may convert the first
tranche of up to $3,500,000 of the outstanding principal balance of the Amended
Series A Note at the conversion price of $0.26 per share, and a second tranche
of the remaining $3,500,000 of the outstanding principal balance of the Amended
Series A Note at the conversion price of $0.9722 per share. The
Amended Series B Note also bears interest at a rate per annum equal to 10%, and
is convertible into shares of common stock at the conversion price of $0.36 per
share. Pursuant to the provisions of the Certificate of Designations,
Voting Powers, Preferences, Limitations, Restrictions, and Relative Rights of
Series A 8% Cumulative Convertible Preferred Stock, Montaur may convert all or
any portion of the shares of the Preferred Stock into an aggregate 6,000,000
shares of our common stock, subject to adjustment as described in the
Certificate of Designations.
11
Pursuant
to registration rights of Montaur in connection with the SPA, we have filed a
registration statement covering the sale by Montaur of up to up to: (i)
3,600,000 shares issuable upon the conversion of the Amended Series A Note; (ii)
6,000,000 shares of Common Stock issued upon exercise of the Amended Series Y
Warrant; (iii) 3,500,000 shares of Common Stock issued or issuable as
interest or dividends on the Amended Montaur Notes and the Preferred Stock; and
(iv) 2,400,000 shares issuable upon exercise of the Series AA Warrant, for a
total of 15,500,000 shares. Additionally, we agreed that within
thirty-five days of receipt from Montaur of written request therefor, we would
prepare and file an additional “resale” registration statement providing for the
resale of: (i) the remaining shares of Common Stock issuable upon the conversion
of the Amended Series A Note; (ii) the shares of Common Stock issuable upon the
exercise of the Amended Series W Warrant; (iii) the shares of Common Stock
issuable upon the conversion of the Amended Series B Note; (iv) the shares of
Common Stock issuable upon the exercise of the Amended Series X Warrant; and (v)
the shares of Common Stock issuable upon conversion of the Preferred
Stock
The
selling stockholders may sell none, some or all of the shares of common stock
acquired from us, as well as common stock acquired on the exercise of the
warrants and convertible securities held by them. We have no way of
knowing whether or when the selling stockholders will sell these
shares. Depending upon market liquidity at the time, a sale of these
shares at any given time could cause the trading price of our common stock to
decline. The sale of a substantial number of shares of our common
stock, or anticipation of such sales, could make it more difficult for us to
sell equity or equity-related securities in the future at a time and at a price
that we might otherwise wish to effect sales.
We
may lose out to larger and better-established competitors.
The
medical device and biotechnology industries are intensely
competitive. Some of our competitors have significantly greater
financial, technical, manufacturing, marketing and distribution resources as
well as greater experience in the medical device industry than we
have. The particular medical conditions our product lines address can
also be addressed by other medical devices, procedures or drugs. Many
of these alternatives are widely accepted by physicians and have a long history
of use. Physicians may use our competitors’ products and/or our
products may not be competitive with other technologies. If these
things happen, our sales and revenues will decline. In addition, our
current and potential competitors may establish cooperative relationships with
large medical equipment companies to gain access to greater research and
development or marketing resources. Competition may result in price
reductions, reduced gross margins and loss of market share.
Our
products may be displaced by newer technology.
The
medical device and biotechnology industries are undergoing rapid and significant
technological change. Third parties may succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by us, or that would make our technology and products obsolete or
non-competitive. Additionally, researchers could develop new surgical
procedures and medications that replace or reduce the importance of the
procedures that use our products. Accordingly, our success will
depend, in part, on our ability to respond quickly to medical and technological
changes through the development and introduction of new products. We
may not have the resources to do this. If our products become
obsolete and our efforts to develop new products do not result in any
commercially successful products, our sales and revenues will
decline.
We
may not have sufficient legal protection against infringement or loss of our
intellectual property, and we may lose rights to our licensed intellectual
property if diligence requirements are not met.
Our
success depends, in part, on our ability to secure and maintain patent
protection, to preserve our trade secrets, and to operate without infringing on
the patents of third parties. While we seek to protect our
proprietary positions by filing United States and foreign patent applications
for our important inventions and improvements, domestic and foreign patent
offices may not issue these patents. Third parties may challenge,
invalidate, or circumvent our patents or patent applications in the
future. Competitors, many of which have significantly more resources
than we have and have made substantial investments in competing technologies,
may apply for and obtain patents that will prevent, limit, or interfere with our
ability to make, use, or sell our products either in the United States or
abroad.
12
In the
United States, patent applications are secret until patents are issued, and in
foreign countries, patent applications are secret for a time after
filing. Publications of discoveries tend to significantly lag the
actual discoveries and the filing of related patent
applications. Third parties may have already filed applications for
patents for products or processes that will make our products obsolete or will
limit our patents or invalidate our patent applications.
We
typically require our employees, consultants, advisers and suppliers to execute
confidentiality and assignment of invention agreements in connection with their
employment, consulting, advisory, or supply relationships with
us. They may breach these agreements and we may not obtain an
adequate remedy for breach. Further, third parties may gain access to
our trade secrets or independently develop or acquire the same or equivalent
information.
Agencies
of the United States government conducted some of the research activities that
led to the development of antibody technology that some of our proposed
antibody-based surgical cancer detection products use. When the
United States government participates in research activities, it retains rights
that include the right to use the technology for governmental purposes under a
royalty-free license, as well as rights to use and disclose technical data that
could preclude us from asserting trade secret rights in that data and
software.
We
may lose the license rights to certain in-licensed products if we do not
exercise adequate diligence.
Our
license agreements for Lymphoseek, RIGS, and ACT contain provisions that require
that we demonstrate ongoing diligence in the continuing research and development
of these potential products. Cira Bio’s rights to certain
applications of the ACT technology may be affected by its failure to achieve
certain capital raising milestones although no such notices to that effect have
been received to date. We have provided information, as required or
requested, to the licensors of our technology indicating the steps we have taken
to demonstrate our diligence and believe we are adequately doing so to meet the
terms and/or intent of our license agreements. However, it is
possible that the licensors may not consider our actions adequate in
demonstrating such diligence. Should we fail to demonstrate the
requisite diligence required by any such agreements or as interpreted by the
respective licensors, we may lose our development and commercialization rights
for the associated product.
We
could be damaged by product liability claims.
Our
products are used or intended to be used in various clinical or surgical
procedures. If one of our products malfunctions or a physician
misuses it and injury results to a patient or operator, the injured party could
assert a product liability claim against our company. We currently
have product liability insurance with a $10 million per occurrence limit, which
we believe is adequate for our current activities. However, we may
not be able to continue to obtain insurance at a reasonable
cost. Furthermore, insurance may not be sufficient to cover all of
the liabilities resulting from a product liability claim, and we might not have
sufficient funds available to pay any claims over the limits of our
insurance. Because personal injury claims based on product liability
in a medical setting may be very large, an underinsured or an uninsured claim
could financially damage our company.
We
may have difficulty attracting and retaining qualified personnel and our
business may suffer if we do not.
Our
business has experienced a number of successes and faced several challenges in
recent years that have resulted in several significant changes in our strategy
and business plan, including the shifting of resources to support our current
product initiatives. Our management will need to remain flexible to
support our business model over the next few years. However, losing
members of the Neoprobe management team could have an adverse effect on our
operations. Our success depends on our ability to attract and retain
technical and management personnel with expertise and experience in the medical
device business. The competition for qualified personnel in the
biotechnology industry is intense and we may not be successful in hiring or
retaining the requisite personnel. If we are unable to attract and
retain qualified technical and management personnel, we will suffer diminished
chances of future success.
13
Our
secured indebtedness imposes significant restrictions on us, and a default could
cause us to cease operations.
All of
our material assets have been pledged as collateral for the $10 million in
principal amount of our Series A and Series B Convertible Notes issued to
Montaur, and a $1 million in principal amount Series B Convertible Note issued
to our CEO and members of his family dated July 3, 2007, as amended December 26,
2007 (collectively, the “Notes”). In addition to the security interest in our
assets, the Notes carry substantial covenants that impose significant
requirements on us, including, among others, requirements that:
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we
pay all principal by December 26,
2011;
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we
use the proceeds from the sale of the Notes only for permitted purposes,
such as Lymphoseek development and general corporate
purposes;
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we
keep reserved out of our authorized shares of common stock sufficient
shares to satisfy our obligation to issue shares on conversion of the
Notes and the exercise of the warrants issued in connection with the sale
of the Notes; and
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we
indemnify the purchasers of the Notes against certain
liabilities.
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Additionally,
with certain exceptions, the Notes prohibit us from:
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amending
our organizational or governing agreements and documents, entering into
any merger or consolidation, dissolving the company or liquidating its
assets, or acquiring all or any substantial part of the business or assets
of any other person;
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engaging
in transactions with any affiliate;
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entering
into any agreement inconsistent with our obligations under the Notes and
related agreements;
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incurring
any indebtedness, capital leases, or contingent obligations outside the
ordinary course of business;
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granting
or permitting liens against or security interests in our
assets;
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making
any material dispositions of our assets outside the ordinary course of
business;
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declaring
or paying any dividends or making any other restricted payments;
or
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making
any loans to or investments in other persons outside of the ordinary
course of business.
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Our
ability to comply with these provisions may be affected by changes in our
business condition or results of our operations, or other events beyond our
control. The breach of any of these covenants would result in a default under
the Notes, permitting the holders of the Notes to accelerate their maturity and
to sell the assets securing them. Such actions by the holders of the Notes could
cause us to cease operations or seek bankruptcy protection.
Our
common stock is traded over the counter, which may deprive stockholders of the
full value of their shares.
Our
common stock is quoted via the OTC Bulletin Board (OTCBB). As such,
our common stock may have fewer market makers, lower trading volumes and larger
spreads between bid and ask prices than securities listed on an exchange such as
the New York Stock Exchange or the NASDAQ Stock Market. These factors
may result in higher price volatility and less market liquidity for the common
stock.
A
low market price may severely limit the potential market for our common
stock.
Our
common stock is currently trading at a price substantially below $5.00 per
share, subjecting trading in the stock to certain SEC rules requiring additional
disclosures by broker-dealers. These rules generally apply to any
non-NASDAQ equity security that has a market price share of less than $5.00 per
share, subject to certain exceptions (a "penny stock"). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and institutional or wealthy
investors. For these types of transactions, the broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. The
broker-dealer also must disclose the commissions payable to the broker-dealer,
current bid and offer quotations for the penny stock and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Such information
must be provided to the customer orally or in writing before or with the written
confirmation of trade sent to the customer. Monthly statements must
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. The
additional burdens imposed upon broker-dealers by such requirements could
discourage broker-dealers from effecting transactions in our common
stock.
14
The
price of our common stock has been highly volatile due to several factors that
will continue to affect the price of our stock.
Our
common stock traded as low as $0.35 per share and as high as $1.48 per share
during the 12-month period ended December 28, 2009. The market price
of our common stock has been and is expected to continue to be highly
volatile. Factors, including announcements of technological
innovations by us or other companies, regulatory matters, new or existing
products or procedures, concerns about our financial position, operating
results, litigation, government regulation, developments or disputes relating to
agreements, patents or proprietary rights, may have a significant impact on the
market price of our stock. In addition, potential dilutive effects of
future sales of shares of common stock by the company and by stockholders, and
subsequent sale of common stock by the holders of warrants and options could
have an adverse effect on the market price of our shares.
Some
additional factors which could lead to the volatility of our common stock
include:
|
·
|
price
and volume fluctuations in the stock market at large which do not relate
to our operating performance;
|
|
·
|
financing
arrangements we may enter that require the issuance of a significant
number of shares in relation to the number of shares currently
outstanding;
|
|
·
|
public
concern as to the safety of products that we or others develop;
and
|
|
·
|
fluctuations
in market demand for and supply of our
products.
|
An
investor’s ability to trade our common stock may be limited by trading
volume.
Generally,
the trading volume for our common stock has been relatively
limited. A consistently active trading market for our common stock
may not occur on the OTCBB. The average daily trading volume for our
common stock on the OTCBB for the 12-month period ended December 15, 2009, was
approximately 93,000 shares.
Some
provisions of our organizational and governing documents may have the effect of
deterring third parties from making takeover bids for control of our company or
may be used to hinder or delay a takeover bid.
Our
certificate of incorporation authorizes the creation and issuance of “blank
check” preferred stock. Our Board of Directors may divide this stock
into one or more series and set their rights. The Board of Directors
may, without prior stockholder approval, issue any of the shares of “blank
check” preferred stock with dividend, liquidation, conversion, voting or other
rights, which could adversely affect the relative voting power or other rights
of the common stock. Preferred stock could be used as a method of
discouraging, delaying, or preventing a take-over of our company. If
we issue “blank check” preferred stock, it could have a dilutive effect upon our
common stock. This would decrease the chance that our stockholders
would realize a premium over market price for their shares of common stock as a
result of a takeover bid.
Because
we will not pay dividends in the foreseeable future, stockholders will only
benefit from owning common stock if it appreciates.
We have
never paid dividends on our common stock and we do not intend to do so in the
foreseeable future. We intend to retain any future earnings to
finance our growth. Accordingly, any potential investor who
anticipates the need for current dividends from his investment should not
purchase our common stock.
15
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions, including, among other things:
|
·
|
general
economic and business conditions, both nationally and in our
markets;
|
|
·
|
our
history of losses, negative net worth and uncertainty of future
profitability;
|
|
·
|
our
expectations and estimates concerning future financial performance,
financing plans and the impact of
competition;
|
|
·
|
our
ability to implement our growth
strategy;
|
|
·
|
anticipated
trends in our business;
|
|
·
|
advances
in technologies; and
|
|
·
|
other
risk factors set forth under “Risk Factors” in this
prospectus.
|
In
addition, in this prospectus, we use words such as “anticipate,” “believe,”
“plan,” “expect,” “future,” “intend,” and similar expressions to identify
forward-looking statements.
We
undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in this prospectus may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholder. We will receive no proceeds from
the sale of shares of common stock in this offering.
16
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock trades on the OTCBB under the trading symbol NEOP. The
prices set forth below reflect the quarterly high, low and closing sales prices
for shares of our common stock during the last two fiscal years, and the current
fiscal year through December 28, 2009, as reported by Reuters
Limited. These quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and may not represent actual
transactions.
High
|
Low
|
Close
|
||||||||||
Fiscal
Year 2009
|
||||||||||||
First
Quarter
|
$ | 0.80 | $ | 0.42 | $ | 0.54 | ||||||
Second
Quarter
|
1.20 | 0.35 | 0.95 | |||||||||
Third
Quarter
|
1.48 | 0.91 | 1.40 | |||||||||
Fourth
Quarter through December
28, 2009
|
1.40 | 0.95 | 1.05 | |||||||||
Fiscal
Year 2008
|
||||||||||||
First
Quarter
|
$ | 0.42 | $ | 0.29 | $ | 0.35 | ||||||
Second
Quarter
|
0.87 | 0.34 | 0.68 | |||||||||
Third
Quarter
|
0.75 | 0.42 | 0.57 | |||||||||
Fourth
Quarter
|
0.68 | 0.45 | 0.57 | |||||||||
Fiscal
Year 2007:
|
||||||||||||
First
Quarter
|
$ | 0.27 | $ | 0.20 | $ | 0.24 | ||||||
Second
Quarter
|
0.32 | 0.19 | 0.31 | |||||||||
Third
Quarter
|
0.50 | 0.23 | 0.31 | |||||||||
Fourth
Quarter
|
0.35 | 0.25 | 0.29 |
As of
December 15, 2009, we had approximately 767 holders of common stock of record.
On December 28, 2009, the last reported sale price for our common stock as
reported on the OTC Bulletin Board was $1.05 per share.
We have
not paid any dividends on our common stock and do not anticipate paying cash
dividends in the foreseeable future. We intend to retain any earnings
to finance the growth of our business. We cannot assure you that we
will ever pay cash dividends. Whether we pay cash dividends in the
future will be at the discretion of our Board of Directors and will depend upon
our financial condition, results of operations, capital requirements and any
other factors that the Board of Directors decides are relevant. See
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
17
DESCRIPTION
OF BUSINESS
Development
of the Business
Neoprobe
Corporation (Neoprobe, the company or we) is a biomedical company that develops
and commercializes innovative oncology products that enhance patient care and
improve patient outcome. We were originally incorporated in Ohio in
1983 and reincorporated in Delaware in 1988. Our executive offices
are located at 425 Metro Place North, Suite 300, Dublin, Ohio
43017. Our telephone number is (614) 793-7500.
From our
inception through 1998, we devoted substantially all of our efforts and
resources to the research and clinical development of radiopharmaceutical and
medical device technologies related to the intraoperative diagnosis and
treatment of cancers, including our proprietary radioimmunoguided surgery
(RIGS®)
technology. In 1998, U.S. and European regulatory agencies completed
an evaluation of the status of the regulatory pathway for our RIGS products,
which coupled with our limited financial resources at the time, caused us to
suspend our radiopharmaceutical development activities and refocus our operating
strategy on our medical device business. After achieving
profitability in the fourth quarter of 1999 following this retrenchment, we
expanded our medical device offerings in 2002 through the acquisition of an
Israeli company that was developing a line of blood flow measurement
devices.
Although
we had expanded our strategic focus with the addition of medical devices outside
the oncology field, we continued to look for other avenues to reinvigorate our
radiopharmaceutical development portfolio. In 2004, our efforts
resulted in a number of positive events that caused us to take steps to
re-activate our radiopharmaceutical and therapeutic initiatives. As a
result of our efforts since 2004, we now have submitted data from a Phase 3
clinical trial of one of our radiopharmaceutical products, Lymphoseek®, to the
U.S. Food and Drug Administration (FDA) for review and we are enrolling patients
in a second Phase 3 clinical trial intended to further support and expand our
proposed product labeling for Lymphoseek. Interest in, and activity
related to, our second radiopharmaceutical product, RIGScan® CR, has also
increased significantly in recent years as we sought, and subsequently received,
formal scientific advice in 1998 from the European Medicinal Evaluation Agency
(EMEA) regarding our regulatory and clinical development plans for RIGScan
CR. We have taken steps during the fourth quarter of 2009 to obtain
similar feedback from FDA through the submission of a pre-Phase 3 meeting
request and Special Protocol Assessment (SPA) request. Our
subsidiary, Cira Biosciences, Inc. (Cira Bio), is evaluating the market
opportunities for yet another technology platform, activated cellular therapy
(ACT). The success we have been experiencing in recent years related
to our drug development activities caused us, during 2009, to re-evaluate our
product initiatives and strategies. As a result of this evaluation,
we made the decision during the third quarter of 2009 to discontinue the
operations of our blood flow measurement device product line and to look for
opportunities to divest our Cardiosonix Ltd. subsidiary. We believe
this decision will allow us to better focus on our oncology-related development
platforms as we approach several key milestones in the coming twelve to eighteen
months.
We
believe that our virtual business model is unique within our industry as we
combine revenue generation from medical devices covering our public company
overhead while we devote capital raised through financing efforts to the
development of products such as Lymphoseek which possess even greater potential
for shareholder return. In addition, we have sought to maintain a
development pipeline with additional longer-term return potential such as
RIGScan CR and ACT that provide the opportunity for incremental return on the
achievement of key development and funding milestones.
Our
Technology
Gamma
Detection Devices
Through
2009, our line of gamma radiation detection devices has generated substantially
all of our revenue. Our gamma detection systems are used by surgeons
in the diagnosis and treatment of cancer and related diseases. Our
currently-marketed line of gamma detection devices has been cleared by FDA and
other international regulatory agencies for marketing and commercial
distribution throughout most major global markets.
18
Our
patented gamma detection device systems consist of hand-held detector probes and
a control unit. The critical detection component is a highly
radiosensitive crystal mounted in the tip of the probe that relays a signal
through a preamplifier to the control unit to produce both a digital readout and
an audible signal. The detector element fits into a housing
approximately the size of a pen flashlight. The neoprobe® GDS
gamma detection system, originally released in 1998 under the name neo2000®, is the
fourth generation of our gamma detection products. The neoprobe GDS
is designed as a platform for future growth of our instrument
business. The neoprobe GDS is software upgradeable and is designed to
support future surgical targeting probes without the necessity of costly
remanufacture. Our most recent software release that enables our
entire installed base of neoprobe GDS and neo2000 users to use our wireless
gamma detection probes based on Bluetooth® wireless
technology that have been commercially launched over the last few
years. During 2009, we introduced a new gamma detection probe capable
of detecting higher energy isotopes such as Fludeoxyglucose F18 (FDG or F18)
that are frequently used in connection with Positive Emission Tomography (PET)
scans.
Surgeons
are using our gamma detection devices in a surgical application referred to as
sentinel lymph node biopsy (SLNB) or intraoperative lymphatic mapping (ILM or
lymphatic mapping). SLNB helps trace the lymphatic drainage patterns
in a cancer patient to evaluate potential tumor drainage and cancer spread in
lymphatic tissue. The technique does not detect cancer; rather it
helps surgeons identify the lymph node(s) to which a tumor is likely to drain
and spread. The lymph node(s), sometimes referred to as the
"sentinel" node(s), may provide critical information about the stage of a
patient’s disease. SLNB begins when a patient is injected at the site
of the main tumor with a commercially available radioactive tracing
agent. The agent is intended to follow the same lymphatic flow as the
cancer would have if it had metastasized. The surgeon may then track
the agent's path with a hand-held gamma radiation detection probe, thus
following the potential avenues of metastases and identifying lymph nodes to be
biopsied for evaluation and determination of cancer spread.
The
application of SLNB to solid tumor cancer treatment has been most widely
developed in the breast cancer and melanoma indications. Numerous
clinical studies, involving a total of nearly 2,000 patients and published in
peer-reviewed medical journals as far back as Oncology (January 1999) and The
Journal of The American College of Surgeons (December 2000), have indicated SLNB
is approximately 97% accurate in predicting the presence or absence of disease
spread in melanoma and breast cancers. Consequently, it is estimated
that more than 80% of breast cancer patients who would otherwise have undergone
full axillary lymph node dissections (ALND), involving the removal of as many as
20 - 30 lymph nodes, might be spared this radical surgical procedure if the
sentinel node was found to be free of cancer. Surgeons practicing
SLNB have found that our gamma detection probes are well-suited to the
procedure.
Hundreds
of articles have been published in recent years in peer-reviewed journals on the
topic of SLNB. Furthermore, a number of thought leaders and cancer
treatment institutions have recognized and embraced the technology as standard
of care for melanoma and for breast cancer. Our marketing partner
continues to see strong sales, especially for use in breast cancer
treatment. SLNB in breast cancer has been the subject of national and
international clinical trials, including one major study sponsored by the U.S.
Department of Defense and the National Cancer Institute (NCI) and one sponsored
by the American College of Surgeons. The first of these trials
completed accrual approximately four years ago. While we are not
aware of the exact timing of publication or presentation of results from these
trials, it is possible that such data may be available sometime in
2010. Accrual on the second trial was halted early (in 2007), due, we
believe, to the overwhelming desire of patients to be treated with SLNB rather
than be randomized in a trial whereby they might receive a full axillary
dissection. We believe that once data from these trials are widely
published, there may be an additional demand for our devices from those surgeons
who have not yet adopted the SLNB procedure. We also believe, based
on an estimate of the total number of operating rooms in medical centers that
are capable of performing the types of procedures in which our gamma detection
devices are used, that while we are potentially reaching saturation at the major
cancer centers and teaching institutions, a significant portion of the global
market for gamma detection devices such as ours remains untapped. We
also believe we are beginning to see the development of a replacement device
market in the gamma detection device sector, aided in part by new offerings such
as our wireless probes, as devices purchased over ten years ago during the early
years of lymphatic mapping begin to be retired.
19
Although
lymphatic mapping has found its greatest acceptance thus far in breast cancer
and melanoma, we believe that Lymphoseek may be instrumental in extending SLNB
into other solid tumor cancers in which surgeons are currently investigating
such as prostate, gastric, colon, head and neck, and non-small cell lung
cancers. Investigations in these other cancer types have thus far met
with mixed levels of success; however, we believe our development of Lymphoseek
may positively impact the effectiveness of SLNB in such
indications. Surgeons have also been using our devices for other
gamma-guided surgery applications, such as evaluating the thyroid function and
conducting parathyroid surgery, and in determining the state of disease in
patients with vulvar and penile cancers. Expanding the application of
SLNB beyond the current primary uses in the treatment of breast cancer and
melanoma is a primary focus of our strategy regarding our gamma-guided surgery
products and is consistent with our Phase 3 Lymphoseek clinical trial
strategy. To support that expansion, we continue to work with our
marketing and distribution partners to develop additional enhancements to the
neoprobe GDS platform such as the wireless probes that were introduced over the
last few years and the new F18 probe we launched at the Society of Surgical
Oncology (SSO) 62nd Annual Cancer Symposium held in March of 2009. We
believe the market for the intraoperative detection of higher energy isotope
detection is just beginning to develop and may not significantly impact our
sales for some time.
Lymphoseek
Our gamma
detection devices are primarily capital in nature; as such, they generate
revenue only on the initial sale. To complement the one-time revenue
stream related to capital products, we are working on developing recurring
revenue or "procedural" products that would generate revenue based on each
procedure in which they are used. The product we are developing with
the greatest near-term potential in this area is Lymphoseek, a proprietary drug
compound under exclusive worldwide license from the Regents of the University of
California through their UC, San Diego affiliate (“UCSD”). The UCSD
license grants Neoprobe the commercialization rights to Lymphoseek for
diagnostic imaging and intraoperative detection applications. If
proven effective and cleared for commercial sale, Lymphoseek would be the first
radiopharmaceutical product specifically designed and labeled for the targeting
of sentinel lymph nodes.
The
initial pre-clinical evaluations of Lymphoseek were completed in
2001. Since that time, Neoprobe, in cooperation with UCSD, has
completed or initiated five Phase 1 clinical trials, a multi-center Phase 2
trial and a multi-center Phase 3 involving Lymphoseek. The status of
these trials is listed below:
Indication
|
|
Phase
|
|
Number of
Patients
|
|
Status
|
Breast
(peritumoral injection)
|
1
|
24
|
Completed
|
|||
Melanoma
|
1
|
24
|
Completed
|
|||
Breast
(intradermal injection, next day surgery)
|
1
|
60
|
Ongoing
|
|||
Prostate
|
1
|
20
|
Ongoing
|
|||
Colon
|
1
|
20
|
Ongoing
|
|||
Breast
or Melanoma
|
2
|
80
|
Completed
|
|||
Breast
or Melanoma
|
3
|
130
|
Completed
|
|||
Head
and Neck Squamous Cell Carcinoma (“Sentinel”)
|
|
3
|
|
180*
|
|
Ongoing
|
*estimated number; actual
number is dependent on statistical analysis at potential early stoppage
points
The Phase
1 studies were or are being supported, including being substantially funded
through research grants, by a number of organizations such as the Susan G. Komen
Breast Cancer Research Foundation, the American Cancer Society (ACS) and the
NCI. Research data from some of these clinical evaluations of
Lymphoseek have been presented at meetings of the Society of Nuclear Medicine,
the Society of Surgical Oncology and the World Sentinel Node
Congress. The ongoing breast, prostate and colon studies are being
conducted under Neoprobe’s investigational new drug (IND) application that has
been cleared with FDA using drug product supplied by Neoprobe.
20
In
November 2003, we met with the Interagency Council on Biomedical Imaging in
Oncology, an organization representing FDA, the NCI and the Centers for Medicare
and Medicaid Services, to discuss the regulatory approval process and to
determine the objectives for the next clinical trial involving Lymphoseek.
During 2004, we prepared and submitted an IND application to FDA to support the
marketing clearance of Lymphoseek.
In early
2005, we announced that FDA had accepted our application to establish a
corporate IND for Lymphoseek. With the transfer of the UCSD physician IND to
Neoprobe, we assumed full clinical and commercial responsibility for the
development of Lymphoseek. Following the establishment of the corporate IND,
Neoprobe’s clinical and regulatory personnel began discussions with FDA
regarding the clinical development program for Lymphoseek.
As a
“first in class” drug, Neoprobe was advised that additional non-clinical studies
needed to be completed before additional clinical testing of the drug could
occur in humans. The additional non-clinical testing was successfully completed
in late 2005 and the reports were filed with FDA in December 2005. The seven
studies included repeat administrations of Lymphoseek at dosages significantly
in excess of the anticipated clinical dosage. None of the non-clinical studies
revealed any toxicity issues associated with the drug.
Upon the
submission of the IND and draft Phase 2 protocol, FDA advised Neoprobe that
commercially produced Lymphoseek would need to be used in the Phase 2 clinical
study, as opposed to using drug previously manufactured in laboratories at UCSD.
Also, the regulatory agencies raised a number of Chemistry, Manufacturing and
Control (CMC) questions regarding the drug compound and characterization.
Neoprobe began the transfer of bulk drug manufacturing to Reliable
Biopharmaceutical Corporation (Reliable) early in 2005 and engaged OSO
BioPharmaceuticals Manufacturing LLC (OSO Bio, formerly Cardinal Health PTS) to
develop and validate procedures and assays to establish commercial standards for
the formulation, filling and lyophilization of the drug compound. We submitted
an initial CMC response to FDA in 2006.
We
received clearance from FDA in May 2006 to move forward with patient enrollment
for a multi-center Phase 2 clinical study of Lymphoseek. The first of our Phase
2 clinical sites received clearance from its internal clinical review committee,
or Institutional Review Board (IRB), in July 2006. The IRB clearance permitted
us to finalize arrangements to begin patient screening and enrollment activities
for the Phase 2 trial, and we began patient enrollment in September 2006 and
completed enrollment of the 80 patients in June 2007. We announced positive
preliminary efficacy results from our Phase 2 Lymphoseek trial in June 2007 and
final results in December 2007. Localization of Lymphoseek to lymphoid tissue
was confirmed by pathology in over 99% of the lymph node tissue samples removed
during the Phase 2 trial. We held an end of Phase 2 meeting with FDA during late
October 2007 during which the final results were reviewed. The Phase 2 study was
conducted at five of the leading cancer centers in the U.S.: John Wayne Cancer
Center; University of California, San Francisco; MD Anderson Cancer Center;
University Hospital Cleveland (Case Western Reserve); and the University of
Louisville.
Based on
dialogue with FDA, we proposed to FDA that we conduct two separate Phase 3
studies to support an application for marketing clearance. During 2008, we
initiated patient enrollment in the first of the two phase 3 clinical studies to
be conducted in patients with either breast cancer or melanoma (NEO3-05). In
March 2009, we announced that this first study had reached the accrual of 203
lymph nodes, the study’s primary accrual objective. The NEO3-05 Phase 3 clinical
trial was designed to provide, and achieved its primary endpoint of, the
evaluation of the efficacy of Lymphoseek in anatomically delineating lymph nodes
in both breast cancer and melanoma patients that may be predictive of
determining whether cancer has spread into the lymphatic system. Final data from
the trial has now been reviewed and audited, and Neoprobe has submitted an
end-of-Phase 3 meeting request to the US FDA to discuss the results of the
clinical trial as part of our continuing preparation of a New Drug Application
(NDA), which we plan to file later in 2010. The NEO3-05 study has also been
closed on the national clinical trials website
www.clinicaltrials.gov.
21
The
NEO3-05 clinical trial results confirmed the identification of lymphatic tissue
in patients with either breast cancer or melanoma as designed, and when used in
conjunction with and compared to vital blue dyes, showed a marked improvement in
this identification. Pathological assessment of lymphatic tissue removed during
surgery provided further prognostic value in determining the disease state. The
Phase 3 trial was designed to determine the accuracy of Lymphoseek to identify
lymphatic tissue as compared to commonly used vital blue dyes. The primary
objective of the Phase 3 was to obtain at least 203 lymph nodes identified with
the vital blue dyes and to statistically demonstrate that 94% of those nodes
were identified with Lymphoseek. Procedure-compliant patients in the trial
contributed 215 vital blue positive nodes and Lymphoseek identified 210 of those
nodes for a success rate of over 97%. In addition, Lymphoseek identified 85
lymph nodes that were missed by the vital blue dyes. Of these Lymphoseek
positive nodes, over 18% were found by pathology to contain tumor.
A second
Phase 3 study is also underway to validate Lymphoseek as a sentinel lymph node
targeting agent. This second trial, NEO3-06 or the “Sentinel” trial,
is being conducted in patients with head and neck squamous cell
carcinoma. The Sentinel study is designed to validate Lymphoseek as a
sentinel lymph node targeting agent. Our discussions with FDA and
EMEA have also suggested that the Sentinel 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). We plan to have
approximately 25 – 35 participating institutions in the Sentinel
trial. Patient recruitment and enrollment is actively underway at a
number of institutions and the trial protocol is currently under review at
several. The accrual rate for trials of this nature is highly
dependent on the timing of IRB 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 and other factors.
We plan
to use the safety and efficacy results from the Phase 3 clinical evaluations of
Lymphoseek, which will include sites in the EU, to support the drug registration
application process in the EU as well as in the U.S. However, as
noted previously, we have submitted a request for an end of Phase 3 meeting with
FDA to review the results of the NEO3-05 trial and to clarify our clinical
development and regulatory submission plan. Our goal is to file the
new drug application with FDA for Lymphoseek later in 2010. Depending
on the timing of patient accrual, and the timing and outcome of FDA regulatory
review cycle including FDA feedback on the results of the NEO3-05 trial, we
believe that Lymphoseek could be commercialized in mid-2011. We
cannot assure you, however, that this product will achieve regulatory approval,
or if approved, that it will achieve market acceptance. We expect to
incur approximately $4 million in out-of-pocket development costs in 2009
related to the clinical and regulatory development of
Lymphoseek. Depending on the timing and outcome of the FDA regulatory
review cycle, we believe that Lymphoseek can be commercialized by
mid-2011. We cannot assure you, however, that this product will
achieve regulatory approval, or if approved, that it will achieve market
acceptance. See Risk Factors.
RIGS
From
inception until 1998, Neoprobe devoted significant efforts and resources to the
development of its proprietary RIGS technology. The RIGS system
combines a patented hand-held gamma radiation detection probe with proprietary
radiolabeled cancer-specific targeting agents to provide surgeons with real-time
information to locate tumor deposits generally not detectable by conventional
methods. The RIGS system is designed to assist the surgeon in the
more thorough removal of the cancer, thereby leading to improved surgical
treatment of the patient. The targeting agents used in the RIGS
process are monoclonal antibodies, labeled with a radioactive isotope that emits
low energy gamma rays. The device used is a very sensitive radiation
detection instrument that is capable of detecting small amounts of radiation
bound to the targeting agent. Before surgery, a cancer patient is
injected with one of the targeting agents which circulates throughout the
patient’s body and binds specifically to cancer cell antigens or
receptors. Concentrations of the targeting agent are then located
during surgery by Neoprobe's gamma detection device, which emits an audible tone
to direct the surgeon to targeted tissue.
RIGScan
CR is an intraoperative targeting agent consisting of a radiolabeled murine
monoclonal antibody (CC49 MAb). The radiolabel used is 125I, a 27 -
35 KeV emitting isotope. The CC49 MAb was developed by the NCI and is
licensed to Neoprobe by the National Institutes of Health (NIH). The
CC49 MAb is produced from a murine cell line generated by the fusion of splenic
lymphocytes from mice immunized with tumor-associated glycoprotein-72 (TAG-72)
with non-immunoglobulin secreting P3-NS-1-Ag4 myeloma cells. The CC49
MAb localizes or binds to TAG-72 antigen and shows a strong reactivity with both
LS-174T colon cancer extract and to a breast cancer extract.
22
RIGScan
CR is the biologic component for the RIGS system to be used in patients with
colon or rectal cancer. The RIGS system was conceived to be a
diagnostic aid in the intraoperative detection of clinically occult
disease. RIGScan CR is intended to be used in conjunction with other
diagnostic methods, for the detection of the extent and location of tumor in
patients with colorectal cancer. The detection of clinically occult
tumor provides the surgeon with a more accurate assessment of the extent of
disease, and therefore may impact the surgical and therapeutic management of the
patient. Clinical trials suggest that RIGScan CR provides additional
information outside that provided by standard diagnostic modalities (including
surgical exploration) that may aid in patient
management. Specifically, RIGScan CR, used as a component of the RIGS
system, confirms the location of surgically suspicious metastases, evaluates the
margins of surgical resection, and detects occult tumor in perihepatic (portal
and celiac axis) lymph nodes.
Neoprobe
conducted two Phase 3 studies, NEO2-13 and NEO2-14, of RIGScan CR in the
mid-1990s in patients with primary and metastatic colorectal cancer,
respectively. Both studies were multi-institutional involving cancer
treatment institutions in the U.S., Israel, and the EU. The primary
endpoint of both studies was to demonstrate that RIGScan CR detected
pathology-confirmed disease that had not been detected by traditional
preoperative (i.e., CT Scans) or intraoperative (i.e., surgeon’s visual
observations and palpation) means. That is, the trials were intended
to show that the use of RIGScan CR assisted the surgeon in the detection of
occult tumor. In 1996, Neoprobe submitted applications to EMEA and
FDA for marketing approval of RIGScan CR for the detection of metastatic
colorectal cancer.
Clinical
study NEO2-14, which was submitted to FDA in the RIGScan CR Biologic License
Application (BLA), enrolled 151 colorectal cancer patients with either suspected
metastatic primary colorectal disease or recurrent colorectal
disease. During FDA’s review of the BLA, 109 of the enrolled patients
were determined to be evaluable patients. Clinical study NEO2-13 was
conducted in 287 enrolled patients with primary colorectal
disease. The primary end-point for clinical study NEO2-13 was the
identification of occult tumor.
NEO2-14
was the pivotal study submitted with Neoprobe’s referenced BLA. Two
additional studies evaluating patients with either primary or metastatic
colorectal disease, NEO2-11 (a multi-center study) and NEO2-18 (a single
institution study), were included in the BLA and provided supportive proof of
concept (i.e., localization and occult tumor detection) and safety
data. A study summary report for NEO2-13 was submitted under the BLA;
however, FDA undertook no formal review of the study.
Following
review of our applications, we received requests for further information from
FDA and from the European Committee for Proprietary Medicinal Products on behalf
of EMEA. Both FDA and EMEA acknowledged that our studies met the
diagnostic endpoint of the Phase 3 clinical study, which was to provide
incremental information to the surgeon regarding the location of hidden
tumor. However, both agencies wanted to know how the finding of
additional tumor provided clinical benefit that altered patient management or
outcome for patients with metastatic colorectal cancer. In a series
of conversations with FDA, the product claims were narrowed to the
intraoperative detection of hepatic and perihepatic disease in patients with
advanced colorectal cancer and patients with recurrent colorectal
cancer.
FDA
determined during its review of the BLA that the clinical studies of RIGScan CR
needed to demonstrate clinical utility in addition to identifying additional
pathology-confirmed disease. In discussions between Neoprobe and the
agency, an FDA-driven post hoc analysis plan was developed to limit the
evaluation of RIGScan CR to patients with hepatic and perihepatic disease with
known metastasis to the liver. Findings of occult disease and
subsequent changes in patient management (i.e., abandoning otherwise risky
hepatic resections) in this limited population would serve as a measure of
patient benefit. FDA's analysis of the patients enrolled in NEO2-14 matching the
limited criteria was evaluated with a determination to confirm the surgical
resection abandonment outcome. The number of evaluable patients in
this redefined patient population was deemed too small by the agency and the
lack of pre-stated protocol guidance precluded consistent sets of management
changes given similar occult findings. The number of evaluable
patients for any measure of clinical utility, therefore, was too small to meet
relevant licensing requirements and FDA ultimately issued a not approvable
letter for the BLA on December 22, 1997, describing certain clinical and
manufacturing deficiencies. Neoprobe withdrew its application to EMEA
in November 1997.
23
We
developed a clinical response plan for both agencies during the first half of
1998. However, following our analysis of the regulatory pathways for
approval that existed at that time, we determined that we did not have
sufficient financial resources to conduct the additional studies requested and
sought to identify others with an interest in continuing the development
process.
In 2004,
we obtained access to survival analyses of patients treated with RIGScan CR
which have been prepared by third parties, indicating that RIGScan CR may be
predictive of, or actually contribute to, a positive outcome when measuring
survival of the patients that participated in our original BLA
studies. The data or its possible significance was unknown at the
time of the BLA review given the limited maturity of the follow-up
experience. The data includes publication by some of the primary
investigators involved in the Phase 3 RIGS trials who have independently
conducted survival follow-up analyses to their own institution’s RIGS trial
patients with apparently favorable results relating to the long-term survival
prognosis of patients who were treated with RIGS. Based primarily on
this survival-related information, we requested a meeting with FDA in 2004 to
discuss the possible next steps for evaluating the survival related to our
previous Phase 3 clinical trials as well as the possible submission of this
data, if acceptable, as a prospective analysis in response to questions
originally asked by FDA in response to our original BLA.
The April
2004 meeting with FDA was an important event in the re-activation of the RIGS
program. The meeting was very helpful from a number of aspects: we
confirmed that the RIGS BLA remains active and open. We believe this
will improve both the cost effectiveness and timeliness of future regulatory
submissions for RIGScan CR. Additionally, FDA preliminarily confirmed
that the BLA may be applicable to the general colorectal population; and not
just the recurrent colorectal market as applied for in
1996. Applicability to a general colorectal population could result
in a greater market potential for the product than if applicable to just the
recurrent population. During the meeting, FDA also indicated that it
would consider possible prognostic indications for RIGScan CR and that survival
data from one of our earlier Phase 3 studies could be supportive of a prognostic
indication.
Our
statistical analyses following the 2004 meeting with FDA indicated a potential
trial size which proved cost prohibitive to us and our potential development
partners in evaluating continued development for RIGScan CR. However,
during 2008 we developed a protocol design which we could believe could support
our desired clinical endpoints but in a much smaller patient
population. We made the decision to initially approach the EMEA with
this trial design under their formal process for seeking scientific
advice. After holding a successful pre-submission meeting with EMEA
in July 2008, we received positive feedback in October 1998 to the clinical
trial design which involved 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 investigational new drug (IND) amendment to the
United States FDA which includes the design of a proposed Phase 3 clinical trial
of RIGScan CR. The IND amendment includes a Special Protocol Assessment (SPA) in
accordance with the Prescription Drug User Fee Act of 1992 (PDUFA) and current
regulatory guidelines, and will be registered on the clinicaltrials.gov website
following discussions with FDA regarding the SPA.
The Phase
3 clinical study as currently designed 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 may be as few as 250
patients including both the RIGScan CR and traditional treatment groups. In
addition to assessing the ability of RIGScan CR to identify tumor-associated
tissue, the survival rate of the RIGScan CR treated patients will be compared to
the patients treated with conventional treatment modalities.
24
It should
also be noted that the RIGScan CR biologic drug has not been produced for
several years. We would have to perform some additional work related
to ensuring 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. 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. 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.
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 is 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. See Risk Factors.
Activated
Cellular Therapy
Through
various research collaborations, we performed early-stage research during the
late 1990’s on another technology platform, ACT, based on work originally done
in conjunction with the RIGS technology. ACT is intended to boost the
patient’s own immune system by removing lymph nodes identified during surgery
and then, in a cell processing technique, activating and expanding “helper”
T-cells found in the nodes. Within 10 to 14 days, the patient’s own
immune cells, activated and numbering more than 20 billion, are infused into the
patient in an attempt to trigger a more effective immune response to the
cancer.
In the
course of our research into ACT performed with RIGS, we learned that these lymph
node lymphocytes containing helper T-cells could be activated and expanded to
treat patients afflicted with viral and autoimmune disease as well as oncology
patients. We have seen promising efficacy of this technology
demonstrated from six Phase 1 clinical trials covering the oncology, viral and
autoimmune applications.
In 2005,
we formed a new subsidiary, Cira Bio, to explore the development of
ACT. Neoprobe owns approximately 90% of the outstanding shares of
Cira Bio with the remaining shares being held by the principals of a private
holding company, Cira LLC. In conjunction with the
formation of Cira Bio, an amended technology license agreement also was executed
with The Ohio State University, from whom both Neoprobe and Cira LLC had
originally licensed or optioned the various cellular therapy
technologies. As a result of the cross-license agreements, Cira Bio
has the exclusive development and commercialization rights to three issued U.S.
patents that cover the oncology and autoimmune applications of its
technology. In addition, Cira Bio has exclusive licenses to several
pending patent applications.
In 2006,
Cira Bio engaged the Battelle Memorial Institute to complete a technology and
manufacturing process assessment of the cellular therapy
approach. Cira Bio has attempted over the past few years to raise the
necessary capital to move this technology platform forward. In August
2007 we entered into a Stock and Technology Option Agreement whereby Neoprobe
gained the option to purchase the remaining 10% of Cira Bio from Cira LLC for
$250,000; however, this option expired in 2008. The
prospects for the ACT technology have been buoyed in during the fourth quarter
of 2009 as a result of the publication of the discovery of a retrovirus linked
to chronic fatigue syndrome, an autoimmune dysfunction the treatment of which
showed promise the early clinical trials for ACT. Based on this
disclosure, we are renewing our investigation the technology applications and
pospects.We do not know if our assessment of the technology’s prospects will
ultimately yield positive results or 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. See Risk Factors.
25
Market
Overviews
The
medical device marketplace is a fast growing market. Medical Device
& Diagnostic Industry magazine reported in 2008 an annual medical device and
diagnostic market of as much as $75 billion in the U.S. and $169 billion
internationally.
Cancer
Market Overview
Cancer is
the second leading cause of death in the U.S. and Western Europe and has been
estimated to be responsible for over 565,000 deaths annually in 2008 in the U.S.
alone. The NIH has estimated the overall annual costs for cancer (the
primary focus of our gamma detection and pharmaceutical products) for the U.S.
for 2007 at $219.2 billion: $89.0 billion for direct medical costs, $18.2
billion for indirect morbidity, and $112.0 billion for indirect
mortality. Our line of gamma detection systems is currently used
primarily in the application of SLNB in breast cancer and melanoma which,
according to the ACS, have been estimated to account for 13% and 4%,
respectively, of new cancer cases which occurred in the U.S. in
2008.
The NIH
has estimated that breast cancer will annually affect half a million women in
North America, Western Europe, and other major economic
markets. Breast cancer is the second leading cause of death from
cancer among all women in the U.S. The incidence of breast cancer,
while starting to show minor declines in the past year or so, generally
increases with age, rising from about 100 cases per 100,000 women at age 40 to
about 400 cases per 100,000 women at age 65. While the incidence rate
for breast cancer appears to be decreasing, the overall number of new cases of
breast cancer is still increasing. According to the ACS, over 182,000
new cases of invasive breast cancer are expected to be diagnosed and
approximately 41,000 women are estimated to have died from the disease during
2008 in the U.S. alone. Thus, we believe that the significant aging
of the population, combined with improved education and awareness of breast
cancer and diagnostic methods, will continue to lead to an increased number of
breast cancer surgical diagnostic procedures.
Approximately
80% of the patients diagnosed with breast cancer undergo a lymph node dissection
(either ALND or SLNB) to determine if the disease has spread. While
many breast cancer patients are treated in large cancer centers or university
hospitals, regional and/or community hospitals continue to treat the majority of
breast cancer patients. Over 10,000 hospitals are located in the
markets targeted for our gamma detection SLNB products. We believe a
significant portion of the potential market for gamma detection devices remains
unpenetrated and that a replacement market is beginning to develop as units
placed in the early years of SLNB begin to exceed over ten years of
use. In addition, if the potential of Lymphoseek as a radioactive
tracing agent is ultimately realized, it has the potential to address not only
the current breast and melanoma markets on a procedural basis, but also to
assist in the clinical evaluation and staging of solid tumor cancers and
expanding SLNB to additional indications, such as gastric, non-small cell lung
and other solid tumor cancers.
We
estimate the total market potential for Lymphoseek, if ultimately approved for
all of these indications, could exceed $250 million. However, we
cannot assure you that Lymphoseek will be cleared to market, or if cleared to
market, that it will achieve the prices or sales we have estimated.
The ACS
has also estimated that nearly 148,000 new incidences of colon and rectal
cancers were expected to occur in the U.S. in 2008. Based on an
assumed recurrence rate of 40%, this would translate into total potential
surgical procedures of over 200,000 annually in the U.S. alone. We
believe the number of procedures in other markets of the world to be
approximately two times the estimated U.S. market. As a result, we
believe the total potential global market for RIGScan CR could be in excess of
$2 billion annually, depending on the level of reimbursement
allowed. However, we cannot assure you that RIGScan CR will be
cleared to market, or if cleared to market, that it will receive the
reimbursement or achieve the level of sales we have currently
estimated.
26
Marketing
and Distribution
Gamma
Detection Devices
We began
marketing the neo2000 gamma detection system in October 1998. Since
October of 1999, our gamma detection systems have been marketed and distributed
throughout most of the world through Ethicon Endo-Surgery, Inc. (EES), a Johnson
& Johnson company. In Japan, however, we market our products
through a pre-existing relationship with Century Medical, Inc.
The heart
of our gamma detection product line, the neoprobe GDS, is a control unit that is
software-upgradeable, permitting product enhancements without costly
remanufacturing. Since the original launch of the GDS’ predecessor
platform, the neo2000 (in 1998), we have also introduced a number of enhanced
radiation detection probes optimized for lymphatic mapping procedures, including
three wireless probes, as well as a new probe optimized for the
detection of high energy radioisotopes. We have also developed four
major software upgrades for the system that have been made available for sale to
customers. We intend to continue developing additional SLNB-related
probes and instrument products in cooperation with EES to maintain our
leadership position in the gamma detection field.
Physician
training is critical to the use and adoption of SLNB products by surgeons and
other medical professionals. Our company and our marketing partners
have established relationships with leaders in the SLNB surgical community and
have established and supported training courses internationally for lymphatic
mapping. We intend to continue to work with our partners to expand
the number of SLNB training courses available to surgeons.
We
entered into a distribution agreement with EES effective October 1, 1999 for an
initial five-year term with options to extend for two successive two-year
terms. In March 2004, EES exercised its first two-year extension
option, and in March 2006 EES exercised its option for the second and final
two-year term extension, thus extending the term of our the agreement through
the end of 2008. In December 2007, Neoprobe and EES executed an
amendment to the distribution agreement which extended the agreement through the
end of 2013. Under this agreement, we manufacture and sell our SLNB
products almost exclusively to EES, who distributes the products globally
(except for Japan). EES has no ongoing purchase or reimbursement
commitments to us other than the rolling four-month binding purchase commitment
for gamma detection devices and certain annual minimum sales levels in order to
maintain their exclusivity in distribution in most global markets. In
addition, the economic terms of the revenue sharing from the end customer sale
of our gamma detection devices increased commencing in January
2009. Our agreement with EES also contains certain termination
provisions and licenses to our intellectual property that take effect only in
the event we fail to supply product, or for other reasons such as a change of
control. See Risk Factors.
Gamma
Detection Radiopharmaceuticals
During
the fourth quarter of 2007, we executed an agreement with Cardinal Health,
Inc.’s radiopharmaceutical distribution division (Cardinal Health) for the
exclusive distribution of Lymphoseek in the United States. The
agreement is for a term of five years from the date of marketing clearance of a
NDA from FDA. Under the terms of our agreement with Cardinal Health,
Neoprobe will receive a share of each patient dose sold. In addition,
Neoprobe will receive up to $3 million in payments upon the achievement of
certain sales milestones by Cardinal Health. We do not currently have
collaborative agreements covering Lymphoseek in other areas of the world or for
RIGScan CR or ACT. We cannot assure you that we will be successful in
securing collaborative partners for other global markets or radiopharmaceutical
products, or that we will be able to negotiate acceptable terms for such
arrangements. We believe the most preferable and likely distribution
partners for Lymphoseek would be entities with established radiopharmaceutical
distribution channels, although it is possible that other entities with more
traditional oncology pharmaceutical portfolios may also have
interest.
27
With
respect to RIGScan CR, we believe there are development milestones that can be
achieved prior to the need for significant capital investment in RIGScan CR,
such as harmonizing the regulatory requirements in the US and EU for the planned
Phase 3 trial. 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 to fund the pivotal clinical testing that will be necessary to
gain marketing clearance for RIGScan CR. At the present time, while
we have parties who have indicated an interest in entering into a development
relationship, we do not believe these efforts will result in a definitive
partnership at least until a regulatory and development pathway is
obtained. We anticipate continuing discussions for RIGScan CR as we
move forward with the clinical development of the product; however, we cannot
assure you that we will be able to secure marketing and distribution partners
for the product, or if secured, that such arrangements will result in
significant sales of RIGScan CR.
Manufacturing
Medical
Devices
We rely
on independent contract manufacturers, some of which are single-source
suppliers, for the manufacture of the principal components of our current line
of gamma detection system products. See Risk Factors. We
have devoted significant resources to develop production capability of our gamma
detection systems at qualified contract manufacturers. Production of
the neoprobe GDS control unit, the 14mm probe, the 11mm laparoscopic probe, and
the wireless probes involve the manufacture of components by a combination of
subcontractors, including but not limited to, eV Microelectronics, a division of
Endicott Interconnect Technologies, Inc. (eV), and TriVirix International, Inc.
(TriVirix). We also purchase certain accessories for our line of
gamma detection systems from other qualified manufacturers.
We have
purchased certain solid-state crystals and associated electronics used in the
manufacture of our proprietary line of hand-held gamma detection probes from
eV. We do not currently have a supply agreement with eV, however we
currently purchase from them under extended blanket purchase
orders. The number of potential suppliers of such solid-state
crystals is limited. In the event we are unable to secure a viable
alternative source of supply should we become unable to obtain crystals from eV,
any prolonged interruption of this source could restrict the availability of our
probe products, which would adversely affect our operating results.
In
February 2004, we executed a Product Supply Agreement with TriVirix for the
manufacture and/or final assembly of our gamma detection products, including
probes and control units. The original term of this agreement expired
in February 2007 but has been extended under the automatic renewal terms of the
agreement through February 2010. The Agreement will continue to be
automatically extended for successive one-year periods unless six months notice
is provided by either party.
We cannot
assure you that we will be able to maintain agreements or other purchasing
arrangements with our subcontractors on terms acceptable to us, or that our
subcontractors will be able to meet our production requirements on a timely
basis, at the required levels of performance and quality. In the
event that any of our subcontractors is unable or unwilling to meet our
production requirements, we cannot assure you that an alternate source of supply
could be established without significant interruption in product supply or
without significant adverse impact to product availability or
cost. Any significant supply interruption or yield problems that we
or our subcontractors experience would have a material adverse effect on our
ability to manufacture our products and, therefore, a material adverse effect on
our business, financial condition, and results of operations until a new source
of supply is qualified. See Risk Factors.
Gamma
Detection Radiopharmaceuticals
In
preparation for the commencement of a multi-center clinical evaluation of
Lymphoseek, Neoprobe engaged drug manufacturing organizations to produce the
drug that was used in the Phase 2 trial and is expected to be used in the
pivotal (i.e., Phase 3) clinical trials. Reliable has produced the
active chemical compound and OSO Bio has performed final product manufacturing
including final drug formulation, lyophilization (i.e., freeze-drying) and
packaging processes. Once packaged, the vialed drug can then be
shipped to a hospital or regional commercial radiopharmacy where it can be made
radioactive (i.e., radiolabeled) with Tc99m to become Lymphoseek. The
commercial manufacturing processes at Reliable and OSO Bio are being validated
and both organizations have assisted Neoprobe in the preparation of the
chemistry, manufacturing and control sections of our submissions to FDA and
EMEA. Both Reliable and OSO Bio are registered manufacturers with FDA
and/or EMEA. At this point, drug product produced by Reliable and OSO
Bio has been produced under clinical development
agreements. Commercial supply and distribution agreements are being
negotiated with both Reliable and OSO Bio. We cannot assure you that
we will be successful in reaching such agreements with Reliable or OSO Bio on
terms satisfactory to us or at all.
28
During
the third quarter of 2009, we announced that we had executed a Biopharmaceutical
Development and Supply Agreement with Laureate Pharma. 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. 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.
We cannot
assure you that we will be successful in securing and/or maintaining the
necessary biologic, product and/or radiolabeling capabilities. See
Risk Factors.
Competition
We face
competition from medical product and biotechnology companies, as well as from
universities and other non-profit research organizations in the field of cancer
diagnostics and treatment. Many emerging medical product companies
have corporate partnership arrangements with large, established companies to
support the research, development, and commercialization of products that may be
competitive with our products. In addition, a number of large
established companies are developing proprietary technologies or have enhanced
their capabilities by entering into arrangements with or acquiring companies
with technologies applicable to the detection or treatment of
cancer. Many of our existing or potential competitors have
substantially greater financial, research and development, regulatory,
marketing, and production resources than we have. Other companies may
develop and introduce products and processes competitive with or superior to
those of ours. See Risk Factors.
For our
products, an important factor in competition is the timing of market
introduction of our products or those of our competitors’
products. Accordingly, the relative speed with which we can develop
products, complete the regulatory clearance processes and supply commercial
quantities of the products to the market is an important competitive
factor. We expect that competition among products cleared for
marketing will be based on, among other things, product efficacy, safety,
reliability, availability, price, and patent position.
Gamma
Detection Devices
With the
continued emergence of SLNB, a number of companies have begun to market gamma
radiation detection instruments. Most of the competitive products
have been designed from an industrial or nuclear medicine perspective rather
than being developed initially for surgical use. We compete with
products produced and/or marketed by Care Wise Medical Products Corporation,
Intra-Medical Imaging LLC, RMD Instruments LLC (a subsidiary of Dynasil
Corporation), SenoRx, Eurorad S.A and other companies.
It is
often difficult to glean accurate competitive information within the lymphatic
mapping field, primarily because most of our competitors are either subsidiaries
or divisions of larger corporations or privately held corporations, whose sales
revenue or volume data is not readily available or determinable. In
addition, lymphatic mapping does not currently have a separate reimbursement
code in most healthcare systems. As such, determining trends in the
actual number of procedures being performed using lymphatic mapping is
difficult. We believe, based on our understanding of EES’ success
rate in competitive bid situations, that our market share has remained
relatively constant or increased slightly in light of changes in the competitive
landscape over the past few years. As we have discussed, we believe
that current sales levels indicate that some prospective customers may be
waiting on the results of important international clinical trials prior to
adoption of the SLNB procedure and purchasing a gamma detection
device. We expect the results from these trials, when announced, will
likely have a positive impact on sales volumes. We believe our
intellectual property portfolio will be a barrier to competitive products;
however, we cannot assure you that competitive products will not be developed,
be successful in eroding our market share or affect the prices we receive for
our gamma detection devices. See Risk Factors.
29
Gamma
Detection Radiopharmaceuticals
We do not
believe there are any directly competitive intraoperative diagnostic
radiopharmaceuticals with RIGScan CR that would be used intraoperatively in the
colorectal cancer application that RIGScan CR is initially targeted
for. There are other radiopharmaceuticals that are used as
preoperative imaging agents; however, we are unaware of any that could be used
as a real-time diagnostic aid during surgery such as RIGScan CR.
Surgeons
who practice the lymphatic mapping procedure for which Lymphoseek is intended
currently use other radiopharmaceuticals such as a sulphur-colloid compound in
the U.S. and other colloidal compounds in other markets. However,
these drugs are being used “off-label” in most major global markets (i.e., they
are not specifically indicated for use as a sentinel node targeting
agent). As such, we believe that Lymphoseek, if ultimately approved,
would be the first drug specifically labeled for use as a sentinel lymph node
targeting agent.
Patents
and Proprietary Rights
We regard
the establishment of a strong intellectual property position in our technology
as an integral part of the development process. We attempt to protect
our proprietary technologies through patents and intellectual property positions
in the United States as well as major foreign markets. Approximately
20 instrument patents issued in the United Sates as well as major foreign
markets protect our gamma detection technology.
Lymphoseek
is also the subject of patents and patent applications in the United States and
certain major foreign markets. The patents and patent applications
are held by The Regents of the University of California and have been licensed
exclusively to Neoprobe for lymphatic tissue imaging and intraoperative
detection worldwide. The first composition of matter patent covering
Lymphoseek was issued in the United States in June 2002. The claims
of the composition of matter patent covering Lymphoseek have been allowed in the
EU and issued in the majority of EU countries in 2005. The
composition of matter patent is being prosecuted in Japan and we have received
notice of the allowance of the underlying claims.
We
continue to support proprietary protection for the products related to RIGS and
ACT in major global markets such as the U.S. and the EU, which although not
currently integral to our near-term business plans, may be important to a
potential RIGS or ACT development partner. Composition of matter
patents have been issued in the U.S. and EU that cover the antibodies used in
clinical studies. The most recent of these patents was issued in 2004
and additional patent applications are pending. We have a license to
these patents through the NIH; however, our license is subject to ongoing
diligence requirements.
The
activated cellular therapy technology of Cira Bio is the subject of issued
patents in the United States to which Neoprobe has exclusive license
rights. European patent statutes do not permit patent coverage for
treatment technologies such as Cira Bio’s. The oncology applications
of Cira Bio’s treatment approach are covered by issued patents with expiration
dates of 2018 and 2020, unless extended. The autoimmune applications
are covered by an issued patent with an expiration date of 2018, unless
extended. The viral applications are the subject of patent
applications and other aspects of the Cira Bio technology that are in the
process of being reviewed by the United States Patent and Trademark
Office. Cira Bio has received favorable office action correspondence
on both applications.
The
patent position of biotechnology and medical device firms, including our
company, generally is highly uncertain and may involve complex legal and factual
questions. Potential competitors may have filed applications, or may
have been issued patents, or may obtain additional patents and proprietary
rights relating to products or processes in the same area of technology as that
used by our company. The scope and validity of these patents and
applications, the extent to which we may be required to obtain licenses
thereunder or under other proprietary rights, and the cost and availability of
licenses are uncertain. We cannot assure you that our patent
applications will result in additional patents being issued or that any of our
patents will afford protection against competitors with similar technology; nor
can we assure you that any of our patents will not be designed around by others
or that others will not obtain patents that we would need to license or design
around.
30
We also
rely upon unpatented trade secrets. We cannot assure you that others
will not independently develop substantially equivalent proprietary information
and techniques, or otherwise gain access to our trade secrets, or disclose such
technology, or that we can meaningfully protect our rights to our unpatented
trade secrets.
We
require our employees, consultants, advisers, and suppliers to execute a
confidentiality agreement upon the commencement of an employment, consulting or
manufacturing relationship with us. The agreement provides that all
confidential information developed by or made known to the individual during the
course of the relationship will be kept confidential and not disclosed to third
parties except in specified circumstances. In the case of employees,
the agreements provide that all inventions conceived by the individual will be
the exclusive property of our company. We cannot assure you, however,
that these agreements will provide meaningful protection for our trade secrets
in the event of an unauthorized use or disclosure of such
information. See Risk Factors.
Government
Regulation
Most
aspects of our business are subject to some degree of government regulation in
the countries in which we conduct our operations. As a developer,
manufacturer and marketer of medical products, we are subject to extensive
regulation by, among other governmental entities, FDA and the corresponding
state, local and foreign regulatory bodies in jurisdictions in which our
products are sold. These regulations govern the introduction of new
products, the observance of certain standards with respect to the manufacture,
safety, efficacy and labeling of such products, the maintenance of certain
records, the tracking of such products and other matters.
Failure
to comply with applicable federal, state, local or foreign laws or regulations
could subject us to enforcement action, including product seizures, recalls,
withdrawal of marketing clearances, and civil and criminal penalties, any one or
more of which could have a material adverse effect on our
business. We believe that we are in substantial compliance with such
governmental regulations. However, federal, state, local and foreign
laws and regulations regarding the manufacture and sale of medical devices are
subject to future changes. We cannot assure you that such changes
will not have a material adverse effect on our company.
For some
products, and in some countries, government regulation is significant and, in
general, there is a trend toward more stringent regulation. In recent
years, FDA and certain foreign regulatory bodies have pursued a more rigorous
enforcement program to ensure that regulated businesses like ours comply with
applicable laws and regulations. We devote significant time, effort
and expense addressing the extensive governmental regulatory requirements
applicable to our business. To date, we have not received any
notifications or warning letters from FDA or any other regulatory bodies of
alleged deficiencies in our compliance with the relevant requirements, nor have
we recalled or issued safety alerts on any of our products. However,
we cannot assure you that a warning letter, recall or safety alert, if it
occurred, would not have a material adverse effect on our company.
In the
early- to mid-1990s, the review time by FDA to clear medical products for
commercial release lengthened and the number of marketing clearances
decreased. In response to public and congressional concern, FDA
Modernization Act of 1997 (the 1997 Act) was adopted with the intent of bringing
better definition to the clearance process for new medical
products. While FDA review times have improved since passage of the
1997 Act, we cannot assure you that FDA review process will not continue to
delay our company's introduction of new products in the U.S. in the
future. In addition, many foreign countries have adopted more
stringent regulatory requirements that also have added to the delays and
uncertainties associated with the release of new products, as well as the
clinical and regulatory costs of supporting such releases. It is
possible that delays in receipt of, or failure to receive, any necessary
clearance for our new product offerings could have a material adverse effect on
our business, financial condition or results of operations.
31
While we
are unable to predict the extent to which our business may be affected by future
regulatory developments, we believe that our substantial experience dealing with
governmental regulatory requirements and restrictions on our operations
throughout the world, and our development of new and improved products, should
enable us to compete effectively within this environment.
Gamma
Detection Devices
As a
manufacturer of medical devices sold in various global markets, we are required
by regulatory agency regulations to manufacture the devices under recognized
quality standards and controls. Our medical devices are regulated in
the United States by FDA in accordance with 21CFR requirements, in the EU
according to the Medical Device Directive (93/42/EEC), and in Canada and Japan
according to the Medical Devices Regulation. These regulatory
requirements for quality systems are prescribed in the international standard
ISO 13485 Medical devices – Quality management systems – Requirements for
regulatory purposes. To ensure continued compliance in our daily
processes, we have established and maintain the Neoprobe Corporate Quality
Management System, which is based on the ISO 13485 standard. These
requirements can also be extended to drug and biologic products regarding our
future product portfolio.
Our first
generation gamma detection instrument received 510(k) marketing clearance from
FDA in December 1986 with modified versions receiving similar clearances in 1992
through 1997. In March 1998, FDA reclassified "nuclear uptake
detectors" as Class 1 and conditionally exempt from 510(k) with full quality
controls. We obtained the European CE mark, by “self-declaration,”
for the neo2000 device in January 1999, with full quality
controls. The gamma detection products are Class IIa in the
EU. We maintain a “manufacturer’s license” in order to import our
gamma detection products into Canada, with full quality controls. The
gamma detection products are Class II in Canada.
Gamma
Detection Radiopharmaceuticals (Lymphoseek and RIGScan)
Our
radiolabeled targeting agents and biologic products, if developed, would require
a regulatory license to market by FDA and by comparable agencies in foreign
countries. The process of obtaining regulatory licenses and approvals
is costly and time consuming, and we have encountered significant impediments
and delays related to our previously proposed biologic products.
The
process of completing pre-clinical and clinical testing, manufacturing
validation and submission of a marketing application to the appropriate
regulatory bodies usually takes a number of years and requires the expenditure
of substantial resources, and we cannot assure you that any approval will be
granted on a timely basis, if at all. Additionally, the length of
time it takes for the various regulatory bodies to evaluate an application for
marketing approval varies considerably, as does the amount of preclinical and
clinical data required to demonstrate the safety and efficacy of a specific
product. The regulatory bodies may require additional clinical
studies that may take several years to perform. The length of the
review period may vary widely depending upon the nature and indications of the
proposed product and whether the regulatory body has any further questions or
requests any additional data. Also, the regulatory bodies will likely
require post-marketing reporting and surveillance programs to monitor the side
effects of the products. We cannot assure you that any of our
potential drug or biologic products will be approved by the regulatory bodies or
approved on a timely or accelerated basis, or that any approvals received will
not subsequently be revoked or modified.
In
addition to regulations enforced by FDA, the manufacture, distribution, and use
of radioactive targeting agents, if developed, are also subject to regulation by
the Nuclear Regulatory Commission (NRC), the Department of Transportation and
other federal, state, and local government authorities. We, or our
manufacturer of the radiolabeled antibodies, must obtain a specific license from
the NRC to manufacture and distribute radiolabeled antibodies, as well as comply
with all applicable regulations. We must also comply with Department
of Transportation regulations on the labeling and packaging requirements for
shipment of radiolabeled antibodies to licensed clinics, and must comply with
federal, state, and local governmental laws regarding the disposal of
radioactive waste. We cannot assure you that we will be able to
obtain all necessary licenses and permits and be able to comply with all
applicable laws. The failure to obtain such licenses and permits or
to comply with applicable laws would have a materially adverse effect on our
business, financial condition, and results of operations.
32
Research
and Development
We spent
approximately $4.3 million and $2.5 million on research and development
activities in the fiscal years ended December 31, 2008, and December 31, 2007,
respectively. For the nine-month period ended September 30, 2009, we
spent approximately $3.7 million on research and development
activities.
Employees
As of
December 29, 2009, we had 25 full-time employees. We consider our
relations with our employees to generally be good.
DESCRIPTION
OF PROPERTY
We
currently lease approximately 11,300 square feet of office space at 425 Metro
Place North, Dublin, Ohio, as our principal offices. The current lease term is
from June 1, 2007 and ending on January 31, 2013, at a monthly base rent of
approximately $8,200 during 2009. We must also pay a pro-rata portion
of the operating expenses and real estate taxes of the building. We
believe these facilities are in good condition, but that we may need to expand
our leased space related to our radiopharmaceutical activities depending on the
level of activities performed internally versus by third parties.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read together with our Financial Statements and
the Notes related to those statements, as well as the other financial
information included in this Registration Statement on Form S-1, of which this
prospectus is a part. Some of our discussion is forward-looking and involves
risks and uncertainties. For information regarding risk factors that could have
a material adverse effect on our business, refer to the Risk Factors section of
this prospectus beginning on page 5.
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. In addition to our medical device products,
we have two radiopharmaceutical products, Lymphoseek® and
RIGScan® 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).
YEARS
ENDED DECEMBER 31, 2008 AND 2007
Results
of Operations
Revenue
for 2008 increased to $7.6 million from $6.8 million in the prior
year. The increase was primarily due to sales of our neoprobe GDS
control units (launched during 2008) and wireless probes, offset by decreases in
sales of the legacy versions of our gamma detection systems (i.e., neo2000
control units and corded probes). In addition, we recognized revenue
of $172,000 related to research and development revenue from EES related to the
development of a high energy probe recently introduced at a conference of the
Society of Surgical Oncology.
Gross
margins for 2008 increased to 63% as compared to 57% in 2007. The
increase in gross margins was due to a combination of factors including research
and development revenue from EES in 2008, a lower proportionate level of
demonstration units placed in 2008 compared to 2007, increased unit sales and
prices of gamma detection control units and increased unit sales and prices of
wireless probes offset by a decrease in the percentage of ASP for wireless
probes received by Neoprobe. The price increases we experienced in
2008 were due in part to the current favorable impact on our sales prices to EES
of the Euro to U.S. Dollar exchange rate as well as improvement in prices in
base currencies.
33
Results
for 2008 also reflect an increase in research and development expenditures of
$1.8 million to $4.3 million from $2.5 million in 2007. The increase
was primarily due to higher Lymphoseek development expenses related to
conducting the Phase 3 clinical trials as well as increased activities related
to RIGScan CR. Research and development costs were further increased
by additional expenses related to investment in our gamma detection device line
related to product line expansion and innovation. Consolidated
selling, general and administrative expenses increased to $3.0 million in 2008
from $2.4 million in 2007.
Net Sales and
Margins. Net sales, comprised primarily of sales of our gamma
detection systems, increased $644,000, or 10%, to $7.4 million during 2008 from
$6.8 million in 2007. Gross margins on net sales increased to 62% of
net sales for 2008 compared to 57% of net sales for 2007.
The
wireless innovations we have made to both the probes and control units in our
gamma detection device product line over the last two years have positively
impacted our sales in 2008. Overall, the increase in net sales was
the result of increased gamma detection device sales of $491,000, increased
gamma detection device extended service contract revenue of $145,000 and
increased gamma detection device service-related revenue of
$9,000. Increased unit sales of our control units and wireless probes
were partially offset by decreased unit sales of corded
probes. Increased unit prices of our control units and corded probes
were partially offset by decreased unit prices of our wireless probes due to a
decrease in the percentage of ASP received by Neoprobe offsetting an overall
increase in ASP for wireless probes.
The
increase in gross margins on net product sales was due to a combination of
factors including a lower proportionate level of demonstration units placed in
2008 compared to 2007, increased unit sales and prices of gamma detection
control units and increased unit sales and prices of wireless probes offset by a
decrease in the percentage of ASP for wireless probes received by
Neoprobe. The price increases we experienced in 2008 were due in part
to the current favorable impact on our sales prices to EES of the Euro to U.S.
Dollar exchange rate.
Research and Development
Expenses. Research and development expenses increased $1.8
million, or 71%, to $4.3 million during 2008 from $2.5 million in
2007. Research and development expenses in 2008 included
approximately $3.3 million in drug and therapy product development costs and
$948,000 in gamma detection device development costs. This compares
to expenses of $1.8 million and $680,000 in these segment categories in
2007. The changes in each category were primarily due to (i)
increased clinical activities related to Lymphoseek due to costs of conducting
the Phase 3 clinical trials in 2008 being higher than costs of conducting the
Phase 2 clinical trials in 2007, as well as increased activities related to
RIGScan CR and (ii) development of our neoprobe GDS control units and various
probes in 2008.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
increased $585,000, or 25%, to $3.0 million during 2008 from $2.4 million in
2007. The net difference was due primarily to increases in investor
relations expenses, professional services and personnel-related
expenses.
Other Income
(Expenses). Other expenses, net decreased $1.2 million to $2.1
million during 2008 from $3.3 million in 2007. Interest expense,
primarily related to the convertible debt agreements we completed in December
2004, July 2007, December 2007 and April 2008, decreased $539,000 to $1.7
million during 2008 from $2.3 million in 2007. Of this interest
expense, $706,000 and $1.4 million in 2008 and 2007, respectively, was non-cash
in nature related to the amortization of debt issuance costs and discounts
resulting from the warrants, beneficial conversion features and derivative
liabilities related to the convertible debt. Interest expense in 2007
also included an adjustment to non-cash interest which was recorded in the third
quarter of 2007. During the fourth quarter of 2007, we also recorded
debt extinguishment charges of $860,000 related to modification of the terms of
a convertible debt agreement with our CEO. In addition, during 2008
and 2007, we recorded $451,000 and $248,000, respectively, of increases in
derivative liabilities resulting from the accounting treatment for the
convertible note agreements we executed in December 2007 and April 2008 and the
related warrants to purchase our common stock, which contained certain
provisions that resulted in their being treated as derivative
instruments.
34
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. Total revenues
from discontinued operations were $297,000 and $351,000 in 2008 and 2007,
respectively. The net loss from discontinued operations was $534,000
and $748,000 for the years ended December 31, 2008 and 2007,
respectively.
THREE
AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
Overview
This
Overview section contains a number of forward-looking statements, all of which
are based on current expectations. Actual results may differ
materially. Our financial performance is highly dependent on our
ability to continue to generate income and cash flow from our medical device
product lines. We cannot assure you that we will achieve the volume
of sales anticipated, or if achieved, that the margin on such sales will be
adequate to produce positive operating cash flow.
We
believe that the future prospects for Neoprobe continue to improve as we make
progress in all of our key growth areas, especially related to our Lymphoseek
initiative. Despite the current global economic conditions, our gamma
device line continues to provide a strong revenue base. Due in part
to the increased revenue share we receive from EES starting in January 2009, we
expect overall revenue for our gamma device line for 2009 to be higher than
2008. 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 2009 or 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 to 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.
Our
operating expenses during the first nine months of 2009 were focused primarily
on support of Lymphoseek product development. In addition, we
continued to modestly invest in our gamma detection device line related to
product line expansion and innovation. We expect our drug-related
development expenses to increase significantly over the remainder of 2009 as we
continue the second multi-center Phase 3 clinical evaluation of Lymphoseek and
support the other drug stability and production validation activities related to
supporting the potential marketing registration of Lymphoseek. We
expect to continue to incur modest development expenses to support our device
product lines as well as we work with our marketing partners to expand our
product offerings in the gamma device arena.
Our
efforts thus far in 2009 have resulted in the following milestone
achievements:
|
·
|
Completed
a multi-center Phase 3 clinical trial of Lymphoseek (NEO3-05) in patients
with breast cancer or melanoma and announced that the primary efficacy
endpoint was exceeded with no drug-related safety events
reported.
|
|
·
|
Initiated
patient enrollment in a second multi-center Phase 3 clinical trial of
Lymphoseek (NEO3-06 or the “Sentinel” trial) in patients with head and
neck squamous cell carcinoma.
|
|
·
|
Initiated
drug development activities for RIGScan CR to support a multi-center Phase
3 study.
|
|
·
|
Began
a new five-year term of our EES gamma detection device distribution
agreement.
|
|
·
|
Added
a high energy (F-18) probe to our gamma detection device product
portfolio.
|
35
|
·
|
Completed
a debt restructuring agreement allowing reclassification of a majority of
the Company’s derivative liabilities and resulting in the accelerated
exercise of the Series Y Warrants, producing $3.45 million in cash flow to
the Company.
|
In June
2008, we initiated the NEO3-05 study, which was a Phase 3 study to support the
filing of a new drug application for Lymphoseek. This trial was
conducted in patients with either breast cancer or melanoma and was designed to
determine the concordance of Lymphoseek uptake in lymph nodes with the uptake of
vital blue dye in the same lymph nodes. In March 2009, we announced
that we had reached the original patient accrual target and, based on a review
of preliminary data, the efficacy endpoint for the trial had been
achieved. We have completed a full audit of the clinical data and
have confirmed that the primary clinical endpoint was statistically
achieved. Final audited data from the trial is expected to be
presented at medical meetings and published in peer-reviewed publications later
this year and early in 2010.
In June
2009, we initiated a second Phase 3 clinical trial to be conducted in patients
with head and neck squamous cell carcinoma (NEO3-06 or the “Sentinel”
trial). The Sentinel study is designed to validate Lymphoseek as a
sentinel lymph node targeting agent. Our discussions with FDA and
EMEA have also suggested that the Sentinel 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). We plan to have
approximately 25 – 35 participating institutions in the Sentinel
trial. We hope a larger number of participating sites than we have
had in previous trials will ultimately enable us to enroll patients at a more
rapid rate. The trial protocol is currently under review at a number
of these institutions and patient recruitment and enrollment is actively
underway. The accrual rate for trials of this nature is highly
dependent on the timing of institutional review board (IRB) 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 and other factors.
We plan
to use the safety and efficacy results from the Phase 3 clinical evaluations of
Lymphoseek, which will include sites in the EU, to support the drug registration
application process in the EU as well as in the U.S. During the
fourth quarter of 2009, we plan to request an end of Phase 3 meeting with FDA to
review the results of the NEO3-05 trial and to clarify our clinical development
and regulatory submission plan. Our goal remains to file the new drug
application with FDA for Lymphoseek in mid-2010. Depending on the
timing of patient accrual, and the timing and outcome of the FDA regulatory
review cycle, we believe that Lymphoseek can be commercialized in
mid-2011. We cannot assure you, however, that this product will
achieve regulatory approval, or if approved, that it will achieve market
acceptance.
Over the
past few years, we have made progress in advancing our RIGScan CR development
program while incurring minimal research expenses. Our RIGS®
technology, which had been essentially inactive since failing to gain approval
following our original license application in 1997, has been the subject of
renewed interest due primarily to the analysis of survival data related to
patients who participated in the original Phase 3 clinical studies that were
completed in 1996. After a successful pre-submission meeting with
EMEA in July 2008, we submitted a plan during the third quarter on how we would
propose to complete clinical development 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. EMEA cleared the
protocol in December 2008. We had planned to submit the protocol to
FDA in December 2008 but were delayed awaiting confirmation that FDA has
transferred responsibility for our IND from the Center for Biologics Evaluation
and Review (CBER) division to the Center for Diagnostics Evaluation and Review
(CDER) division. We are currently planning to submit a pre-Phase 3
meeting request to FDA during the fourth quarter of 2009 in connection with a
request for a Special Protocol Assessment. As we endeavor to clarify
the regulatory pathway for RIGScan CR, we have commenced the initial development
activities for the production of RIGScan CR consistent with the scientific
advice received from EMEA.
36
We
continue to believe it will be necessary for us to identify a development
partner or an alternative funding source in order to prepare for and fund the
pivotal clinical testing that will be necessary to gain marketing clearance for
RIGScan CR. In the past, we have engaged in discussions with various
parties regarding such a partnership. We believe the recently
clarified regulatory pathway approved by EMEA will assist us in those
efforts. However, we believe it remains important to gain FDA
concurrence with the EMEA decision in order to secure a partnership that is
optimally beneficial to the Company. Even if we are able to make such
arrangements on satisfactory terms, we believe that the time required for
continued development, regulatory approval and commercialization of a RIGS
product would likely be a minimum of five years before we receive any
significant product-related royalties or revenues. We cannot assure
you that we will be able to complete definitive agreements with a development
partner or obtain financing to fund development of the RIGS technology and do
not know if such arrangements could be obtained on a timely basis on terms
acceptable to us, or at all. We also cannot assure you that FDA or
EMEA will clear our RIGS products for marketing or that any such products will
be successfully introduced or achieve market acceptance.
In 2005,
we formed a new subsidiary, Cira Bio, to explore the development of
ACT. Neoprobe owns approximately 90% of the outstanding shares of
Cira Bio with the remaining shares being held by the principals of a private
holding company, Cira LLC. In conjunction with the formation of Cira
Bio, an amended technology license agreement also was executed with The Ohio
State University, from whom both Neoprobe and Cira LLC had originally licensed
or optioned the various cellular therapy technologies. As a result of
the cross-license agreements, Cira Bio has the exclusive development and
commercialization rights to three issued U.S. patents that cover the oncology
and autoimmune applications of its technology. In addition, Cira Bio
has exclusive licenses to several pending patent applications. We
hope to identify a funding source to continue Cira Bio’s development
efforts. If we are successful in identifying a funding source, we
expect that any funding would likely be accomplished by an investment directly
into Cira Bio, so that the funds raised would not dilute current Neoprobe
shareholders. Obtaining this funding would likely dilute Neoprobe’s
ownership interest in Cira Bio; however, we believe that moving forward such a
promising technology will only yield positive results for the Neoprobe
stockholders and the patients who could benefit from these
treatments. 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
that revenues from our gamma detection devices will result in a net profit in
2009 for that line of business, excluding general and administrative costs,
interest and other financing-related charges. Our overall operating
results for 2009 will also be greatly affected by the amount of development of
our radiopharmaceutical products. Primarily as a result of the
significant development costs we expect to incur related to the continued
clinical development of Lymphoseek, we do not expect to achieve operating profit
during 2009. In addition, our net loss and loss per share will likely
be significantly impacted by the non-cash expense we have recorded year-to-date
due to the accounting treatment for the derivative liabilities related to the
convertible debt we issued in December 2007 and April 2008 and the convertible
preferred stock we issued in December 2008. We cannot assure you that
our current or potential new products will be successfully commercialized, that
we will achieve significant product revenues, or that we will achieve or be able
to sustain profitability in the future.
Results
of Operations
Revenue
for the first nine months of 2009 increased to $7.1 million from $5.6 million
for the same period in 2008. Research and development expenses, as a
percentage of net sales, decreased slightly to 53% during the first nine months
of 2009 from 55% during the same period in 2008. Selling, general and
administrative expenses, as a percentage of net sales, decreased to 35% during
the first nine months of 2009 from 40% during the same period in
2008. Due to the ongoing development activities of the Company,
research and development expenses as a percentage of sales are expected to be
somewhat higher in 2009 than they were in 2008.
37
Three
Months Ended September 30, 2009 and 2008
Net Sales and
Margins. Net sales of our gamma detection systems increased
$847,000, or 49%, to $2.6 million during the third quarter of 2009 from $1.7
million during the same period in 2008. Gross margins on net sales
increased slightly to 64% of net sales for the third quarter of 2009 compared to
63% of net sales for the same period in 2008.
The
increase in net sales was the result of increased gamma detection device sales
of $803,000, increased gamma detection device extended service contract revenue
of $22,000 and increased gamma detection device non-warranty service revenue of
$22,000. The increase in gamma detection device sales was primarily
due to increased unit sales partially offset by decreased unit prices of our
control units and probes. The increase in unit sales compared to the
prior year can be partially attributed to sales of our new high energy probes
and wireless laparoscopic probes, both of which were launched during the last 12
months. The price at which we sell our gamma detection products to
our primary marketing partner, Ethicon Endo-Surgery, Inc. (EES), a Johnson &
Johnson company, is based on a percentage of the global average selling price
(ASP) received by EES on sales of Neoprobe products to end customers, subject to
a minimum floor price. The ASP received by EES on sales outside the
U.S. decreased during the third quarter of 2009. This decrease was
partially offset by an increased percentage of ASP for certain products under
the terms of our amended distribution agreement with EES, which Neoprobe began
receiving in January 2009. The increase in gross margins on net
product sales was due to a combination of factors including the increased
percentage of ASP received by Neoprobe from EES, offset by the decreased ASP on
ex-U.S. sales.
Research and Development
Expenses. Research and development expenses decreased
$537,000, or 31%, to $1.2 million during the third quarter of 2009 from $1.7
million during the same period in 2008. Research and development
expenses in the third quarter of 2009 included approximately $985,000 in drug
and therapy product development costs and $220,000 in gamma detection device
development costs. This compares to expenses of $1.5 million and
$268,000 in these segment categories during the same period in
2008. The changes in each category were primarily due to (i)
decreased non-clinical testing, validation and process development activities
related to Lymphoseek and decreased costs related to the Phase 3 clinical trials
of Lymphoseek, and (ii) increased development costs of our new high energy
detection probe offset by decreased development costs of our wireless
laparoscopic and other products in the third quarter of 2009,
respectively.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
increased $71,000, or 10%, to $779,000 during the third quarter of 2009 from
$708,000 during the same period in 2008. The net difference was due
primarily to increases in compensation costs offset by decreases in investor
relations fees.
Other Income
(Expense). Other expense, net increased $22.5 million to $22.9
million during the third quarter of 2009 from $374,000 during the same period in
2008. 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. Also during the third quarter of 2009, we
recorded a $6.3 million increase in derivative liabilities resulting from the
accounting treatment for the convertible debt agreements we executed in December
2007 and April 2008, the convertible preferred stock we issued in December 2008,
and the related warrants to purchase our common stock, which contained certain
provisions that resulted in their being treated as derivative liabilities under
new accounting guidance effective January 1, 2009. During the third
quarter of 2008, we recorded a $59,000 decrease in derivative
liabilities. Interest expense, primarily related to the convertible
debt agreements we completed in December 2007 and April 2008, decreased $126,000
to $331,000 during the third quarter of 2009 from $457,000 for the same period
in 2008. Of this interest expense, $55,000 and $181,000 in the third
quarters of 2009 and 2008, respectively, was non-cash in nature related to the
amortization of debt issuance costs and discounts resulting from the warrants
and conversion features of the convertible debt. An additional
$250,000 of interest expense in the third quarter of 2009 was non-cash in nature
due to the payment or accrued payment of interest on our convertible debt with
shares of our common stock.
38
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 $9,000 and $85,000 in the first nine months of 2009 and 2008,
respectively. The net loss from discontinued operations was $52,000
and $141,000 for the third quarter of 2009 and 2008, respectively.
Nine
Months Ended September 30, 2009 and 2008
Net Sales and
Margins. Net sales of our gamma detection systems increased
$1.4 million, or 24%, to $7.0 million during the first nine months of 2009 from
$5.6 million during the same period in 2008. Gross margins on net
sales increased to 67% of net sales for the first nine months of 2009 compared
to 62% of net sales for the same period in 2008.
The
increase in net sales was the result of increased gamma detection device sales
of $1.3 million, increased gamma detection device extended service contract
revenue of $69,000 and increased gamma detection device non-warranty service
revenue of $45,000. The increase in gamma detection device sales was
primarily due to increased unit prices of our control units and detector
probes. The increase in net sales compared to the prior year can also
be partially attributed to sales of our new high energy probes and wireless
laparoscopic probes, both of which were launched during the last 12
months. The price at which we sell our gamma detection products to
EES is based on a percentage of the global ASP received by EES on sales of
Neoprobe products to end customers, subject to a minimum floor
price. In January 2009, Neoprobe began receiving an increased
percentage of ASP for certain products under the terms of our amended
distribution agreement with EES. The increase in gross margins on net
product sales was due to a combination of factors including the increased
percentage of ASP received by Neoprobe from EES.
Research and Development
Expenses. Research and development expenses increased
$646,000, or 21%, to $3.7 million during the first nine months of 2009 from $3.1
million during the same period in 2008. Research and development
expenses in the first nine months of 2009 included approximately $2.9 million in
drug and therapy product development costs and $857,000 in gamma detection
device development costs. This compares to expenses of $2.4 million
and $718,000 in these segment categories during the same period in
2008. The changes in each category were primarily due to (i)
increased costs related to the Phase 3 clinical trials of Lymphoseek offset by
decreased non-clinical testing, validation and process development activities
related to Lymphoseek, and (ii) decreased development costs of our neoprobe GDS
control unit and wireless laparoscopic probe, offset by increased development
costs of our new high energy detection probe and other products in the first
nine months of 2009, respectively.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
increased $169,000, or 8%, to $2.4 million during the first nine months of 2009
from $2.2 million during the same period in 2008. The net difference
was due primarily to increases in compensation and utilities costs offset by
decreases in investor relations fees.
Other Income
(Expense). Other expense, net increased $34.4 million to $36.0
million during the first nine months of 2009 from $1.6 million during the same
period in 2008. 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. Also during the first nine
months of 2009, we recorded a $18.5 million increase in derivative liabilities
resulting from the accounting treatment for the convertible debt agreements we
executed in December 2007 and April 2008, the convertible preferred stock we
issued in December 2008, and the related warrants to purchase our common stock,
which contained certain provisions that resulted in their being treated as
derivative liabilities under new accounting guidance effective January 1,
2009. During the first nine months of 2008, we recorded a $441,000
increase in derivative liabilities. Interest expense, primarily
related to the convertible debt agreements we completed in December 2007 and
April 2008, decreased $9,000 to $1.25 million during the first nine months of
2009 from $1.26 million for the same period in 2008. Of this interest
expense, $420,000 and $515,000 in the first nine months of 2009 and 2008,
respectively, was non-cash in nature related to the amortization of debt
issuance costs and discounts resulting from the warrants and conversion features
of the convertible debt. An additional $667,000 of interest expense
in the first nine months of 2009 was non-cash in nature due to the payment or
accrued payment of interest on our convertible debt with shares of our common
stock.
39
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 $82,000 and $209,000 in the first nine months of
2009 and 2008, respectively. The net loss from discontinued operations was
$163,000 and $460,000 for the first nine months of 2009 and 2008,
respectively.
Liquidity
and Capital Resources
Cash
balances including short term available-for-sale securities increased to $6.0
million at September 30, 2009 from $4.1 million at December 31, 2008. The net
increase was primarily due to cash received for the issuance of common stock
related to the exercise of warrants, partially offset by cash used to fund our
operations, mainly for research and development activities. The current ratio
increased to 3.6:1 at September 30, 2009 from 3.1:1 at December 31,
2008.
Operating Activities. Cash
used in operations decreased $486,000 to $1.2 million during the first nine
months of 2009 compared to $1.7 million during the same period in
2008.
Accounts
receivable decreased to $1.4 million at September 30, 2009 from $1.6 million at
December 31, 2008. The decrease was primarily a result of normal
fluctuations in timing of purchases and payments by EES. We expect
overall receivable levels will continue to fluctuate during the remainder of
2009 depending on the timing of purchases and payments by EES.
Inventory
levels increased to $1.0 million at September 30, 2009 compared to $544,000 at
December 31, 2008. The first commercial-grade lot of the active
pharmaceutical ingredient of Lymphoseek was produced during the third quarter of
2009. Gamma detection finished device inventory decreased as sales of
detector probes increased. Gamma detection device materials inventory
increased in preparation for detector probe production. We expect
inventory levels to fluctuate during the remainder of 2009 depending on the
timing of production and sales to EES.
Investing Activities.
Investing activities provided $353,000 during the first nine months of
2009 compared to $111,000 used during the same period in
2008. Available-for-sale securities of $494,000 matured during the
first nine months of 2009. Capital expenditures of $75,000 and
$98,000 during the first nine months of 2009 and 2008, respectively, were
primarily for computers, software, and production and laboratory
equipment. We expect our overall capital expenditures for 2009 will
be comparable to 2008 as we prepare for the commercial production of
Lymphoseek. Payments for patent and trademark costs were $66,000 and
$14,000 during the first nine months of 2009 and 2008,
respectively.
Financing
Activities. Financing activities provided $3.3 million during
the first nine months of 2009 compared to $2.9 million provided during the same
period in 2008. Proceeds from the issuance of common stock were $3.6
million and $232,000 during the first nine months of 2009 and 2008,
respectively. Payments of stock offering costs were $111,000 and
$1,000 during the first nine months of 2009 and 2008,
respectively. Proceeds from notes payable were $3.0 million during
the first nine months of 2008. Payments of debt issuance costs were
$20,000 and $200,000 during the first nine months of 2009 and 2008,
respectively. Payments of notes payable were $138,000 and $125,000
during the first nine months of 2009 and 2008, respectively.
40
In
December 2006, we entered into a common stock purchase agreement with Fusion
Capital, an Illinois limited liability company, to sell $6.0 million of our
common stock to Fusion Capital over a 24-month period which ended on November
21, 2008. Through November 21, 2008, we sold to Fusion Capital under
the agreement 7,568,671 shares for proceeds of $1.9 million. In
December 2008, we entered into an amendment to the agreement which gave us a
right to sell an additional $6.0 million of our common stock to Fusion Capital
before March 1, 2011, along with the $4.1 million of the unsold balance of the
$6.0 million we originally had the right to sell to Fusion Capital under the
original agreement. After giving effect to this amendment, the
remaining aggregate amount of our common stock we can sell to Fusion Capital is
$10.1 million. We have reserved a total of 10,654,000 shares of our
common stock in respect to potential sales of common stock we may make to Fusion
Capital in the future under the amended agreement.
In
December 2006, we issued to Fusion Capital 720,000 shares of our common stock as
a commitment fee upon execution of the original agreement. As sales
of our common stock were made under the original agreement, we issued an
additional 234,000 shares of our common stock to Fusion Capital as an additional
commitment fee. In connection with entering into the amendment, we
issued an additional 360,000 shares in consideration for Fusion Capital’s
entering into the amendment. Also, as an additional commitment fee,
we have agreed to issue to Fusion Capital an additional 486,000 shares of our
common stock pro rata as we sell the first $4.1 million of our common stock to
Fusion Capital under the amended agreement.
In July
2007, David C. Bupp, our President and CEO, and certain members of his family
(the “Bupp Investors”) purchased a $1.0 million convertible note (the Bupp Note)
and warrants. The note bears interest at 10% per annum, had an
original term of one year and is repayable in whole or in part with no
penalty. The note is convertible into shares of our common stock at a
price of $0.31 per share, a 25% premium to the average closing market price of
our common stock for the 5 days preceding the closing of the
transaction. As part of this transaction, we issued the Bupp
Investors Series V Warrants to purchase 500,000 shares of our common stock at an
exercise price of $0.31 per share, expiring in July 2012.
In
December 2007, we entered into a Securities Purchase Agreement (“SPA”) with
Platinum Montaur Life Sciences, LLC (“Montaur”), pursuant to which we issued
Montaur a 10% Series A Convertible Senior Secured Promissory Note in the
principal amount of $7,000,000, due December 26, 2011 (the “Series A Note”) and
a five-year Series W Warrant to purchase 6,000,000 shares of our common stock,
$.001 par value per share, at an exercise price of $0.32 per
share. Montaur may convert $3.5 million of the Series A Note into
shares of our common stock at the conversion price of $0.26 per
share. The SPA also provided for two further tranches of financing, a
second tranche of $3 million in exchange for a 10% Series B Convertible Senior
Secured Promissory Note along with a five-year Series X Warrant to purchase
shares of our common stock, and a third tranche of $3 million in exchange for
3,000 shares of our 8% Series A Cumulative Convertible Preferred Stock and a
five-year Series Y Warrant to purchase shares of our common
stock. Closings of the second and third tranches were subject to the
satisfaction by the Company of certain milestones related to the progress of the
Phase 3 clinical trials of our Lymphoseek radiopharmaceutical
product.
In April
2008, following receipt by the Company of clearance from FDA to commence a Phase
3 clinical trial for Lymphoseek in patients with breast cancer or melanoma, we
amended the SPA related to the second tranche and issued Montaur a 10% Series B
Convertible Senior Secured Promissory Note in the principal amount of
$3,000,000, also due December 26, 2011 (the “Series B Note,” and hereinafter
referred to collectively with the Series A Note as the “Montaur Notes”), and a
five-year Series X Warrant to purchase 8,333,333 shares of our common stock at
an exercise price of $0.46 per share. Montaur may convert the Series
B Note into shares of our common stock at the conversion price of $0.36 per
share. Provided we have satisfied certain conditions stated therein,
we may elect to make payments of interest due under the Montaur Notes in
registered shares of our common stock. If we choose to make interest
payments in shares of common stock, the number of shares of common stock to be
applied against any such interest payment will be determined by reference to the
quotient of (a) the applicable interest payment divided by (b) 90% of the
average daily volume weighted average price of our common stock on the OTCBB (or
national securities exchange, if applicable) as reported by Bloomberg Financial
L.P. for the five days upon which our common stock is traded on the OTCBB
immediately preceding the date of the interest payment.
41
In
December 2008, after we obtained 135 vital blue dye lymph nodes from patients
who had completed surgery and the injection of the drug in a Phase 3 clinical
trial of Lymphoseek in patients with breast cancer or melanoma, we issued
Montaur 3,000 shares of our 8% Series A Cumulative Convertible Preferred Stock
(the “Preferred Stock”) and a five-year Series Y Warrant (hereinafter referred
to collectively with the Series W Warrant and Series X Warrant as the “Montaur
Warrants”) to purchase 6,000,000 shares of our common stock, at an exercise
price of $0.575 per share, also for an aggregate purchase price of
$3,000,000. Montaur may convert each share of the Preferred Stock
into a number of shares of our common stock equal to the quotient of (a) the
Liquidation Preference Amount of the shares of Preferred Stock by (b) the
Conversion Price. The “Liquidation Preference Amount” for the Preferred Stock is
$1,000 and the “Conversion Price” of the Preferred Stock was set at $0.50 on the
date of issuance, thereby making the shares of Preferred Stock convertible into
an aggregate 6,000,000 shares of our common stock, subject to adjustment as
described in the Certificate of Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series A 8% Cumulative
Convertible Preferred Stock. We may elect to pay dividends due to
Montaur on the shares of Preferred Stock in registered shares of our common
stock. The number of shares of common stock to be applied against any
such dividend payment will be determined by reference to the quotient of (a) the
applicable dividend payment by (b) 90% of the average daily volume weighted
average price of our common stock on the OTCBB (or national securities exchange,
if applicable) as reported by Bloomberg Financial L.P. for the five days upon
which our common stock is traded on the OTCBB immediately preceding the date of
the dividend payment.
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 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 is convertible at $0.9722 per share. The amendments
also eliminated certain price reset features of the Montaur Notes, the Preferred
Stock and the Montaur Warrants that had created significant non-cash derivative
liabilities on the Company’s balance sheet. 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 changes in terms of the Montaur Notes, the Preferred
Stock and the Montaur Warrants was treated as an extinguishment of debt for
accounting purposes. The Company recorded an additional $5.6 million
in mark-to-market adjustments related to the increase in the Company’s common
stock from June 30 to July 24, 2009. As a result of the
extinguishment treatment associated with the elimination of the price reset
features, the Company also recorded $16.2 million in non-cash loss on the
extinguishment and reclassified $27.0 million in derivative liabilities to
additional paid-in capital. Following the extinguishment, the
Company’s balance sheet reflects the face value of the $10 million due to
Montaur pursuant to the Montaur Notes. In connection with this
transaction, 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
$1,635,483 received in July 2009. Montaur also 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 $1,814,517
received in September 2009.
In
connection with the Montaur SPA, the term of the $1.0 million Bupp Note was
extended to December 27, 2011, one day following the maturity date of the
Montaur Notes. In consideration for the Bupp Investors’ agreement to
extend the term of the Bupp Note pursuant to an Amendment to the Bupp Purchase
Agreement, dated December 26, 2007, we agreed to provide security for the
obligations evidenced by the Amended 10% Convertible Note in the principal
amount of $1,000,000, due December 31, 2011, executed by Neoprobe in favor of
the Bupp Investors (the “Amended Bupp Note”), under the terms of a Security
Agreement, dated December 26, 2007, by and between Neoprobe and the Bupp
Investors (the “Bupp Security Agreement”). This security interest is
subordinate to the security interest of Montaur. As further
consideration for extending the term of the Bupp Note, we issued the Bupp
Investors Series V Warrants to purchase 500,000 shares of our common stock at an
exercise price of $0.32 per share, expiring in December 2012. The
Amended Bupp Note had an outstanding principal amount of $1.0 million on
September 30, 2009, and an outstanding principal amount of $1.0 million as of
November 6, 2009. During the first nine months of 2009, we paid none
of the outstanding principal and paid $75,000 in interest due under the Amended
Bupp Note.
42
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 the second Phase 3 clinical trial of
Lymphoseek. We believe our current funds and access to available
capital resources will be adequate to complete our Lymphoseek development
efforts and 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 the recent EMEA scientific advice response. We
plan to use part of the proceeds from Montaur’s recent warrant exercises to
initiate the first steps of restarting manufacturing of RIGScan CR; however, we
still intend to involve a partner in the longer-term development of RIGScan
CR. We may also be able to raise additional funds through a stock
purchase agreement with Fusion Capital to supplement our capital
needs. However, the extent to which we rely on Fusion Capital as a
source of funding will depend on a number of factors, including the prevailing
market price of our common stock and the extent to which we are able to secure
working capital from other sources. Specifically, Fusion Capital does
not have the right or the obligation to purchase any shares of our common stock
on any business day that the market price of our common stock is less than $0.20
per share. We cannot assure you that we will be successful in raising
additional capital through Fusion Capital or any other sources at terms
acceptable to the Company, or at all. We also cannot assure you that
we will be able to successfully 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
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements,
which was primarily codified in FASB Accounting Standards CodificationTM (ASC)
Topic 820, Fair Value
Measurements and Disclosures. FASB ASC 820 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
FASB ASC 820 did not require any new fair value measurements. FASB ASC 820 was
initially effective for Neoprobe beginning January 1, 2008 for nonfinancial
assets and nonfinancial liabilities recognized or disclosed at fair value on at
least an annual basis. In February 2008, the FASB decided to allow entities to
electively defer the effective date of FASB ASC 820 until January 1, 2009 for
nonfinancial assets and nonfinancial liabilities that are not recognized or
disclosed at fair value on at least an annual basis. We began applying the fair
value measurement and disclosure provisions of FASB ASC 820 to nonfinancial
assets and liabilities effective January 1, 2009. The application of such was
not material to our consolidated results of operations or financial
condition.
In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations, which
was primarily codified in FASB ASC Topic 805, Business Combinations. FASB
ASC 805 requires that the acquisition method (formerly called the purchase
method) of accounting be used for all business combinations and for an acquirer
to be identified for each business combination. FASB ASC 805 defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination, establishes the acquisition date as the date that the
acquirer achieves control and requires the acquirer to recognize the assets and
liabilities assumed and any noncontrolling interest at their fair values as of
the acquisition date. FASB ASC 805 also requires, among other things, that the
acquisition-related costs be recognized separately from the acquisition. FASB
ASC 805 applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and was adopted by Neoprobe beginning January 1,
2009. The adoption of FASB ASC 805 did not impact our consolidated results of
operations or financial condition. The effect the adoption of FASB ASC 805 may
have on us in the future will depend on the nature and size of acquisitions we
complete in the future, if any.
43
Also in
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51, which was
primarily codified in FASB ASC Topic 810, Consolidation. FASB
ASC 810 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. FASB ASC 810 is effective for fiscal years and interim
periods within those fiscal years beginning on or after December 15, 2008, and
was adopted by Neoprobe beginning January 1, 2009. FASB ASC 810 is
being applied prospectively as of the beginning of the fiscal year in which it
was adopted, except for the presentation and disclosure
requirements. The presentation and disclosure requirements are being
applied retrospectively for all periods presented. The adoption of
the new provisions of FASB ASC 810 did not have a material effect on our
consolidated results of operations or financial condition.
In
December 2007, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) on EITF Issue No. 07-1, Accounting for Collaborative
Arrangements, which was primarily codified in FASB ASC Topic 808, Collaborative
Arrangements. FASB ASC 808 defines a collaborative arrangement
as well as the accounting for transactions between participants in a
collaborative arrangement and between the participants in the arrangement and
third parties. FASB ASC 808 requires that both types of transactions
be reported in each participant’s respective income statement. We
adopted the new provisions of FASB ASC 808 beginning January 1,
2009. The adoption did not impact our consolidated results of
operations or financial condition.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an Amendment of FASB Statement No.
133, which was primarily codified in FASB ASC Topic 815, Derivatives and
Hedging. FASB ASC 815 provides an understanding of how and why
an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for, and their effect on an entity’s financial
position, financial performance, and cash flows. We adopted the new
provisions of FASB ASC 815 beginning January 1, 2009. The adoption
did not have a material impact on our derivative disclosures.
In June
2008, the FASB ratified the consensus reached by the EITF on EITF Issue No.
07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,
which was primarily codified in FASB ASC Topic 815, Derivatives and
Hedging. The new provisions of FASB ASC 815 clarify the
determination of whether equity-linked instruments (or embedded features), such
as our convertible notes or warrants to purchase our common stock, are
considered indexed to our own stock, which would qualify as a scope
exception. We adopted the new provisions of FASB ASC 815 beginning
January 1, 2009. The adoption had a material impact on our
consolidated financial statements.
Also in
June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities,
which was primarily codified in FASB ASC Topic 260, Earnings Per Share. FASB ASC
260 provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents, whether paid or
unpaid, are participating securities and are required to be included in the
computation of earnings per share pursuant to the two-class method. The
two-class method of computing earnings per share includes an earnings allocation
formula that determines earnings per share for common stock and any
participating securities according to dividends declared, whether paid or
unpaid, and participation rights in undistributed earnings. All prior period
earnings per share data presented are required to be adjusted retrospectively to
conform to the new provisions of FASB ASC 260. We adopted the new provisions of
FASB ASC 260 beginning January 1, 2009. The adoption did not impact our earnings
(loss) per share for the three-month and nine-month periods ended September 30,
2009 and 2008.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value
of Financial Instruments, which amends SFAS No. 107, Disclosures About Fair Value of
Financial Instruments, and APB Opinion 28, Interim Financial Reporting,
respectively. FSP FAS 107-1 and APB 28-1 were primarily codified in
FASB ASC Topic 825, Financial
Instruments. FASB ASC 825 requires disclosure about fair value
of financial instruments for interim reporting periods of publicly traded
companies in addition to annual financial statements. We adopted the
new provisions of FASB ASC 825 beginning April 1, 2009. As the new
provisions of FASB ASC 825 provide only disclosure requirements, the adoption of
this standard did not impact on our consolidated financial position, results of
operations or cash flows, but did result in increased disclosures in the second
and third quarters of 2009.
44
In May
2009, the FASB issued SFAS No. 165, Subsequent Events, which was
primarily codified in FASB ASC Topic 855, Subsequent
Events. FASB ASC 855 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before the financial statements are issued or are available to be
issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that
date. We adopted FASB ASC 855 beginning April 1, 2009. The
adoption of FASB ASC 855 did not impact our consolidated financial position,
results of operations or cash flows.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162, which was primarily codified in
FASB ASC Topic 105, Generally
Accepted Accounting Principles. FASB ASC 105 established the
FASB Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with generally accepted
accounting principles in the United States (U.S. GAAP). All guidance
contained in FASB ASC 105 carries an equal level of authority. FASB
ASC 105 did not change current U.S. GAAP, but is intended to simplify user
access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. FASB ASC 105
superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature
not included in FASB ASC 105 became non-authoritative. FASB ASC 105
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. The implementation of FASB ASC 105
did not impact our consolidated financial statements.
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 and the earnings process has
been completed. However, in cases where product is shipped but the
earnings process is not yet completed, revenue is deferred until it has been
determined that the earnings process has been completed. Our
customers have no right to return products purchased in the ordinary course of
business.
The
prices we charge our primary customer, EES, related to sales of products are
subject to retroactive annual adjustment based on a fixed percentage of the
actual sales prices achieved by EES on sales to end customers made during each
fiscal year. To the extent that we can reasonably estimate the
end-customer prices received by EES, we record sales to EES based upon these
estimates. If we are unable to reasonably estimate end customer sales
prices related to certain products sold to EES, we record revenue related to
these product sales at the minimum (i.e., floor) price provided for under our
distribution agreement with EES.
We also
generate revenue from the service and repair of out-of-warranty
products. Fees charged for service and repair on products not covered
by an extended service agreement are recognized on completion of the service
process when the serviced or repaired product has been returned to the
customer. Fees charged for service or repair of products covered by
an extended warranty agreement are deferred and recognized as revenue ratably
over the life of the extended service agreement.
Use of
Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. We base these
estimates and assumptions upon historical experience and existing, known
circumstances. Actual results could differ from those
estimates. Specifically, management may make significant estimates in
the following areas:
45
|
·
|
Stock-Based
Compensation. We account for stock-based compensation in
accordance with FASB ASC Topic 718, Compensation – Stock
Compensation. FASB ASC 718 requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their estimated fair
values. Compensation cost arising from stock-based awards is
recognized as expense using the straight-line method over the vesting
period. We use the Black-Scholes option pricing model to value
share-based payments.
|
|
·
|
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.
|
|
·
|
Impairment or Disposal of
Long-Lived Assets. We account for long-lived assets in
accordance with the provisions of FASB ASC Topic 360, Property, Plant and
Equipment. FASB ASC 360 requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to
sell.
|
|
·
|
Product
Warranty. We warrant our products against defects in
design, materials, and workmanship generally for a period of one year from
the date of sale to the end customer. Our accrual for warranty
expenses is adjusted periodically to reflect actual
experience. EES also reimburses us for a portion of warranty
expense incurred based on end customer sales they make during a given
fiscal year.
|
|
·
|
Fair Value of Derivative
Instruments. We account for derivative
instruments in accordance with FASB ASC Topic 815, Derivatives and
Hedging. FASB ASC 815 provides accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts. We do not use
derivative instruments for hedging of market risks or for trading or
speculative purposes. Effective January 1, 2009, we were
required to adopt new provisions of FASB ASC 815 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, which would qualify as a
scope exception. As a result of adopting the new provisions of
FASB ASC 815, certain embedded features of our convertible securities, as
well as warrants to purchase our common stock, that were previously
treated as equity are now considered derivative
liabilities.
|
46
Other
Items Affecting Financial Condition
At
December 31, 2008, we had deferred tax assets in the U.S. related to net
operating tax loss carryforwards and tax credit carryforwards of approximately
$32.0 million and $4.8 million, respectively, available to offset or reduce
future income tax liability, if any, through 2027. However, under
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, use of
prior tax loss and credit carryforwards may be limited after an ownership
change. As a result of ownership changes as defined by Sections 382
and 383, which have occurred at various points in our history, we believe
utilization of our tax loss carryforwards and tax credit carryforwards may be
significantly limited and are therefore fully reserved in our financial
statements.
OUR
MANAGEMENT
Directors,
Executive Officers, Promoters and Control Persons
Directors
Directors
whose terms continue until the 2010 Annual Meeting:
Reuven Avital, age 58, has
served as a director of our Company since January 2002. Mr. Avital is
a partner and general manager of Ma’Aragim Enterprises Ltd., an investment
company in Israel, and he is a board member of a number of privately-held
Israeli companies, two of them in the medical device field. Mr.
Avital was a board member of Cardiosonix, Ltd. from April 2001 through December
31, 2001, when we acquired the company. Previously, Mr. Avital served
in the Israeli government in a variety of middle and senior management
positions. He is also chairman or a board member of several
not-for-profit organizations, mainly involved in education for the
under-privileged and international peace-building. Mr. Avital has
B.A. degrees in The History of the Middle East and International Relations from
the Hebrew University of Jerusalem, and a M.P.A. from the Kennedy School of
Government at Harvard University.
David C. Bupp, age 60, has
served as President and a director of our Company since August 1992 and as Chief
Executive Officer since February 1998. From August 1992 to May 1993, Mr. Bupp
served as our Treasurer. In addition to the foregoing positions, from
December 1991 to August 1992, he was Acting President, Executive Vice President,
Chief Operating Officer and Treasurer, and from December 1989 to December 1991,
he was Vice President, Finance and Chief Financial Officer. From 1982
to December 1989, Mr. Bupp was Senior Vice President, Regional Manager for
AmeriTrust Company National Association, a nationally chartered bank holding
company, where he was in charge of commercial and retail banking operations
throughout Central Ohio. Mr. Bupp has a B.A. degree in Economics from Ohio
Wesleyan University. Mr. Bupp also completed a course of study at
Stonier Graduate School of Banking at Rutgers University.
Directors
whose terms continue until the 2011 Annual Meeting:
Carl J. Aschinger, Jr., age
71, has served as a director of our Company since June 2004 and as Chairman of
the Board since July 2007. Mr. Aschinger is the Chairman of CSC
Worldwide (formerly Columbus Show Case Co.), a privately-held company that
manufactures showcases for the retail industry. Mr. Aschinger also
serves on the Board of Directors and as Chairman of the Audit Committee of
Pinnacle Data Systems, a publicly-traded company that provides software and
hardware solutions to original equipment manufacturers. Mr. Aschinger
is a former director of Liqui-Box Corporation and Huntington National Bank as
well as other privately-held ventures and has served on boards or advisory
committees of several not-for-profit organizations.
Owen E. Johnson, M.D., age 69,
has served as a director of our Company since July 2007. Prior to his
retirement in December 2006, Dr. Johnson served as Vice President and Senior
Medical Director of UnitedHealthcare of Ohio, Inc. (UHC), a subsidiary of
UnitedHealth Group, where he was involved in a number of roles and activities
including new technology assessment and reimbursement
establishment. During 2007, Dr. Johnson rejoined UnitedHealth
Networks, a subsidiary of UnitedHealth Group, as Medical Director for their
cardiac line of service. Dr. Johnson has also served on the Board and
on numerous Committees of UHC as well as other related
organizations. Prior to joining UHC, Dr. Johnson held several
hospital appointments with Riverside Methodist Hospital in Columbus,
Ohio. Dr. Johnson has also been active in numerous professional,
fraternal and community organizations in the Columbus, Ohio
area.
47
Fred B. Miller, age 70, has
served as a director of our Company since January 2002. Mr. Miller
serves as Chairman of the Audit Committee. Mr. Miller is the
President and Chief Operating Officer of Seicon, Limited, a privately held
company that specializes in developing, applying and licensing technology to
reduce seismic and mechanically induced vibration. Mr. Miller also
serves on the board of one other privately-held company. Until his
retirement in 1995, Mr. Miller had been with Price Waterhouse LLP since
1962. Mr. Miller is a Certified Public Accountant, a member of the
American Institute of Certified Public Accountants (AICPA), a past member of the
Council of the AICPA and a member and past president of the Ohio Society of
Certified Public Accountants. He also has served on the boards or
advisory committees of several universities and not-for-profit
organizations. Mr. Miller has a B.S. degree in Accounting from The
Ohio State University.
Directors
whose terms continue until the 2012 Annual Meeting:
Kirby I. Bland, M.D., age 67,
has served as a director of our Company since May 2004. Dr. Bland
currently serves as Professor and Chairman and Fay Fletcher Kerner Professor and
Chairman, Department of Surgery of the University of Alabama at Birmingham (UAB)
School of Medicine since 1999 and 2002, respectively, Deputy Director of the UAB
Comprehensive Cancer Center since 2000 and Senior Scientist, Division of Human
Gene Therapy, UAB School of Medicine since 2001. Prior to his
appointments at UAB, Dr. Bland was J. Murry Breadsley Professor and Chairman,
Professor of Medical Science, Department of Surgery and Director, Brown
University Integrated Program in Surgery at Brown University School of Medicine
from 1993 to 1999. Prior to his appointments at Brown University, Dr.
Bland was Professor and Associate Chairman, Department of Surgery, University of
Florida College of Medicine from 1983 to 1993 and Associate Director of Clinical
Research at the University of Florida Cancer Center from 1991 to
1993. Dr. Bland held a number of medical staff positions at the
University of Louisville, School of Medicine from 1977 to 1983 and at M. D.
Anderson Hospital and Tumor Institute from 1976 to 1977. Dr. Bland is
a member of the Board of Governors of the American College of Surgeons (ACS), a
member of the ACS’ Advisory Committee, Oncology Group (ACOSOG), a member of the
ACS’ American Joint Committee on Cancer Task Force and serves as Chairman of the
ACS’ Breast Disease Site Committee, COC. Dr. Bland is a past
President of the Society of Surgical Oncology. Dr. Bland received his
B.S. in Chemistry/Biology from Auburn University and a M.D. degree from the
University of Alabama, Medical College of Alabama.
Gordon A. Troup, age 56, has
served as a director of our Company since July 2008, Mr. Troup served
as President of the Nuclear Pharmacy Services business at Cardinal Health, Inc.
(Cardinal Health), a multinational medical products and services company, from
January 2003 until his retirement in December 2007. Mr. Troup joined
Cardinal Health in 1990 and was appointed Group President of Pharmaceutical
Distribution and Specialty Distribution Services in 1999. Prior to
joining Cardinal Health, Mr. Troup was employed for 10 years by American
Hospital Supply Corporation and 3 years by Zellerbach Paper, a Mead
Company. Mr. Troup has a B.S. degree in Business Management from San
Diego State University. Mr. Troup is a member of several national
healthcare trade organizations and is active in a number of not-for-profit
organizations.
J. Frank Whitley, Jr., age 67,
has served as a director of our Company since May 1994. Mr. Whitley
was Director of Mergers, Acquisitions and Licensing at The Dow Chemical Company
(Dow), a multinational chemical company, from June 1993 until his retirement in
June 1997. After joining Dow in 1965, Mr. Whitley served in a variety
of marketing, financial, and business management functions. Mr.
Whitley is also involved with several not-for-profit health care organizations,
serving as a member of their Boards of Trustees and/or Committees of the
Board. Mr. Whitley has a B.S. degree in Mathematics from Lamar State
College of Technology.
48
Executive
Officers
In
addition to Mr. Bupp, the following individuals are executive officers of our
Company and serve in the position(s) indicated below:
Name
|
Age
|
Position
|
||
Anthony
K. Blair
|
49
|
Vice
President, Manufacturing Operations
|
||
Rodger
A. Brown
|
59
|
Vice
President, Regulatory Affairs and Quality
Assurance
|
||
Frederick
O. Cope, Ph.D.
|
63
|
Vice
President of Pharmaceutical Research and
Clinical Development
|
||
Brent
L. Larson
|
46
|
Vice
President, Finance; Chief Financial Officer;
Treasurer and Secretary
|
||
Douglas
L. Rash
|
66
|
Vice
President,
Marketing
|
Anthony K. Blair has served as
Vice President, Manufacturing Operations of our Company since July
2004. Prior to joining our Company, he served as Vice President,
Manufacturing Operations of Enpath Medical, Lead Technologies Division, formerly
known as Biomec Cardiovascular, Inc. from 2002 to June 2004. From
1998 through 2001, Mr. Blair led the manufacturing efforts at Astro
Instrumentation, a medical device contract manufacturer. From 1989 to
1998 at Ciba Corning Diagnostics (now Bayer), Mr. Blair held managerial
positions including Operations Manager, Materials Manager, Purchasing Manager
and Production Supervisor. From 1985 to 1989, Mr. Blair was employed
by Bailey Controls and held various positions in purchasing and industrial
engineering. Mr. Blair started his career at Fisher Body, a division
of General Motors, in production supervision. Mr. Blair has a B.B.A.
degree in management and labor relations from Cleveland State
University.
Rodger A. Brown has served as
Vice President, Regulatory Affairs and Quality Assurance of our Company since
November 2000. From July 1998 through November 2000, Mr. Brown served
as our Director, Regulatory Affairs and Quality Assurance. Prior to
joining our Company, Mr. Brown served as Director of Operations for Biocore
Medical Technologies, Inc. from April 1997 to April 1998. From 1981
through 1996, Mr. Brown served as Director, Regulatory Affairs/Quality Assurance
for E for M Corporation, a subsidiary of Marquette Electronics,
Inc.
Frederick O. Cope, Ph.D. has
served as Vice President, Pharmaceutical Research and Clinical Development of
our Company since February 2009. Prior to accepting this position
with the Company, Dr. Cope served as the Assistant Director for Research and
Head of Program Research Development for The Ohio State University Comprehensive
Cancer Center, The James Cancer Hospital and The Richard J. Solove Research
Institute, from April 2001 to February 2009. Dr. Cope is also active
in a number of professional and scientific organizations such as serving as an
Ad Hoc Member of the FDA Scientific Advisory Panel and a member of Emory
University’s Scientific Advisory Board. Dr. Cope received his BSc
from the Delaware Valley College of Science and Agriculture, his MS from
Millersville University of Pennsylvania and his Ph.D. from the University of
Connecticut.
Brent L. Larson has served as
Vice President, Finance, Chief Financial Officer and Treasurer of our Company
since February 1999 and as Secretary since 2003. Prior to that, he
served as our Vice President, Finance from July 1998 to January 1999 and as
Controller from July 1996 to June 1998. Before joining our Company,
Mr. Larson was employed by Price Waterhouse LLP. Mr. Larson has a
B.B.A. degree in accounting from Iowa State University of Science and Technology
and is a Certified Public Accountant.
49
Douglas L. Rash has served as
Vice President, Marketing of our Company since January 2005. Prior to
that, Mr. Rash was Neoprobe’s Director, Marketing and Product Management from
March to December 2004. Before joining our Company, Mr. Rash served
as Vice President and General Manager of MTRE North America, Inc. from 2000 to
2003. From 1994 to 2000, Mr. Rash served as Vice President and
General Manager (Medical Division) of Cincinnati Sub-Zero, Inc. From
1993 to 1994, Mr. Rash was Executive Vice President of Everest & Jennings
International, Ltd. During his nine-year career at Gaymar Industries,
Inc. from 1984 to 1993, Mr. Rash held positions as Vice President and General
Manager (Clinicare Division) and Vice President, Marketing and Sales (Acute Care
Division). From 1976 to 1984, Mr. Rash held management positions at
various divisions of British Oxygen Corp. Mr. Rash has a B.S. degree
in Business Administration with a minor in Chemistry from Wisconsin State
University.
Family
Relationships
There are
no family relationships among the directors and executive officers of the
company.
Code
of Conduct and Ethics
We have
adopted a code of business conduct and ethics that applies to our directors,
officers and all employees. The code of business conduct and ethics is
posted on our website at www.neoprobe.com. The code of business
conduct and ethics may be also obtained free of charge by writing to Neoprobe
Corporation, Attn: Chief Financial Officer, 425 Metro Place North, Suite
300, Dublin, Ohio 43017.
Executive
Compensation
Summary
Compensation Table
The
following table sets forth certain information concerning the annual and
long-term compensation of our Chief Executive Officer and our other two highest
paid executive officers (the Named Executives) for the last two fiscal
years.
(c)
|
||||||||||||||||||||||||||
(b)
|
Restricted
|
(d)
|
||||||||||||||||||||||||
(a)
|
Option
|
Stock
|
All Other
|
Total
|
||||||||||||||||||||||
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Compensation
|
|||||||||||||||||||
Anthony
K. Blair
|
2008
|
$ | 150,000 | $ | 15,700 | $ | 10,827 | $ | 8,975 | $ | 4,676 | $ | 190,178 | |||||||||||||
Vice
President,
|
2007
|
134,000 | 19,125 | 8,550 | - | 3,887 | 165,562 | |||||||||||||||||||
Manufacturing
Operations
|
||||||||||||||||||||||||||
David
C. Bupp
|
2008
|
$ | 325,000 | $ | 40,000 | $ | 43,875 | $ | 53,850 | $ | 7,208 | $ | 469,933 | |||||||||||||
President
and
|
2007
|
305,000 | 60,000 | 51,808 | - | 8,398 | 425,206 | |||||||||||||||||||
Chief
Executive Officer
|
||||||||||||||||||||||||||
Brent
L. Larson
|
2008
|
$ | 177,000 | $ | 15,000 | $ | 9,677 | $ | 8,975 | $ | 5,442 | $ | 216,094 | |||||||||||||
Vice
President, Finance and
|
2007
|
170,000 | 19,125 | 10,184 | - | 4,896 | 204,205 | |||||||||||||||||||
Chief
Financial Officer
|
(a)
|
Bonuses,
if any, have been disclosed for the year in which they were earned (i.e.,
the year to which the service
relates).
|
(b)
|
Amount
represents the dollar amount recognized for financial statement reporting
purposes in accordance with SFAS No. 123(R). Assumptions made
in the valuation of stock option awards are disclosed in Note 1(o) of the
Notes to the December 31, 2008 Consolidated Financial Statements in this
Registration Statement on Form S-1.
|
(c)
|
Amount
represents the dollar amount recognized for financial statement reporting
purposes in accordance with SFAS No. 123(R). Assumptions made
in the valuation of restricted stock awards are disclosed in Note 1(o) of
the Notes to the December 31, 2008 Consolidated Financial Statements in
this Registration Statement on Form
S-1.
|
(d)
|
Amount
represents life insurance premiums paid during the fiscal year for the
benefit of the Named Executives and matching contributions under the
Neoprobe Corporation 401(k) Plan (the Plan). Eligible employees
may make voluntary contributions and we may, but are not obligated to,
make matching contributions based on 40 percent of the employee’s
contribution, up to 5 percent of the employee’s
salary. Employee contributions are invested in mutual funds
administered by an independent plan administrator. Company
contributions, if any, are made in the form of shares of common
stock. The Plan qualifies under section 401 of the Internal
Revenue Code, which provides that employee and company contributions and
income earned on contributions are not taxable to the employee until
withdrawn from the Plan, and that we may deduct our contributions when
made.
|
50
Compensation
of Mr. Bupp
Employment
Agreement. David C. Bupp is employed under a twelve (12) month
employment agreement effective January 1, 2009. The employment
agreement provides for an annual base salary of $335,000.
The Board
of Directors and/or the Compensation, Nominating and Governance (CNG) Committee
will, on an annual basis, review the performance of our company and of Mr. Bupp
and may pay a bonus to Mr. Bupp as it deems appropriate, in its
discretion. Such review and bonus will be consistent with any bonus
plan adopted by the CNG Committee that covers the executive officers of our
company generally. For the calendar year ending December 31, 2009, the Committee
has determined that the maximum bonus payment to the Mr. Bupp will be
$90,000.
If a
change in control occurs with respect to our company and the employment of Mr.
Bupp is concurrently or subsequently terminated:
|
·
|
by
our company without cause (cause is defined as any willful breach of a
material duty by Mr. Bupp in the course of his employment or willful and
continued neglect of his duty as an
employee);
|
|
·
|
by
the expiration of the term of Mr. Bupp’s employment agreement;
or
|
|
·
|
by
the resignation of Mr. Bupp because his title, authority,
responsibilities, salary, bonus opportunities or benefits have materially
diminished, a material adverse change in his working conditions has
occurred, his services are no longer required in light of the company’s
business plan, or we breach the
agreement;
|
then, Mr.
Bupp will be paid a severance payment of $762,500 (less amounts paid as Mr.
Bupp’s salary and benefits that continue for the remaining term of the agreement
if his employment is terminated without cause).
For
purposes of Mr. Bupp’s employment agreement, a change in control
includes:
|
·
|
the
acquisition, directly or indirectly, by a person (other than our company
or an employee benefit plan established by the Board of Directors) of
beneficial ownership of thirty percent (30%) or more of our securities
with voting power in the next meeting of holders of voting securities to
elect the directors;
|
|
·
|
a
majority of the Directors elected at any meeting of the holders of our
voting securities are persons who were not nominated by our then current
Board of Directors or an authorized committee
thereof;
|
|
·
|
our
stockholders approve a merger or consolidation of our company with another
person, other than a merger or consolidation in which the holders of our
voting securities outstanding immediately before such merger or
consolidation continue to hold voting securities in the surviving or
resulting corporation (in the same relative proportions to each other as
existed before such event) comprising eighty percent (80%) or more of the
voting power for all purposes of the surviving or resulting corporation;
or
|
|
·
|
our
stockholders approve a transfer of substantially all of our assets to
another person other than a transfer to a transferee, eighty percent (80%)
or more of the voting power of which is owned or controlled by us or by
the holders of our voting securities outstanding immediately before such
transfer in the same relative proportions to each other as existed before
such event.
|
Mr. Bupp
will be paid a severance amount of $406,250 if his employment is terminated at
the end of his employment agreement or without cause. If Mr. Bupp is
terminated without cause, his benefits will continue for the longer of
thirty-six (36) months or the full term of the agreement.
51
Compensation
of Other Named Executives
Our
Executive Officers are employed under employment agreements of varying terms as
outlined below. In addition, the CNG Committee will, on an annual
basis, review the performance of our company and may pay bonuses to our
executives as the CNG Committee deems appropriate, in its
discretion. Such review and bonus will be consistent with any bonus
plan adopted by the CNG Committee that covers Mr. Bupp as well as the executive
officers of our company generally.
Anthony
K. Blair
Employment
Agreement. Anthony Blair is employed under a twenty-four (24)
month employment agreement effective January 1, 2009. The employment
agreement provides for an annual base salary of $157,000.
The CNG
Committee will, on an annual basis, review the performance of our company and of
Mr. Blair and we may pay a bonus to Mr. Blair as we deem appropriate, in our
discretion. Such review and bonus will be consistent with any bonus
plan adopted by the CNG Committee that covers the executive officers of our
company generally.
If a
change in control occurs with respect to our company and the employment of Mr.
Blair is concurrently or subsequently terminated:
|
·
|
by
our company without cause (cause is defined as any willful breach of a
material duty by Mr. Blair in the course of his employment or willful and
continued neglect of his duty as an
employee);
|
|
·
|
by
the expiration of the term of Mr. Blair’s employment agreement;
or
|
|
·
|
by
the resignation of Mr. Blair because his title, authority,
responsibilities, salary, bonus opportunities or benefits have materially
diminished, a material adverse change in his working conditions has
occurred, his services are no longer required in light of the company’s
business plan, or we breach the
agreement;
|
then, Mr.
Blair will be paid a severance payment of $310,000 and will continue his
benefits for the longer of twelve (12) months or the remaining term of his
employment agreement.
For
purposes of Mr. Blair’s employment agreement, a change in control
includes:
|
·
|
the
acquisition, directly or indirectly, by a person (other than our company
or an employee benefit plan established by the Board of Directors) of
beneficial ownership of thirty percent (30%) or more of our securities
with voting power in the next meeting of holders of voting securities to
elect the directors;
|
|
·
|
a
majority of the directors elected at any meeting of the holders of our
voting securities are persons who were not nominated by our then current
Board of Directors or an authorized committee
thereof;
|
|
·
|
our
stockholders approve a merger or consolidation of our company with another
person, other than a merger or consolidation in which the holders of our
voting securities outstanding immediately before such merger or
consolidation continue to hold voting securities in the surviving or
resulting corporation (in the same relative proportions to each other as
existed before such event) comprising eighty percent (80%) or more of the
voting power for all purposes of the surviving or resulting corporation;
or
|
52
|
·
|
our
stockholders approve a transfer of substantially all of the assets of our
company to another person other than a transfer to a transferee, eighty
percent (80%) or more of the voting power of which is owned or controlled
by us or by the holders of our voting securities outstanding immediately
before such transfer in the same relative proportions to each other as
existed before such event.
|
Mr. Blair
will be paid a severance amount of $157,000 if his employment is terminated at
the end of his employment agreement or without cause. If Mr. Blair is
terminated without cause, his benefits will continue for the longer of twelve
(12) months or the full term of the agreement.
Brent
L. Larson
Employment
Agreement. Brent Larson is employed under a twenty-four (24)
month employment agreement effective January 1, 2009. The employment
agreement provides for an annual base salary of $184,000.
The terms
of Mr. Larson’s employment agreement are substantially identical to Mr. Blair’s
employment agreement, except that:
|
·
|
If
a change in control occurs with respect to our company and the employment
of Mr. Larson is concurrently or subsequently terminated, then Mr. Larson
will be paid a severance payment of $360,000;
and
|
|
·
|
Mr.
Larson will be paid a severance amount of $184,000 if his employment is
terminated at the end of his employment agreement or without
cause.
|
The CNG
Committee will, on an annual basis, review the performance of our company and of
Mr. Larson and we may pay a bonus to Mr. Larson as we deem appropriate, in our
discretion. Such review and bonus will be consistent with any bonus
plan adopted by the CNG Committee that covers the executive officers of our
company generally.
53
Outstanding
Equity Awards at Fiscal Year End
The
following table presents certain information concerning outstanding equity
awards held by the Named Executives as of December 31, 2008.
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||
Number of Securities
Underlying Unexercised
Options (#)
|
Option Exercise
|
Option
Expiration
|
Number of
|
Market value of
|
||||||||||||||||||||
Name
|
Exercisable
|
Unexercisable
|
Price
|
Date
|
Note
|
unearned shares
|
unearned shares (q)
|
Note
|
||||||||||||||||
Anthony
K. Blair
|
50,000 | - | $ | 0.60 |
7/1/2014
|
(h)
|
50,000 | $ | 28,500 |
(p)
|
||||||||||||||
40,000 | - | $ | 0.39 |
12/10/2014
|
(j)
|
|||||||||||||||||||
30,000 | - | $ | 0.26 |
12/27/2015
|
(k)
|
|||||||||||||||||||
20,000 | 10,000 | $ | 0.27 |
12/15/2016
|
(l)
|
|||||||||||||||||||
6,667 | 13,333 | $ | 0.35 |
7/27/2017
|
(m)
|
|||||||||||||||||||
- | 50,000 | $ | 0.362 |
1/3/2018
|
(n)
|
|||||||||||||||||||
David
C. Bupp
|
180,000 | - | $ | 0.50 |
1/4/2010
|
(b)
|
300,000 | $ | 171,000 |
(p)
|
||||||||||||||
180,000 | - | $ | 0.41 |
1/3/2011
|
(c)
|
|||||||||||||||||||
180,000 | - | $ | 0.42 |
1/7/2012
|
(d)
|
|||||||||||||||||||
100,000 | - | $ | 0.14 |
1/15/2013
|
(e)
|
|||||||||||||||||||
70,000 | - | $ | 0.13 |
2/15/2013
|
(f)
|
|||||||||||||||||||
150,000 | - | $ | 0.30 |
1/7/2014
|
(g)
|
|||||||||||||||||||
150,000 | - | $ | 0.49 |
7/28/2014
|
(i)
|
|||||||||||||||||||
200,000 | - | $ | 0.39 |
12/10/2014
|
(j)
|
|||||||||||||||||||
200,000 | - | $ | 0.26 |
12/27/2015
|
(k)
|
|||||||||||||||||||
200,000 | 100,000 | $ | 0.27 |
12/15/2016
|
(l)
|
|||||||||||||||||||
- | 200,000 | $ | 0.362 |
1/3/2018
|
(n)
|
|||||||||||||||||||
Brent
L. Larson
|
25,000 | - | $ | 1.25 |
2/11/2009
|
(a)
|
50,000 | $ | 28,500 |
(p)
|
||||||||||||||
60,000 | - | $ | 0.50 |
1/4/2010
|
(b)
|
|||||||||||||||||||
60,000 | - | $ | 0.41 |
1/3/2011
|
(c)
|
|||||||||||||||||||
50,000 | - | $ | 0.42 |
1/7/2012
|
(d)
|
|||||||||||||||||||
40,000 | - | $ | 0.14 |
1/15/2013
|
(e)
|
|||||||||||||||||||
30,000 | - | $ | 0.13 |
2/15/2013
|
(f)
|
|||||||||||||||||||
70,000 | - | $ | 0.30 |
1/7/2014
|
(g)
|
|||||||||||||||||||
50,000 | - | $ | 0.49 |
7/28/2014
|
(i)
|
|||||||||||||||||||
50,000 | - | $ | 0.39 |
12/10/2014
|
(j)
|
|||||||||||||||||||
40,000 | - | $ | 0.26 |
12/27/2015
|
(k)
|
|||||||||||||||||||
33,333 | 16,667 | $ | 0.27 |
12/15/2016
|
(l)
|
|||||||||||||||||||
- | 50,000 | $ | 0.362 |
1/3/2018
|
(n)
|
(a)
|
Options
were granted 2/11/1999 and vested as to one-third immediately and on each
of the first two anniversaries of the date of
grant.
|
(b)
|
Options
were granted 1/4/2000 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(c)
|
Options
were granted 1/3/2001 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(d)
|
Options
were granted 1/7/2002 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(e)
|
Options
were granted 1/15/2003 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(f)
|
Options
were granted 2/15/2003 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(g)
|
Options
were granted 1/7/2004 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(h)
|
Options
were granted 7/1/2004 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(i)
|
Options
were granted 7/28/2004 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(j)
|
Options
were granted 12/10/2004 and vested as to one-third on each of the first
three anniversaries of the date of
grant.
|
(k)
|
Options
were granted 12/27/2005 and vested as to one-third immediately and on each
of the first two anniversaries of the date of
grant.
|
(l)
|
Options
were granted 12/15/2006 and vest as to one-third on each of the first
three anniversaries of the date of
grant.
|
(m)
|
Options
were granted 7/27/2007 and vest as to one-third on each of the first three
anniversaries of the date of grant.
|
(n)
|
Options
were granted 1/3/2008 and vest as to one-third on each of the first three
anniversaries of the date of grant.
|
(o)
|
Estimated
by reference to the closing market price of the Company’s common stock on
December 31, 2008, pursuant to Instruction 3 to Item 402(p)(2) of
Regulation S-K. The closing price of the Company’s common stock
on December 31, 2008, was $0.57.
|
(p)
|
Restricted
shares granted January 3, 2008. Pursuant to the terms of Restricted Stock
Agreements between the Company and each grantee, the restricted shares
will vest upon the approval by the United States Food and Drug
Administration of the New Drug Application for Lymphoseek. If the
employment of a grantee with the Company is terminated before all of the
restricted shares have vested, then pursuant to the terms of the
Restricted Stock Agreements all restricted shares that have not vested at
the effective date of such grantee’s termination shall immediately be
forfeited by the grantee. Pursuant to its authority under Section 3.2 of
the Restricted Stock Agreements the Company’s Compensation, Nominating and
Governance Committee eliminated the forfeiture provision in Section 3.2(b)
of the Restricted Stock Agreements effective January 1, 2009, which
provision effected the forfeiture of the shares if the vesting event did
not occur before June 30, 2010.
|
54
Compensation
of Non-Employee Directors
Each
non-employee director received an annual cash retainer of $20,000 and earned an
additional $1,500 per board meeting attended in person or $500 per telephonic
board meeting during the fiscal year ended December 31, 2008. The
Chairmen of the Company’s Board of Directors and Audit Committee each received
an additional annual retainer of $10,000 for their services in those capacities
during 2008. Members of committees of the Company’s Board of
Directors earned an additional $500 per committee meeting attended in person or
telephonically. We also reimbursed non-employee directors for travel
expenses for meetings attended during 2008.
Each
non-employee director also received 10,000 options to purchase common stock as a
part of the Company’s annual stock incentive grants, in accordance with the
provisions of the Neoprobe Corporation Second Amended and Restated 2002 Stock
Incentive Plan. The options granted to purchase common stock vested
on the first anniversary of the date of grant and have an exercise price of
$0.362, the closing price of the Company’s common stock as reported on the OTC
Bulletin Board regulated quotation service on January 3, 2008, the date of
grant. The aggregate number of option awards outstanding at December
15, 2009 for each Director is set forth in the footnotes to the beneficial
ownership table provided on page 56 of this prospectus. Directors who
are also officers or employees of Neoprobe do not receive any compensation for
their services as directors.
The
following table sets forth certain information concerning the compensation of
non-employee Directors for the fiscal year ended December 31, 2008.
Name
|
Fees Earned
or Paid in
Cash(a)
|
Option
Awards(b),(c)
|
Total
Compensation
|
|||||||||
Carl
J. Aschinger, Jr.
|
$ | 37,500 | $ | 3,046 | $ | 40,546 | ||||||
Reuven
Avital
|
28,000 | 3,046 | 31,046 | |||||||||
Kirby
I. Bland, M.D.
|
27,500 | 3,046 | 30,546 | |||||||||
Owen
E. Johnson, M.D.
|
27,500 | 6,011 | 33,511 | |||||||||
Fred
B. Miller
|
38,000 | 3,046 | 41,046 | |||||||||
Gordon
A. Troup
|
13,000 | 2,020 | 15,202 | |||||||||
J.
Frank Whitley, Jr.
|
28,000 | 3,046 | 31,046 |
(a)
|
Amount
represents fees earned during the fiscal year ended December 31, 2008
(i.e., the year to which the service relates). Quarterly
retainers and meeting attendance fees are paid during the quarter
following the quarter in which they are
earned.
|
(b)
|
Amount
represents the dollar amount recognized for financial statement reporting
purposes in accordance with SFAS No. 123(R). Assumptions made
in the valuation of stock option awards are disclosed in Note 1(o) of the
Notes to the Consolidated Financial Statements in this Registration
Statement on Form S-1.
|
(c)
|
At
December 31, 2008, the non-employee directors held an aggregate of
1,057,500 options to purchase shares of common stock of the
Company.
|
55
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Principal
Stockholders, Directors, Nominees and Executive Officers and Related Stockholder
Matters
The
following table sets forth, as of December 15, 2009, certain information with
respect to the beneficial ownership of shares of our common stock by: (i) each
person known to us to be the beneficial owner of more than 5% of our outstanding
shares of common stock, (ii) each director or nominee for director of our
Company, (iii) each of the Named Executives (see “Executive Compensation –
Summary Compensation Table”), and (iv) our directors and executive officers
as a group.
Beneficial Owner
|
Number of Shares
Beneficially Owned (*)
|
Percent
of Class (**)
|
|||||
Carl
J. Aschinger, Jr.
|
368,245 |
(a)
|
(n)
|
||||
Reuven
Avital
|
455,556 |
(b)
|
(n)
|
||||
Anthony
K. Blair
|
288,762 |
(c)
|
(n)
|
||||
Kirby
I. Bland, M.D.
|
205,000 |
(d)
|
(n)
|
||||
David
C. Bupp
|
7,036,975 |
(e)
|
8.1 | % | |||
Frederick
O. Cope, Ph.D.
|
- |
(f)
|
(n)
|
||||
Owen
E. Johnson, M.D.
|
75,000 |
(g)
|
(n)
|
||||
Brent
L. Larson
|
692,472 |
(h)
|
(n)
|
||||
Fred
B. Miller
|
386,000 |
(i)
|
(n)
|
||||
Gordon
A. Troup
|
50,000 |
(j)
|
(n)
|
||||
J.
Frank Whitley, Jr.
|
286,500 |
(k)
|
(n)
|
||||
All
directors and officers as a group
|
10,398,833 |
(l)(o)
|
11.6 | % | |||
(13
persons)
|
|||||||
Platinum-Montaur
Life Sciences, LLC
|
7,323,789 |
(m)
|
9.1 | % |
(*)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission which generally attribute beneficial ownership of
securities to persons who possess sole or shared voting power and/or
investment power with respect to those securities. Unless
otherwise indicated, voting and investment power are exercised solely by
the person named above or shared with members of such person’s
household.
|
(**)
|
Percent
of class is calculated on the basis of the number of shares outstanding on
December 15, 2009, plus the number of shares the person has the right to
acquire within 60 days of December 15,
2009.
|
(a)
|
This
amount includes 150,000 shares issuable upon exercise of options which are
exercisable within 60 days and 1,145 shares held in a trust account for
which Mr. Aschinger is the custodian, but does not include 30,000 shares
of unvested restricted stock which are not exercisable within 60
days.
|
(b)
|
This
amount consists of 139,256 shares of our common stock owned by Mittai
Investments Ltd. (Mittai), an investment fund under the management and
control of Mr. Avital, and 195,000 shares issuable upon exercise of
options which are exercisable within 60 days but does not include 30,000
shares of unvested restricted stock which are not exercisable within 60
days. The shares held by Mittai were obtained through a
distribution of 2,785,123 shares previously held by Ma’Aragim Enterprise
Ltd. (Ma’Aragim), another investment fund under the management and control
of Mr. Avital. On February 28, 2005, Ma’Aragim distributed its
shares to the partners in the fund. Mr. Avital is not an
affiliate of the other fund to which the remaining 2,645,867 shares were
distributed. Of the 2,785,123 shares previously held by
Ma’Aragim, 2,286,712 were acquired in exchange for surrendering its shares
in Cardiosonix Ltd. on December 31, 2001, in connection with our
acquisition of Cardiosonix, and 498,411 were acquired by Ma’Aragim based
on the satisfaction of certain developmental milestones on December 30,
2002, associated with our acquisition of
Cardiosonix.
|
56
(c)
|
This
amount includes 205,000 shares issuable upon exercise of options which are
exercisable within 60 days and 33,763 shares in Mr. Blair’s account in the
401(k) Plan, but it does not include 100,000 shares of unvested restricted
stock and 115,000 shares issuable upon exercise of options which are not
exercisable within 60 days.
|
(d)
|
This
amount includes 180,000 shares issuable upon exercise of options which are
exercisable within 60 days but does not include 30,000 shares of unvested
restricted stock which are not exercisable within 60
days.
|
(e)
|
This
amount includes 1,683,333 shares issuable upon exercise of options which
are exercisable within 60 days, 770,000 warrants which are exercisable
within 60 days, a promissory note convertible into 3,225,806 shares of our
common stock, 213,746 shares that are held by Mr. Bupp’s wife for which he
disclaims beneficial ownership and 119,390 shares in Mr. Bupp’s account in
the 401(k) Plan, but it does not include 1,000,000 shares of unvested
restricted stock and 66,667 shares issuable upon exercise of options which
are not exercisable within 60 days.
|
(f)
|
This
amount does not include 175,000 shares of unvested restricted stock and
125,000 shares issuable upon exercise of options which are not exercisable
within 60 days.
|
(g)
|
This
amount includes 40,000 shares issuable upon exercise of options which are
exercisable within 60 days but does not include 30,000 shares of unvested
restricted stock which are not exercisable within 60
days.
|
(h)
|
This
amount includes 481,666 shares issuable upon exercise of options which are
exercisable within 60 days and 87,414 shares in Mr. Larson’s account in
the 401(k) Plan, but it does not include 125,000 shares of unvested
restricted stock and 108,334 shares issuable upon exercise of options
which are not exercisable within 60
days.
|
(i)
|
This
amount includes 255,000 shares issuable upon exercise of options which are
exercisable within 60 days and 81,000 shares held by Mr. Miller’s wife for
which he disclaims beneficial ownership, but does not include 30,000
shares of unvested restricted stock which are not exercisable within 60
days.
|
(j)
|
This
amount does not include 30,000 shares of unvested restricted stock which
are not exercisable within 60 days.
|
(k)
|
This
amount includes 255,000 shares issuable upon exercise of options which are
exercisable within 60 days, but does not include 30,000 shares of unvested
restricted stock which are not exercisable within 60
days.
|
(l)
|
This
amount includes 3,979,998 shares issuable upon exercise of options which
are exercisable within 60 days, 770,000 warrants which are exercisable
within 60 days, a promissory note convertible into 3,225,806 shares of our
common stock, 295,891 shares that are held by spouses of our Directors and
Officers or in trusts for which they are custodian but for which they
disclaim beneficial ownership and 253,224 shares held in the 401(k) Plan
on behalf of certain officers, but it does not include 1,680,000 shares of
unvested restricted stock and 530,002 shares issuable upon the exercise of
options which are not exercisable within 60 days. The Company
itself is the trustee of the Neoprobe 401(k) Plan and may, as such, share
investment power over common stock held in such plan. The
trustee disclaims any beneficial ownership of shares held by the 401(k)
Plan. The 401(k) Plan holds an aggregate total of 575,350
shares of common stock.
|
(m)
|
Based
on information filed on Schedule 13G with the Securities and Exchange
Commission on August 18, 2009 and information supplied subsequently by
holder. The number of shares beneficially owned by Platinum-Montaur Life
Sciences, LLC (Montaur), 152 W. 57th Street, 54th Floor, New York, NY
10019, does not include 17,061,621 shares of common stock issuable upon
conversion of a 10% Series A Convertible Senior Secured Promissory Note
issued to Montaur on December 26, 2007, as amended (the “Series A Note”),
8,333,333 shares of common stock issuable upon conversion of a 10% Series
B Convertible Senior Secured Promissory Note issued to Montaur on April
16, 2008 (the “Series B Note”), 6,000,000 shares of common stock issuable
upon conversion of 3,000 shares Series A 8% Cumulative Convertible
Preferred Stock issued to Montaur on December 5, 2008 (the “Preferred
Stock”), 6,000,000 shares of common stock issuable upon exercise of a
Series W Warrant issued to Montaur on December 26, 2007, as amended (the
“Series W Warrant”), 8,333,333 shares of common stock issuable upon
exercise of a Series X Warrant issued to Montaur on April 16, 2008 (the
“Series X Warrant”), and 2,400,000 shares of common stock issuable upon
exercise of a Series AA Warrant issued to Montaur on July 24, 2009 (the
“Series AA Warrant”). The Certificates of Designation of the Preferred
Stock, the Series A Note, the Series B Note, the Series W Warrant, the
Series X Warrant and the Series AA Warrant each provide that the holder of
shares of the Preferred Stock, the Series A Note, the Series B Note, the
Series W Warrant, the Series X Warrant and the Series AA Warrant,
respectively, may not convert any of the preferred stock or notes or
exercise any of the warrants to the extent that such conversion or
exercise would result in the holder and its affiliates together
beneficially owning more than 4.99% or 9.99% of the outstanding shares of
Common Stock, except on 61 days’ prior written notice to Neoprobe that the
holder waives such limitation. Effective September 23, 2009,
the 4.99% limitation, however, does not apply to shares of Common Stock
issued as a dividend on the Preferred Stock or shares of Common Stock
issued as interest on the Series A Note or the Series B
Note.
|
(n)
|
Less
than one percent.
|
(o)
|
The
address of all directors and executive officers is c/o Neoprobe
Corporation, 425 Metro Place North, Suite 300, Dublin, Ohio
43017-1367.
|
57
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
In July
2007, David C. Bupp, our President and CEO, and certain members of his family
(the Bupp Investors) purchased a $1.0 million convertible note (the “Bupp Note”)
and warrants. The note bore interest at 10% per annum, had an
original term of one year and is repayable in whole or in part with no
penalty. The note is convertible into shares of our common stock at a
price of $0.31 per share, a 25% premium to the average closing market price of
our common stock for the 5 days preceding the closing of the
transaction. As part of this transaction, we issued the Bupp
Investors 500,000 Series V warrants to purchase our common stock at an exercise
price of $0.31 per share, expiring in July 2012. In connection with the Montaur
Purchase Agreement, the term of the $1.0 million Bupp Note was extended to
December 27, 2011, one day following the maturity date of the Montaur
Notes. In consideration for the Bupp Investors’ agreement to extend
the term of the Bupp Note pursuant to an Amendment to the Bupp Purchase
Agreement, dated December 26, 2007, we agreed to provide security for the
obligations evidenced by the Amended 10% Convertible Note in the principal
amount of $1,000,000, due December 31, 2011, executed by Neoprobe in favor of
the Bupp Investors the “Amended Bupp Note”), under the terms of a Security
Agreement, dated December 26, 2007, by and between Neoprobe and the Bupp
Investors (the “Bupp Security Agreement"). This security interest is
subordinate to the security interest of Montaur. As further
consideration for extending the term of the Bupp Note, we issued the Bupp
Investors an additional 500,000 Series V warrants to purchase our common stock
at an exercise price of $0.32 per share, expiring in December
2012. The largest amount of principal outstanding under the Amended
Bupp Note during the fiscal year ended December 31, 2008, was $1 million, and
the Amended Bupp Note had an outstanding principal amount of $1 million on
December 31, 2008. We made interest payments due under the Amended
Bupp Note totaling $100,000 but did not make any payments of principal during
the fiscal year ended December 31, 2008.
It is our
practice and policy to comply with all applicable laws, rules and regulations
regarding related-person transactions, including the Sarbanes-Oxley Act of
2002. A related person is an executive officer, director or more than
5% stockholder of Neoprobe, including any immediate family members, and any
entity owned or controlled by such persons. Our Board of Directors
(excluding any interested director) is charged with reviewing and approving all
related-person transactions, and a special committee of our Board of Directors
is established to negotiate the terms of such transactions. In
considering related-person transactions, our Board of Directors takes into
account all relevant available facts and circumstances.
Director
Independence
Our Board
of Directors has adopted the definition of “independence” as described under the
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) Section 301, Rule 10A-3 under the
Securities Exchange Act of 1934 (the Exchange Act) and Nasdaq Rules 4200 and
4350. Our Board of Directors has determined that Messrs. Aschinger,
Avital, Miller, Troup and Whitley, and Drs. Bland and Johnson meet the
independence requirements.
58
DESCRIPTION
OF CAPITAL STOCK
Authorized and Issued
Stock
Number of Shares at December 15,
2009
|
||||||||||||
Title of Class
|
Authorized
|
Outstanding
|
Reserved
|
|||||||||
Common
Stock, $0.001 par value per share
|
150,000,000 | 80,889,561 | 58,188,511 | |||||||||
Preferred
Stock, $0.001 par value per share
|
5,000,000 | 3,000 | 0 |
Common
Stock
Dividends
Each
share of common stock is entitled to receive an equal dividend, if one is
declared, which is unlikely. We have never paid dividends on our common stock
and do not intend to do so in the foreseeable future. We intend to retain any
future earnings to finance our growth. See Risk Factors.
Liquidation
If our
company is liquidated, any assets that remain after the creditors are paid, and
the owners of preferred stock receive any liquidation preferences, will be
distributed to the owners of our common stock pro-rata.
Voting
Rights
Each
share of our common stock entitles the owner to one vote. There is no cumulative
voting. A simple majority can elect all of the directors at a given meeting and
the minority would not be able to elect any directors at that
meeting.
Preemptive
Rights
Owners of
our common stock have no preemptive rights. We may sell shares of our common
stock to third parties without first offering it to current
stockholders.
Redemption
Rights
We do not
have the right to buy back shares of our common stock except in extraordinary
transactions such as mergers and court approved bankruptcy reorganizations.
Owners of our common stock do not ordinarily have the right to require us to buy
their common stock. We do not have a sinking fund to provide assets for any buy
back.
Conversion
Rights
Shares of
our common stock can not be converted into any other kind of stock except in
extraordinary transactions, such as mergers and court approved bankruptcy
reorganizations.
Preferred
Stock
Our
certificate of incorporation authorizes our board of directors to issue "blank
check" preferred stock. The board of directors may divide this stock into series
and set their rights. On December 26, 2007, the board of directors designated
3,000 shares of preferred stock as Series A 8% Cumulative Convertible Preferred
Stock. On December 5, 2008, we issued 3,000 shares of Series A 8% Cumulative
Convertible Preferred Stock. Montaur may convert all or any portion of the
shares of 8% Series A Cumulative Convertible Preferred Stock into an aggregate
6,000,000 shares of our common stock.
59
The board
of directors may, without prior stockholder approval, issue any of the remaining
4,997,000 shares of authorized preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the relative
voting power or other rights of the common stock. Preferred stock could be used
as a method of discouraging, delaying, or preventing a take-over of our company.
If we do issue preferred stock in the future, it could have a dilutive effect
upon the common stock. See Risk Factors.
Anti-Takeover
Charter Provisions and Laws
Some
features of our certificate of incorporation and by-laws and the Delaware
General Corporation Law (DGCL), which are further described below, may have the
effect of deterring third parties from making takeover bids for control of our
company or may be used to hinder or delay a takeover bid. This would decrease
the chance that our stockholders would realize a premium over market price for
their shares of common stock as a result of a takeover bid. See Risk
Factors.
Limitations
on Stockholder Actions
Our
certificate of incorporation provides that stockholder action may only be taken
at a meeting of the stockholders. Thus, an owner of a majority of the voting
power could not take action to replace the board of directors, or any class of
directors, without a meeting of the stockholders, nor could he amend the by-laws
without presenting the amendment to a meeting of the stockholders. Furthermore,
under the provisions of the certificate of incorporation and by-laws, only the
board of directors has the power to call a special meeting of stockholders.
Therefore, a stockholder, even one who owns a majority of the voting power, may
neither replace sitting board of directors members nor amend the by-laws before
the next annual meeting of stockholders.
Advance
Notice Provisions
Our
by-laws establish advance notice procedures for the nomination of candidates for
election as directors by stockholders, as well as for other stockholder
proposals to be considered at annual meetings. Generally, we must receive a
notice of intent to nominate a director or raise any other matter at a
stockholder meeting not less than 120 days before the first anniversary of the
mailing of our proxy statement for the previous year’s annual meeting. The
notice must contain required information concerning the person to be nominated
or the matters to be brought before the meeting and concerning the stockholder
submitting the proposal.
Delaware
Law
We are
incorporated in Delaware, and as such are subject to Section 203 of the DGCL,
which provides that a corporation may not engage in any business combination
with an interested stockholder during the three years after he becomes an
interested stockholder unless:
|
·
|
the
corporation’s board of directors approved in advance either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
|
|
·
|
the
interested stockholder owned at least 85 percent of the corporation’s
voting stock at the time the transaction commenced;
or
|
|
·
|
the
business combination is approved by the corporation’s board of directors
and the affirmative vote of at least two-thirds of the voting stock which
is not owned by the interested
stockholder.
|
An
interested stockholder is anyone who owns 15 percent or more of a corporation’s
voting stock, or who is an affiliate or associate of the corporation and was the
owner of 15 percent or more of the corporation’s voting stock at any time within
the previous three years; and the affiliates and associates of any those
persons. Section 203 of the DGCL makes it more difficult for an interested
stockholder to implement various business combinations with our company for a
three-year period, although our stockholders may vote to exclude it from the
law’s restrictions.
60
Classified
Board
Our
certificate of incorporation and by-laws divide our board of directors into
three classes with staggered three year terms. There are currently eight
directors, two in one class and three in each of two additional classes. At each
annual meeting of stockholders, the terms of one class of directors will expire
and the newly nominated directors of that class will be elected for a term of
three years. The board of directors will be able to determine the total number
of directors constituting the full board of directors and the number of
directors in each class, but the total number of directors may not exceed 17 nor
may the number of directors in any class exceed six. Subject to these rules, the
classes of directors need not have equal numbers of members. No reduction in the
total number of directors or in the number of directors in a given class will
have the effect of removing a director from office or reducing the term of any
then sitting director. Stockholders may only remove directors for cause. If the
board of directors increases the number of directors in a class, it will be able
to fill the vacancies created for the full remaining term of a director in that
class even though the term may extend beyond the next annual meeting. The
directors will also be able to fill any other vacancies for the full remaining
term of the director whose death, resignation or removal caused the
vacancy.
A person
who has a majority of the voting power at a given meeting will not in any one
year be able to replace a majority of the directors since only one class of the
directors will stand for election in any one year. As a result, at least two
annual meeting elections will be required to change the majority of the
directors by the requisite vote of stockholders. The purpose of classifying the
board of directors is to provide for a continuing body, even in the face of a
person who accumulates a sufficient amount of voting power, whether by ownership
or proxy or a combination, to have a majority of the voting power at a given
meeting and who may seek to take control of our company without paying a fair
premium for control to all of the owners of our common stock. This will allow
the board of directors time to negotiate with such a person and to protect the
interests of the other stockholders who may constitute a majority of the shares
not actually owned by that person. However, it may also have the effect of
deterring third parties from making takeover bids for control of our company or
may be used to hinder or delay a takeover bid.
ACQUISITION
OF COMMON STOCK BY SELLING STOCKHOLDER
On
December 26, 2007, we entered into a Securities Purchase Agreement (“SPA”) with
Platinum-Montaur Life Sciences, LLC (“Montaur”), pursuant to which we issued
Montaur a 10% Series A Convertible Senior Secured Promissory Note in the
principal amount of $7,000,000, due December 26, 2011 (the “Series A Note”) and
a five-year Series W warrant to purchase 6,000,000 shares of our common stock,
$.001 par value per share (“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. Closing of the second and third tranches were subject to the
satisfaction by the Company of certain milestones related to the progress of the
Company’s Phase 3 clinical trials of the Company’s Lymphoseek
radiopharmaceutical product.
On April
16, 2008, following receipt by the Company of clearance by the FDA to commence a
Phase 3 clinical trial for Lymphoseek in patients with breast cancer or
melanoma, we amended the SPA related to the second tranche and issued Montaur a
10% Series B Convertible Senior Secured Promissory Note in the principal amount
of $3,000,000, also due December 26, 2011 (the “Series B Note,” and hereinafter
referred to collectively with the Series A Note as the “Montaur Notes”), and a
five-year Series X warrant to purchase 8,333,333 shares of our Common Stock at
an exercise price of $0.46 per share.
61
On
December 5, 2008, after the Company obtained 135 vital blue dye lymph nodes from
patients who had completed surgery and the injection of the drug in a Phase 3
clinical trial of Lymphoseek in patients with breast cancer or melanoma, we
issued Montaur 3,000 shares of our 8% Series A Cumulative Convertible Preferred
Stock (the ”Preferred Stock”) and a five-year Series Y warrant (hereinafter
referred to collectively with the Series W warrant and Series X warrant as the
“Montaur Warrants”) to purchase 6,000,000 shares of our Common Stock, at an
exercise price of $0.575 per share, also for an aggregate purchase price of
$3,000,000.
On July
24, 2009, we entered into a Securities Amendment and Exchange Agreement (the
“Amendment Agreement”) with Montaur, pursuant to which Montaur agreed to the
amendment and restatement of the terms of the Montaur Notes, the Montaur
Warrants and the Preferred Stock, to remove price-based anti-dilution adjustment
provisions that had created a significant non-cash derivative liability on the
Company’s balance sheet. Upon the surrender of the Montaur Notes and the Montaur
Warrants, the Company issued to Montaur: (a) the Company’s Amended and Restated
10% Series A Convertible Senior Secured Promissory Note in the principal amount
of $7,000,000, due December 26, 2011 (the “Amended Series A Note”); (b) the
Company’s Amended and Restated 10% Series B Convertible Senior Secured
Promissory Note in the principal amount of $3,000,000, due December 26, 2011
(the “Amended Series B Note,” and together with the Amended Series A Note the
“Amended Montaur Notes”); (c) the Company’s Amended and Restated
Series W Warrant to purchase shares of common stock of the Company (the “Amended
Series W Warrant”); (d) the Company’s Amended and Restated Series X Warrant to
purchase shares of common stock of the Company (the “Amended Series X Warrant”);
and (e) the Company’s Amended and Restated Series Y Warrant to purchase shares
of common stock of the Company (the “Amended Series Y Warrant,” and together
with the Amended Series W Warrant and Amended Series X Warrant the “Amended
Montaur Warrants”).
Montaur
may convert the full $7,000,000 principal amount of the Amended Series A Note
into shares of Common Stock in two tranches. Montaur may convert the first
tranche of up to $3,500,000 of the outstanding principal balance of the Amended
Series A Note at the conversion price of $0.26 per share, and a second tranche
of the remaining $3,500,000 of the outstanding principal balance of the Amended
Series A Note at the conversion price of $0.9722 per share. Montaur may convert
the Amended Series B Note into shares of Common Stock at the conversion price of
$0.36 per share. Provided we have satisfied certain conditions stated therein,
we may elect to make payments of interest due under the Amended Montaur Notes in
registered shares of Common Stock. If we choose to make interest payments in
shares of Common Stock, the number of shares of Common Stock to be applied
against any such interest payment will be determined by reference to the
quotient of (a) the applicable interest payment divided by (b) 90% of the
average daily volume weighted average price of our Common Stock on the OTC
Bulletin Board (or national securities exchange, if applicable) as reported by
Bloomberg Financial L.P. for the five days upon which our Common Stock is traded
on the OTC Bulletin Board immediately preceding the date of the interest
payment.
Montaur
may convert each share of the Preferred Stock into a number of shares of our
common stock equal to the quotient of: (1) the Liquidation Preference Amount of
the shares of Preferred Stock by; (2) the Conversion Price. The “Liquidation
Preference Amount” for the Preferred Stock is $1,000 and the “Conversion Price”
of the Preferred Stock was set at $0.50 on the date of issuance, thereby making
the shares of Preferred Stock convertible into an aggregate 6,000,000 shares of
our Common Stock, subject to adjustment as
described in the Certificate of Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series A 8% Cumulative
Convertible Preferred Stock. We may elect to pay dividends due to Montaur
on the shares of Preferred Stock in registered shares of Common Stock. The
number of shares of Common Stock to be applied against any such dividend payment
will be determined by reference to the quotient of (a) the applicable dividend
payment by (b) 90% of the average daily volume weighted average price of our
Common Stock on the OTC Bulletin Board (or national securities exchange, if
applicable) as reported by Bloomberg Financial L.P. for the five days upon which
our Common Stock is traded on the OTC Bulletin Board immediately preceding the
date of the dividend payment.
62
Pursuant
to the terms of a Registration Rights Agreement, dated December 26, 2007, as
amended by the Amendment to Registration Rights Agreement, dated February 7,
2008, Second Amendment to Registration Rights Agreement, dated April 16, 2008,
Third Amendment to Registration Rights Agreement, dated July 10, 2008, Fourth
Amendment to Registration Rights Agreement, dated December 5, 2008, and Fifth
Amendment to Registration Rights Agreement, dated December 21, 2009, we have
agreed to register the resale of: (i) up to 3,600,000 shares issuable upon the
conversion of the Amended Series A Note; (ii) the shares of Common Stock issued
upon exercise of the Amended Series Y Warrant; (iii) 3,500,000 shares of Common
Stock issued or issuable as interest or dividends on the Amended Montaur
Notes and the Preferred Stock; and (iv) 2,400,000 shares issuable upon exercise
of the Series AA Warrant, provided that the total number of shares of Common
Stock registered does not exceed 15,500,000. Additionally, we have agreed that
within thirty-five days of receipt from Montaur of written request therefor, we
will prepare and file an additional “resale” registration statement providing
for the resale of: (i) the remaining shares of Common Stock issuable upon the
conversion of the Amended Series A Note; (ii) the shares of Common Stock
issuable upon the exercise of the Amended Series W Warrant; (iii) the shares of
Common Stock issuable upon the conversion of the Amended Series B Note; (iv) the
shares of Common Stock issuable upon the exercise of the Amended Series X
Warrant; and (v) the shares of Common Stock issuable upon conversion of the
Preferred Stock, provided, however, that we are not required to file such
additional registration statement, or may exclude shares from such additional
registration statement, if we believe in good faith, based upon advice from the
Securities and Exchange Commission’s Staff, that application of Rule 415 would
not permit registration of all or the excluded portion of such shares. This
prospectus covers the resale of up to: (i) 3,600,000 shares issuable upon the
conversion of the Amended Series A Note; (ii) 6,000,000 shares of Common Stock
issued upon exercise of the Amended Series Y Warrant; (iii) 3,500,000 shares of
Common Stock issued or issuable as interest or dividends on the Amended
Montaur Notes and the Preferred Stock; and (iv) 2,400,000 shares issuable upon
exercise of the Series AA Warrant, for a total of
15,500,000 shares.
63
Table 1
below sets forth the dollar amount of payments which the Company has made or may
be required to make to the Selling Shareholder or any affiliate, or any person
with whom the Selling Shareholder has a contractual arrangement in connection
with the Purchase Agreement, during the first year following the effective date
of the Purchase Agreement.
Table
1
Payee
|
Cash
Payment
|
Purpose of Payment
|
|||
Platinum-Montaur
Life Sciences, LLC
|
$ | 30,000 |
Selling
Shareholder's Diligence Fee
|
||
Burak
Anderson & Melloni, PLC, attorney for the Selling
Shareholder
|
2,610 |
Reimbursement
of document amendment, filing and recording fees
|
|||
Subtotal,
transaction costs paid to Selling Stockholder
|
32,610 | ||||
Interest
payments December 26, 2007 through December 31, 2008 (1)
|
923,506 |
Interest
paid on outstanding principal
|
|||
Total
of transaction costs and possible payments to Selling Stockholder (2),(3),(4)
|
$ | 956,116 |
(1) Interest
payments are based on a rate of 10% per annum times the outstanding principal
and will continue until the convertible notes are either converted or retired on
their maturity at December 26, 2011.
(2) The
Company's obligation to register these shares is a best efforts obligation.
There is no requirement for the Company to pay liquidated damages to the Selling
Stockholder in the event of delays in the registration of the underlying shares
of Common Stock, but the selling stockholder may seek actual damages or specific
performance in the event of a breach by the Company of this best efforts
obligation.
(3) In
the event of default, the Selling Stockholder is entitled to a variety of
remedies, including default interest at the rate of 13% per annum, and payment
of costs of collection (including reasonable attorneys’ fees). In the
event that the Company fails to issue the full number of shares to which the
Selling Stockholder is entitled to receive upon conversion of the Montaur Notes,
or fails to have sufficient shares available for resale of such shares under an
effective registration statement, the Selling Stockholder may require to Company
to prepay a portion of the notes equal to 125% of the portion of the aggregate
principal of the Montaur Notes which the Selling Stockholder was unable to
convert. Since the Company has authorized and reserved sufficient
shares issuable on conversion of the notes, and since the number of shares
available for resale under the registration statement of which this prospectus
forms a part and under Rule 144 after the date of this prospectus are sufficient
to permit resales by the Selling Stockholder, the Company has not estimated any
amount that might become payable to the Selling Shareholder under this
provision.
(4) The
Company has paid WBB Securities, LLC (WBB) a placement agent fee equal to 6% of
the gross proceeds received from the Selling Stockholder. However,
WBB had no contractual arrangement with the Selling Stockholder in connection
with the transaction, and is not an affiliate of the Selling
Stockholder.
64
Table 2
below sets forth the total possible profit the Selling Stockholder could realize
as a result of sale of the Common Stock issuable upon conversion of the Montaur
Notes as of their respective dates of sale.
Table
2
Principal
Amount
of
Note
|
Total
Possible
Shares
|
Market
Price per
Share(1)
|
Conversion
Price
per
Share(2)
|
Combined
Market
Price
|
Combined
Conversion
Price
|
Total
Possible
Discount(3)
(Net Profit to
Selling
Stockholder)
|
||||||||||||||||||||||
Note
A
|
$ | 3,500,000 | 13,461,538 | $ | 0.27 | $ | 0.2600 | $ | 3,634,615 | $ | 3,500,000 | $ | 134,615 | |||||||||||||||
Note
A
|
3,500,000 | 3,600,000 | $ | 1.12 | $ | 0.9722 | 4,032,000 | 3,500,000 | 532,000 | |||||||||||||||||||
Note
B
|
3,000,000 | 8,333,333 | $ | 0.52 | $ | 0.3600 | 4,333,333 | 3,000,000 | 1,333,333 | |||||||||||||||||||
$ | 10,000,000 | 25,394,871 | $ | 11,999,948 | $ | 10,000,000 | $ | 1,999,948 |
(1) The
closing prices of the Common Stock on December 26, 2007 (the original closing
date for Note A), on April 16, 2008 (the closing date for Note B), and on July
24, 2009 (the closing date of the amendment to Note A) were $0.27, $0.52, and
$1.12, respectively.
(2) The
conversion prices for each of the Montaur Notes are fixed, subject to customary
anti-dilution provisions.
(3) This
calculation assumes interest is paid in cash rather than in stock as permitted
by the terms of the notes.
Table 3
below sets forth the total possible profit the Selling Stockholder could realize
as a result of sale of the Common Stock issuable upon conversion of the
Preferred Stock as of the date of sale.
Table
3
Purchase
Price
of
Preferred
Stock
|
Total
Possible
Shares
|
Market
Price
per
Share(1)
|
Conversion
Price
per
Share(2)
|
Market
Price
|
Conversion
Price
|
Total
Possible
Discount(3)
(Net Profit to
Selling
Stockholder)
|
|||||||||||||||||||
$3,000,000
|
6,000,000 | $ | 0.57 | $ | 0.50 | $ | 3,420,000 | $ | 3,000,000 | $ | 420,000 |
(1) The
closing price of the Common Stock on December 5, 2008, was $0.57.
(2) The
conversion prices for the shares of Preferred Stock is fixed, subject to
customary anti-dilution provisions.
(3) This
calculation assumes dividends are paid in cash rather than in stock as permitted
by the terms of the Preferred Stock.
65
Table 4
below sets forth the total possible profit the Selling Stockholder could realize
as a result of sale of the Common Stock issuable on exercise of the Montaur
Warrants as of the dates of sale of the Montaur Notes.
Table
4
Total
Possible
Shares
|
Market
Price
per
Share(1)
|
Exercise
Price per
Share(2)
|
Combined
Market
Price
|
Combined
Exercise
Price
|
Total Possible
(Premium)
Discount(3) (Net
Profit to Selling
Stockholder)
|
|||||||||||||||||||
Series
W Warrant
|
6,000,000 | $ | 0.27 | $ | 0.32 | $ | 1,620,000 | $ | 1,920,000 | $ | (300,000 | ) | ||||||||||||
Series
X Warrant
|
8,333,333 | $ | 0.52 | $ | 0.46 | 4,333,333 | 3,833,333 | 500,000 | ||||||||||||||||
Series
Y Warrant
|
6,000,000 | $ | 0.57 | $ | 0.575 | 3,420,000 | 3,450,000 | (30,000 | ) | |||||||||||||||
Series
AA Warrant
|
2,400,000 | $ | 1.12 | $ | 0.97 | 2,688,000 | 2,328,000 | 360,000 | ||||||||||||||||
22,733,333 | $ | 12,061,333 | $ | 11,531,333 | $ | 530,000 |
(1) The
closing prices of our common stock on December 26, 2007 (the closing date for
Note A), April 16, 2008 (the closing date for Note B), December 5, 2008 (the
closing date for the Preferred Stock), and July 24, 2009 (the closing date for
the amendment to the Montaur Notes, the Preferred Stock and the Montaur
Warrants) were $0.27, $0.52, $0.57, and $1.12, respectively.
(2) The
exercise prices for each of the Montaur Warrants are fixed, subject to customary
anti-dilution provisions.
Table 5
below sets forth the net proceeds to the Company as a result of the sale of the
Montaur Notes and the Preferred Stock.
Table
5
Gross
proceeds to the Company
|
||||
Gross
proceeds from the issuance of Note A
|
$ | 7,000,000 | ||
Gross
proceeds from the issuance of Note B
|
3,000,000 | |||
Gross
proceeds from the issuance of Preferred Stock
|
3,000,000 | |||
Subtotal
gross proceeds to the Company
|
13,000,000 | |||
Less:
|
||||
Transaction
costs and possible payments to Selling Shareholder(1),(2)
|
956,116 | |||
Net
proceeds to the Company during first year following issuance of the
notes
|
$ | 12,043,884 |
(1) See
Table 1 above.
(2) The
Company has paid WBB Securities, LLC (WBB) a placement agent fee equal to 6% of
the gross proceeds received from the Selling Stockholder. However,
WBB had no contractual arrangement with the Selling Stockholder in connection
with the transaction, and is not an affiliate of the Selling
Stockholder.
66
Table 6
below sets forth the total possible profit to the Selling Stockholder from the
conversion of the Montaur Notes and Preferred Stock and exercise of the Montaur
Warrants and the percentage profit to the Selling Shareholder based on the fixed
conversion and exercise prices of the notes, shares of Preferred Stock and
warrants on the respective closing dates as compared to the net proceeds
realized by the Company.
Table
6
Total
possible profit to selling stockholder
|
||||
From
the conversion of the convertible notes(1)
|
$ | 1,999,948 | ||
From
the exercise of the warrants(2)
|
530,000 | |||
From
the conversion of Preferred Stock(3)
|
420,000 | |||
Combined
total possible profit to Selling Shareholder
|
$ | 2,949,948 | ||
Total
possible payments to Selling Shareholder(4)
|
$ | 956,116 | ||
Total
possible profit to Selling Shareholder on conversion of the notes and
preferred stock only(5)
|
2,419,948 | |||
Total
possible payments and profit from note and preferred stock conversion to
Selling Shareholder
|
$ | 3,376,064 | ||
Total
net proceeds to the Company(6)
|
$ | 12,043,884 | ||
Total
possible profit to selling stockholder related to the notes, preferred
stock and payments as a percentage of Net Proceeds to the
Company
|
28.0 | % | ||
Total
possible profit to selling stockholder related to the notes, preferred
stock and payments as a percentage of Net Proceeds to the Company averaged
over the four-year term of the notes
|
7.0 | % |
(1) See
Table 2.
(2) See
Table 4.
(3) See
Table 3.
(4) See
Table 1.
(5) See
Table 2 and Table 3.
(6) See
Table 5.
67
Table 7
below sets forth the number of shares of common stock of the Company that were
outstanding prior to the amendment and exchange agreement with the Selling
Stockholder and shares registered for resale pursuant to the registration
statement of which this prospectus forms a part
Table
7
Shares
outstanding prior to the date of the amendment and exchange
agreement
|
73,353,787 | |||||||
Less: Shares
outstanding prior to the date of the amendment and exchange agreement held
by the Selling Stockholder and affiliates, or officers, directors and
affiliates of the Company(1)
|
(3,600,805 | ) | ||||||
Shares
outstanding prior to the date of the amendment and exchange agreement held
by persons other than the Selling Stockholder and affiliates, or officers,
directors and affiliates of the Company
|
72,396,079 | |||||||
Shares
registered for sale by the Selling Stockholder pursuant to this prospectus
(2)
|
15,500,000 | 21.41 | % |
(1) The
Selling Stockholder or its affiliates held 957,708 shares of the Company’s
common stock prior to the date of the amendment and exchange agreement. The
Company previously registered for resale 20,166,666 shares of its common stock
underlying the convertible notes, warrants and preferred stock issued to the
Selling Stockholder pursuant to the Stock Purchase Agreement dated December 26,
2007, which convertible notes and warrants (the “Original Notes and Warrants”)
the Selling Stockholder surrendered to the Company pursuant to the amendment and
exchange agreement. The Company deregistered the shares of its common stock
registered for resale on Form S-1 (File No. 333-150650)(the “Original
Registration Statement”), and underlying the Original Notes and Warrants, which
remained unsold by the filing of Post-effective Amendment No. 2 to the Original
Registration Statement on December 21, 2009. As of the date hereof, all of the
shares registered for resale by the Selling Stockholder continue to be held by
the Selling Stockholder or its affiliates, and there are no shares that have
been sold in registered resale transactions by the Selling Stockholder or its
affiliates.
(2) The
number of shares which the Company may issue to the Selling Stockholder on
conversion of the Amended Montaur Notes and Preferred Stock and exercise of the
Amended Montaur Warrants, plus up to 3,500,000 shares issued or potentially
issuable as interest or dividend payments on the Montaur Notes and Preferred
Stock, totals 58,951,994 shares; however, under the terms of the Registration
Rights Agreement, as amended, the number of shares which the Company is required
to register in the registration statement of which this prospectus forms a part
is 15,500,000, which excludes 13,461,538 shares issuable on conversion of a
portion of the Series A Note, 8,333,333 shares issuable upon conversion of the
Series B Note, 6,000,000 shares issuable on conversion of the Series A Preferred
Stock, 6,000,000 shares issuable on exercise of the Series W Warrant, 8,333,333
shares issuable on exercise of the Series X Warrant.
We will
not receive any proceeds from the resale of the common stock by the Selling
Stockholder. We will receive the sale price of any common stock we sell to the
Selling Stockholder upon exercise of warrants. We expect to use the proceeds
received from the exercise of warrants, if any, for general working capital
purposes. However, the selling stockholder is entitled to exercise the warrants
on a cashless basis, and in that event, we will not receive any proceeds from
the exercise of the warrants.
The
Company believes that a description of the relationships and arrangements
between and among the Company, its predecessors, the selling stockholder and
affiliates of the selling stockholder or persons with whom the selling
stockholder has a contractual relationship in connection with the sale of the
Montaur Notes and Montaur Warrants is presented in this prospectus and all
material agreements between and/or among those parties are included as exhibits
to the registration statement of which this prospectus forms a
part. Prior to the sale of the Montaur Notes, the Preferred Stock and
the Montaur Warrants, there were no transactions between the Company and any
such persons.
68
SELLING
STOCKHOLDER
The
following table presents information regarding the selling stockholder and the
shares that may be sold by it pursuant to this prospectus. See also
Security Ownership of Certain Beneficial Owners and Management. The selling
stockholder acquired our securities pursuant to the Stock Purchase Agreement,
dated December 26, 2007, and the Securities Amendment and Exchange Agreement,
dated July 24, 2009, the material terms of which are described in this
prospectus.
Selling
Stockholder
|
Shares
Owned
Before
Offering
(1)
|
Percentage
of
Outstanding
Shares
Owned
Before
Offering
(1)
|
Shares
to be
Sold
in the
Offering
|
Percentage
of
Outstanding
Shares
Owned
After
Offering (1)
|
||||||||||||
Platinum-Montaur
Life Sciences, LLC (2)(3)
|
7,323,789 | 9.1 | % | 15,500,000 | 4.99 | % |
(1)
|
The
ownership percentages listed in these columns include only shares
beneficially owned by the listed selling stockholder. Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission. In computing the percentage of shares beneficially owned by a
selling stockholder, shares of common stock subject to options or
warrants, or debt convertible into common stock held by that selling
stockholder that was exercisable on or within 60 days after December 15,
2009, were deemed outstanding for the purpose of computing the percentage
ownership of that selling stockholder. The ownership percentages are
calculated assuming that 80,889,561 shares of common stock were
outstanding on December 15,
2009.
|
(2)
|
Prior
to giving effect to the offering, Platinum-Montaur Life Sciences, LLC
(“Montaur”), 152 W. 57th
Street, 54th
Floor, New York, NY 10019, holds promissory notes in the principal amount
of $10,000,000 convertible into 25,394,953 shares of our common stock,
3,000 shares of Series A 8% Cumulative Convertible Preferred Stock
convertible into an aggregate 6,000,000 shares of our common stock and
warrants to purchase 16,733,333 shares of our common
stock. Each of our convertible promissory notes, shares of
preferred stock and warrants held by Montaur provide that Montaur may not
convert any of the preferred stock or notes or exercise any of the
warrants to the extent that such conversion or exercise would result in
the holder and its affiliates together beneficially owning more than 4.99%
or 9.99% of the outstanding shares of our common stock, except on 61 days’
prior written notice to us that Montaur waives such limitation, provided,
however, that: (a) on July 24, 2009, Montaur waived the 4.99%
limitation with respect to the Series Y Warrant; and (b) effective
September 23, 2009, the 4.99% limitation does not apply to shares of our
common stock issued as a dividend on the Preferred Stock or shares of our
common stock issued as interest on the Series A Note or the Series B Note.
The shares to be sold in the offering by Montaur also include 3,500,000
shares which we have issued, or may elect to issue, in payment of
interest or dividends on the promissory notes and preferred stock,
respectively. Following the offering, assuming the sale of all shares of
our common stock offered hereby, Montaur will still hold 42,128,286 shares
of our common stock, which remaining shares are: (a) issuable upon the
conversion of debt or preferred shares which is subject to demand
registration rights; or (b) issuable upon the exercise of warrants to
purchase shares of our common stock which are subject to demand
registration rights (in each case subject to the limitations on
exercisability and conversion discussed
above).
|
(3)
|
Marc
Nordlicht has the voting and dispositive power over the shares to be sold
in the offering. Mr. Nordlicht disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest in the selling
stockholder. The selling stockholder has advised us that it is not a
broker-dealer or affiliate of a
broker-dealer.
|
69
PLAN
OF DISTRIBUTION
The
Selling Stockholder and any of its pledgees, donees, transferees, assignees and
successors-in-interest may, from time to time, sell any or all of its shares of
common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The Selling Stockholder may use any one
or more of the following methods when selling shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
to
cover short sales made after the date that this Registration Statement is
declared effective by the
Commission;
|
|
·
|
broker-dealers
may agree with the Selling Stockholder to sell a specified number of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholder may also sell shares under Rule 144 promulgated under the
Securities Act, or another exemption from the registration requirements under
the Securities Act, if available, rather than under this
prospectus.
Broker-dealers
engaged by the Selling Stockholder may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or
discounts from the Selling Stockholder (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholder does not expect these commissions
and discounts to exceed what is customary in the types of transactions
involved.
The
Selling Stockholder may from time to time pledge or grant a security interest in
some or all of the Shares owned by it and, if it defaults in the performance of
their secured obligations, the pledgees or secured parties may offer and sell
shares of common stock from time to time under this prospectus, or under an
amendment to this prospectus under Rule 424(b)(3) or other applicable provision
of the Securities Act of 1933 amending the list of selling stockholders to
include the pledgee, transferee or other successors in interest as selling
stockholders under this prospectus.
Upon the
company being notified in writing by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of common
stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such Selling Stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of common stock were sold, (iv) the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and (vi) other facts material to the transaction. In
addition, upon the company being notified in writing by a Selling Stockholder
that a donee or pledgee intends to sell more than 500 shares of common stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.
The
Selling Stockholder also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
70
The
Selling Stockholder and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Because the
Selling Stockholder may be deemed to be an underwriter within the meaning of the
Securities Act, they may be subject to the prospectus delivery requirements of
the Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, that can be attributed to the sale of Securities will be paid
by the Selling Stockholder and/or the purchasers. The Selling
Stockholder has represented and warranted to the company that it acquired the
securities subject to this registration statement for its own account and not
with a view to or for sale in connection with a distribution thereof, and at the
time of its purchase of such securities the Selling Stockholder had no
agreements or understandings, directly or indirectly, with any person to
distribute any such securities.
The
company has advised the Selling Stockholder that it may not use shares
registered on this Registration Statement to cover short sales of Common Stock
made prior to the date on which this Registration Statement shall have been
declared effective by the Commission. If the Selling Stockholder uses
this prospectus for any sale of the common stock, it will be subject to the
prospectus delivery requirements of the Securities Act. The Selling
Stockholder will be responsible to comply with the applicable provisions of the
Securities Act and Exchange Act, and the rules and regulations thereunder
promulgated, including, without limitation, Regulation M, as applicable to such
Selling Stockholder in connection with resales of their respective shares under
this Registration Statement.
The
company is required to pay all fees and expenses incident to the registration of
the shares, but the company will not receive any proceeds from the sale of the
common stock. The company has agreed to indemnify the Selling
Stockholder against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES
ACT LIABILITIES
Section
145 of the General Corporation Law of the State of Delaware (Section 145)
provides that directors and officers of Delaware corporations may, under certain
circumstances, be indemnified against expenses (including attorneys’ fees) and
other liabilities actually and reasonably incurred by them as a result of any
suit brought against them in their capacity as a director or officer, if they
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful. Section 145 also provides that directors and officers may
also be indemnified against expenses (including attorneys’ fees) incurred by
them in connection with a derivative suit if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, except that no indemnification may be made without court
approval if such person was adjudged liable to the corporation.
Article V
of the Company’s By-laws contains provisions which require that the Company
indemnify its officers, directors, employees and agents, in substantially the
same language as Section 145.
Article
Nine, section (b), of the Company’s Certificate of Incorporation further
provides that no director will be personally liable to the Company or its
stockholders for monetary damages or for any breach of fiduciary duty except for
breach of the director’s duty of loyalty to the Company or its stockholders, for
acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, pursuant to Section 174 of the Delaware General
Corporation Law (which imposes liability in connection with the payment of
certain unlawful dividends, stock purchases or redemptions), or any amendment or
successor provision thereto, or for any transaction from which a director
derived an improper personal benefit.
71
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to the directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the
event that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a
directors, officers or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
LEGAL
OPINION
The
validity of the shares offered hereby has been passed upon for us by Porter,
Wright, Morris & Arthur LLP, 41 South High Street, Columbus, Ohio
43215.
EXPERTS
The
financial statements as of December 31, 2008 and 2007 and for each of the two
years in the period ended December 31, 2008 included in this Prospectus and in
the Registration Statement have been so included in reliance on the report of
BDO Seidman, LLP, an independent registered public accounting firm, appearing
elsewhere herein and in the Registration Statement, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL
INFORMATION
We are
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, and file reports, proxy statements and other information with the
Securities and Exchange Commission. These reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 100 F Street, N.E.,
Washington, D.C. 20549. You can obtain copies of these materials from
the Public Reference Section of the Securities and Exchange Commission upon
payment of fees prescribed by the Securities and Exchange Commission. You may
obtain information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities
and Exchange Commission’s Web site contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission. The address of that site is
http://www.sec.gov.
We have
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
securities offered in this prospectus. This prospectus, which is filed as part
of a Registration Statement, does not contain all of the information set forth
in the Registration Statement, some portions of which have been omitted in
accordance with the Securities and Exchange Commission’s rules and regulations.
Statements made in this prospectus as to the contents of any contract, agreement
or other document referred to in this prospectus are not necessarily complete
and are qualified in their entirety by reference to each such contract,
agreement or other document which is filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected without charge at the
public reference facilities maintained by the Securities and Exchange
Commission, and copies of such materials can be obtained from the Public
Reference Section of the Securities and Exchange Commission at prescribed rates.
You may also obtain additional information regarding the company on our website,
located at http://www.neoprobe.com.
72
NEOPROBE
CORPORATION and SUBSIDIARIES
Index
to Financial Statements
Consolidated
Financial Statements of Neoprobe Corporation
|
|||
Report
of Independent Registered Public Accounting Firm BDO Seidman,
LLP
|
F-2
|
||
Consolidated
Balance Sheets as of December 31, 2008 and December 31,
2007
|
F-3
|
||
Consolidated
Statements of Operations for the years ended December 31, 2008 and
December 31, 2007
|
F-5
|
||
Consolidated
Statements of Stockholders’ Equity (Deficit) for the years ended December
31, 2008 and December 31, 2007
|
F-6
|
||
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
December 31, 2007
|
F-7
|
||
Notes
to the Consolidated Financial Statements
|
F-8
|
||
Unaudited
Consolidated Financial Statements of Neoprobe Corporation
|
|||
Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
F-36
|
||
Consolidated
Statements of Operations for the Three-Month and Nine-Month Periods Ended
September 30, 2009 and September 30, 2008 (unaudited)
|
F-38
|
||
Consolidated
Statement of Stockholders’ Deficit for the Nine-Month Period Ended
September 30, 2009 (unaudited)
|
F-39
|
||
Consolidated
Statements of Cash Flows for the Nine-Month Periods Ended September 30,
2009 and September 30, 2008 (unaudited)
|
F-40
|
||
Notes
to the Consolidated Financial Statements (Unaudited)
|
F-41
|
F-1
Report
of Independent Registered Public Accounting Firm
Board of
Directors
Neoprobe
Corporation
Dublin,
Ohio
We have
audited the accompanying consolidated balance sheets of Neoprobe Corporation as
of December 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Neoprobe Corporation at
December 31, 2008 and 2007 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO
Seidman, LLP
Chicago,
Illinois
March 27,
2009, except for Note 2
which is
as of December 22, 2009
F-2
Neoprobe
Corporation and Subsidiaries
Consolidated
Balance Sheets
December
31, 2008 and 2007
ASSETS
|
2008
|
2007
|
||||||
Current
assets:
|
||||||||
Cash
|
$ | 3,565,837 | $ | 1,540,220 | ||||
Available-for-sale
securities
|
495,383 | - | ||||||
Accounts
receivable, net
|
1,626,065 | 1,560,877 | ||||||
Inventory
|
544,126 | 690,452 | ||||||
Prepaid
expenses and other
|
573,573 | 247,035 | ||||||
Assets
associated with discontinued operations
|
435,740 | 607,984 | ||||||
Total
current assets
|
7,240,724 | 4,646,568 | ||||||
Property
and equipment
|
1,940,748 | 1,733,077 | ||||||
Less
accumulated depreciation and amortization
|
1,593,501 | 1,528,667 | ||||||
347,247 | 204,410 | |||||||
Patents
and trademarks
|
459,431 | 456,867 | ||||||
Less
accumulated amortization
|
433,358 | 425,506 | ||||||
26,073 | 31,361 | |||||||
Other
assets
|
594,449 | 527,634 | ||||||
Other
assets associated with discontinued operations
|
1,410,957 | 1,652,974 | ||||||
Total
assets
|
$ | 9,619,450 | $ | 7,062,947 |
Continued
F-3
Neoprobe
Corporation and Subsidiaries
Consolidated
Balance Sheets, continued
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
2008
|
2007
|
||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 725,820 | $ | 771,807 | ||||
Accrued
liabilities and other
|
900,796 | 786,815 | ||||||
Capital
lease obligations, current portion
|
9,084 | 14,592 | ||||||
Deferred
revenue, current portion
|
526,619 | 451,512 | ||||||
Notes
payable to finance companies
|
137,857 | 124,770 | ||||||
Liabilities
associated with discontinued operations
|
22,280 | 21,412 | ||||||
Total
current liabilities
|
2,322,456 | 2,170,908 | ||||||
Capital
lease obligations
|
11,095 | 2,422 | ||||||
Deferred
revenue
|
490,165 | 623,640 | ||||||
Note
payable to CEO, net of discounts of $76,294 and $95,786,
respectively
|
923,706 | 904,214 | ||||||
Notes
payable to investors, net of discounts of $5,001,149 and $2,600,392,
respectively
|
4,998,851 | 4,399,608 | ||||||
Derivative
liabilities
|
853,831 | 2,853,476 | ||||||
Other
liabilities
|
45,071 | 52,273 | ||||||
Total
liabilities
|
9,645,175 | 11,006,541 | ||||||
Commitments
and contingencies
|
||||||||
Preferred
stock; $.001 par value; 5,000,000 shares authorized; 3,000 Series A
shares, par value $1,000, issued and outstanding at December 31, 2008;
none outstanding at December 31, 2007
|
3,000,000 | - | ||||||
Stockholders’
deficit:
|
||||||||
Common
stock; $.001 par value; 150,000,000 shares authorized; 70,862,641 and
67,240,030 shares issued and outstanding at December 31, 2008 and 2007,
respectively
|
70,863 | 67,240 | ||||||
Additional
paid-in capital
|
145,742,044 | 136,765,697 | ||||||
Accumulated
deficit
|
(148,840,015 | ) | (140,776,531 | ) | ||||
Unrealized
gain on available-for-sale securities
|
1,383 | - | ||||||
Total
stockholders’ deficit
|
(3,025,725 | ) | (3,943,594 | ) | ||||
Total
liabilities and stockholders’ deficit
|
$ | 9,619,450 | $ | 7,062,947 |
See
accompanying notes to consolidated financial statements.
F-4
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Operations
Years Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Revenues:
|
||||||||
Net
sales
|
$ | 7,417,751 | $ | 6,773,442 | ||||
License
and other revenue
|
171,750 | - | ||||||
Total
revenues
|
7,589,501 | 6,773,442 | ||||||
Cost
of goods sold
|
2,845,498 | 2,901,581 | ||||||
Gross
profit
|
4,744,003 | 3,871,861 | ||||||
Operating
expenses:
|
||||||||
Research
and development
|
4,286,474 | 2,506,467 | ||||||
Selling,
general and administrative
|
2,965,342 | 2,380,181 | ||||||
Total
operating expenses
|
7,251,816 | 4,886,648 | ||||||
Loss
from operations
|
(2,507,813 | ) | (1,014,787 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income
|
60,808 | 70,659 | ||||||
Interest
expense
|
(1,744,825 | ) | (2,283,585 | ) | ||||
Loss
on extinguishment of debt
|
- | (859,955 | ) | |||||
Change
in derivative liabilities
|
(451,381 | ) | (247,876 | ) | ||||
Other
|
11,308 | (4,487 | ) | |||||
Total
other expense, net
|
(2,124,090 | ) | (3,325,244 | ) | ||||
Loss
from continuing operations
|
(4,631,903 | ) | (4,340,031 | ) | ||||
Discontinued
operations:
|
||||||||
Loss
from operations
|
(534,323 | ) | (748,181 | ) | ||||
Net
loss
|
$ | (5,166,226 | ) | $ | (5,088,212 | ) | ||
Loss
per common share (basic):
|
||||||||
Continuing
operations
|
$ | (0.07 | ) | $ | (0.07 | ) | ||
Discontinued
operations
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
Loss
per common share (diluted):
|
||||||||
Continuing
operations
|
$ | (0.07 | ) | $ | (0.07 | ) | ||
Discontinued
operations
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted
average shares outstanding:
|
||||||||
Basic
|
68,594,172 | 62,921,491 | ||||||
Diluted
|
68,594,172 | 62,921,491 |
See
accompanying notes to consolidated financial statements.
F-5
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Stockholders’ Deficit
Common Stock
|
Additional
Paid-in
|
Accumulated
|
Accumulated
Other
Comprehensive
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Income
|
Total
|
|||||||||||||||||||
Balance,
December 31, 2006
|
59,624,379 | $ | 59,624 | $ | 135,330,668 | $ | (135,688,319 | ) | $ | - | $ | (298,027 | ) | |||||||||||
Cancelled
restricted stock that did not vest
|
(130,000 | ) | (130 | ) | - | - | - | (130 | ) | |||||||||||||||
Issued
stock to 401(k) plan at $0.28
|
107,313 | 108 | 29,423 | - | - | 29,531 | ||||||||||||||||||
Issued
stock in connection with stock purchase agreement, net of
costs
|
7,588,338 | 7,588 | 1,703,953 | - | - | 1,711,541 | ||||||||||||||||||
Issued
stock as fees to an investment banking firm
|
50,000 | 50 | 11,950 | - | - | 12,000 | ||||||||||||||||||
Effect
of beneficial conversion feature of convertible promissory
note
|
- | - | 86,587 | - | - | 86,587 | ||||||||||||||||||
Issued
warrants to purchase common stock
|
- | - | 175,719 | - | - | 175,719 | ||||||||||||||||||
Repurchased
warrants related to extinguishment of debt
|
- | - | (675,000 | ) | - | - | (675,000 | ) | ||||||||||||||||
Stock
compensation expense
|
- | - | 102,397 | - | - | 102,397 | ||||||||||||||||||
Net
loss
|
- | - | - | (5,088,212 | ) | - | (5,088,212 | ) | ||||||||||||||||
Balance,
December 31, 2007
|
67,240,030 | 67,240 | 136,765,697 | (140,776,531 | ) | - | (3,943,594 | ) | ||||||||||||||||
Issued
restricted stock to employees
|
480,000 | 480 | (30 | ) | - | - | 450 | |||||||||||||||||
Issued
stock to investor advisory service firms
|
117,500 | 118 | 78,433 | - | - | 78,551 | ||||||||||||||||||
Issued
stock to 401(k) plan at $0.26
|
114,921 | 115 | 29,916 | - | - | 30,031 | ||||||||||||||||||
Issued
stock upon exercise of warrants
|
2,365,190 | 2,365 | 167,441 | - | - | 169,806 | ||||||||||||||||||
Issued
stock upon exercise of options
|
185,000 | 185 | 61,715 | - | - | 61,900 | ||||||||||||||||||
Issued
stock as a commitment fee in connection with a stock purchase
agreement
|
360,000 | 360 | 215,640 | - | - | 216,000 | ||||||||||||||||||
Paid
preferred stock issuance costs
|
- | - | (180,000 | ) | - | - | (180,000 | ) | ||||||||||||||||
Paid
common stock issuance costs
|
- | - | (900 | ) | - | - | (900 | ) | ||||||||||||||||
Issued
warrants to purchase common stock
|
- | - | 2,473,087 | (1,130,629 | ) | - | 1,342,458 | |||||||||||||||||
Effect
of beneficial conversion feature of convertible promissory
note
|
- | - | 1,443,845 | - | - | 1,443,845 | ||||||||||||||||||
Effect
of beneficial conversion feature of convertible preferred
stock
|
- | - | 1,550,629 | (1,550,629 | ) | - | - | |||||||||||||||||
Effect
of put option feature of convertible preferred stock
|
- | - | - | (216,000 | ) | - | (216,000 | ) | ||||||||||||||||
Reclassified
derivative liabilities
|
- | - | 2,924,994 | - | - | 2,924,994 | ||||||||||||||||||
Stock
compensation expense
|
- | - | 211,577 | - | - | 211,577 | ||||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||
Net
loss
|
- | - | - | (5,166,226 | ) | - | (5,166,226 | ) | ||||||||||||||||
Unrealized
gain on available-for- sale securities
|
- | - | - | - | 1,383 | 1,383 | ||||||||||||||||||
Total
comprehensive loss
|
- | - | - | - | - | (5,164,843 | ) | |||||||||||||||||
Balance,
December 31, 2008
|
70,862,641 | $ | 70,863 | $ | 145,742,044 | $ | (148,840,015 | ) | $ | 1,383 | $ | (3,025,725 | ) |
See
accompanying notes to consolidated financial statements.
F-6
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
Years Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (5,166,226 | ) | $ | (5,088,212 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
of property and equipment
|
183,209 | 171,713 | ||||||
Amortization
of intangible assets
|
225,143 | 233,006 | ||||||
Loss
on disposal and abandonment of assets
|
30,850 | 22,551 | ||||||
Amortization
of debt discount and debt offering costs
|
706,064 | 1,406,195 | ||||||
Provision
for bad debts
|
849 | 1,000 | ||||||
Stock
compensation expense
|
211,577 | 102,397 | ||||||
Loss
on extinguishment of debt
|
- | 859,955 | ||||||
Change
in derivative liabilities
|
451,381 | 247,876 | ||||||
Other
|
130,341 | 29,400 | ||||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(23,009 | ) | (376,821 | ) | ||||
Inventory
|
93,372 | (166,838 | ) | |||||
Prepaid
expenses and other assets
|
131,039 | 177,351 | ||||||
Accounts
payable
|
(46,865 | ) | 109,797 | |||||
Accrued
liabilities and other liabilities
|
108,525 | 319,337 | ||||||
Deferred
revenue
|
(58,368 | ) | 686,089 | |||||
Net
cash used in operating activities
|
(3,022,118 | ) | (1,265,204 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases
of available-for-sale securities
|
(690,000 | ) | - | |||||
Maturities
of available-for-sale securities
|
196,000 | - | ||||||
Purchases
of property and equipment
|
(116,352 | ) | (41,274 | ) | ||||
Proceeds
from sales of property and equipment
|
495 | - | ||||||
Patent
and trademark costs
|
(17,486 | ) | (6,736 | ) | ||||
Net
cash used in investing activities
|
(627,343 | ) | (48,010 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of preferred stock
|
3,000,000 | - | ||||||
Payment
of preferred stock offering costs
|
(180,000 | ) | - | |||||
Proceeds
from issuance of common stock
|
232,156 | 1,900,000 | ||||||
Payment
of common stock offering costs
|
(900 | ) | (22,674 | ) | ||||
Proceeds
from notes payable
|
3,000,000 | 8,000,000 | ||||||
Payment
of debt issuance costs
|
(200,154 | ) | (565,004 | ) | ||||
Payment
of notes payable
|
(158,304 | ) | (8,271,702 | ) | ||||
Payments
under capital leases
|
(17,720 | ) | (14,841 | ) | ||||
Payment
for repurchase of warrants
|
- | (675,000 | ) | |||||
Net
cash provided by financing activities
|
5,675,078 | 350,779 | ||||||
Net
increase (decrease) in cash
|
2,025,617 | (962,435 | ) | |||||
Cash,
beginning of year
|
1,540,220 | 2,502,655 | ||||||
Cash,
end of year
|
$ | 3,565,837 | $ | 1,540,220 |
See
accompanying notes to consolidated financial statements.
F-7
Notes
to the Consolidated Financial Statements
1.
|
Organization
and Summary of Significant Accounting
Policies:
|
|
a.
|
Organization and Nature of
Operations: Neoprobe Corporation (Neoprobe, the company,
or we), a Delaware corporation, is engaged in the development and
commercialization of innovative surgical and diagnostic products that
enhance patient care by meeting the critical decision making needs of
physicians. We currently manufacture a line of gamma radiation
detection equipment used in the application of sentinel lymph node biopsy
(SLNB).
|
Our gamma
detection device products are marketed throughout most of the world through a
distribution arrangement with Ethicon Endo-Surgery, Inc. (EES), a Johnson &
Johnson company. For the years ended December 31, 2008 and 2007, 93%
and 91% of net sales, respectively, were made to EES. The loss of
this customer would have a significant adverse effect on our operating
results.
We also
have developmental and/or intellectual property rights related to two drugs that
could be used in connection with gamma detection devices in cancer
surgeries. The first, Lymphoseek®, is
intended to be used in determining the spread of certain solid tumor cancers
into the lymphatic system. The second, RIGScan® CR, is
intended to be used to help surgeons locate cancerous or disease involved tissue
during colorectal cancer surgeries. Both of these drug products are
still in development and must be cleared for marketing by the appropriate
regulatory bodies before they can be sold in any markets.
In
addition, in January 2005 we formed a new corporation, Cira Biosciences, Inc.
(Cira Bio), to explore the development of patient-specific cellular therapies
that have shown positive patient responses in a variety of clinical
settings. Cira Bio is combining our activated cellular therapy (ACT)
technology for patient-specific oncology treatment with similar technology
licensed from Cira LLC, a privately held company, for treating viral and
autoimmune diseases. Neoprobe owns approximately 90% of the
outstanding shares of Cira Bio with the remaining shares being held by the
principals of Cira LLC. During the third quarter of 2007, we executed an option
agreement with Cira Ltd., the sole minority shareholder in Cira Bio, whereby
Neoprobe may acquire Cira Ltd.’s 10% interest in Cira Bio for
$250,000. The option to acquire Cira Ltd.’s interest in Cira Bio
expired on June 30, 2008.
|
b.
|
Principles of
Consolidation: Our consolidated financial statements
include the accounts of Neoprobe, our wholly-owned subsidiary, Cardiosonix
Ltd. (Cardiosonix), and our majority-owned subsidiary, Cira
Bio. All significant inter-company accounts were eliminated in
consolidation.
|
In August
2009, the Company’s 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 to the Company, due in
large part to positive events in our other development
initiatives. Our consolidated balance sheets and statements of
operations have been restated 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.
|
c.
|
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 disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
|
F-8
|
d.
|
Financial Instruments and Fair
Value: We adopted Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements, for financial assets and liabilities as of January 1,
2008. SFAS No. 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described
below:
|
Level 1 – Unadjusted quoted
prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in
markets that are not active or financial instruments for which all significant
inputs are observable, either directly or indirectly; and
Level 3 – Prices or
valuations that require inputs that are both significant to the fair value
measurement and unobservable.
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement. In determining the appropriate levels, we perform a
detailed analysis of the assets and liabilities that are subject to SFAS No.
157. At each reporting period, all assets and liabilities for which
the fair value measurement is based on significant unobservable inputs or
instruments which trade infrequently and therefore have little or no price
transparency are classified as Level 3. In estimating the fair value
of our derivative liabilities, we used the Black-Scholes option pricing model
and, where necessary, other macroeconomic, industry and Company-specific
conditions. See Note 3.
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)
|
Available-for-sale
securities: Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses on
available-for-sale securities are excluded from earnings and are reported
as a separate component of other comprehensive income (loss) until
realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification
basis.
|
|
A
decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is
established. Premiums and discounts are amortized or accreted
over the life of the related available-for-sale security as an adjustment
to yield using the effective interest method. Dividend and
interest income are recognized when
earned.
|
|
Available-for-sale
securities are accounted for on a specific identification
basis. As of December 31, 2008, we held available-for-sale
securities with an aggregate fair value of $495,383, including $1,383 of
net unrealized gains recorded in accumulated other comprehensive
income. As of December 31, 2008, all of our available-for-sale
securities were invested in short-term certificates of deposit with
maturity dates within 1 year. Available-for-sale securities
were classified as current based on their maturity dates as well as our
intent to use them to fund short-term working capital needs. We
held no available-for-sale securities at December 31,
2007.
|
F-9
|
(3)
|
Notes
payable to finance companies: The fair value of our debt is
estimated by discounting the future cash flows at rates currently offered
to us for similar debt instruments of comparable maturities by banks or
finance companies. At December 31, 2008 and 2007, the carrying
values of these instruments approximate fair
value.
|
|
(4)
|
Note
payable to CEO: 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, 2008, the
note payable to our CEO had an estimated fair value of $1.8
million. At December 31, 2007, the carrying value of the note
payable to our CEO approximated fair
value.
|
|
(5)
|
Notes
payable to outside investors: The carrying value of our debt is
presented as the face amount of the notes less the unamortized discounts
related to the fair value of the beneficial conversion feature, the
initial estimated fair value of the put options embedded in the notes and
the initial estimated fair value of the warrants to purchase common stock
issued in connection with the notes. At December 31, 2008, the
notes payable to outside investors had an estimated fair value of $15.9
million. At December 31, 2007, the carrying value of the notes
payable to outside investors approximated fair
value.
|
|
e.
|
Cash and Cash
Equivalents: There were no cash equivalents at December
31, 2008 or 2007. No cash was restricted as of December 31,
2008 or 2007.
|
|
f.
|
Inventory: All
components of inventory are valued at the lower of cost (first-in,
first-out) or market. We adjust inventory to market value when
the net realizable value is lower than the carrying cost of the
inventory. Market value is determined based on recent sales
activity and margins achieved. During 2008 and 2007, we wrote
off $4,000 and $37,000, respectively, of excess and obsolete
materials.
|
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 2007, we capitalized $150,000 associated with our
Lymphoseek product. During 2008, we wrote off $153,000 of previously
capitalized Lymphoseek inventory due to changes in our projections of the
probability of future commercial use for the specific units previously
capitalized.
The components of net inventory at
December 31, 2008 and 2007 are as follows:
2008
|
2007
|
|||||||
Materials
and component parts
|
$ | 112,637 | $ | 176,531 | ||||
Work-in-process
|
- | 151,741 | ||||||
Finished
goods
|
431,489 | 362,180 | ||||||
$ | 544,126 | $ | 690,452 |
|
g.
|
Property and
Equipment: Property and equipment are stated at
cost. Property and equipment under capital leases are stated at
the present value of minimum lease payments. Depreciation is
computed using the straight-line method over the estimated useful lives of
the depreciable assets ranging from 2 to 7 years, and includes
amortization related to equipment under capital
leases. Maintenance and repairs are charged to expense as
incurred, while renewals and improvements are
capitalized. Property and equipment includes $44,000 and
$57,000 of equipment under capital leases with accumulated amortization of
$25,000 and $47,000 at December 31, 2008 and 2007,
respectively. During 2008 and 2007, we recorded losses of
$31,000 and $21,000, respectively, on the disposal of property and
equipment.
|
F-10
The major
classes of property and equipment are as follows:
Useful Life
|
2008
|
2007
|
||||||||
Production
machinery and equipment
|
5 years
|
$ | 623,107 | $ | 606,492 | |||||
Other
machinery and equipment, primarily research equipment, loaners and
computers
|
2 – 5 years
|
727,483 | 584,076 | |||||||
Furniture
and fixtures
|
7 years
|
349,369 | 340,007 | |||||||
Software
|
3 years
|
166,107 | 127,820 | |||||||
Leasehold
improvements
|
Life of Lease1
|
74,682 | 74,682 | |||||||
$ | 1,940,748 | $ | 1,733,077 |
1 We
amortize leasehold improvements over the life of the lease, which in all cases
is shorter than the estimated useful life of the asset.
|
h.
|
Intangible
Assets: Intangible assets consist primarily of patents
and other acquired intangible assets. Intangible assets are
stated at cost, less accumulated amortization. Patent costs are
amortized using the straight-line method over the estimated useful lives
of the patents of 5 to 15 years. Patent application costs are
deferred pending the outcome of patent applications. Costs
associated with unsuccessful patent applications and abandoned
intellectual property are expensed when determined to have no recoverable
value. Acquired technology costs are amortized using the
straight-line method over the estimated useful life of seven
years. We evaluate the potential alternative uses of all
intangible assets, as well as the recoverability of the carrying values of
intangible assets on a recurring
basis.
|
The major
classes of intangible assets are as follows:
December 31, 2008
|
December 31, 2007
|
|||||||||||||||||
Wtd
Avg
Life
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
||||||||||||||
Patents
and trademarks
|
1.2 yrs
|
$ | 459,431 | $ | 433,358 | $ | 456,867 | $ | 425,506 |
|
During
2008 and 2007, we recorded $22,000 and $30,000, respectively, of
intangible asset amortization in general and administrative
expenses. During 2007, we wrote off $1,000 of intangible assets
related to patents and trademarks that were determined to have no
recoverable value. No intangible assets were written off during
2008.
|
The estimated amortization expense for
the next five fiscal years is as follows:
Estimated
Amortization
Expense
|
||||
For
the year ended 12/31/2009
|
$ | 13,325 | ||
For
the year ended 12/31/2010
|
2,393 | |||
For
the year ended 12/31/2011
|
1,088 | |||
For
the year ended 12/31/2012
|
885 | |||
For
the year ended 12/31/2013
|
126 |
F-11
|
i.
|
Impairment or Disposal of
Long-Lived Assets: We account for the impairment of long-lived
assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. 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 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. We recorded no impairment charges during 2008 or
2007.
|
|
j.
|
Other Assets: Other
assets consist primarily of deferred debt issuance costs. We defer costs
associated with the issuance of notes payable and amortize those costs
over the period of the notes using the effective interest method. In 2008
and 2007, we incurred $200,000 and $565,000, respectively, of debt
issuance costs related to notes payable. During 2007, we expensed $209,000
of deferred debt issuance costs related to debt refinancing activities.
Other assets include deferred debt issuance costs of $588,000 and $496,000
at December 31, 2008 and 2007, respectively. See Note
8.
|
|
k.
|
Deferred Revenue:
Deferred revenue as of December 31, 2008 and 2007 consists primarily of
$500,000 in non-refundable license fees and reimbursement of past research
and development expenses which EES paid us as consideration for extending
our distribution agreement with them. We intend to recognize the $500,000
payment as license revenue on a straight-line basis over the extended term
of the agreement, or January 2009 through December 2013. In addition,
deferred revenue as of December 31, 2008 and 2007 includes revenues from
the sale of extended warranties covering our medical devices over periods
of one to four years. We recognize revenue from extended warranty sales on
a pro-rata basis over the period covered by the extended
warranty.
|
|
l.
|
Derivatives: We
account for
derivatives in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which provides accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts. Derivative instruments
embedded in contracts, to the extent not already a free-standing contract,
are required to be 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. See Note
8.
|
m.
|
Revenue
Recognition:
|
|
(1)
|
Product Sales: We derive
revenues primarily from sales of our medical devices. 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 when the products are shipped and the earnings process has
been completed. However, in cases where product is shipped but the
earnings process is not yet completed, revenue is deferred until it has
been determined that the earnings process has been completed. Our
customers generally have no right to return products purchased in the
ordinary course of business.
|
Sales
prices on gamma detection products sold to EES are subject to retroactive annual
adjustment based on a fixed percentage of the actual sales prices achieved by
EES on sales to end customers made during each fiscal year, subject to a minimum
(i.e., floor) price. To the extent that we can reasonably estimate the end
customer prices received by EES, we record sales to EES based upon these
estimates. To the extent that we are not able to reasonably estimate end
customer sales prices related to certain products sold to EES, we record revenue
related to these product sales at the floor price provided for under our
distribution agreement with EES.
F-12
We
recognize revenue related to the sales of products to be used for demonstration
units when products are shipped and the earnings process has been
completed. Our distribution agreements do not permit return of
purchased demonstration units in the ordinary course of business nor do we have
any performance obligations other than normal product warranty
obligations. To the extent that the earnings process has not been
completed, revenue is deferred. To the extent we enter into
multiple-element arrangements, we allocate revenue based on the relative fair
value of the elements.
|
(2)
|
Extended Warranty
Revenue: We derive revenues from the sale of extended
warranties covering our medical devices over periods of one to four
years. We recognize revenue from extended warranty sales on a
pro-rata basis over the period covered by the extended
warranty. Expenses related to the extended warranty are
recorded when incurred.
|
|
(3)
|
Service
Revenue: We derive revenues from the repair and service
of our medical devices that are in use beyond the term of the original
warranty and that are not covered by an extended warranty. We
recognize revenue from repair and service activities once the activities
are complete and the repaired or serviced device has been shipped back to
the customer.
|
|
n.
|
Research and Development
Costs: All costs related to research and development are
expensed as incurred.
|
|
o.
|
Stock-Based
Compensation: At December 31, 2008, we have three
stock-based compensation plans. Under the Amended and Restated
Stock Option and Restricted Stock Purchase Plan (the Amended Plan), the
1996 Stock Incentive Plan (the 1996 Plan), and the Second Amended and
Restated 2002 Stock Incentive Plan (the 2002 Plan), we may grant incentive
stock options, nonqualified stock options, and restricted stock awards to
full-time employees, and nonqualified stock options and restricted 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 options are still
outstanding under the Amended Plan and the 1996 Plan, these plans are
considered expired and no new grants may be made from
them. Under all three plans, the exercise price of each option
is greater than or equal to the closing market price of our common stock
on the date of the grant.
|
Options
granted under the Amended Plan, the 1996 Plan and the 2002 Plan generally vest
on an annual basis over one to three years. Outstanding options under
the plans, if not exercised, generally expire ten years from their date of grant
or 90 days from the date of an optionee’s separation from employment with the
Company. The Company issues new shares of our common stock upon
exercise of stock options.
Compensation
cost arising from stock-based awards is recognized as expense using the
straight-line method over the vesting period. As of December 31,
2008, there was approximately $321,000 of total unrecognized compensation cost
related to unvested stock-based awards, which we expect to recognize over
remaining weighted average vesting terms of 0.8 years. For the years
ended December 31, 2008 and 2007, our total stock-based compensation expense was
approximately $212,000 and $102,000, respectively. We have not
recorded any income tax benefit related to stock-based compensation for the
years ended December 31, 2008 and 2007.
F-13
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model to value share-based
payments. Expected volatilities are based on the Company’s historical
volatility, which management believes represents the most accurate basis for
estimating expected volatility under the current
circumstances. Neoprobe uses historical data to estimate forfeiture
rates. The expected term of options granted is based on the vesting
period and the contractual life of the options. The risk-free rate is based on
the U.S. Treasury yield in effect at the time of the grant. The
assumptions used for the years ended December 31, 2008 and 2007 are noted in the
following table:
2008
|
2007
|
|||||||
Expected
volatility
|
93%-104%
|
102%-104% | ||||||
Weighted-average
volatility
|
101%
|
103% | ||||||
Expected
dividends
|
- | - | ||||||
Expected
term
|
5.9
years
|
5.8
years
|
||||||
Risk-free
rate
|
3.4% | 4.6% |
A summary
of stock option activity under our stock option plans as of December 31, 2008,
and changes during the year then ended is presented below:
Year Ended December 31, 2008
|
|||||||||||||
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding
at beginning of period
|
5,495,473 | $ | 0.42 | ||||||||||
Granted
|
576,000 | 0.42 | |||||||||||
Exercised
|
(185,000 | ) | 0.33 | ||||||||||
Forfeited
|
- | - | |||||||||||
Expired
|
(266,973 | ) | 1.02 | ||||||||||
Outstanding
at end of period
|
5,619,500 | $ | 0.40 |
5.3
years
|
$ | 1,102,325 | |||||||
Exercisable
at end of period
|
4,880,167 | $ | 0.40 |
4.8
years
|
$ | 958,712 |
The
weighted average grant-date fair value of options granted in 2008 and 2007 was
$0.33 and $0.28, respectively. During 2008, 185,000 stock options with an
aggregate intrinsic value of $43,550 were exercised in exchange for issuance of
185,000 shares of our common stock, resulting in proceeds of
$61,900.
A summary
of the status of our unvested restricted stock as of December 31, 2008, and
changes during the year then ended is presented below:
Year Ended
December 31, 2008
|
||||||||
Number of
Shares
|
Weighted
Average
Grant-Date
Fair Value
|
|||||||
Unvested
at beginning of period
|
- | - | ||||||
Granted
|
480,000 | $ | 0.38 | |||||
Vested
|
(7,000 | ) | 0.65 | |||||
Forfeited
|
- | - | ||||||
Unvested
at end of period
|
473,000 | $ | 0.37 |
F-14
During
2008, 7,000 shares of restricted stock vested with an aggregate fair value of
$4,060. During 2007, all of our then-outstanding restricted shares
were effectively cancelled due to failure to vest under the terms of issuance of
these shares. Restricted shares generally vest upon occurrence of a
specific event or achievement of goals as defined in the grant
agreements. As a result, we have recorded compensation expense
related to grants of restricted stock based on management’s estimates of the
probable dates of the vesting events. See Note 18(a).
|
p.
|
Income
Taxes: Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Due to the uncertainty
surrounding the realization of the deferred tax assets in future tax
returns, all of the deferred tax assets have been fully offset by a
valuation allowance at December 31, 2008 and 2007. See Note
9.
|
In July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.
48, Accounting for Uncertainty
in Income Taxes–An Interpretation of FASB Statement No. 109 (FIN
48). We adopted the provisions of FIN 48 on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with FASB Statement No.
109. FIN 48 also prescribes a recognition threshold and measurement
model for the financial statement recognition of a tax position taken, or
expected to be taken, and provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. No adjustment was made to the beginning retained earnings
balance as the ultimate deductibility of all tax positions is highly certain,
although there is uncertainty about the timing of such
deductibility. As a result, no liability for uncertain tax positions
was recorded as of December 31, 2008 or 2007. Should the Company need
to accrue interest or penalties on uncertain tax positions, it would recognize
the interest as interest expense and the penalties as a selling, general and
administrative expense. As of December 31, 2008, federal and state
tax returns for tax years 2005-2007 remained subject to examination by tax
authorities.
|
q.
|
Recent Accounting
Developments: In September 2006, the FASB issued SFAS No. 157,
Fair Value
Measurements (SFAS No. 157). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS No. 157 does not require
any new fair value measurements. SFAS No. 157 was initially effective for
Neoprobe beginning January 1, 2008. In February 2008, the FASB approved
the issuance of FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2 allows
entities to electively defer the effective date of SFAS No. 157 until
January 1, 2009 for nonfinancial assets and nonfinancial liabilities
except those items recognized or disclosed at fair value on at least an
annual basis. We will apply the fair value measurement and disclosure
provisions of SFAS No. 157 to nonfinancial assets and liabilities
effective January 1, 2009. The application of such is not expected to be
material to our consolidated results of operations or financial condition.
See Note 1(d) and Note 3 for a discussion regarding the January 1, 2008
implementation of SFAS No. 157 relating to our financial assets and
liabilities.
|
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value at specified
election dates. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to FASB Statement No.
115, Accounting for Certain
Investments in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. The fair value option established by
SFAS No. 159 permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity shall report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. The fair value option may be applied
instrument by instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method, is irrevocable (unless a new election date
occurs), and is applied only to entire instruments and not to portions of
instruments. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. We adopted SFAS No. 159 as required on January 1, 2008; however, we
did not elect to measure any of our currently outstanding financial instruments
using the fair value option outlined in SFAS No. 159. As such, the adoption of
SFAS No. 159 did not have any impact on our consolidated results of operations
or financial condition.
F-15
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)). SFAS No. 141(R) retains the fundamental requirements of
the original pronouncement requiring that the acquisition method (formerly
called the purchase method) of accounting be used for all business combinations
and for an acquirer to be identified for each business
combination. SFAS No. 141(R) defines the acquirer as the entity that
obtains control of one or more businesses in the business combination,
establishes the acquisition date as the date that the acquirer achieves control
and requires the acquirer to recognize the assets and liabilities assumed and
any noncontrolling interest at their fair values as of the acquisition
date. SFAS No. 141(R) requires, among other things, that the
acquisition-related costs be recognized separately from the
acquisition. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and is
required to be adopted by Neoprobe beginning January 1, 2009. The
effect the adoption of SFAS No. 141(R) will have on us will depend on the nature
and size of acquisitions we complete after we adopt SFAS No. 141(R), if
any.
Also in
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51 (SFAS No.
160). SFAS No. 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB No.
51’s consolidation procedures for consistency with the requirements of SFAS No.
141(R), Business
Combinations. SFAS No. 160 is effective for fiscal years and
interim periods within those fiscal years beginning on or after December 15,
2008, and is required to be adopted by Neoprobe beginning January 1,
2009. Earlier adoption is prohibited. SFAS No. 160 shall
be applied prospectively as of the beginning of the fiscal year in which it is
adopted, except for the presentation and disclosure requirements. The
presentation and disclosure requirements shall be applied retrospectively for
all periods presented. We do not expect the adoption of SFAS No. 160
to have a material effect on our consolidated results of operations or financial
condition.
In
December 2007, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) on EITF Issue No. 07-1, Accounting for Collaborative
Arrangements. EITF No. 07-1 focuses on defining a
collaborative arrangement as well as the accounting for transactions between
participants in a collaborative arrangement and between the participants in the
arrangement and third parties. The EITF concluded that both types of
transactions should be reported in each participant’s respective income
statement. EITF No. 07-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years and should be applied retrospectively to all prior periods
presented for all collaborative arrangements existing as of the effective
date. We do not expect EITF No. 07-1 to have a material effect on our
consolidated results of operations or financial condition.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an Amendment of FASB Statement No.
133 (SFAS No. 161). SFAS No. 161 amends and expands the
disclosure requirements of Statement No. 133 to provide a better understanding
of how and why an entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for, and their effect on an entity’s
financial position, financial performance, and cash flows. SFAS No.
161 is effective for fiscal years beginning after November 15,
2008. We are currently evaluating the impact that the adoption of
SFAS No. 161 will have on our derivative disclosures.
F-16
In June
2008, the FASB ratified the consensus reached by the EITF on EITF Issue No.
07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock. EITF Issue No. 07-5 clarifies the determination of
whether equity-linked instruments (or embedded features), such as our
convertible notes or warrants to purchase our common stock, are considered
indexed to our own stock, which would qualify as a scope exception under SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities. EITF Issue No.
07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. Early adoption for an existing instrument is
not permitted. We are currently evaluating the impact that the
adoption of EITF Issue No. 07-5 will have on our consolidated financial
statements. If we determine that the provisions of EITF Issue No.
07-5 are applicable to our financial instruments, we currently estimate that the
adoption of EITF Issue No. 07-5 will result in a cumulative effect adjustment of
approximately $3.9 million that would be recorded as additional accumulated
deficit during the first quarter of 2009 as well as the disclosure of additional
derivative liabilities in our balance sheet in future reports.
2.
|
Discontinued
Operations:
|
In August
2009, the Company’s 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 product and drug development
initiatives.
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. 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:
December 31,
2008
|
December 31,
2007
|
|||||||
Accounts
receivable, net
|
$ | 18,005 | $ | 61,033 | ||||
Inventory
|
417,735 | 546,951 | ||||||
Current
assets associated with discontinued operations
|
435,740 | 607,984 | ||||||
Property
and equipment, net of accumulated depreciation
|
43,545 | 83,193 | ||||||
Patents
and trademarks, net of accumulated amortization
|
1,367,412 | 1,569,781 | ||||||
Other
assets associated with discontinued operations
|
1,410,957 | 1,652,974 | ||||||
Assets
associated with discontinued operations
|
$ | 1,846,697 | $ | 2,260,958 | ||||
Accounts
payable
|
$ | 5,400 | $ | 6,278 | ||||
Accrued
expenses
|
16,880 | 15,134 | ||||||
Liabilities
associated with discontinued operations
|
$ | 22,280 | $ | 21,412 |
F-17
Until a
sale is completed, we expect to continue to generate revenues and incur 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:
Years Ended
December 31,
|
||||||||
2008
|
2007
|
|||||||
Net
sales
|
$ | 296,769 | $ | 351,369 | ||||
Cost
of goods sold
|
164,734 | 283,125 | ||||||
Gross
profit
|
132,035 | 68,244 | ||||||
Operating
expenses:
|
||||||||
Research
and development
|
219,148 | 359,072 | ||||||
Selling,
general and administrative
|
447,192 | 457,163 | ||||||
Total
operating expenses
|
666,340 | 816,235 | ||||||
Other
income (expense)
|
(18 | ) | (190 | ) | ||||
Loss
from discontinued operations
|
$ | (534,323 | ) | $ | (748,181 | ) |
Cash
flows associated with the operation of Cardiosonix were not significant and have
been combined within operating, investing and financing cash flows, as
appropriate, in our consolidated statements of cash flows.
3.
|
Fair
Value Hierarchy:
|
The
following tables set forth by level financial assets and liabilities measured at
fair value on a recurring basis.
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2008
|
||||||||||||||||
Quoted Prices
in Active
Markets for
Identical
Assets and
Liabilities
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
Balance as of
December 31,
|
|||||||||||||
Description
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
2008
|
||||||||||||
Assets:
|
||||||||||||||||
Available-for-sale
securities
|
$ | 495,383 | $ | - | $ | - | $ | 495,383 | ||||||||
Liabilities:
|
||||||||||||||||
Derivative
liabilities related to conversion and put options
|
$ | - | $ | - | $ | 853,831 | $ | 853,831 |
F-18
Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2007
|
||||||||||||||||
Quoted Prices
in Active
Markets for
Identical
Assets and
Liabilities
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
Balance as of
December 31,
|
|||||||||||||
Description
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
2007
|
||||||||||||
Liabilities:
|
||||||||||||||||
Derivative
liabilities related to warrants
|
$ | - | $ | 1,254,404 | $ | - | $ | 1,254,404 | ||||||||
Derivative
liabilities related to conversion and put options
|
- | - | 1,599,072 | 1,599,072 | ||||||||||||
Total
derivative liabilities
|
$ | - | $ | 1,254,404 | $ | 1,599,072 | $ | 2,853,476 |
The
following table sets forth a summary of changes in the fair value of our Level 3
liabilities for the year ended December 31, 2008:
Description
|
Balance at
December 31,
2007
|
Unrealized
Losses
|
Issuance of
Put Options
Related to
the Montaur
Notes and
Preferred
Stock
|
Transfers In
and/or (Out)
(See Note 7)
|
Balance at
December 31,
2008
|
|||||||||||||||
Derivative
liabilities related to conversion and put options
|
$ | 1,599,072 | $ | 180,727 | $ | 473,968 | $ | (1,399,936 | ) | $ | 853,831 |
The Level
2 Series W Warrant derivative liability and the Level 3 Series A Note conversion
option derivative liability were $1,254,404 and $1,289,215 as of January 1,
2008, respectively. These derivative liabilities incurred unrealized
losses of $270,654 and $110,721, respectively, through March 14, 2008 when the
Series W Warrant and Series A Note were amended as discussed in Note
8. As a result of the amendment, the Level 2 warrant derivative
liability and the Level 3 conversion option derivative liability required equity
treatment. The warrant derivative liability and the conversion option
derivative liability were reclassified to equity on March 14, 2008 at their fair
value amounts of $1,525,058 and $1,399,936, respectively, for a total of
$2,924,994.
The
unrealized gains and losses on the derivatives are classified in other expenses
as a change in derivative liabilities in the statement of
operations. Fair value of available-for-sale securities is determined
based on a discounted cash flow analysis using current market
rates. Fair value of conversion and put option liabilities is
determined based on a probability-weighted Black-Scholes option pricing model
calculation.
4.
|
Earnings
Per Share:
|
Basic
earnings (loss) per share is calculated using the weighted average number of
common shares outstanding during the periods. Diluted earnings (loss)
per share is calculated using the weighted average number of common shares
outstanding during the periods, adjusted for the effects of unvested restricted
stock, convertible securities, options and warrants, if
dilutive.
F-19
Year Ended
December 31, 2008
|
Year Ended
December 31, 2007
|
|||||||||||||||
Basic
Earnings
Per Share
|
Diluted
Earnings
Per Share
|
Basic
Earnings
Per Share
|
Diluted
Earnings
Per Share
|
|||||||||||||
Outstanding
shares
|
70,862,641 | 70,862,641 | 67,240,030 | 67,240,030 | ||||||||||||
Effect
of weighting changes in outstanding shares
|
(1,795,469 | ) | (1,795,469 | ) | (4,318,539 | ) | (4,318,539 | ) | ||||||||
Contingently
issuable shares
|
(473,000 | ) | (473,000 | ) | - | - | ||||||||||
Adjusted
shares
|
68,594,172 | 68,594,172 | 62,921,491 | 62,921,491 |
There is
no difference in basic and diluted loss per share related to 2008 or
2007. The net loss per common share for these periods excludes the
effects of 59,793,178 and 35,691,194 common share equivalents, respectively,
since such inclusion would be anti-dilutive. The excluded shares
consist of unvested restricted stock and common shares issuable upon exercise of
outstanding stock options and warrants, or upon the conversion of convertible
debt or convertible preferred stock.
5.
|
Accounts
Receivable and Concentrations of Credit
Risk:
|
Accounts
receivable at December 31, 2008 and 2007, net of allowance for doubtful accounts
of $1,000, consist of the following:
2008
|
2007
|
|||||||
Trade
|
$ | 1,585,709 | $ | 1,548,912 | ||||
Other
|
40,356 | 11,965 | ||||||
$ | 1,626,065 | $ | 1,560,877 |
At
December 31, 2008 and 2007, approximately 93% and 94%, respectively, of net
accounts receivable were due from EES. We do not believe we are
exposed to significant credit risk related to EES based on the overall financial
strength and credit worthiness of the customer and its parent
company. We believe that we have adequately addressed other credit
risks in estimating the allowance for doubtful accounts.
We
estimate an allowance for doubtful accounts based on a review and assessment of
specific accounts receivable and write off accounts when deemed
uncollectible.
6.
|
Accrued
Liabilities and Other:
|
Accrued
liabilities at December 31, 2008 and 2007 consist of the following:
2008
|
2007
|
|||||||
Contracted
services and other
|
$ | 584,004 | $ | 441,933 | ||||
Compensation
|
220,487 | 207,904 | ||||||
Warranty
reserve
|
62,261 | 104,365 | ||||||
Interest
|
18,000 | 9,409 | ||||||
Inventory
purchases
|
16,044 | 23,204 | ||||||
$ | 900,796 | $ | 786,815 |
F-20
7. Product
Warranty:
We
warrant our products against defects in design, materials, and workmanship
generally for a period of one year from the date of sale to the end customer,
except in cases where the product has a limited use as designed. Our
accrual for warranty expenses is adjusted periodically to reflect actual
experience and is included in accrued liabilities on the consolidated balance
sheets. EES also reimburses us for a portion of warranty expense
incurred based on end customer sales they make during a given fiscal
year. Payments charged against the reserve are disclosed net of EES’
estimated reimbursement.
The
activity in the warranty reserve account for the years ended December 31, 2008
and 2007 is as follows:
2008
|
2007
|
|||||||
Warranty
reserve at beginning of year
|
$ | 104,365 | $ | 22,965 | ||||
Provision
for warranty claims and changes in reserve for warranties
|
32,194 | 107,423 | ||||||
Payments
charged against the reserve
|
(74,298 | ) | (26,023 | ) | ||||
Warranty
reserve at end of year
|
$ | 62,261 | $ | 104,365 |
8. Notes
Payable:
In
December 2004, we completed a private placement of four-year convertible
promissory notes in an aggregate principal amount of $8.1 million under a
Securities Purchase Agreement with Biomedical Value Fund, L.P., Biomedical
Offshore Value Fund, Ltd. and David C. Bupp, our President and CEO. Biomedical
Value Fund, L.P. and Biomedical Offshore Value Fund, Ltd. are funds managed by
Great Point Partners, LLC (collectively, the Great Point Funds). The notes
originally bore interest at 8% per annum and were due on December 13, 2008. As
part of the original transaction with the Great Point Funds, we issued the
investors Series T warrants to purchase 10,125,000 shares of our common stock at
an exercise price of $0.46 per share, expiring in December 2009. In connection
with this financing, we also issued Series U warrants to purchase 1,600,000
shares of our common stock to the placement agents, containing substantially the
same terms as the warrants issued to the investors. The fair value of the
warrants issued to the investors and the value of the beneficial conversion
feature were recorded as discounts on the note and were being amortized over the
term of the notes using the effective interest method. The fair value of the
warrants issued to the placement agents was recorded as a deferred debt issuance
cost and was also being amortized over the term of the notes using the effective
interest method. In November 2006, we amended the Agreement and modified several
of the key terms in the related notes, including the interest rate which was
increased to 12% per annum, and modified the maturity of the notes to provide
for a series of scheduled payments due on approximately six month intervals
through January 7, 2009. We were also required to make additional mandatory
repayments of principal to the Great Point Funds under certain circumstances.
During 2007, we made scheduled principal payments and mandatory repayments
totaling $2.4 million.
In
exchange for the increased interest rate and accelerated principal repayment
schedule, the note holders eliminated the financial covenants under the original
notes and eliminated certain conversion price adjustments from the original
notes related to sales of equity securities by Neoprobe. We treated the
amendment to the Agreement as a modification for accounting purposes, and the
amortization of debt discount and issuance costs using the effective interest
method was revised accordingly. During the third quarter of 2007, management
determined that we had, from the date of the modification of the notes payable
on November 30, 2006, through June 30, 2007, incorrectly applied the effective
interest method in calculating the amortization of the debt discount and
issuance costs related to the notes. As a result of the error in calculation, we
recorded a total adjustment of $286,000 in non-cash interest expense related to
the seven months ended June 30, 2007 in our results of operations for the third
quarter of 2007. We determined that the net effect of this adjustment was not
material, either quantitatively or qualitatively, to our results of operations
and would not have resulted in changes to net loss per share, as reported, for
the year ended December 31, 2006 or for the quarters ended March 31, 2007 and
June 30, 2007. Recording the adjustment did not require amendment of the
previously filed reports for the periods affected.
F-21
In July
2007, David C. Bupp, our President and CEO, and certain members of his family
(the Bupp Investors) purchased a $1.0 million convertible note (the Bupp Note)
and warrants. The note bears interest at 10% per annum, had an original term of
one year and is repayable in whole or in part with no penalty. The note is
convertible, at the option of the Bupp Investors, into shares of our common
stock at a price of $0.31 per share, a 25% premium to the average closing market
price of our common stock for the 5 days preceding the closing of the
transaction. As part of this transaction, we issued the Bupp Investors Series V
warrants to purchase 500,000 shares of our common stock at an exercise price of
$0.31 per share, expiring in July 2012. The fair value of the warrants issued to
the investors was approximately $80,000 on the date of issuance and was
determined using the Black-Scholes option pricing model with the following
assumptions: an average risk-free interest rate of 4.95%, volatility of 105% and
no expected dividend rate. The value of the beneficial conversion feature of the
note was estimated at $86,000 based on the effective conversion price at the
date of issuance. The fair value of the warrants issued to the investors and the
value of the beneficial conversion feature were recorded as discounts on the
note. We incurred $43,000 of costs related to completing the Bupp financing,
which were recorded in other assets. The discounts and the deferred debt
issuance costs were being amortized over the term of the note using the
effective interest method.
In
December 2007, we executed a Securities Purchase Agreement (SPA) with Platinum
Montaur Life Sciences, LLC (Montaur), pursuant to which we issued Montaur: (1) a
10% Series A Convertible Senior Secured Promissory Note in the principal amount
of $7,000,000, due December 26, 2011 (the Series A Note); and (2) a Series W
warrant to purchase 6,000,000 shares of our common stock at an exercise price of
$0.32 per share, expiring in December 2012 (the Series W warrant). Additionally,
pursuant to the terms of the SPA: (1) upon commencement of the Phase 3 clinical
studies of Lymphoseek, we agreed to issue to Montaur a 10% Series B Convertible
Senior Secured Promissory Note, due December 26, 2011 (the Series B Note, and
hereinafter referred to collectively with the Series A Note as the Montaur
Notes), and a five-year warrant to purchase an amount of common stock equal to
the number of shares into which Montaur may convert the Series B Note, at an
exercise price of 115% of the conversion price of the Series B Note (the Series
X warrant), for an aggregate purchase price of $3,000,000; and (2) upon
completion of enrollment of 200 patients in the Phase 3 clinical studies of
Lymphoseek, we agreed to issue to Montaur 3,000 shares of our 8% Series A
Cumulative Convertible Preferred Stock (the Preferred Stock) and a five-year
warrant to purchase an amount of common stock equal to the number of shares into
which Montaur may convert the Preferred Stock, at an exercise price of 115% of
the conversion price of the Preferred Stock (the Series Y warrant, and
hereinafter referred to collectively with the Series W warrant and Series X
warrant as the Montaur warrants), also for an aggregate purchase price of
$3,000,000. See Note 10.
The
Series A Note bears interest at 10% per annum and is partially convertible at
the option of Montaur into common stock at a price of $0.26 per share. Interest
is payable monthly, in arrears, beginning February 2008 until the earlier of the
maturity date or the date of conversion. At our discretion, we may pay the
monthly interest payments in cash, common stock, or a combination of cash and
common stock, subject to certain limitations set forth in the Series A Note.
According to the provisions of the Certificate of Designations, Voting Powers,
Preferences, Limitations, Restrictions, and Relative Rights of Series A 8%
Cumulative Convertible Preferred Stock (the Certificate of Designations),
Montaur may convert all or any portion of the shares of Preferred Stock into a
number of shares of common stock equal to the quotient of: (1) the Liquidation
Preference Amount of the shares of Preferred Stock by (2) the Conversion Price
then in effect for the Preferred Stock. Per the Certificate of Designations, the
Liquidation Preference Amount is equal to $1,000 per share of Preferred Stock,
and the Conversion Price is equal to the lesser of $0.50 or the closing price of
the common stock on the issuance date of the Preferred Stock, subject to
adjustment as described in the Certificate of Designations.
F-22
Under the
terms of the original Registration Rights Agreement, dated December 26, 2007, we
agreed to file a registration statement with the Commission registering the
shares of common stock underlying the Notes, the Preferred Stock and the
warrants issued to Montaur pursuant to the SPA. On April 16, 2008, we entered
into the Second Amendment to Registration Rights Agreement (the Second
Amendment), pursuant to which Montaur agreed to limit our registration
obligations to (a) the shares of common stock issuable upon conversion of the
Series B Note; (b) the shares of common stock issuable upon exercise of the
Series W and X warrants; and (c) 3,500,000 shares of common stock issuable as
interest on the Montaur Notes. On July 10, 2008, we entered into a Third
Amendment to Registration Rights Agreement (the Third Amendment), pursuant to
which Montaur agreed to further limit our registration obligations to: (a) the
shares of common stock issuable upon conversion of the Series B Note; (b) the
shares of common stock issuable upon exercise of the Series X warrant; and (c)
3,500,000 shares of common stock issuable as interest on the Montaur Notes.
Additionally, pursuant to the terms of the Registration Rights Agreement, as
amended by the Second Amendment and Third Amendment, we agreed that: (a) within
thirty-five (35) days following the Third Closing Date (as that term is defined
in the SPA) we will prepare and file with the Commission an additional “resale”
registration statement providing for the resale of (in the following order of
priority): (i) the shares of common stock issuable upon the conversion of the
Preferred Shares; (ii) the shares of common stock issuable upon exercise of the
Series Y warrant; and (iii) shares of common stock issuable as dividends on the
Preferred Stock, for an offering to be made on a continuous basis pursuant to
Rule 415, and (b) within thirty-five (35) days of a receipt by the written
request of the Holder therefore, we will prepare and file with the Commission an
additional “resale” Registration Statement providing for the resale of the
shares of common stock issuable upon the conversion of the Series A Note, and
the shares of common stock issuable upon the exercise of the Series W
warrant.
In
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the conversion option and two put
options were considered derivative instruments and were required to be
bifurcated from the Series A Note and accounted for separately. In
addition, in accordance with SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, the
Series W warrant was accounted for as a liability due to the existence of
certain provisions in the instrument. As a result, we recorded a
total aggregate derivative liability of $2.6 million on the date of issuance of
the Series A Note and Series W warrant. The fair value of the
bifurcated conversion option and put options was approximately $1.45 million on
the date of issuance. The fair value of the Series W warrant was
approximately $1.15 million on the date of issuance and was determined using the
Black-Scholes option pricing model with the following assumptions: an
average risk-free interest rate of 3.7%, volatility of 94% and no expected
dividend rate. Changes in the fair value of the derivative
liabilities are recorded in the consolidated statement of
operations. As of December 31, 2007, the derivative liabilities had
estimated fair values of $1.60 million and $1.25 million for the conversion and
put options and the warrants, respectively.
On March
14, 2008, Neoprobe and Montaur executed amendments to the Series A Note and the
Series W warrant. The amendments eliminated certain minor cash-based
penalty provisions in the Series A Note and Series W warrant which entitled the
holders to different compensation than our common shareholders under certain
circumstances and qualifying Triggering Events. The provisions that
were eliminated and/or modified were the provisions that led to the derivative
accounting treatment for the embedded conversion option in the Series A Note and
the Series W warrant. Because the value of our stock increased
between December 31, 2007, our year end, and March 14, 2008, the effect of
marking the conversion option and warrant liabilities to “market” at March 14,
2008 resulted in an increase in the estimated fair value of the conversion
option and warrant liabilities of $381,000 which was recorded as non-cash
expense during the first quarter of 2008. The estimated fair value of
the conversion option and warrant liabilities of $2.9 million was reclassified
to additional paid-in capital during the first quarter of 2008 as a result of
the amendments. The effect of marking the put option liabilities
related to the Series A Note to “market” at March 31, June 30, September 30 and
December 31, 2008 resulted in a net increase in the estimated fair value of the
put option liabilities of $51,000 which was recorded as non-cash expense during
2008. The estimated fair value of the put option liabilities related
to the Series A Note of $360,000 remained classified as derivative liabilities
as of December 31, 2008.
F-23
The
initial aggregate fair value of the conversion option and the put options
related to the Series A Note and the fair value of the Series W warrant of $2.6
million were recorded as a discount on the note and are being amortized over the
term of the note using the effective interest method. During 2008, we
recorded interest expense of $543,000 related to the amortization of the debt
discount. We incurred $510,000 of costs related to completing the
initial Montaur financing, which were recorded in other assets on the
consolidated balance sheet. The deferred financing costs are being
amortized using the effective interest method over the term of the
note. During 2008, we recorded interest expense of $106,000 related
to the amortization of the deferred financing costs.
In April
2008, we completed the second closing under the December 2007 Montaur Purchase
Agreement, as amended, pursuant to which we issued Montaur a 10%
Series B Convertible Senior Secured Promissory Note in the principal amount
of $3,000,000, due December 26, 2011; and a Series X warrant to purchase
8,333,333 shares of our common stock at an exercise price of $0.46 per share,
expiring in April 2013. The Series B Note bears interest at 10%
per annum and is fully convertible at the option of Montaur into common stock at
a price of $0.36 per share. Interest is payable monthly, in arrears,
beginning in April 2008 until the earlier of the maturity date or the date of
conversion. At our discretion, we may pay the monthly interest
payments in cash, common stock, or a combination of cash and common stock,
subject to certain limitations set forth in the Series B Note.
The fair
value of the Series X warrant was approximately $1.28 million on the date of
issuance and was determined using the Black-Scholes option pricing model with
the following assumptions: an average risk-free interest rate of
2.6%, volatility of 95% and no expected dividend rate. The value of
the beneficial conversion feature of the Series B Note was estimated at $1.44
million based on the effective conversion price at the date of
issuance. The fair value of the warrant issued to the investors and
the value of the beneficial conversion feature were recorded as discounts on the
note and are being amortized over the term of the note using the effective
interest method. The two put options were considered derivative
instruments and were required to be bifurcated from the Series B Note and
accounted for separately. The fair value of the bifurcated put
options was approximately $258,000 on the date of issuance. Changes
in the fair value of the derivative liabilities are recorded in the consolidated
statement of operations. The effect of marking the put option
liabilities related to the Series B Note to “market” at June 30, September 30
and December 31, 2008 resulted in a net increase in the estimated fair value of
the put option liabilities of $20,000 which was recorded as non-cash expense
during 2008. The estimated fair value of the put option liabilities
related to the Series B Note of $277,000 remained classified as derivative
liabilities as of December 31, 2008.
The
initial aggregate fair value of the beneficial conversion feature and put
options related to the Series B Note, and the fair value of the Series X warrant
of $2.98 million were recorded as discounts on the note and are being amortized
over the term of the note using the effective interest method. During
2008, we recorded interest expense of $33,000 related to the amortization of the
debt discount. We incurred $188,000 of costs related to completing
the second Montaur financing, which were recorded in other assets on the
consolidated balance sheet. The deferred financing costs are being
amortized using the effective interest method over the term of the
note. During 2008, we recorded interest expense of $2,000 related to
the amortization of the deferred financing costs.
In
connection with the second closing, we also amended the SPA with respect to the
milestone that would trigger the third closing for an additional $3 million
investment from Montaur. The milestone was revised from the accrual
of 200 patients in a Phase 3 trial for Lymphoseek to obtaining 135 vital blue
dye lymph nodes from patients with breast cancer or melanoma who have completed
surgery with the injection of the drug in a Phase 3 clinical trial of
Lymphoseek.
In
connection with the SPA, Montaur requested that the term of the $1.0 million
Bupp Note be extended until at least one day following the maturity date of the
Montaur Notes. In consideration for the Bupp Investors’ agreement to extend the
term of the Bupp Note pursuant to an Amendment to the Bupp Purchase Agreement,
dated December 26, 2007, we agreed to provide security for the obligations
evidenced by the Amended 10% Convertible Note in the principal amount of
$1,000,000, due December 31, 2011, executed by Neoprobe in favor of the Bupp
Investors (the Amended Bupp Note), under the terms of a Security Agreement,
dated December 26, 2007, by and between Neoprobe and the Bupp Investors (the
Bupp Security Agreement). As further consideration for extending the term of the
Bupp Note, we issued the Bupp Investors Series V warrants to purchase 500,000
shares of our common stock at an exercise price of $0.32 per share, expiring in
December 2012. The fair value of the warrants issued to the Bupp Investors was
approximately $96,000 on the date of issuance and was determined using the
Black-Scholes option pricing model with the following assumptions: an average
risk-free interest rate of 3.72%, volatility of 94% and no expected dividend
rate. The fair value of the warrants was recorded as a discount on the note and
is being amortized over the term of the note using the effective interest
method. We treated the amendment to the Bupp Note as an extinguishment of debt
for accounting purposes. As such, the remaining discount resulting from the fair
value of the warrants and the value of the beneficial conversion feature and the
remaining unamortized deferred financing costs associated with the original note
were written off as a loss on extinguishment of debt in December
2007.
F-24
We
applied $5,725,000 from the proceeds of our issuance of the Series A Note
and Series W warrant to the complete and total satisfaction of our outstanding
obligations under the Replacement Series A Convertible Promissory Notes
issued to the Great Point Funds and David C. Bupp as of November 30, 2006,
pursuant to the Securities Purchase Agreement, dated as of December 13,
2004, by and among Neoprobe, the Great Point Funds and Mr. Bupp, as amended
by the Amendment dated as of November 30, 2006 (the Amended GPP Purchase
Agreement). We treated the early repayment of the notes as an
extinguishment of debt for accounting purposes. As such, the
remaining discount resulting from the fair value of the warrants and the value
of the beneficial conversion feature associated with the original notes was
written off as a loss on extinguishment of debt in December 2007. We
applied an additional $675,000 from the proceeds of our issuance of the
Series A Note and Series W warrant to the redemption of Series T
warrants to purchase 10,000,000 shares of our common stock at an exercise price
of $0.46 per share, issued to the Great Point Funds pursuant to the Amended GPP
Purchase Agreement. In connection with the consummation of the
Montaur Purchase Agreement and amendment of the Bupp Purchase Agreement,
Mr. Bupp agreed to the cancellation of Series T warrants to purchase
125,000 shares of our common stock at an exercise price of $0.46 per share,
originally issued to Mr. Bupp pursuant to the Amended GPP Purchase
Agreement. The combined events retired all of the Series T warrants
issued to the Great Point Funds and Mr. Bupp.
9.
|
Income
Taxes:
|
As of
December 31, 2008 and 2007, our deferred tax assets in the U.S. were
approximately $37.8 million and $40.1 million, respectively, prior to any
limitations under Sections 382 and 383 of the Internal Revenue Code (IRC), as
discussed below. The components of our deferred tax assets, pursuant
to SFAS No. 109, Accounting
for Income Taxes, are summarized as follows:
As of December 31,
|
||||||||
2008
|
2007
|
|||||||
Deferred
tax assets:
|
||||||||
Federal
net operating loss carryforwards
|
$ | 30,071,041 | $ | 32,428,173 | ||||
State
net operating loss carryforwards
|
1,945,601 | 2,229,635 | ||||||
R&D
credit carryforwards
|
4,781,584 | 4,906,697 | ||||||
Temporary
differences
|
979,828 | 552,981 | ||||||
Deferred
tax assets before valuation allowance
|
37,778,055 | 40,117,486 | ||||||
Valuation
allowance
|
(37,778,055 | ) | (40,117,486 | ) | ||||
Net
deferred tax assets
|
$ | - | $ | - |
SFAS No.
109 requires a valuation allowance against deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets may not be realized. Due to the uncertainty
surrounding the realization of these deferred tax assets in future tax returns,
all of the deferred tax assets have been fully offset by a valuation allowance
at December 31, 2008 and 2007.
F-25
Under
Sections 382 and 383 of the IRC of 1986, as amended, the utilization of U.S. net
operating loss and tax credit carryforwards may be limited under the change in
stock ownership rules of the IRC. As a result of ownership changes as
defined by Sections 382 and 383, which have occurred at various points in our
history, we believe utilization of our net operating loss carryfowards and tax
credit carryforwards will likely be significantly limited under certain
circumstances.
Reconciliations
between the statutory federal income tax rate and our effective tax rate are as
follows:
Years Ended December 31,
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
Benefit
at statutory rate
|
$ | (1,756,517 | ) | (34.0 | )% | $ | (1,729,992 | ) | (34.0 | )% | ||||||
Adjustments
to valuation allowance
|
1,582,238 | 30.6 | % | 1,502,950 | 29.5 | % | ||||||||||
Other
|
174,279 | 3.4 | % | 227,042 | 4.5 | % | ||||||||||
Benefit
per financial statements
|
$ | - | $ | - | - |
Deferred
tax assets of $3.7 million related to net operating loss carryforwards and
$657,000 related to R&D credit carryforwards expired during
2008.
10.
|
Preferred
Stock:
|
In
December 2007, we entered into a SPA with Montaur, pursuant to which we issued
Montaur a 10% Series A Note in the principal amount of $7,000,000, due December
26, 2011, 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. Montaur may
convert $3.5 million of the Series A Note into shares of common stock at the
conversion price of $0.26 per share. The SPA also provided for two
further tranches of financing, a second tranche of $3 million in exchange for a
10% Series B 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% Preferred Stock and a five-year Series Y warrant to purchase shares of
our common stock. Closing 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. See Notes 8 and 11(a).
In
December 2008, after we obtained 135 vital blue dye lymph nodes from patients
who had completed surgery and the injection of the drug in a Phase 3 clinical
trial of Lymphoseek in patients with breast cancer or melanoma, we issued
Montaur 3,000 shares of our 8% Preferred Stock and a five-year Series Y warrant
to purchase 6,000,000 shares of our common stock, at an exercise price of $0.575
per share, for an aggregate purchase price of $3,000,000. Montaur may
convert each share of the Preferred Stock into a number of shares of our common
stock equal to the quotient of (a) the Liquidation Preference Amount of the
shares of Preferred Stock by (b) the Conversion Price. The
“Liquidation Preference Amount” for the Preferred Stock is $1,000 and the
“Conversion Price” of the Preferred Stock was set at $0.50 on the date of
issuance, thereby making the shares of Preferred Stock convertible into an
aggregate 6,000,000 shares of our common stock, subject to adjustment as
described in the Certificate of Designations. We may elect to
pay dividends due to Montaur on the shares of Preferred Stock in registered
shares of common stock. The number of shares of common stock to be
applied against any such dividend payment will be determined by reference to the
quotient of (a) the applicable dividend payment by (b) the average daily volume
weighted average price of our common stock on the OTC Bulletin Board (or
national securities exchange, if applicable) as reported by Bloomberg Financial
L.P. for the five days upon which our common stock is traded on the OTC Bulletin
Board immediately preceding the date of the dividend
payment.
F-26
Pursuant
to the terms of a Registration Rights Agreement, dated December 26, 2007, as
amended by the Amendment to Registration Rights Agreement, dated February 7,
2008, Second Amendment to Registration Rights Agreement, dated April 16, 2008,
Third Amendment to Registration Rights Agreement, dated July 10, 2008, and
Fourth Amendment to Registration Rights Agreement, dated December 5, 2008, we
agreed to file a post-effective amendment to the registration statement
providing for the: (a) deregistration of shares of common stock issuable upon
the conversion of the Series B Note and the shares of common stock issuable upon
the exercise of the Series X warrant; and (b) registration of the resale of: (i)
the shares of common stock issuable upon conversion of the Preferred Stock; (ii)
the shares of common stock issuable upon exercise of the Series Y warrant; (iii)
3,500,000 shares of common stock issuable as interest or dividends on the
Montaur Notes and the Preferred Stock; and (iv) up to 4,666,666 shares issuable
upon the conversion of the Series B Note, provided that the total number of
shares of common stock registered would not exceed
20,166,666. Additionally, we agreed that within thirty-five days of
receipt from Montaur of written request therefor, we would prepare and file an
additional “resale” registration statement providing for the resale of: (i) the
shares of common stock issuable upon the conversion of the Series A Note; (ii)
the shares of common stock issuable upon the exercise of the Series W warrant;
(iii) any unregistered shares of common stock issuable upon the conversion of
the Series B Note; and (iv) the shares of common stock issuable upon the
exercise of the Series X warrant, provided, however, that we are not required to
file such additional registration statement, or may exclude shares from such
additional registration statement, if we believe in good faith, based upon
advice from the Securities and Exchange Commission’s Staff, that application of
Rule 415 would not permit registration of all or the excluded portion of such
shares.
The fair
value of the Series Y warrant was approximately $2.07 million on the date of
issuance and was determined using the Black-Scholes option pricing model with
the following assumptions: an average risk-free interest rate of
1.7%, volatility of 74% and no expected dividend rate. The relative
fair value of the warrant, the amount recorded to equity in accordance with
Accounting Principles Board Opinion No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants, was $1.13
million. The value of the beneficial conversion feature of the
Preferred Stock was estimated at $1.55 million based on the effective conversion
price at the date of issuance. The put option was considered a
derivative instrument and was required to be bifurcated from the Preferred Stock
and accounted for separately. The fair value of the bifurcated put
option was approximately $216,000 on the date of issuance. Changes in
the fair value of the derivative liability are recorded in the consolidated
statement of operations. The estimated fair value of the put option
liability related to the Preferred Stock of $216,000 remained classified as a
derivative liability as of December 31, 2008.
In
accordance with EITF Topic D-98, Classification and Measurement of
Redeemable Securities, the preferred stock was classified as temporary
equity as the shares are subject to redemption under the contingent put
option. The initial relative fair value of the Series Y warrant of
$1.13 million and the initial intrinsic value of the beneficial conversion
feature and put option related to the Preferred Stock were recorded as deemed
distributions and added to the accumulated deficit. We incurred
$180,000 of costs related to completing the third Montaur financing, which were
recorded as a reduction of additional paid-in capital on the consolidated
balance sheet.
F-27
11.
|
Equity:
|
|
a.
|
Stock
Warrants: At December 31, 2008, there are 23.4 million
warrants outstanding to purchase our common stock. The warrants
are exercisable at prices ranging from $0.31 to $0.85 per share with a
weighted average exercise price per share of
$0.45.
|
The
following table summarizes information about our outstanding warrants at
December 31, 2008:
Exercise
Price
|
Number of
Warrants
|
Expiration Date
|
||||||||
Series
Q
|
$ | 0.50 | 375,000 |
March
2009
|
||||||
Series
U
|
$ | 0.46 | 1,600,000 |
December 2009
|
||||||
Series
V
|
$ | 0.31 | 500,000 |
July
2012
|
||||||
Series
V
|
$ | 0.32 | 500,000 |
December
2012
|
||||||
Series
W
|
$ | 0.32 | 6,000,000 |
December
2012
|
||||||
Series
X
|
$ | 0.46 | 8,333,333 |
April
2013
|
||||||
Series
Y
|
$ | 0.575 | 6,000,000 |
December
2013
|
||||||
Series
Z
|
$ | 0.70 | 60,000 |
August
2013
|
||||||
Series
Z
|
$ | 0.85 | 60,000 |
August
2013
|
||||||
$ | 0.45 | 23,428,333 |
In April
2003, we completed bridge loans with our President and CEO, David Bupp, and an
outside investor. In connection with these loans, we issued a total
of 875,000 Series Q warrants to purchase our common stock at an exercise price
of $0.13 per share, expiring in April 2008. In March 2004, at the
request of our Board of Directors, Mr. Bupp agreed to extend the due date of his
loan. In exchange for extending the due date of his loan, we issued
Mr. Bupp an additional 375,000 Series Q warrants to purchase our common stock at
an exercise price of $0.50 per share, expiring in March 2009. During
2008, Mr. Bupp exercised 375,000 Series Q warrants in exchange for issuance of
375,000 shares of our common stock, resulting in gross proceeds of
$48,750. In addition, the outside investor exercised 500,000 Series Q
warrants in exchange for issuance of 500,000 shares of our common stock,
resulting in gross proceeds of $65,000. At December 31, 2008, 375,000
Series Q warrants related to the bridge loan from Mr. Bupp remained
outstanding. See Note 18(b).
In November 2003, we
executed common stock purchase agreements with certain investors. In
connection with these agreements, we issued the purchasers 6,086,959 Series R
warrants to purchase our common stock at an exercise price of $0.28 per share,
expiring in October 2008, and issued the placement agents 1,354,348 Series S
warrants to purchase our common stock on similar terms. During 2008,
an outside investor exercised a total of 200,200 Series R warrants in exchange
for issuance of 200,200 shares of our common stock, resulting in gross proceeds
of $56,056. In addition, certain outside investors exercised a total
of 2,658,698 Series R warrants and 644,565 Series S warrants on a cashless basis
in exchange for issuance of 1,289,990 shares of our common stock. No
Series R or Series S warrants were exercised during 2007. At December
31, 2008, no Series R or Series S warrants remained outstanding.
In August
2008, we executed consulting agreements with certain investor advisory service
firms. In connection with these agreements, we issued the consultants
60,000 Series Z warrants to purchase our common stock at an exercise price of
$0.70 per share and 60,000 Series Z warrants to purchase our common stock at an
exercise price of $0.85 per share, expiring in August 2013. All
120,000 Series Z warrants remained outstanding at December 31,
2008.
See Note
8 for a discussion of Series U, V, W and X warrants. See Notes 8 and
10 for a discussion of the Series Y warrant.
F-28
|
b.
|
Common Stock Purchase
Agreement: In December 2006, we entered into a Common
Stock Purchase Agreement with Fusion Capital, an Illinois limited
liability company, to sell $6.0 million of our common stock to Fusion
Capital over a 24-month period which ended on November 21,
2008. Through November 21, 2008, we sold to Fusion Capital
7,568,671 shares for proceeds of $1.9 million under the
agreement. We have not sold any shares under the agreement
since November 13, 2007. In December 2008, we entered into the
First Amendment to the Common Stock Purchase Agreement (the First
Amendment) which gave us a right to sell to Fusion Capital before March 1,
2011, an additional $6.0 million of our common stock 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 agreement prior to the First
Amendment. After giving effect to the First Amendment, the
remaining aggregate amount of our common stock we can now sell to Fusion
Capital is $10.1 million. In respect of sales to Fusion Capital
that we may make in the future under the agreement as amended, we have
authorized a total of 10,654,000 shares of our common stock for sale to
Fusion Capital.
|
In
December 2006, we issued to Fusion Capital 720,000 shares of our common stock as
a commitment fee upon execution of the agreement. In connection with
sales of our common stock, we issued an additional 234,000 shares of our common
stock to Fusion Capital as an additional commitment fee. In
connection with entering into the First Amendment, we issued an additional
360,000 shares in consideration for Fusion Capital’s entering into the
amendment. Also, under the agreement, as an additional commitment fee
we have agreed to issue to Fusion Capital pro rata an additional 486,000 shares
of our common stock as we sell the first $4.1 million of our common stock to
Fusion Capital under the agreement as amended.
|
c.
|
Common Stock
Reserved: As of December 31, 2008, we have reserved
59,793,178 shares of authorized common stock for the exercise of all
outstanding options, warrants, convertible debt, and convertible preferred
stock.
|
12.
|
Segments
and Subsidiary Information:
|
|
a.
|
Segments: We
report information about our operating segments using the “management
approach” in accordance with SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This information
is based on the way management organizes and reports the segments within
the enterprise for making operating decisions and assessing
performance. Our reportable segments are identified based on
differences in products, services and markets served. There
were no inter-segment sales. We own or have rights to
intellectual property involving two primary types of medical device
products, including gamma detection instruments currently used primarily
in the application of SLNB, and blood flow measurement
devices. We also own or have rights to intellectual property
related to several drug and therapy
products.
|
F-29
The
information in the following table is derived directly from each reportable
segment’s financial reporting.
($ amounts in thousands)
2008
|
Gamma
Detection
Devices
|
Blood
Flow
Devices
|
Drug and
Therapy
Products
|
Corporate
|
Total
|
|||||||||||||||
Net
sales:
|
||||||||||||||||||||
United
States1
|
$ | 7,422 | $ | — | $ | — | $ | — | $ | 7,422 | ||||||||||
International
|
167 | — | — | — | 167 | |||||||||||||||
Research
and development expenses
|
948 | — | 3,338 | — | 4,286 | |||||||||||||||
Selling,
general and administrative expenses, excluding depreciation and
amortization2
|
17 | — | — | 2,780 | 2,797 | |||||||||||||||
Depreciation
and amortization
|
120 | — | 2 | 46 | 168 | |||||||||||||||
Income
(loss) from operations3
|
3,658 | — | (3,340 | ) | (2,826 | ) | (2,508 | ) | ||||||||||||
Other
income (expense)4
|
— | — | — | (2,124 | ) | (2,124 | ) | |||||||||||||
Loss
from discontinued operations
|
— | (534 | ) | — | — | (534 | ) | |||||||||||||
Total
assets, net of depreciation and amortization:
|
||||||||||||||||||||
United
States operations
|
2,410 | — | 25 | 5,337 | 7,772 | |||||||||||||||
Discontinued
operations
|
— | 1,847 | — | — | 1,847 | |||||||||||||||
Capital
expenditures
|
9 | — | 18 | 89 | 116 |
($ amounts in thousands)
2007
|
Gamma
Detection
Devices
|
Blood
Flow
Devices
|
Drug and
Therapy
Products
|
Corporate
|
Total
|
|||||||||||||||
Net
sales
|
||||||||||||||||||||
United
States1
|
$ | 6,576 | $ | — | $ | — | $ | — | $ | 6,576 | ||||||||||
International
|
197 | — | — | — | 197 | |||||||||||||||
Research
and development expenses
|
680 | — | 1,826 | — | 2,506 | |||||||||||||||
Selling,
general and administrative expenses, excluding depreciation and
amortization2
|
— | — | — | 2,237 | 2,237 | |||||||||||||||
Depreciation
and amortization
|
99 | — | — | 44 | 143 | |||||||||||||||
Income
(loss) from operations3
|
3,092 | — | (1,826 | ) | (2,281 | ) | (1,015 | ) | ||||||||||||
Other
income (expense)
4
|
— | — | — | (3,325 | ) | (3,325 | ) | |||||||||||||
Loss
from discontinued operations
|
— | (748 | ) | — | — | (748 | ) | |||||||||||||
Total
assets, net of depreciation and amortization:
|
||||||||||||||||||||
United
States operations
|
2,280 | — | 186 | 2,336 | 4,802 | |||||||||||||||
Discontinued
operations
|
— | 2,261 | — | — | 2,261 | |||||||||||||||
Capital
expenditures
|
16 | 9 | — | 16 | 41 |
1 All
sales to EES are made in the United States. EES 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 were allocated to our
individual reportable segments beginning in 2008.
3 Income
(loss) from operations does not reflect the allocation of 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.
|
b.
|
Subsidiary: On
December 31, 2001, we acquired 100 percent of the outstanding common
shares of Cardiosonix, an Israeli company. We accounted for the
acquisition under SFAS No. 141, Business Combinations,
and certain provisions of SFAS No. 142, Goodwill and Other Intangible
Assets. In August 2009, the Company’s 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 to the Company, due in large part to
positive events in our other development initiatives. Our
consolidated balance sheets and statements of operations have been
restated 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.
|
F-30
13.
|
Agreements:
|
|
a.
|
Supply
Agreement: In February 2004, we entered into a product
supply agreement with TriVirix International (TriVirix) for the
manufacture of certain of our medical device products. The term
of this agreement expired in February 2008, but was automatically extended
through February 2009, and may continue to be automatically extended for
successive one-year periods. Either party has the right to
terminate the agreement at any time upon 180 days prior written notice, or
may terminate the agreement upon a material breach or repeated
non-material breaches by the other. Total purchases under the
product supply agreement were $1.5 million and $1.2 million for the years
ended December 31, 2008 and 2007, respectively. As of December
31, 2008, we have issued purchase orders under the agreement with TriVirix
for $1.7 million of our products for delivery through December
2009.
|
|
b.
|
Marketing and Distribution
Agreement: During 1999, we entered into a distribution
agreement with EES covering our gamma detection devices used in surgical
radiation detection. The initial five-year term expired
December 31, 2004, with options to extend for two successive two-year
terms. In March 2006, EES exercised its option for a second
two-year term extension of the distribution agreement covering our gamma
detection devices, thus extending the distribution agreement through the
end of 2008. In December 2007, Neoprobe and EES executed an
amendment to the distribution agreement which extended the agreement
through the end of 2013. Under the agreement, we manufacture
and sell our current line of gamma detection device products exclusively
to EES, who distributes the products globally, except in
Japan. EES agreed to purchase minimum quantities of our
products over the first three years of the term of the agreement and to
reimburse us for certain research and development costs and a portion of
our warranty costs. We are obligated to continue certain
product maintenance activities and to provide ongoing regulatory support
for the products.
|
EES may
terminate the agreement if we fail to supply products for specified periods,
commit a material breach of the agreement, suffer a change of control to a
competitor of EES, or become insolvent. If termination were due to
failure to supply or a material breach by us, EES would have the right to use
our intellectual property and regulatory information to manufacture and sell the
products exclusively on a global basis for the remaining term of the agreement
with no additional financial obligation to us. If termination is due
to insolvency or a change of control that does not affect supply of the
products, EES has the right to continue to sell the products on an exclusive
global basis for a period of six months or require us to repurchase any unsold
products in its inventory.
Under the
agreement, EES received a non-exclusive worldwide license to our SLNB
intellectual property to make and sell other products that may be developed
using our SLNB intellectual property. The term of the license is the
same as that of the agreement. EES paid us a non-refundable license
fee of $4 million. We recognized the license fee as revenue on a
straight-line basis over the five-year initial term of the agreement, and the
license fee was fully amortized into income as of the end of September
2004. As consideration for extending the distribution agreement
through the end of 2013, EES paid us $500,000 in December 2007, representing a
non-refundable license fee and reimbursement of past research and development
expenses. We intend to recognize the $500,000 payment as revenue on a
straight-line basis over the extended term of the agreement, or January 2009
through December 2013. If we terminate the agreement as a result of a
material breach by EES, they would be required to pay us a royalty on all
products developed and sold by EES using our SLNB intellectual
property. In addition, we are entitled to a royalty on any SLNB
product commercialized by EES that does not infringe any of our existing
intellectual property.
F-31
|
c.
|
Research and Development
Agreements: Cardiosonix’s research and development
efforts have been partially financed through grants from the Office of the
Chief Scientist of the Israeli Ministry of Industry and Trade (the
OCS). Through the end of 2004, Cardiosonix received a total of
$775,000 in grants from the OCS. In return for the OCS’s
participation, Cardiosonix is committed to pay royalties to the Israeli
Government at a rate of 3% to 5% of the sales of its products, up to 300%
of the total grants received, depending on the portion of manufacturing
activity that takes place in Israel. There are no future
performance obligations related to the grants received from the
OCS. However, under certain limited circumstances, the OCS may
withdraw its approval of a research program or amend the terms of its
approval. Upon withdrawal of approval, Cardiosonix may be
required to refund the grant, in whole or in part, with or without
interest, as the OCS determines. In January 2006, the OCS
consented to the transfer of manufacturing as long as we comply with the
terms of the OCS statutes under Israeli law. As long as we
maintain at least 10% Israeli content in our blood flow devices, we will
pay a royalty rate of 4% on sales of applicable blood flow devices and
must repay the OCS a total of $1.2 million in
royalties. However, should the amount of Israeli content of our
blood flow device products decrease below 10%, the royalty rate could
increase to 5% and the total royalty payments due could increase to $2.3
million. As such, the total amount we will have to repay the
OCS will likely be 150% to 300% of the amounts of the original
grants. Through December 2008, we have paid the OCS a total of
$66,000 in royalties related to sales of products developed under this
program. As of December 31, 2008, we have accrued obligations
for royalties totaling $6,000.
|
During
January 2002, we completed a license agreement with the University of
California, San Diego (UCSD) for a proprietary compound that we believe could be
used as a lymph node locating agent in SLNB procedures. The license
agreement is effective until the later of the expiration date of the
longest-lived underlying patent or January 30, 2023. Under the terms
of the license agreement, UCSD has granted us the exclusive rights to make, use,
sell, offer for sale and import licensed products as defined in the agreement
and to practice the defined licensed methods during the term of the
agreement. We may also sublicense the patent rights, subject to the
approval of certain sublicense terms by UCSD. In consideration for
the license rights, we agreed to pay UCSD a license issue fee of $25,000 and
license maintenance fees of $25,000 per year. We also agreed to pay
UCSD milestone payments related to commencement of clinical trials and
successful regulatory clearance for marketing of the licensed products, a
royalty on net sales of licensed products subject to a $25,000 minimum annual
royalty, fifty percent of all sublicense fees and fifty percent of sublicense
royalties. We also agreed to reimburse UCSD for all patent-related
costs. Total costs related to the UCSD license agreement were $35,000
and $45,000 in 2008 and 2007, respectively, and were recorded in research and
development expenses.
UCSD has
the right to terminate the agreement or change the nature of the agreement to a
non-exclusive agreement if it is determined that we have not been diligent in
developing and commercializing the covered products, marketing the products
within six months of receiving regulatory approval, reasonably filling market
demand or obtaining all the necessary government approvals.
During
April 2005, we completed an evaluation license agreement with UCSD expanding the
field of use for the proprietary compound developed by UCSD
researchers. The expanded field of use will allow Lymphoseek to be
developed as an optical or ultrasound agent. The evaluation license
agreement was effective until March 31, 2007. Under the terms of the
agreement, UCSD granted us limited rights to make and use licensed products as
defined in the agreement and to practice the defined licensed methods during the
term of the agreement for the sole purpose of evaluating our interest in
negotiating a commercial license. We may also sublicense the patent
rights, subject to the approval of certain sublicense terms by
UCSD. In consideration for the license rights, we agreed to pay UCSD
an initial evaluation license fee of $36,000 and evaluation license maintenance
fees of $9,000 payable on the first year anniversary of the effective date,
$9,000 payable on the eighteen-month anniversary of the effective date, and
$18,000 payable prior to termination. We also agreed to pay UCSD
fifty percent of any sublicense fees and to reimburse UCSD for all
patent-related costs. In March 2007, we executed a second evaluation
license agreement which was effective until March 31, 2008. In
consideration for the license rights, we agreed to pay UCSD an initial
evaluation license fee of $20,000 and evaluation license maintenance fees of
$10,000 payable on the six-month anniversary of the effective date and $10,000
payable on the twelve-month anniversary of the effective date. We
also agreed to pay UCSD fifty percent of any sublicense fees and to reimburse
UCSD for all patent-related costs. Total costs related to the UCSD
evaluation license agreements were $10,000 and $53,000 in 2008 and 2007,
respectively, and were recorded in research and development
expenses.
F-32
During
April 2008, we completed a license agreement with UCSD for an expanded field of
use allowing Lymphoseek to be developed as an optical or ultrasound
agent. The license agreement is effective until the expiration date
of the longest-lived underlying patent. Under the terms of the
license agreement, UCSD has granted us the exclusive rights to make, use, sell,
offer for sale and import licensed products as defined in the agreement and to
practice the defined licensed methods during the term of the
agreement. We may also sublicense the patent rights, subject to
certain sublicense terms as defined in the agreement. In
consideration for the license rights, we agreed to pay UCSD a license issue fee
of $25,000 and license maintenance fees of $25,000 per year. We also
agreed to pay UCSD milestone payments related to commencement of clinical trials
and successful regulatory clearance for marketing of the licensed products, a
royalty on net sales of licensed products subject to a $25,000 minimum annual
royalty, fifty percent of all sublicense fees and fifty percent of sublicense
royalties. We also agreed to reimburse UCSD for all patent-related
costs. Total costs related to the UCSD license agreement were $37,000
in 2008 and were recorded in research and development expenses.
During
January 2005, we executed a license agreement with The Ohio State University
(OSU), Cira LLC, and Cira Bio for certain technology relating to activated
cellular therapy. The license agreement is effective until the
expiration date of the longest-lived underlying patent. Under the
terms of the license agreement, OSU has granted the licensees the exclusive
rights to make, have made, use, lease, sell and import licensed products as
defined in the agreement and to utilize the defined licensed
practices. We may also sublicense the patent rights. In
consideration for the license rights, we agreed to pay OSU a license fee of
$5,000 on January 31, 2006. We also agreed to pay OSU additional
license fees related to initiation of Phase 2 and Phase 3 clinical trials, a
royalty on net sales of licensed products subject to a minimum annual royalty of
$100,000 beginning in 2012, and a percentage of any non-royalty license
income. Also during January 2005, we completed a business venture
agreement with Cira LLC that defines each party’s responsibilities and
commitments with respect to Cira Bio and the license agreement with
OSU. In connection with the execution of the option, Cira Ltd. also
agreed to assign all interests in the ACT technology in the event of the closing
of such a financing transaction.
|
d.
|
Employment
Agreements: We maintain employment agreements with five
of our officers. The employment agreements contain change in
control provisions that would entitle each of the officers to 1 to 2.5
times their current annual salaries, vest outstanding restricted stock and
options to purchase common stock, and continue certain benefits if there
is a change in control of our company (as defined) and their employment
terminates. As of December 31, 2008, our maximum contingent
liability under these agreements in such an event is approximately $2.0
million. The employment agreements also provide for severance,
disability and death benefits. See Note
18(c).
|
14.
|
Leases:
|
We lease
certain office equipment under capital leases which expire from 2009 to
2011. We also lease office space under an operating lease that
expires in January 2013.
F-33
The
future minimum lease payments for the years ending December 31 are as
follows:
Capital
Leases
|
Operating
Leases
|
|||||||
2009
|
$ | 10,382 | $ | 98,465 | ||||
2010
|
7,897 | 101,285 | ||||||
2011
|
3,948 | 104,105 | ||||||
2012
|
- | 106,925 | ||||||
2013
|
- | 8,930 | ||||||
22,227 | $ | 419,710 | ||||||
Less
amount representing interest
|
2,048 | |||||||
Present
value of net minimum lease payments
|
20,179 | |||||||
Less
current portion
|
9,084 | |||||||
Capital
lease obligations, excluding current portion
|
$ | 11,095 |
Total
rental expense was $108,000 and $153,000 for the years ended December 31, 2008
and 2007, respectively.
15.
|
Employee
Benefit Plan:
|
We
maintain an employee benefit plan under Section 401(k) of the Internal Revenue
Code. The plan allows employees to make contributions and we may, but
are not obligated to, match a portion of the employee’s contribution with our
common stock, up to a defined maximum. We accrued expenses of $33,000
and $30,000 during 2008 and 2007, respectively, related to common stock
contributed to the plan in 2009 and 2008, respectively.
16.
|
Supplemental
Disclosure for Statements of Cash
Flows:
|
We paid
interest aggregating $1.0 million and $869,000 for the years ended December 31,
2008 and 2007, respectively. During 2008 and 2007, we transferred $182,000 and
$84,000, respectively, in inventory to fixed assets related to the creation and
maintenance of a pool of service loaner equipment. Also during 2008 and 2007, we
prepaid $171,000 and $160,000, respectively, in insurance through the issuance
of notes payable to finance companies with weighted average interest rates of
6.6%. The note payable to a finance company issued in 2008 matures in July 2009.
During 2008, we purchased equipment under a capital lease totaling $20,000. No
new equipment was leased during 2007.
17.
|
Contingencies:
|
We are
subject to legal proceedings and claims that arise in the ordinary course of
business. In our opinion, the amount of ultimate liability, if any,
with respect to these actions will not materially affect our financial
position.
18.
|
Subsequent
Events:
|
|
a.
|
Stock-Based
Compensation: On January 5, 2009, the Compensation,
Nominating and Governance (CNG) Committee of the Board of Directors
granted 165,000 stock options with an exercise price of $0.59 to employees
and directors. Also on January 5, 2009, the CNG Committee
granted 400,000 shares of restricted stock that will vest based on certain
defined performance objectives to David C. Bupp, our President and
CEO. In addition, on February 16, 2009, we granted 50,000 stock
options with an exercise price of $0.65 and 100,000 shares of restricted
stock that will vest based on certain defined performance objectives to
Frederick O. Cope, our Vice President, Pharmaceutical Research and
Clinical Development. On February 27, 2009, the CNG Committee
granted 68,000 stock options with an exercise price of $0.55 to
employees. See Note
1(o).
|
F-34
|
b.
|
Warrant
Exercises: During the first quarter of 2009, David C.
Bupp, our President and CEO, exercised Series Q warrants resulting in the
issuance of 50,000 shares of our common stock and from which we received
gross proceeds of $25,000. See Note
11(a).
|
c.
|
Employment Agreements:
During January 2009, we entered into new employment agreements with six
officers. The new agreements have substantially similar terms to the
officers’ previous agreements. See Note
13(d).
|
|
d.
|
Discontinued
Operations: In August 2009, the Company’s 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 product and drug development
initiatives. See Note 2.
|
19.
|
Supplemental
Information (Unaudited):
|
The
following summary financial data are derived from our consolidated financial
statements that have been audited by our independent registered public
accounting firm. These data are qualified in their entirety by, and
should be read in conjunction with, our Consolidated Financial Statements and
Notes thereto included herein.
(Amounts in thousands, except per share data)
|
Years Ended December 31,
|
|||||||||||||||||||
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Statement
of Operations Data:
|
||||||||||||||||||||
Net
sales
|
$ | 7,418 | $ | 6,773 | $ | 5,445 | $ | 5,579 | $ | 5,264 | ||||||||||
License
and other revenue
|
172 | - | - | - | 600 | |||||||||||||||
Gross
profit
|
4,744 | 3,872 | 3,291 | 3,356 | 3,745 | |||||||||||||||
Research
and development expenses
|
4,286 | 2,506 | 3,095 | 2,618 | 892 | |||||||||||||||
Selling,
general and administrative expenses
|
2,965 | 2,380 | 2,467 | 2,442 | 2,192 | |||||||||||||||
(Loss)
income from operations
|
(2,508 | ) | (1,015 | ) | (2,270 | ) | (1,704 | ) | 660 | |||||||||||
Other
expenses, net
|
(2,124 | ) | (3,325 | ) | (1,283 | ) | (1,278 | ) | (1,535 | ) | ||||||||||
Loss
from continuing operations
|
(4,632 | ) | (4,340 | ) | (3,553 | ) | (2,982 | ) | (875 | ) | ||||||||||
Discontinued
operations
|
(534 | ) | (748 | ) | (1,188 | ) | (1,947 | ) | (2,666 | ) | ||||||||||
Net
loss
|
$ | (5,166 | ) | $ | (5,088 | ) | $ | (4,741 | ) | $ | (4,929 | ) | $ | (3,541 | ) | |||||
Loss
per common share (basic):
|
||||||||||||||||||||
Continuing
operations
|
$ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.01 | ) | |||||
Discontinued
operations
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.05 | ) | |||||
Loss
per common share (diluted):
|
||||||||||||||||||||
Continuing
operations
|
$ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.01 | ) | |||||
Discontinued
operations
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.05 | ) | |||||
Shares
used in computing loss per common share: (1)
|
||||||||||||||||||||
Basic
|
68,594 | 62,921 | 58,587 | 58,434 | 56,764 | |||||||||||||||
Diluted
|
68,594 | 62,921 | 58,587 | 58,434 | 56,764 |
As
of December 31,
|
||||||||||||||||||||
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Total
assets
|
$ | 9,619 | $ | 7,063 | $ | 8,034 | $ | 11,570 | $ | 15,366 | ||||||||||
Long-term
obligations
|
7,323 | 8,836 | 4,922 | 6,052 | 8,192 | |||||||||||||||
Accumulated
deficit
|
(148,840 | ) | (140,777 | ) | (135,688 | ) | (130,947 | ) | (126,018 | ) |
(1)
|
Basic
earnings (loss) per share are calculated using the weighted average number
of common shares outstanding during the periods. Diluted
earnings (loss) per share is calculated using the weighted average number
of common shares outstanding during the periods, adjusted for the effects
of unvested restricted stock, convertible securities, options and
warrants, if dilutive.
|
F-35
Neoprobe
Corporation and Subsidiaries
Consolidated
Balance Sheets
ASSETS
|
September 30,
2009
(unaudited)
|
December 31,
2008
|
||||||
Current
assets:
|
||||||||
Cash
|
$ | 6,031,298 | $ | 3,565,837 | ||||
Available-for-sale
securities
|
— | 495,383 | ||||||
Accounts
receivable, net
|
1,393,420 | 1,626,065 | ||||||
Inventory
|
1,038,407 | 544,126 | ||||||
Prepaid
expenses and other
|
319,647 | 573,573 | ||||||
Assets
associated with discontinued operations
|
31,389 | 435,740 | ||||||
Total
current assets
|
8,814,161 | 7,240,724 | ||||||
Property
and equipment
|
1,949,461 | 1,940,748 | ||||||
Less
accumulated depreciation and amortization
|
1,654,969 | 1,593,501 | ||||||
294,492 | 347,247 | |||||||
Patents
and trademarks
|
519,896 | 459,431 | ||||||
Less
accumulated amortization
|
440,018 | 433,358 | ||||||
79,878 | 26,073 | |||||||
Other
assets
|
26,266 | 594,449 | ||||||
Other
assets associated with discontinued operations
|
— | 1,410,957 | ||||||
Total
assets
|
$ | 9,214,797 | $ | 9,619,450 |
Continued
F-36
Neoprobe
Corporation and Subsidiaries
Consolidated
Balance Sheets, continued
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
September 30,
2009
(unaudited)
|
December 31,
2008
|
||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 772,483 | $ | 725,820 | ||||
Accrued
liabilities and other
|
1,155,398 | 900,796 | ||||||
Capital
lease obligations, current portion
|
7,092 | 9,084 | ||||||
Deferred
revenue, current portion
|
526,898 | 526,619 | ||||||
Notes
payable to finance companies
|
— | 137,857 | ||||||
Liabilities
associated with discontinued operations
|
20,686 | 22,280 | ||||||
Total
current liabilities
|
2,482,557 | 2,322,456 | ||||||
Capital
lease obligations, net of current portion
|
5,721 | 11,095 | ||||||
Deferred
revenue, net of current portion
|
440,873 | 490,165 | ||||||
Notes
payable to CEO, net of discounts of $59,917 and $76,294,
respectively
|
940,083 | 923,706 | ||||||
Notes
payable to investors, net of discounts of $0 and $5,001,149,
respectively
|
10,000,000 | 4,998,851 | ||||||
Derivative
liabilities
|
2,697,487 | 853,831 | ||||||
Other
liabilities
|
36,348 | 45,071 | ||||||
Total
liabilities
|
16,603,069 | 9,645,175 | ||||||
Commitments
and contingencies
|
||||||||
Preferred
stock; $.001 par value; 5,000,000 shares authorized;
|
||||||||
3,000
Series A shares, par value $1,000, issued and
|
||||||||
outstanding
at September 30, 2009 and December 31, 2008
|
3,000,000 | 3,000,000 | ||||||
Stockholders’
deficit:
|
||||||||
Common
stock; $.001 par value; 150,000,000 shares
|
||||||||
authorized;
79,363,787 and 70,862,641 shares outstanding at
|
||||||||
September
30, 2009 and December 31, 2008, respectively
|
79,364 | 70,863 | ||||||
Additional
paid-in capital
|
181,877,412 | 145,742,044 | ||||||
Accumulated
deficit
|
(192,345,048 | ) | (148,840,015 | ) | ||||
Unrealized
gain on available-for-sale securities
|
— | 1,383 | ||||||
Total
stockholders’ deficit
|
(10,388,272 | ) | (3,025,725 | ) | ||||
Total
liabilities and stockholders’ deficit
|
$ | 9,214,797 | $ | 9,619,450 |
See
accompanying notes to consolidated financial statements
F-37
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Operations
(unaudited)
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues:
|
||||||||||||||||
Net
sales
|
$ | 2,562,079 | $ | 1,715,324 | $ | 6,998,299 | $ | 5,629,573 | ||||||||
License
and other revenue
|
25,000 | — | 75,000 | — | ||||||||||||
Total
revenues
|
2,587,079 | 1,715,324 | 7,073,299 | 5,629,573 | ||||||||||||
Cost
of goods sold
|
927,587 | 641,106 | 2,330,032 | 2,123,728 | ||||||||||||
Gross
profit
|
1,659,492 | 1,074,218 | 4,743,267 | 3,505,845 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
1,204,811 | 1,741,484 | 3,730,361 | 3,084,432 | ||||||||||||
Selling,
general and administrative
|
778,658 | 707,794 | 2,417,622 | 2,248,466 | ||||||||||||
Total
operating expenses
|
1,983,469 | 2,449,278 | 6,147,983 | 5,332,898 | ||||||||||||
Loss
from operations
|
(323,977 | ) | (1,375,060 | ) | (1,404,716 | ) | (1,827,053 | ) | ||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
2,360 | 18,824 | 16,068 | 47,891 | ||||||||||||
Interest
expense
|
(330,806 | ) | (456,941 | ) | (1,249,525 | ) | (1,258,500 | ) | ||||||||
Change
in derivative liabilities
|
(6,334,479 | ) | 59,415 | (18,539,318 | ) | (440,773 | ) | |||||||||
Loss
on extinguishment of debt
|
(16,240,592 | ) | — | (16,240,592 | ) | — | ||||||||||
Other
|
(585 | ) | 4,242 | (2,216 | ) | 2,501 | ||||||||||
Total
other expense, net
|
(22,904,102 | ) | (374,460 | ) | (36,015,583 | ) | (1,648,881 | ) | ||||||||
Loss
from continuing operations
|
(23,228,079 | ) | (1,749,520 | ) | (37,420,299 | ) | (3,475,934 | ) | ||||||||
Discontinued
operations:
|
||||||||||||||||
Impairment
loss
|
(1,728,887 | ) | — | (1,728,887 | ) | — | ||||||||||
Loss
from operations
|
(52,303 | ) | (141,070 | ) | (162,896 | ) | (459,506 | ) | ||||||||
Net
loss
|
(25,009,269 | ) | (1,890,590 | ) | (39,312,082 | ) | (3,935,440 | ) | ||||||||
Preferred
stock dividends
|
(60,000 | ) | — | (180,000 | ) | — | ||||||||||
Loss
attributable to common
stockholders
|
$ | (25,069,269 | ) | $ | (1,890,590 | ) | $ | (39,492,082 | ) | $ | (3,935,440 | ) | ||||
Loss
per common share (basic):
|
||||||||||||||||
Continuing
operations
|
$ | (0.31 | ) | $ | (0.03 | ) | $ | (0.53 | ) | $ | (0.05 | ) | ||||
Discontinued
operations
|
$ | (0.03 | ) | $ | (0.00 | ) | $ | (0.03 | ) | $ | (0.01 | ) | ||||
Loss
to common stockholders
|
$ | (0.34 | ) | $ | (0.03 | ) | $ | (0.56 | ) | $ | (0.06 | ) | ||||
Loss
per common share (diluted):
|
||||||||||||||||
Continuing
operations
|
$ | (0.31 | ) | $ | (0.03 | ) | $ | (0.53 | ) | $ | (0.05 | ) | ||||
Discontinued
operations
|
$ | (0.03 | ) | $ | (0.00 | ) | $ | (0.03 | ) | $ | (0.01 | ) | ||||
Loss
to common stockholders
|
$ | (0.34 | ) | $ | (0.03 | ) | $ | (0.56 | ) | $ | (0.06 | ) | ||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
74,380,714 | 68,758,281 | 70,915,204 | 68,191,889 | ||||||||||||
Diluted
|
74,380,714 | 68,758,281 | 70,915,204 | 68,191,889 |
See
accompanying notes to consolidated financial statements.
F-38
Neoprobe
Corporation and Subsidiaries
Consolidated
Statement of Stockholders’ Deficit
(unaudited)
Common Stock
|
Additional
Paid-in
|
Accumulated
|
Accumulated
Other
Comprehensive
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Total
|
|||||||||||||||||||
Balance,
December 31, 2008
|
70,862,641 | $ | 70,863 | $ | 145,742,044 | $ | (148,840,015 | ) | $ | 1,383 | $ | (3,025,725 | ) | |||||||||||
Effect
of adopting EITF 07-5
|
— | — | (8,948,089 | ) | (4,012,951 | ) | — | (12,961,040 | ) | |||||||||||||||
Issued
restricted stock
|
500,000 | 500 | — | — | — | 500 | ||||||||||||||||||
Cancelled
restricted stock
|
(9,000 | ) | (9 | ) | 9 | — | — | — | ||||||||||||||||
Issued
stock upon exercise of warrants and other
|
6,641,555 | 6,641 | 6,196,513 | — | — | 6,203,154 | ||||||||||||||||||
Issued
stock upon exercise of options
|
330,000 | 330 | 133,420 | — | — | 133,750 | ||||||||||||||||||
Issued
stock as payment of interest on convertible debt and dividends on
preferred stock
|
957,708 | 958 | 553,709 | — | — | 554,667 | ||||||||||||||||||
Effect
of change in terms of notes payable, warrants and preferred
stock
|
— | — | 37,999,312 | — | — | 37,999,312 | ||||||||||||||||||
Issued
stock to 401(k) plan at $0.41
|
80,883 | 81 | 33,392 | — | — | 33,473 | ||||||||||||||||||
Stock
compensation expense
|
— | — | 271,554 | — | — | 271,554 | ||||||||||||||||||
Paid
common stock issuance costs
|
— | — | (98,129 | ) | — | — | (98,129 | ) | ||||||||||||||||
Paid
preferred stock issuance costs
|
— | — | (6,323 | ) | — | — | (6,323 | ) | ||||||||||||||||
Preferred
stock dividends
|
— | — | — | (180,000 | ) | — | (180,000 | ) | ||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||
Net
loss
|
— | — | — | (39,312,082 | ) | — | (39,312,082 | ) | ||||||||||||||||
Unrealized
loss on available-for-sale
securities
|
— | — | — | — | (1,383 | ) | (1,383 | ) | ||||||||||||||||
Total
comprehensive loss
|
(39,313,465 | ) | ||||||||||||||||||||||
Balance,
September 30, 2009
|
79,363,787 | $ | 79,364 | $ | 181,877,412 | $ | (192,345,048 | ) | $ | — | $ | (10,388,272 | ) |
See
accompanying notes to consolidated financial statements.
F-39
Neoprobe
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (39,312,082 | ) | $ | (3,935,440 | ) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
used
in operating activities:
|
||||||||
Depreciation
and amortization
|
284,219 | 302,904 | ||||||
Amortization
of debt discount and debt offering costs
|
420,063 | 515,056 | ||||||
Provision
for bad debts
|
458 | 699 | ||||||
Issuance
of common stock in payment of interest and dividends
|
554,667 | — | ||||||
Stock
compensation expense
|
271,554 | 156,897 | ||||||
Change
in derivative liabilities
|
18,539,318 | 440,773 | ||||||
Loss
on extinguishment of debt
|
16,240,592 | — | ||||||
Impairment
loss on discontinued operations
|
1,728,887 | — | ||||||
Other
|
48,697 | 111,295 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
226,052 | 305,274 | ||||||
Inventory
|
(550,816 | ) | 323,957 | |||||
Prepaid
expenses and other assets
|
260,470 | 111,229 | ||||||
Accounts
payable
|
47,063 | (79,470 | ) | |||||
Accrued
liabilities and other liabilities
|
53,104 | 105,775 | ||||||
Deferred
revenue
|
(49,013 | ) | (81,638 | ) | ||||
Net
cash used in operating activities
|
(1,236,767 | ) | (1,722,689 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases
of available-for-sale securities
|
— | (196,000 | ) | |||||
Maturities
of available-for-sale securities
|
494,000 | 196,000 | ||||||
Purchases
of property and equipment
|
(74,554 | ) | (97,673 | ) | ||||
Proceeds
from sales of property and equipment
|
251 | 120 | ||||||
Patent
and trademark costs
|
(66,317 | ) | (13,616 | ) | ||||
Net
cash provided by (used in) investing activities
|
353,380 | (111,169 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of common stock
|
3,625,250 | 232,156 | ||||||
Payment
of common stock offering costs
|
(104,673 | ) | (900 | ) | ||||
Payment
of preferred stock offering costs
|
(6,323 | ) | — | |||||
Proceeds
from notes payable
|
— | 3,000,000 | ||||||
Payment
of debt issuance costs
|
(20,183 | ) | (200,154 | ) | ||||
Payment
of notes payable
|
(137,857 | ) | (124,770 | ) | ||||
Payments
under capital leases
|
(7,366 | ) | (12,878 | ) | ||||
Net
cash provided by financing activities
|
3,348,848 | 2,893,454 | ||||||
Net
increase in cash
|
2,465,461 | 1,059,596 | ||||||
Cash,
beginning of period
|
3,565,837 | 1,540,220 | ||||||
Cash,
end of period
|
$ | 6,031,298 | $ | 2,599,816 |
See
accompanying notes to consolidated financial statements.
F-40
1.
|
Summary
of Significant Accounting Policies
|
|
a.
|
Basis of
Presentation: The information presented as of September
30, 2009 and for the three-month and nine-month periods ended September
30, 2009 and September 30, 2008 is unaudited, but includes all adjustments
(which consist only of normal recurring adjustments) that the management
of Neoprobe Corporation (Neoprobe, the Company, or we) believes to be
necessary for the fair presentation of results for the periods
presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
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. We have evaluated
subsequent events through December 28, 2009, the date our consolidated
financial statements were issued. The balances as of September
30, 2009 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, 2008, which were included as part of our Annual Report on
Form 10-K.
|
Our
consolidated financial statements include the accounts of Neoprobe, our
wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix), and our 90%-owned
subsidiary, Cira Biosciences, Inc. (Cira Bio). All significant
inter-company accounts were eliminated in consolidation.
In August
2009, the Company’s 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 to the Company, due in
large part to positive events in our other development
initiatives. Our consolidated balance sheets and statements of
operations have been restated 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.
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.
|
F-41
2.
|
Available-for-sale
securities: Available-for-sale securities are recorded at fair value. Fair
value of available-for-sale securities is determined based on a discounted
cash flow analysis using current market rates. Unrealized holding gains
and losses on available-for-sale securities are excluded from earnings and
are reported as a separate component of other comprehensive income (loss)
until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification
basis.
|
A decline
in the market value of any available-for-sale security below cost that is deemed
to be other than temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings or other comprehensive
income (loss) and a new cost basis for the security is
established. Premiums and discounts are amortized or accreted over
the life of the related available-for-sale security as an adjustment to yield
using the effective interest method. Dividend and interest income are
recognized when earned.
Available-for-sale
securities are accounted for on a specific identification basis. As
of December 31, 2008, we held available-for-sale securities with an aggregate
fair value of $495,383, including $1,383 of net unrealized gains recorded in
accumulated other comprehensive income. As of December 31, 2008, all
of our available-for-sale securities were invested in short-term certificates of
deposit with maturity dates within 1 year. Available-for-sale
securities were classified as current based on their maturity dates as well as
our intent to use them to fund short-term working capital needs. We
held no available-for-sale securities at September 30, 2009.
|
3.
|
Notes
payable to finance companies: The fair value of our debt is
estimated by discounting the future cash flows at rates currently offered
to us for similar debt instruments of comparable maturities by banks or
finance companies. At December 31, 2008, the carrying values of
these instruments approximate fair value. We had no notes
payable to finance companies at September 30,
2009.
|
|
4.
|
Note
payable to CEO: 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 September 30, 2009, the
note payable to our CEO had an estimated fair value of $4.5
million. At December 31, 2008, the note payable to our CEO had
an estimated fair value of $1.8
million.
|
|
5.
|
Notes
payable to outside investors: The carrying value of our debt is
presented as the face amount of the notes less the unamortized discounts
related to the fair value of the beneficial conversion features, the
initial estimated fair value of the put options embedded in the notes and
the initial estimated fair value of the warrants to purchase common stock
issued in connection with the notes. At September 30, 2009, the
notes payable to outside investors had an estimated fair value of $35.6
million. At December 31, 2008, the notes payable to outside
investors had an estimated fair value of $15.9
million.
|
6.
|
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 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.
|
F-42
2.
|
Discontinued
Operations
|
In August
2009, the Company’s 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 product and drug development
initiatives.
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. 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,
2009
|
December 31,
2008
|
|||||||
Accounts
receivable, net
|
$ | 5,727 | $ | 18,005 | ||||
Inventory
|
25,662 | 417,735 | ||||||
Current
assets associated with discontinued operations
|
31,389 | 435,740 | ||||||
Property
and equipment, net of accumulated depreciation
|
— | 43,545 | ||||||
Patents
and trademarks, net of accumulated amortization
|
— | 1,367,412 | ||||||
Other
assets associated with discontinued operations
|
— | 1,410,957 | ||||||
Assets
associated with discontinued operations
|
$ | 31,389 | $ | 1,846,697 | ||||
Accounts
payable
|
$ | 5,800 | $ | 5,400 | ||||
Accrued
expenses
|
14,886 | 16,880 | ||||||
Liabilities
associated with discontinued operations
|
$ | 20,686 | $ | 22,280 |
In
addition, we recorded an impairment loss of $1.7 million and reclassified
certain revenues and expenses to discontinued operations during the third
quarter of 2009. Until a sale is completed, we expect to continue to
generate revenues and incur 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,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
$ | 9,345 | $ | 84,942 | $ | 81,904 | $ | 208,510 | ||||||||
Cost
of goods sold
|
2,432 | 51,711 | 36,156 | 135,766 | ||||||||||||
Gross
profit
|
6,913 | 33,231 | 45,748 | 72,744 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
2,642 | 69,445 | 23,128 | 188,912 | ||||||||||||
Selling,
general and administrative
|
56,659 | 104,958 | 185,506 | 343,578 | ||||||||||||
Total
operating expenses
|
59,301 | 174,403 | 208,634 | 532,490 | ||||||||||||
Other
income (expense)
|
85 | 102 | (10 | ) | 240 | |||||||||||
Loss
from discontinued operations
|
$ | (52,303 | ) | $ | (141,070 | ) | $ | (162,896 | ) | $ | (459,506 | ) |
Cash
flows associated with the operation of Cardiosonix were not significant and have
been combined within operating, investing and financing cash flows, as
appropriate, in our consolidated statements of cash flows.
F-43
3.
|
Fair
Value Hierarchy
|
The
following tables set forth, by level, assets and liabilities measured at fair
value on a recurring basis as of September 30, 2009 and December 31,
2008:
Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2009
|
||||||||||||||||
Quoted Prices
in Active Markets for Identical Assets and Liabilities |
Significant
Other Observable Inputs |
Significant
Unobservable Inputs |
Balance as of
September 30, |
|||||||||||||
Description
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
2009
|
||||||||||||
Liabilities:
|
||||||||||||||||
Derivative
liabilities related to warrants
|
$ | — | $ | 1,731,487 | $ | — | $ | 1,731,487 | ||||||||
Derivative
liabilities related to put options
|
— | — | 966,000 | 966,000 | ||||||||||||
Total
derivative liabilities
|
$ | — | $ | 1,731,487 | $ | 966,000 | $ | 2,697,487 |
Assets and Liabilities Measured at Fair Value on a
Recurring Basis as of December 31, 2008
|
||||||||||||||||
Quoted Prices
in Active Markets for Identical Assets and Liabilities |
Significant
Other Observable Inputs |
Significant
Unobservable Inputs |
Balance as of
December 31, |
|||||||||||||
Description
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
2008
|
||||||||||||
Assets:
|
||||||||||||||||
Available-for-sale
securities
|
$ | 495,383 | $ | — | $ | — | $ | 495,383 | ||||||||
Liabilities:
|
||||||||||||||||
Derivative
liabilities related to conversion and put options
|
$ | — | $ | — | $ | 853,831 | $ | 853,831 |
The
following tables set forth a summary of changes in the fair value of our Level 3
liabilities for the three-month periods ended September 30, 2009 and
2008:
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 |
Three Months Ended September 30,
2008
|
||||||||||||||||||||
Description
|
Balance at
June 30, 2008
|
Unrealized
Gains |
Purchases,
Issuances and Settlements |
Transfers In
and/or (Out) |
Balance at
September 30, 2008
|
|||||||||||||||
Liabilities:
|
||||||||||||||||||||
Derivative
liabilities related to conversion and put options
|
$ | 686,638 | $ | (59,415 | ) | $ | — | $ | — | $ | 627,223 |
F-44
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, 2009 and
2008:
Nine Months Ended September 30,
2009
|
||||||||||||||||||||
Description
|
Balance at
December 31, 2008
|
Adoption of
EITF 07-5
(See
Note 10)
|
Unrealized
Losses |
Transfers In
and/or (Out) |
Balance at
September 30, 2009
|
|||||||||||||||
Liabilities:
|
||||||||||||||||||||
Derivative
liabilities related to conversion and put options
|
$ | 853,831 | $ | 5,304,487 | $ | 7,596,329 | $ | (12,788,647 | ) | $ | 966,000 |
Nine Months Ended September 30, 2008
|
||||||||||||||||||||
Description
|
Balance at
December 31, 2007
|
Purchases,
Issuances and Settlements |
Unrealized
Losses |
Transfers In
and/or (Out) |
Balance at
September 30, 2008
|
|||||||||||||||
Liabilities:
|
||||||||||||||||||||
Derivative
liabilities related to conversion and put options
|
$ | 1,599,072 | $ | 257,968 | $ | 170,119 | $ | (1,399,936 | ) | $ | 627,223 |
4.
|
Stock-Based
Compensation
|
Stock-based
payments to employees, including grants of employee stock options, are
recognized in the income statement based on their estimated fair
values. Compensation cost arising from stock-based awards is
recognized as expense using the straight-line method over the vesting
period. The fair value of each option award is estimated on the date
of grant using the Black-Scholes option pricing model to value share-based
payments. Expected volatilities are based on the Company’s historical
volatility, which management believes represents the most accurate basis for
estimating expected volatility under the current
circumstances. Neoprobe uses historical data to estimate forfeiture
rates. The expected term of options granted is based on the vesting
period and the contractual life of the options. The risk-free rate is
based on the U.S. Treasury yield in effect at the time of the
grant.
At
September 30, 2009, we have three stock-based compensation
plans. Under the Amended and Restated Stock Option and Restricted
Stock Purchase Plan (the Amended Plan), the 1996 Stock Incentive Plan (the 1996
Plan), and the Second Amended and Restated 2002 Stock Incentive Plan (the 2002
Plan), we may grant incentive stock options, nonqualified stock options, and
restricted stock awards to full-time employees, and nonqualified stock options
and restricted 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
options are still outstanding under the Amended Plan and the 1996 Plan, these
plans are considered expired and no new grants may be made from
them. Under all three plans, the exercise price of each option is
greater than or equal to the closing market price of our common stock on the day
prior to the date of the grant.
Options
granted under the Amended Plan, the 1996 Plan and the 2002 Plan generally vest
on an annual basis over one to three years. Outstanding options under
the plans, if not exercised, generally expire ten years from their date of grant
or 90 days from the date of an optionee’s separation from employment with the
Company. We issue new shares of our common stock upon exercise of
stock options.
Compensation
cost arising from stock-based awards is recognized as expense using the
straight-line method over the vesting period. As of September 30,
2009, there was approximately $302,000 of total unrecognized compensation cost
related to unvested stock-based awards, which we expect to recognize over
remaining weighted average vesting terms of 0.7 years. For the
three-month periods ended September 30, 2009 and 2008, our total stock-based
compensation expense was approximately $126,000 and $63,000,
respectively. For the nine-month periods ended September 30, 2009 and
2008, our total stock-based compensation expense was approximately $272,000 and
$157,000, respectively. We have not recorded any income tax benefit
related to stock-based compensation in any of the three-month and nine-month
periods ended September 30, 2009 and 2008.
F-45
A summary
of stock option activity under our stock option plans as of September 30, 2009,
and changes during the nine-month period then ended is presented
below:
Nine Months Ended September 30, 2009
|
|||||||||||||
Number of
Options |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life |
Aggregate
Intrinsic Value |
||||||||||
Outstanding at
beginning of period
|
5,619,500 | $ | 0.40 | ||||||||||
Granted
|
283,000 | 0.59 | |||||||||||
Exercised
|
(330,000 | ) | 0.41 | ||||||||||
Forfeited
|
(10,000 | ) | 0.61 | ||||||||||
Expired
|
(111,000 | ) | 1.10 | ||||||||||
Outstanding
at end of period
|
5,451,500 | $ | 0.39 |
5.1
years
|
$ | 5,492,084 | |||||||
Exercisable
at end of period
|
4,682,833 | $ | 0.38 |
4.5
years
|
$ | 4,763,057 |
A summary
of the status of our unvested restricted stock as of September 30, 2009, and
changes during the nine-month period then ended is presented below:
Nine Months Ended
September 30, 2009
|
||||||||
Number of
Shares |
Weighted
Average Grant-Date Fair Value |
|||||||
Unvested
at beginning of period
|
473,000 | $ | 0.37 | |||||
Granted
|
500,000 | 0.60 | ||||||
Vested
|
— | — | ||||||
Forfeited
|
(9,000 | ) | 0.68 | |||||
Unvested
at end of period
|
964,000 | $ | 0.49 |
Restricted
shares generally vest upon occurrence of a specific event or achievement of
goals as defined in the grant agreements. As a result, we have
recorded compensation expense related to grants of restricted stock based on
management’s estimates of the probable dates of the vesting
events. See Note 16.
F-46
5.
|
Comprehensive
Loss
|
Due to
our net operating loss position, there are no income tax effects on
comprehensive loss components for the three-month and nine-month periods ended
September 30, 2009 and 2008.
Three Months
Ended September 30,
2009 |
Three Months
Ended
September 30,
2008 |
|||||||
Net
loss
|
$ | (25,009,269 | ) | $ | (1,890,590 | ) | ||
Unrealized
losses on securities
|
— | — | ||||||
Other
comprehensive loss
|
$ | (25,009,269 | ) | $ | (1,890,590 | ) |
Nine Months
Ended September 30,
2009 |
Nine Months
Ended
September 30,
2008 |
|||||||
Net
loss
|
$ | (39,312,082 | ) | $ | (3,935,440 | ) | ||
Unrealized
losses on securities
|
(1,383 | ) | — | |||||
Other
comprehensive loss
|
$ | (39,313,465 | ) | $ | (3,935,440 | ) |
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 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, if dilutive.
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,
2009 and 2008:
Three Months Ended
September 30, 2009
|
Three Months Ended
September 30, 2008
|
|||||||||||||||
Basic
Earnings
Per Share
|
Diluted
Earnings
Per Share
|
Basic
Earnings
Per Share
|
Diluted
Earnings
Per Share
|
|||||||||||||
Outstanding
shares
|
79,363,787 | 79,363,787 | 69,787,540 | 69,787,540 | ||||||||||||
Effect
of weighting changes in outstanding shares
|
(4,019,073 | ) | (4,019,073 | ) | (579,259 | ) | (579,259 | ) | ||||||||
Unvested
restricted stock
|
(964,000 | ) | (964,000 | ) | (450,000 | ) | (450,000 | ) | ||||||||
Adjusted
shares
|
74,380,714 | 74,380,714 | 68,758,281 | 68,758,281 |
Nine Months Ended
September, 2009
|
Nine Months Ended
September 30, 2008
|
|||||||||||||||
Basic
Earnings
Per Share
|
Diluted
Earnings
Per Share
|
Basic
Earnings
Per Share
|
Diluted
Earnings
Per Share
|
|||||||||||||
Outstanding
shares
|
79,363,787 | 79,363,787 | 69,787,540 | 69,787,540 | ||||||||||||
Effect
of weighting changes in outstanding shares
|
(7,484,583 | ) | (7,484,583 | ) | (1,145,651 | ) | (1,145,651 | ) | ||||||||
Unvested
restricted stock
|
(964,000 | ) | (964,000 | ) | (450,000 | ) | (450,000 | ) | ||||||||
Adjusted
shares
|
70,915,204 | 70,915,204 | 68,191,889 | 68,191,889 |
F-47
Earnings
(loss) per common share for the three-month and nine-month periods ended
September 30, 2009 and 2008 excludes the effects of 58,660,844 and 49,799,546
common share equivalents, respectively, since such inclusion would be
anti-dilutive. The excluded shares consist of common shares issuable
upon exercise of outstanding stock options and warrants, or upon the conversion
of convertible debt and convertible preferred stock.
Effective
January 1, 2009, as required by current accounting standards, we began including
unvested stock awards which contain nonforfeitable rights to dividends or
dividend equivalents, whether paid or unpaid (referred to as “participating
securities”), in the number of shares outstanding for both basic and diluted
earnings per share calculations. Under the accounting standards, the
Company’s unvested restricted stock is considered a participating
security. All prior period earnings per share data presented were
required to be adjusted retrospectively to conform to these
provisions. In the event of a net loss, the participating securities
are excluded from the calculation of both basic and diluted earnings per
share. Due to our net loss, 964,000 and 450,000 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, 2009 and 2008,
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 third quarter of 2009, we capitalized $525,000 of
inventory costs associated with our Lymphoseek product. During the
three-month and nine-month periods ended September 30, 2008, we did not
capitalize any inventory costs associated with our Lymphoseek
product.
The
components of net inventory are as follows:
September 30,
2009
(unaudited)
|
December 31,
2008
|
|||||||
Materials
and component parts
|
$ | 691,276 | $ | 112,637 | ||||
Finished
goods
|
347,131 | 431,489 | ||||||
Total
|
$ | 1,038,407 | $ | 544,126 |
8.
|
Intangible
Assets
|
Our
intangible assets consist primarily of patents and
trademarks. Details about our intangible assets are as
follows:
September 30, 2009
|
December 31, 2008
|
|||||||||||||||||
Wtd
Avg Life |
Gross
Carrying Amount |
Accumulated
Amortization |
Gross
Carrying Amount |
Accumulated
Amortization |
||||||||||||||
Patents
and trademarks
|
0.2
yrs
|
$ | 519,896 | $ | 440,018 | $ | 459,431 | $ | 433,358 |
F-48
The
estimated amortization expense for the next five fiscal years is as
follows:
Estimated
Amortization Expense |
||||
For
the year ended 12/31/20091
|
$ | 126,228 | ||
For
the year ended 12/31/2010
|
2,393 | |||
For
the year ended 12/31/2011
|
1,088 | |||
For
the year ended 12/31/2012
|
885 | |||
For
the year ended 12/31/2013
|
126 |
|
1
|
Amortization
expense for the year ended 12/31/2009 includes approximately $113,000 of
intangible asset amortization related to Cardiosonix, which is included in
loss from discontinued operations. Intangible asset
amortization related to Cardiosonix stopped during the third quarter of
2009 as a result of the decision to discontinue the operations of
Cardiosonix and hold the associated assets for
sale.
|
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 on the consolidated balance
sheets. Our primary marketing partner, Ethicon Endo-Surgery, Inc.
(EES), a Johnson & Johnson company, also reimburses us for a portion of
warranty expense incurred based on end customer sales they make during a given
fiscal year. Payments charged against the reserve are disclosed net
of EES’ estimated reimbursement.
The
activity in the warranty reserve account for the three-month and nine-month
periods ended September 30, 2009 and 2008 is as follows:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Warranty
reserve at beginning of period
|
$ | 71,412 | $ | 87,679 | $ | 72,643 | $ | 115,395 | ||||||||
Provision
for warranty claims and changes in reserve for warranties
|
10,021 | 3,932 | 65,172 | 13,894 | ||||||||||||
Payments
charged against the reserve
|
(21,369 | ) | (18,816 | ) | (77,751 | ) | (56,494 | ) | ||||||||
Warranty
reserve at end of period
|
$ | 60,064 | $ | 72,795 | $ | 60,064 | $ | 72,795 |
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 bears interest at 10% per annum, had an
original term of one year and is repayable in whole or in part with no
penalty. The note is convertible, at the option of the Bupp
Investors, into shares of our common stock at a price of $0.31 per share, a 25%
premium to the average closing market price of our common stock for the 5 days
preceding the closing of the transaction. As part of this
transaction, we issued the Bupp Investors Series V Warrants to purchase 500,000
shares of our common stock at an exercise price of $0.31 per share, expiring in
July 2012. The value of the beneficial conversion feature of the note
was estimated at $86,000 based on the effective conversion price at the date of
issuance. The fair value of the warrants issued to the investors was
approximately $80,000 on the date of issuance and was determined using the
Black-Scholes option pricing model with the following assumptions: an
average risk-free interest rate of 4.95%, volatility of 105% and no expected
dividend rate. The value of the beneficial conversion feature and the
fair value of the warrants issued to the investors were recorded as discounts on
the note. We incurred $43,000 of costs related to completing the Bupp
financing, which were recorded in other assets. The discounts and the
deferred debt issuance costs were being amortized over the term of the note
using the effective interest method.
F-49
In
December 2007, we executed a Securities Purchase Agreement (SPA) with
Platinum Montaur Life Sciences, LLC (Montaur), pursuant to which we issued
Montaur: (1) a 10% Series A Convertible Senior Secured Promissory Note
in the principal amount of $7,000,000, due December 26, 2011 (the
Series A Note); and (2) a Series W Warrant to purchase 6,000,000
shares of our common stock at an exercise price of $0.32 per share, expiring in
December 2012 (the Series W Warrant). Additionally, pursuant to the
terms of the SPA: (1) upon commencement of the Phase 3 clinical studies of
Lymphoseek, in April 2008, we issued Montaur a 10% Series B Convertible
Senior Secured Promissory Note, due December 26, 2011 (the Series B
Note, and hereinafter referred to collectively with the Series A Note as
the Montaur Notes), and a five-year warrant to purchase an amount of common
stock equal to the number of shares into which Montaur may convert the
Series B Note, at an exercise price of 115% of the conversion price of the
Series B Note (the Series X Warrant), for an aggregate purchase price
of $3,000,000; and (2) upon obtaining 135 vital blue dye lymph nodes from
patients with breast cancer or melanoma who completed surgery with the injection
of the drug in a Phase 3 clinical trial of Lymphoseek in December 2008, we
issued Montaur 3,000 shares of our 8% Series A Cumulative Convertible
Preferred Stock (the Preferred Stock) and a five-year warrant to purchase an
amount of common stock equal to the number of shares into which Montaur may
convert the Preferred Stock, at an exercise price of 115% of the conversion
price of the Preferred Stock (the Series Y Warrant, and hereinafter
referred to collectively with the Series W Warrant and Series X
Warrant as the Montaur Warrants), also for an aggregate purchase price of
$3,000,000.
The
conversion option and two put options associated with the Series A Note were
considered derivative instruments at origination and were required to be
bifurcated from the Series A Note and accounted for separately. In
addition, the Series W Warrant was accounted for as a liability at origination
due to the existence of certain provisions in the instrument. As a
result, we recorded a total aggregate derivative liability of $2.6 million on
the date of issuance of the Series A Note and Series W Warrant. The
fair value of the bifurcated conversion option and put options was approximately
$1.45 million on the date of issuance. The fair value of the Series W
Warrant was approximately $1.15 million on the date of issuance and was
determined using the Black-Scholes option pricing model with the following
assumptions: an average risk-free interest rate of 3.7%, volatility
of 94% and no expected dividend rate.
On March
14, 2008, Neoprobe and Montaur executed amendments to the Series A Note and the
Series W Warrant. The amendments eliminated certain minor cash-based
penalty provisions in the Series A Note and Series W Warrant which entitled the
holders to different compensation than our common shareholders under certain
circumstances and qualifying Triggering Events. The provisions that
were eliminated and/or modified were the provisions that led to the derivative
accounting treatment for the embedded conversion option in the Series A Note and
the Series W Warrant. The effect of marking the conversion option and
warrant liabilities to market at March 14, 2008 resulted in an increase in the
estimated fair value of the conversion option and warrant liabilities of
$381,000 which was recorded as non-cash expense during the first quarter of
2008. The estimated fair value of the conversion option and warrant
liabilities of $2.9 million was reclassified to additional paid-in capital
during the first quarter of 2008 as a result of the amendments. The
estimated fair value of the put option liabilities related to the Series A Note
of $360,000 remained classified as derivative liabilities. The
initial aggregate fair value of the conversion option and the put options
related to the Series A Note and the fair value of the Series W Warrant of $2.6
million were recorded as a discount on the note and are being amortized over the
term of the note using the effective interest method.
In April
2008, we completed the second closing under the December 2007 Montaur SPA, as
amended, pursuant to which we issued Montaur a 10% Series B
Convertible Senior Secured Promissory Note in the principal amount of
$3,000,000, due December 26, 2011; and a Series X Warrant to purchase
8,333,333 shares of our common stock at an exercise price of $0.46 per share,
expiring in April 2013. The two put options related to the Series B
Note were considered derivative instruments at origination and were required to
be bifurcated from the Series B Note and accounted for
separately. The fair value of the bifurcated put options was
approximately $258,000 on the date of issuance. The value of the
beneficial conversion feature of the Series B Note was estimated at $1.44
million based on the effective conversion price at the date of
issuance. The fair value of the Series X Warrant was approximately
$1.28 million on the date of issuance and was determined using the Black-Scholes
option pricing model with the following assumptions: an average
risk-free interest rate of 2.6%, volatility of 95% and no expected dividend
rate. The initial aggregate fair value of the beneficial conversion
feature and put options related to the Series B Note, and the fair value of the
Series X Warrant of $2.98 million were recorded as discounts on the note and are
being amortized over the term of the note using the effective interest
method. We incurred $188,000 of costs related to completing the
second Montaur financing, which were recorded in other assets on the
consolidated balance sheet. The deferred financing costs are being
amortized using the effective interest method over the term of the
note.
F-50
In
December 2008, after we obtained 135 vital blue dye lymph nodes from patients
who had completed surgery and the injection of Lymphoseek in a Phase 3 clinical
trial in patients with breast cancer or melanoma, we issued Montaur 3,000 shares
of our 8% Preferred Stock and a five-year Series Y warrant to purchase 6,000,000
shares of our common stock, at an exercise price of $0.575 per share, for an
aggregate purchase price of $3,000,000. The “Liquidation Preference
Amount” for the Preferred Stock is $1,000 and the “Conversion Price” of the
Preferred Stock was set at $0.50 on the date of issuance, thereby making the
shares of Preferred Stock convertible into an aggregate 6,000,000 shares of our
common stock, subject to adjustment as described in the Certificate of
Designations. The value of the beneficial conversion feature of the
Preferred Stock was estimated at $1.55 million based on the effective conversion
price at the date of issuance. The put option was considered a
derivative instrument at origination and was required to be bifurcated from the
Preferred Stock and accounted for separately. The fair value of the
bifurcated put option was approximately $216,000 on the date of
issuance. The fair value of the Series Y warrant was approximately
$2.07 million on the date of issuance and was determined using the Black-Scholes
option pricing model with the following assumptions: an average
risk-free interest rate of 1.7%, volatility of 74% and no expected dividend
rate. The relative fair value of the warrant of $1.13 million was
recorded to equity.
The
Preferred Stock was classified as temporary equity as the shares are subject to
redemption under the contingent put option. The initial intrinsic
value of the beneficial conversion feature and put option related to the
Preferred Stock and the initial relative fair value of the Series Y warrant of
$1.13 million were recorded as deemed distributions and added to the accumulated
deficit. We incurred $180,000 of costs related to completing the
third Montaur financing, which were recorded as a reduction of additional
paid-in capital on the consolidated balance sheet.
In
connection with the SPA, Montaur requested that the term of the $1.0 million
Bupp Note be extended approximately 42 months or until at least one day
following the maturity date of the Montaur Notes. In consideration
for the Bupp Investors’ agreement to extend the term of the Bupp Note pursuant
to an Amendment to the Bupp Purchase Agreement, dated December 26, 2007, we
agreed to provide security for the obligations evidenced by the Amended 10%
Convertible Note in the principal amount of $1,000,000, due December 31,
2011, executed by Neoprobe in favor of the Bupp Investors (the Amended Bupp
Note), under the terms of a Security Agreement, dated December 26, 2007, by
and between Neoprobe and the Bupp Investors (the Bupp Security
Agreement). As further consideration for extending the term of the
Bupp Note, we issued the Bupp Investors Series V Warrants to purchase 500,000
shares of our common stock at an exercise price of $0.32 per share, expiring in
December 2012. The fair value of the warrants issued to the Bupp
Investors was approximately $96,000 on the date of issuance and was determined
using the Black-Scholes option pricing model with the following
assumptions: an average risk-free interest rate of 3.72%, volatility
of 94% and no expected dividend rate. The fair value of the warrants
was recorded as a discount on the note and is being amortized over the term of
the note using the effective interest method. We treated the
amendment to the Bupp Note as an extinguishment of debt for accounting
purposes. As such, the remaining discount resulting from the value of
the beneficial conversion feature and the fair value of the warrants and the
remaining unamortized deferred financing costs associated with the original note
were written off as a loss on extinguishment of debt in December
2007.
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 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 is convertible at $0.9722 per share. The amendments
also eliminated certain price reset features of the Montaur Notes, the Preferred
Stock and the Montaur Warrants that had created significant non-cash derivative
liabilities on the Company’s balance sheet. 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.
F-51
The
changes in terms of the Montaur Notes, the Preferred Stock and the Montaur
Warrants were treated as an extinguishment of debt for accounting
purposes. The Company recorded an additional $5.6 million in
mark-to-market adjustments related to the increase in the Company’s common stock
from June 30 to July 24, 2009. As a result of the extinguishment
treatment associated with the elimination of the price reset features, the
Company also recorded $16.2 million in non-cash loss on the extinguishment and
reclassified $27.0 million in derivative liabilities to additional paid-in
capital. Following the extinguishment, the Company’s balance sheet
reflects the face value of the $10 million due to Montaur pursuant to the
Montaur Notes.
During
the three-month periods ended September 30, 2009 and 2008, we recorded interest
expense of $47,000 and $154,000, respectively, related to amortization of the
debt discount related to our convertible notes. During the nine-month
periods ended September 30, 2009 and 2008, we recorded interest expense of
$353,000 and $433,000, respectively, related to amortization of the debt
discount related to our convertible notes. During the three-month
periods ended September 30, 2009 and 2008, we recorded interest expense of
$9,000 and $28,000, respectively, related to amortization of the deferred
financing costs related to our convertible notes. During the
nine-month periods ended September 30, 2009 and 2008, we recorded interest
expense of $67,000 and $80,000, 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, which would qualify as a scope
exception. As a result of adopting the new standard, certain embedded
features of our convertible securities, as well as warrants to purchase our
common stock, that were previously treated as equity have been considered
derivative liabilities since the beginning of 2009. We do not use
derivative instruments for hedging of market risks or for trading or speculative
purposes.
F-52
The
impact of the January 1, 2009 adoption of the new accounting standard is
summarized in the following table:
December 31,
2008 |
Impact of
New Accounting Standard Adoption |
January 1,
2009
|
||||||||||
Other
assets
|
$ | 594,449 | $ | 2,104 | $ | 596,553 | ||||||
Total
assets
|
$ | 9,619,450 | $ | 9,621,554 | ||||||||
Notes
payable to investors, net of discounts
|
$ | 4,998,851 | (54,396 | ) | $ | 4,944,455 | ||||||
Derivative
liabilities
|
853,831 | 13,017,540 | 13,871,371 | |||||||||
Total
liabilities
|
$ | 9,645,175 | $ | 22,608,319 | ||||||||
Additional
paid-in capital
|
$ | 145,742,044 | (8,948,089 | ) | $ | 136,793,955 | ||||||
Accumulated
deficit
|
(148,840,015 | ) | (4,012,951 | ) | (152,852,966 | ) | ||||||
Total
stockholders’ deficit
|
$ | (3,025,725 | ) | $ | (15,986,765 | ) |
Convertible Notes – other
assets increased $2,104, notes payable to investors, net of discount, increased
$518,229, derivative liabilities increased $4,146,392, additional paid-in
capital decreased $2,843,781, and accumulated deficit increased
$1,818,736.
Convertible Preferred Stock –
derivative liabilities increased $1,158,095, additional paid-in capital
decreased $1,550,629, and accumulated deficit decreased $392,534.
Warrants – notes payable to
investors, net of discount, decreased $572,625, derivative liabilities increased
$7,713,053, additional paid-in capital decreased $4,553,679, and accumulated
deficit increased $2,586,749.
The
estimated fair values of the derivative liabilities are recorded as non-current
liabilities on the consolidated balance sheet. Changes in the
estimated fair values of the derivative liabilities are recorded in the
consolidated statement of operations. The effect of marking
the derivative liabilities to market at March 31, 2009 resulted in a net
decrease in the estimated fair values of the derivative liabilities of $1.5
million which was recorded as non-cash income during the first quarter of
2009. The effect of marking the derivative liabilities to market at
June 30, 2009 resulted in a net increase in the estimated fair values of the
derivative liabilities of $13.2 million which was recorded as non-cash expense
during the second quarter of 2009. 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 Preferred Stock, and the Montaur Warrants. As a result,
the Company recorded an additional $5.6 million in mark-to-market adjustments
related to the increase in the Company’s common stock from June 30 to July 24,
2009, and reclassified $27.0 million in derivative liabilities related to the
Montaur Notes, the 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 effect of marking the
Company’s remaining derivative liabilities to market at September 30, 2009
resulted in a net increase in the estimated fair values of the derivative
liabilities of $705,000 which was recorded as non-cash expense during the third
quarter of 2009. The total estimated fair value of the derivative
liabilities was $2.7 million as of September 30, 2009. See Note
10.
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.
F-53
On July
24, 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.
At
September 30, 2009, there are 18.4 million warrants outstanding to purchase our
common stock. The warrants are exercisable at prices ranging from
$0.31 to $0.97 per share with a weighted average exercise price of $0.48 per
share.
13.
|
Income
Taxes
|
We
account for income taxes in accordance with current accounting standards, which
include guidance on the accounting for uncertainty in income taxes recognized in
the financial statements. Such standards also prescribe a recognition
threshold and measurement model for the financial statement recognition of a tax
position taken, or expected to be taken, and provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. No adjustment was made to the beginning
retained earnings balance as the ultimate deductibility of all tax positions is
highly certain, although there is uncertainty about the timing of such
deductibility. As a result, no liability for uncertain tax positions
was recorded as of September 30, 2009. Should we need to accrue
interest or penalties on uncertain tax positions, we would recognize the
interest as interest expense and the penalties as a selling, general and
administrative expense.
14.
|
Segment
Information
|
We report
information about our operating segments using the “management approach” in
accordance with current accounting standards. This information
is based on the way management organizes and reports the segments within the
enterprise for making operating decisions and assessing
performance. Our reportable segments are identified based on
differences in products, services and markets served. There were no
inter-segment sales. We own or have rights to intellectual property
involving two primary types of medical device products, including oncology
instruments currently used primarily in the application of sentinel lymph node
biopsy, and blood flow measurement devices. We also own or have
rights to intellectual property related to several drug and therapy
products.
F-54
The
information in the following table is derived directly from each reportable
segment’s financial reporting.
($
amounts in thousands)
Three
Months Ended
September
30, 2009
|
Oncology
Devices |
Blood
Flow Devices |
Drug
and
Therapy Products |
Corporate
|
Total
|
|||||||||||||||
Net
sales:
|
||||||||||||||||||||
United
States1
|
$ | 2,477 | $ | — | $ | — | $ | — | $ | 2,477 | ||||||||||
International
|
85 | — | — | — | 85 | |||||||||||||||
License
and other 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 operations
|
1,382 | — | (986 | ) | (720 | ) | (324 | ) | ||||||||||||
Other
income (expenses)4
|
— | — | — | (22,904 | ) | (22,904 | ) | |||||||||||||
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 | |||||||||||||||
($
amounts in thousands)
Three
Months Ended
September
30, 2008
|
Oncology
Devices |
Blood
Flow Devices |
Drug
and
Therapy Products |
Corporate
|
Total
|
|||||||||||||||
Net
sales:
|
||||||||||||||||||||
United
States1
|
$ | 1,630 | $ | — | $ | — | $ | — | $ | 1,630 | ||||||||||
International
|
85 | — | — | — | 85 | |||||||||||||||
Research
and development expenses
|
267 | — | 1,474 | — | 1,741 | |||||||||||||||
Selling,
general and administrative expenses, excluding depreciation and
amortization2
|
7 | — | — | 656 | 663 | |||||||||||||||
Depreciation
and amortization
|
32 | — | 1 | 12 | 45 | |||||||||||||||
Income
(loss) from operations3
|
768 | — | (1,475 | ) | (668 | ) | (1,375 | ) | ||||||||||||
Other
income (expenses)4
|
— | — | — | (374 | ) | (374 | ) | |||||||||||||
Loss
from discontinued operations
|
— | (141 | ) | — | (141 | ) | ||||||||||||||
Total
assets, net of depreciation and amortization:
|
||||||||||||||||||||
United
States operations
|
1,796 | — | 26 | 3,537 | 5,359 | |||||||||||||||
Discontinued
operations
|
— | 1,990 | — | — | 1,990 | |||||||||||||||
Capital
expenditures
|
2 | — | — | 51 | 53 |
F-55
($ amounts in thousands)
Nine Months Ended September 30,
2009
|
Oncology
Devices
|
Blood
Flow
Devices
|
Drug and
Therapy
Products
|
Corporate
|
Total
|
|||||||||||||||
Net
sales:
|
||||||||||||||||||||
United
States1
|
$ | 6,745 | $ | — | $ | — | $ | — | $ | 6,745 | ||||||||||
International
|
253 | — | — | — | 253 | |||||||||||||||
License
and other 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 operations
|
3,683 | — | (2,876 | ) | (2,212 | ) | (1,405 | ) | ||||||||||||
Other
income (expenses)4
|
— | — | — | (36,016 | ) | (36,016 | ) | |||||||||||||
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 |
($ amounts in thousands)
Nine Months Ended September 30,
2008
|
Oncology
Devices
|
Blood
Flow
Devices
|
Drug and
Therapy
Products
|
Corporate
|
Total
|
|||||||||||||||
Net
sales:
|
||||||||||||||||||||
United
States1
|
$ | 5,513 | $ | — | $ | — | $ | — | $ | 5,513 | ||||||||||
International
|
117 | — | — | — | 117 | |||||||||||||||
Research
and development expenses
|
718 | — | 2,366 | — | 3,084 | |||||||||||||||
Selling,
general and administrative expenses, excluding depreciation and
amortization2
|
7 | — | — | 2,122 | 2,129 | |||||||||||||||
Depreciation
and amortization
|
86 | — | 1 | 32 | 119 | |||||||||||||||
Income
(loss) from operations3
|
2,694 | — | (2,367 | ) | (2,154 | ) | (1,827 | ) | ||||||||||||
Other
income (expenses)4
|
— | — | — | (1,649 | ) | (1,649 | ) | |||||||||||||
Loss
from discontinued operations
|
— | (460 | ) | — | — | (460 | ) | |||||||||||||
Total
assets, net of depreciation and amortization:
|
||||||||||||||||||||
United
States operations
|
1,796 | — | 26 | 3,537 | 5,359 | |||||||||||||||
Discontinued
operations
|
— | 1,990 | — | — | 1,990 | |||||||||||||||
Capital
expenditures
|
4 | — | 18 | 76 | 98 |
1
|
All
sales to EES are made in the United States. EES 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.
|
3
|
Income
(loss) from operations does not reflect the allocation of general and
administrative expenses, excluding depreciation and amortization, to the
operating segments.
|
4
|
Amounts
consist primarily of interest income, interest expense and changes in
derivative liabilities which are not currently allocated to our individual
reportable segments.
|
F-56
15.
|
Supplemental
Disclosure for Statements of Cash
Flows
|
During
the nine-month periods ended September 30, 2009 and 2008, we paid interest
aggregating $163,000 and $753,000, respectively. During the
nine-month periods ended September 30, 2009 and 2008, we transferred $33,000 and
$127,000, respectively, of inventory to fixed assets related to the creation and
maintenance of a pool of service loaner equipment. During the
nine-month period ended September 30, 2008, we purchased equipment under a
capital lease totaling $20,000. During the nine-month period ended
September 30, 2009, we issued 957,708 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, 2009 and
2008, we issued 80,883 and 114,921 shares of common stock, respectively, as
matching contributions to our 401(k) Plan.
16.
|
Subsequent
Event
|
On
October 30, 2009, the Compensation, Nominating and Governance (CNG) Committee of
the Board of Directors granted 373,000 stock options to Neoprobe’s officers and
employees with an exercise price of $1.10. Also on October 30, 2009,
the CNG Committee granted 760,000 shares of restricted stock to Neoprobe’s
officers and directors that will vest based on certain defined performance
objectives. See Note 4.
F-57
PART
II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
following table sets forth the expenses expected to be incurred in connection
with the issuance and distribution of the securities being
registered.
SEC
Registration
|
$ | 509 | ||
Legal
Fees and Expenses*
|
$ | 15,000 | ||
Accounting
Fees*
|
$ | 20,000 | ||
Miscellaneous*
|
$ | 1,491 | ||
Total
|
$ | 37,000 |
* Estimated
Item
14. Indemnification of Directors and Officers.
Section
145 of the General Corporation Law of the State of Delaware (Section 145)
provides that directors and officers of Delaware corporations may, under certain
circumstances, be indemnified against expenses (including attorneys’ fees) and
other liabilities actually and reasonably incurred by them as a result of any
suit brought against them in their capacity as a director or officer, if they
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful. Section 145 also provides that directors and officers may
also be indemnified against expenses (including attorneys’ fees) incurred by
them in connection with a derivative suit if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, except that no indemnification may be made without court
approval if such person was adjudged liable to the corporation.
Article V
of the company’s By-laws contains provisions which require that the company
indemnify its officers, directors, employees and agents, in substantially the
same language as Section 145.
Article
Nine, section (b), of the company’s Certificate of Incorporation further
provides that no director will be personally liable to the company or its
stockholders for monetary damages or for any breach of fiduciary duty except for
breach of the director’s duty of loyalty to the company or its stockholders, for
acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, pursuant to Section 174 of the Delaware General
Corporation Law (which imposes liability in connection with the payment of
certain unlawful dividends, stock purchases or redemptions), or any amendment or
successor provision thereto, or for any transaction from which a director
derived an improper personal benefit.
Item
15. Recent Sales of Unregistered Securities
During
2008, certain investors and placement agents who received warrants to purchase
our common stock in connection with a November 2003 financing exercised a total
of 1,354,349 warrants on a cashless basis in exchange for issuance of 270,870
shares of our common stock. During 2008, an additional outside investor who
received warrants to purchase our common stock in connection with the November
2003 financing exercised a total of 200,200 Series R warrants in exchange for
issuance of 200,200 shares of our common stock, resulting in gross proceeds of
$56,056. In addition, certain outside investors who also received warrants to
purchase our common stock in connection with the November 2003 financing
exercised a total of 2,658,698 Series R warrants and 644,565 Series S warrants
on a cashless basis in exchange for issuance of 1,289,990 shares of our common
stock. The issuances of the shares and warrants to the investors and
the placement agents were exempt from registration under Sections 4(2) and 4(6)
of the Securities Act and Regulation D.
II-1
In
December 2006, we entered into a common stock purchase agreement with Fusion
Capital Fund II, LLC (Fusion), which we subsequently amended effective December
24, 2008. We have authorized up to a total of 18,222,671 shares of
our common stock for sale to Fusion under the agreement which includes 7,568,671
shares already purchased by Fusion. Under the terms of the agreement,
in December 2006 we issued 720,000 shares as a commitment fee and in December
2008 we issued an additional 360,000 shares in consideration for Fusion’s
agreement to enter into the amendment, in reliance upon an exemption from
registration provided by Sections 4(2) and 4(6) of the Securities Act and
Regulation D. We have issued 234,000 shares of our common stock as an
additional commitment fee as shares were sold to Fusion, and up to an additional
486,000 shares of our common stock may be issued to Fusion as additional
commitment fee shares. The additional 486,000 shares will be issued
pro rata as we sell our common stock to Fusion under the agreement, resulting in
a total commitment fee of 1,800,000 shares of our common stock if the entire
remaining available amount of $10,050,000.73 is sold. The price of shares sold
to Fusion will generally be based on market prices for purchases that are not
subject to the floor price of $0.20 per share. During 2008 and 2007,
we sold a total of 0 and 7,360,338 shares of common stock under the agreement
and realized gross proceeds of $0 and $1,900,000 from such sales,
respectively. Also during 2008 and 2007, we issued Fusion 0 and
228,000, respectively, of common stock as additional commitment fees related to
such sales. During 2009 to date, we have sold no shares to Fusion and
have issued them no common stock as commitment fees.
In March
2007, February 2008, and February 2009, our Board of Directors authorized the
issuance of 107,313, 114,921 and 80,883 shares, respectively, of
common stock to the trustees of our 401(k) employee benefit plan (the Plan)
without registration. Such issuance is exempt from registration under
the Securities Act under Section 3(a)(2). The Plan is a pension,
profit sharing or stock bonus plan that is qualified under Section 401 of the
Internal Revenue Code. The assets of the Plan are held in a single
trust fund for the benefit of our employees, which does not hold assets for the
benefit of the employees of any other employer. All of the
contributions to the Plan from our employees have been invested in assets other
than our common stock. We have contributed all of the Neoprobe common
stock held by the Plan as a matching contribution that has been less in value at
the time it was contributed to the Plan than the employee contributions that it
matches.
In May
2007, we entered into an agreement with an investment banking firm in which we
agreed to issue a total of 200,000 shares of our common stock over a 12-month
period in exchange for certain advisory services. In July 2007, we
issued 50,000 shares of our common stock to the investment banking firm as
partial payment for their services under the agreement. The issuance
of these shares was exempt from registration under Sections 4(2) and 4(6) of the
Securities Act and Regulation D.
In July
2007, David C. Bupp, our President and CEO, and certain members of his family
(the “Bupp Investors”) purchased a $1.0 million convertible note (the “Bupp
Note”) and warrants. The note bears interest at 10% per annum, had an
original term of one year and is repayable in whole or in part with no
penalty. The note is convertible into shares of our common stock at a
price of $0.31 per share, a 25% premium to the average closing market price of
our common stock for the 5 days preceding the closing of the
transaction. As part of this transaction, we issued the investors
500,000 Series V warrants to purchase our common stock at an exercise price of
$0.31 per share, expiring in July 2012. The issuances of the shares
and warrants to the Bupp Investors were exempt from registration under Sections
4(2) and 4(6) of the Securities Act and Regulation D. In connection
with the issuances of the shares and warrants, we agreed to file a registration
statement when demanded by the Bupp Investors under which the Bupp Investors
would be able to resell the underlying shares of common stock to the
public.
On
December 26, 2007, we entered into a Securities Purchase Agreement with
Platinum-Montaur Life Sciences, LLC (“Montaur”), pursuant to which we issued
Montaur a 10% Series A Convertible Senior Secured Promissory Note in the
principal amount of $7,000,000, due December 26, 2011 (the “Series A Note”) and
a five-year Series W warrant to purchase 6,000,000 shares of our common stock,
$.001 par value per share (“Common Stock”), at an exercise price of $0.32 per
share. On April 16, 2008, following receipt by the Company
of clearance by FDA to commence a Phase 3 clinical trial for Lymphoseek in
patients with breast cancer or melanoma, we amended the Stock Purchase Agreement
and issued Montaur a 10% Series B Convertible Senior Secured Promissory Note in
the principal amount of $3,000,000, also due December 26, 2011 (the “Series B
Note,” and hereinafter referred to collectively with the Series A Note as the
“Montaur Notes”), and a five-year Series X warrant to purchase 8,333,333 shares
of our Common Stock at an exercise price of $0.46 per share. On December 5,
2008, after the Company obtained 135 vital blue dye lymph nodes from patients
who had completed surgery and the injection of the drug in a Phase 3 clinical
trial of Lymphoseek in patients with breast cancer or melanoma, we issued
Montaur 3,000 shares of our Series A 8% Cumulative Convertible Preferred Stock
the “Preferred Stock”) and a five-year Series Y warrant (hereinafter referred to
collectively with the Series W warrant and Series X warrant as the “Montaur
Warrants”) to purchase 6,000,000 shares of our Common Stock, at an exercise
price of $0.575 per share, also for an aggregate purchase price of $3,000,000.
The issuances of the Montaur Notes, the Preferred Stock and Series W, X and Y
Warrants were exempt from registration under Sections 4(2) and 4(6) of the
Securities Act and Regulation D.
II-2
On July
24, 2009, we entered into a Securities Amendment and Exchange Agreement (the
“Amendment Agreement”) with Montaur, pursuant to which Montaur agreed to the
amendment and restatement of the terms of the Montaur Notes, the Series W, X and
Y Warrants and the Preferred Stock, to remove price-based anti-dilution
adjustment provisions that had created a significant non-cash derivative
liability on the Company’s balance sheet. Upon the surrender of the Montaur
Notes and the Series W, X, and Y Warrants, the Company issued to Montaur: (a)
the Company’s Amended and Restated 10% Series A Convertible Senior Secured
Promissory Note in the principal amount of $7,000,000, due December 26, 2011
(the “Amended Series A Note”); (b) the Company’s Amended and Restated 10% Series
B Convertible Senior Secured Promissory Note in the principal amount of
$3,000,000, due December 26, 2011 (the “Amended Series B Note,” and together
with the Amended Series A Note the “Amended Montaur Notes”); (c) the
Company’s Amended and Restated Series W Warrant to purchase shares of common
stock of the Company (the “Amended Series W Warrant”); (d) the Company’s Amended
and Restated Series X Warrant to purchase shares of common stock of the Company
(the “Amended Series X Warrant”); (e) the Company’s Amended and Restated Series
Y Warrant to purchase shares of common stock of the Company (the “Amended Series
Y Warrant”); and (f) and in consideration for
the agreement of Montaur to enter into the Amendment Agreement, a Series AA
Warrant to purchase 2,400,000 shares of our common stock at an exercise price of
$0.97 per share (the “Series AA Warrant,” and together with the Amended Series W
Warrant, Amended Series X Warrant and Amended Series Y Warrant, the “Amended
Montaur Warrants”). The issuances of the
Amended Montaur Notes, the Preferred Stock and Amended Montaur Warrants were
exempt from registration under Sections 4(2) and 4(6) of the Securities Act and
Regulation D.
Montaur
may convert the Amended Series A Note into shares of Common Stock at the
conversion price of $0.26 per share. Montaur may convert the Amended Series B
Note into shares of Common Stock at the conversion price of $0.36 per share.
Provided we have satisfied certain conditions stated therein, we may elect to
make payments of interest due under the Amended Montaur Notes in registered
shares of Common Stock. If we choose to make interest payments in shares of
Common Stock, the number of shares of Common Stock to be applied against any
such interest payment will be determined by reference to the quotient of (a) the
applicable interest payment divided by (b) 90% of the average daily volume
weighted average price of our Common Stock on the OTC Bulletin Board (or
national securities exchange, if applicable) as reported by Bloomberg Financial
L.P. for the five days upon which our Common Stock is traded on the OTC Bulletin
Board immediately preceding the date of the interest payment.
Montaur
may convert each share of the Preferred Stock into a number of shares of our
common stock equal to the quotient of: (1) the Liquidation Preference Amount of
the shares of Preferred Stock by; (2) the Conversion Price. The “Liquidation
Preference Amount” for the Preferred Stock is $1,000 and the “Conversion Price”
of the Preferred Stock was set at $0.50 on the date of issuance, thereby making
the shares of Preferred Stock convertible into an aggregate 6,000,000 shares of
our Common Stock, subject to adjustment as
described in the Certificate of Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series A 8% Cumulative
Convertible Preferred Stock. We may elect to pay dividends due to Montaur
on the shares of Preferred Stock in registered shares of Common Stock. The
number of shares of Common Stock to be applied against any such dividend payment
will be determined by reference to the quotient of (a) the applicable dividend
payment by (b) 90% of the average daily volume weighted average price of our
Common Stock on the OTC Bulletin Board (or national securities exchange, if
applicable) as reported by Bloomberg Financial L.P. for the five days upon which
our Common Stock is traded on the OTC Bulletin Board immediately preceding the
date of the dividend payment.
II-3
Pursuant
to the terms of a Registration Rights Agreement, dated December 26, 2007, as
amended by the Amendment to Registration Rights Agreement, dated February 7,
2008, Second Amendment to Registration Rights Agreement, dated April 16, 2008,
Third Amendment to Registration Rights Agreement, dated July 10, 2008, the
Fourth Amendment to Registration Rights Agreement, dated December 5, 2008, and
the Fifth Amendment to Registration Rights Agreement, dated December 21, 2009,
we have agreed to register the resale of: (i) 3,600,000 shares of Common Stock
issuable upon conversion of a portion of the Series A Note; (ii) 6,000,000
shares of Common Stock issued upon exercise of the Amended Series Y Warrant;
(iii) 2,400,000 shares of common stock issuable upon the exercise of the Series
AA Warrant, and (iv) 3,500,000 shares of Common Stock issued or issuable as
interest or dividends on the Amended Montaur Notes and the Preferred Stock.
Additionally, we have agreed that within thirty-five days of receipt from
Montaur of written request therefor, we will prepare and file an additional
“resale” registration statement providing for the resale of: (i) the remaining
shares of Common Stock issuable upon the conversion of the Amended Series A
Note; (ii) the shares of Common Stock issuable upon the exercise of the Amended
Series W Warrant; (iii) the shares of Common Stock issuable upon the conversion
of the Amended Series B Note; (iv) the shares of Common Stock issuable upon the
exercise of the Amended Series X Warrant; and (v) the shares of Common Stock
issuable upon the conversion of the Preferred Stock, provided, however, that we
are not required to file such additional registration statement, or may exclude
shares from such additional registration statement, if we believe in good faith,
based upon advice from the Securities and Exchange Commission’s Staff, that
application of Rule 415 would not permit registration of all or the excluded
portion of such shares.
WBB
Securities, LLC (WBB) acted as placement agent in connection with the
transaction between Neoprobe and Montaur. In consideration for its
services as placement agent Neoprobe paid WBB a fee equal to 6% of the gross
proceeds received by Neoprobe from the Montaur financing.
In
connection with the Montaur Purchase Agreement, Montaur requested that the term
of the $1.0 million Bupp Note be extended until at least one day following the
maturity date of the Montaur Notes. In consideration for the Bupp
Investors’ agreement to extend the term of the Bupp Note pursuant to an
Amendment to the Bupp Purchase Agreement, dated December 26, 2007, we
agreed to provide security for the obligations evidenced by the Amended 10%
Convertible Note in the principal amount of $1,000,000, due December 31,
2011, executed by Neoprobe in favor of the Bupp Investors (the Amended Bupp
Note), under the terms of a Security Agreement, dated December 26, 2007, by
and between Neoprobe and the Bupp Investors (the Bupp Security
Agreement). This security interest is subordinate to the security
interest of Montaur. As further consideration for extending the term
of the Bupp Note, we issued the Bupp Investors 500,000 Series V warrants to
purchase our common stock at an exercise price of $0.32 per share, expiring in
December 2012. The issuance of the additional warrants to the Bupp
Investors was exempt from registration under Sections 4(2) and 4(6) of the
Securities Act and Regulation D.
During
2008, David C. Bupp, our President and CEO, who received warrants in connection
with an April 2003 financing, exercised 375,000 Series Q warrants in exchange
for issuance of 375,000 shares of our common stock, resulting in gross proceeds
of $48,750. In addition, an outside investor, who also received
warrants in connection with an April 2003 financing, exercised 500,000 Series Q
warrants in exchange for issuance of 500,000 shares of our common stock,
resulting in gross proceeds of $65,000. The issuances of the warrants
to Mr. Bupp and the outside investor were exempt from registration under
Sections 4(2) and 4(6) of the Securities Act and Regulation D.
During
the three-month period ended March 31, 2009, we issued 152,066 shares of our
common stock in payment of January 2009 interest of $83,333 on the 10% Series A
and Series B Convertible Senior Secured Promissory Notes held by
Montaur. Also during the three-month period ended March 31, 2009, our
President and CEO, David C. Bupp, exercised a portion of his Series Q Warrant
and we issued 50,000 shares of our common stock in exchange for gross proceeds
of $25,000. During the three-month period ended June 30, 2009, we
issued 462,292 shares of our common stock in payment of March-May 2009 interest
of $250,000 on the 10% Series A and Series B Convertible Senior Secured
Promissory Notes held by Montaur. During the same period, we issued
171,549 shares of our common stock in payment of December-March 2009 dividends
of $258,000 on the 8% Series A Cumulative Convertible Preferred Stock held by
Montaur. Also during the three-month period ended June 30, 2009, a
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. During the same period, 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. During the
three-month period ended September 30, 2009, we issued 99,884 shares of our
common stock in payment of June 2009 interest of $83,333 on the 10% Series A and
Series B Convertible Senior Secured Promissory Notes held by
Montaur. During the same period, we issued 71,917 shares of our
common stock in payment of April-June 2009 dividends of $60,000 on the 8% Series
A Cumulative Convertible Preferred Stock held by Montaur. Also during
the three-month period ended September 30, 2009, Montaur exercised 6,000,000
Series Y Warrants in exchange for issuance of 6,000,000 shares of our common
stock, resulting in gross proceeds of $3,450,000, and we issued Montaur a Series
AA Warrant to purchase 2,400,000 shares of our common stock at an exercise price
of $0.97 per share, expiring in July 2014. The issuances of the
shares to Montaur, Mr. Bupp, the Bupp Investor, and the outside investors were
exempt from registration under Sections 4(2) and 4(6) of the Securities Act and
Regulation D promulgated thereunder.
II-4
Item
16. Exhibits.
Exhibit
Number
|
Exhibit Description
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of Neoprobe Corporation as
corrected February 18, 1994 and amended June 27, 1994, June 3, 1996, March
17, 1999, May 9, 2000, June 13, 2003, July 27, 2004, June 22, 2005 and
November 20, 2006 (incorporated by reference to Exhibit 3.1 to the
Company’s Registration Statement on Form SB-2 filed December 7,
2006).
|
|
3.2
|
Amended
and Restated By-Laws dated July 21, 1993, as amended July 18, 1995, May
30, 1996 and July 26, 2007 (filed as Exhibit 3.2 to the Company’s Current
Report on Form 8-K dated August 3, 2007, and incorporated herein by
reference).
|
|
4.1
|
Neoprobe
Corporation Second Amended and Restated Certificate of Designations,
Voting Powers, Preferences, Limitations, Restrictions, and Relative Rights
of Series A 8% Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed
July 29, 2009).
|
|
5.1
|
Opinion
of Porter, Wright, Morris & Arthur LLP (incorporated by reference to
Exhibit 5.1 to Post-effective Amendment No. 1 the Company’s Registration
Statement on Form S-1, filed January 7, 2009, Registration file No.
333-150650).
|
|
10.1
|
Amended
and Restated Stock Option and Restricted Stock Purchase Plan dated March
3, 1994 (incorporated by reference to Exhibit 10.2.26 to the Company’s
December 31, 1993 Form 10–K).
|
|
10.2
|
1996
Stock Incentive Plan dated January 18, 1996 as amended March 13, 1997
(incorporated by reference to Exhibit 10.2.37 to the Company’s December
31, 1997 Form 10–K).
|
|
10.3
|
Neoprobe
Corporation Second Amended and Restated 2002 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed June 27, 2008).
|
|
10.4
|
Form
of Stock Option Agreement under the Neoprobe Corporation Amended and
Restated 2002 Stock Incentive Plan (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed December 21,
2006).
|
|
10.5
|
Form
of Restricted Stock Award and Agreement under the Neoprobe Corporation
Amended and Restated 2002 Stock Incentive Plan (incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed January
9, 2008).
|
II-5
10.6
|
Form
of Employment Agreement between the Company and certain named executive
officers (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed December 23, 2008). This
Agreement is one of three substantially identical employment agreements
and is accompanied by a schedule which identifies material details in
which each agreement differs from the form filed
herewith.
|
|
10.7
|
Schedule
identifying material differences between the employment agreements
incorporated by reference as Exhibit 10.6 to this Registration Statement
on Form S-1 (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed December 23, 2008).
|
|
10.8
|
Employment
Agreement, commencing February 15, 2009, by and between the Company and
Frederick O. Cope, Ph.D. (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 17,
2009).
|
|
10.9
|
Technology
Transfer Agreement dated July 29, 1992 between the Company and The Dow
Chemical Corporation (portions of this Exhibit have been omitted pursuant
to a request for confidential treatment and have been filed separately
with the Commission) (incorporated by reference to Exhibit 10.10 to the
Company’s Form S-1 filed October 15, 1992).
|
|
10.10
|
Cooperative
Research and Development Agreement between the Company and the National
Cancer Institute (incorporated by reference to Exhibit 10.3.31 to the
Company’s September 30, 1995 Form 10–QSB).
|
|
10.11
|
License
dated May 1, 1996 between the Company and The Dow Chemical Company
(incorporated by reference to Exhibit 10.3.45 to the Company’s June 30,
1996 Form 10–QSB).
|
|
10.12
|
License
Agreement dated May 1, 1996 between the Company and The Dow Chemical
Company (portions of this Exhibit have been omitted pursuant to a request
for confidential treatment and have been filed separately with the
Commission) (incorporated by reference to Exhibit 10.3.46 to the Company’s
June 30, 1996 Form 10–QSB).
|
|
10.13
|
License
Agreement dated January 30, 2002 between the Company and the Regents of
the University of California, San Diego, as amended on May 27, 2003 and
February 1, 2006 (portions of this Exhibit have been omitted pursuant to a
request for confidential treatment and have been filed separately with the
Commission) (incorporated by reference to Exhibit 10.11 to the Company’s
Annual Report on Form 10-KSB filed March 31, 2006).
|
|
10.14
|
Evaluation
License Agreement dated March 31, 2005 between the Company and the Regents
of the University of California, San Diego (portions of this Exhibit have
been omitted pursuant to a request for confidential treatment and have
been filed separately with the Commission) (incorporated by reference to
Exhibit 10.12 to the Company’s Annual Report on Form 10-KSB filed March
31, 2006).
|
|
10.15
|
Distribution
Agreement between the Company and Ethicon Endo-Surgery, Inc. dated October
1, 1999 (portions of this Exhibit have been omitted pursuant to a request
for confidential treatment and have been filed separately with the
Commission) (incorporated by reference to Exhibit 10.13 to the Company’s
Annual Report on Form 10-KSB filed March 16, 2007).
|
|
10.16
|
First
Amendment to Distribution Agreement, dated December 14, 2007, by and
between the Company and Ethicon Endo-Surgery, Inc. (portions of this
Exhibit have been omitted pursuant to a request for confidential treatment
and have been filed separately with the Commission) (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed December 20,
2007).
|
II-6
10.17
|
Product
Supply Agreement between the Company and TriVirix International, Inc.,
dated February 5, 2004 (portions of this Exhibit have been omitted
pursuant to a request for confidential treatment and have been filed
separately with the Commission) (incorporated by reference to Exhibit
10.17 to the Company’s December 31, 2004 Form 10-KSB).
|
|
10.18
|
Supply
and Distribution Agreement, dated November 15, 2007, by and between the
Company and Cardinal Health 414, LLC (portions of this Exhibit have been
omitted pursuant to a request for confidential treatment and have been
filed separately with the Commission) (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November
21, 2007).
|
|
10.19
|
Warrant
to Purchase Common Stock of Neoprobe Corporation dated March 8, 2004
between the Company and David C. Bupp (incorporated by reference to
Exhibit 10.28 to the Company’s December 31, 2003 Form
10-KSB).
|
|
10.20
|
Registration
Rights Agreement dated April 2, 2003 between the Company, David C. Bupp
and Donald E. Garlikov (incorporated by reference to Exhibit 99(i) to the
Company’s Current Report on Form 8-K filed April 2,
2003).
|
|
10.21
|
Stock
Purchase Agreement dated October 22, 2003 between the Company and Bridges
& Pipes, LLC. This agreement is one of 21 substantially
identical agreements and is accompanied by a schedule identifying the
other agreements omitted and setting forth the material details in which
such documents differ from the one that is filed herewith (incorporated by
reference to Exhibit 10.32 to the Company’s registration statement on Form
SB-2 filed December 2, 2003).
|
|
10.22
|
Registration
Rights Agreement dated October 22, 2003 between the Company and Bridges
& Pipes, LLC. This agreement is one of 21 substantially
identical agreements and is accompanied by a schedule identifying the
other agreements omitted and setting forth the material details in which
such documents differ from the one that is filed herewith (incorporated by
reference to Exhibit 10.33 to the Company’s registration statement on Form
SB-2 filed December 2, 2003).
|
|
10.23
|
Series
R Warrant Agreement dated October 22, 2003 between the Company and Bridges
& Pipes, LLC. This agreement is one of 21 substantially
identical agreements and is accompanied by a schedule identifying the
other agreements omitted and setting forth the material details in which
such documents differ from the one that is filed herewith (incorporated by
reference to Exhibit 10.34 to the Company’s registration statement on Form
SB-2 filed December 2, 2003).
|
|
10.24
|
Series
S Warrant Agreement dated November 21, 2003 between the Company and
Alberdale Capital, LLC. This agreement is one of 7
substantially identical agreements and is accompanied by a schedule
identifying the other agreements omitted and setting forth the material
details in which such documents differ from the one that is filed herewith
(incorporated by reference to Exhibit 10.35 to the Company’s registration
statement on Form SB-2 filed December 2, 2003).
|
|
10.25
|
Common
Stock Purchase Agreement between the Company and Fusion Capital Fund II,
LLC dated December 1, 2006 (incorporated by reference to Exhibit 10.5 to
the Company’s Current Report on Form 8-K filed December 4,
2006).
|
|
10.26
|
First
Amendment to Common Stock Purchase Agreement between the Company and
Fusion Capital Fund II, LLC, dated December 24, 2008 (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed December 31,
2008).
|
II-7
10.27
|
Registration
Rights Agreement dated December 1, 2006, between the Company and Fusion
Capital Fund II, LLC (incorporated by reference to Exhibit 10.6 to the
Company’s Current Report on Form 8-K filed December 4,
2006).
|
|
10.28
|
10%
Convertible Note Purchase Agreement, dated July 3, 2007, between the
Company and David C. Bupp, Cynthia B. Gochoco and Walter H. Bupp, as joint
tenants with right of survivorship (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed July 9,
2007).
|
|
10.29
|
Amendment
to Convertible Note Purchase Agreement, dated December 26, 2007, between
the Company and David C. Bupp, Cynthia B. Gochoco and Walter H. Bupp, as
joint tenants with right of survivorship (incorporated by reference to
Exhibit 10.10 to the Company’s Current Report on Form 8-K filed January 2,
2008).
|
|
10.30
|
Neoprobe
Corporation 10% Convertible Promissory Note Due July 8, 2007, executed in
favor of David C. Bupp, Cynthia B. Gochoco and Walter H. Bupp, as joint
tenants with right of survivorship (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed July 9,
2007).
|
|
10.31
|
Amended
Neoprobe Corporation 10% Convertible Promissory Note Due December 31,
2011, executed in favor of David C. Bupp, Cynthia B. Gochoco and Walter H.
Bupp, as joint tenants with right of survivorship (incorporated by
reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K
filed January 2, 2008).
|
|
10.32
|
Security
Agreement, dated December 26, 2007, by and between the Company and David
C. Bupp, Cynthia B. Gochoco and Walter H. Bupp, as joint tenants with
right of survivorship (incorporated by reference to Exhibit 10.12 to the
Company’s Current Report on Form 8-K filed January 2,
2008).
|
|
10.33
|
Series
V Warrant to Purchase Common Stock of Neoprobe Corporation issued to David
C. Bupp, Cynthia B. Gochoco and Walter H. Bupp, as joint tenants with
right of survivorship (incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed July 9,
2007).
|
|
10.34
|
Additional
Series V Warrant to Purchase Common Stock of Neoprobe Corporation issued
to David C. Bupp, Cynthia B. Gochoco and Walter H. Bupp, as joint tenants
with right of survivorship (incorporated by reference to Exhibit 10.13 to
the Company’s Current Report on Form 8-K filed January 2,
2008).
|
|
10.35
|
Form
of Series U Warrant Agreement, dated December 13, 2004, between the
Company and the placement agents for the Series A Convertible Promissory
Notes and Series T Warrants (incorporated by reference to Exhibit 10.35 to
the Company’s December 31, 2004 Form 10-KSB. This is the form
of six substantially identical agreements. A schedule
identifying the warrants and setting forth the material details in which
such agreements differ from the form that is incorporated by reference
herein is filed as Exhibit 10.34 to this Annual Report on Form
10-K).
|
|
10.36
|
Registration
Rights Agreement, dated July 3, 2007, by and among Neoprobe Corporation
and David C. Bupp, Cynthia B. Gochoco and Walter H. Bupp, as joint tenants
with right of survivorship (incorporated by reference to Exhibit 10.4 to
the Company’s Current Report on Form 8-K filed July 9,
2007).
|
|
10.37
|
Securities
Purchase Agreement, dated as of December 26, 2007, by and between the
Company and Platinum-Montaur Life Sciences, LLC (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January
2, 2008).
|
II-8
10.38
|
Amendment
and Waiver for Securities Purchase Agreement, dated April 16, 2008,
between Neoprobe Corporation and Platinum-Montaur Life Sciences, LLC
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed April 18, 2008).
|
|
10.39
|
Amended
and Restated Neoprobe Corporation 10% Series A Convertible Senior Secured
Promissory Note in the principal amount of $7,000,000, due December 26,
2011 (incorporated by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed July 29, 2009).
|
|
10.40
|
Amended
and Restated Neoprobe Corporation 10% Series B Convertible Senior Secured
Promissory Note in the principal amount of $3,000,000, due December 26,
2011 (incorporated by reference to Exhibit 10.3 to the Company’s Current
Report on Form 8-K filed July 29, 2009).
|
|
10.41
|
Amended
and Restated Series W Warrant to Purchase Shares of Common Stock of
Neoprobe Corporation (incorporated by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed July 29,
2009).
|
|
10.42
|
Amended
and Restated Series X Warrant to Purchase Shares of Common Stock of
Neoprobe Corporation (incorporated by reference to Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed July 29,
2009).
|
|
10.43
|
Amended
and Restated Series Y Warrant to Purchase Shares of Common Stock of
Neoprobe Corporation (incorporated by reference to Exhibit 10.6 to the
Company’s Current Report on Form 8-K filed July 29,
2009).
|
|
10.44
|
Series
AA Warrant to Purchase Shares of Common Stock of Neoprobe Corporation
(incorporated by reference to Exhibit 10.7 to the Company’s Current Report
on Form 8-K filed July 29, 2009).
|
|
10.45
|
Registration
Rights Agreement, dated December 26, 2007, between the Company and
Platinum-Montaur Life Sciences, LLC (incorporated by reference to Exhibit
10.7 to the Company’s Current Report on Form 8-K filed January 2,
2008).
|
|
10.46
|
Second
Amendment to Registration Rights Agreement, dated April 16, 2008, between
Neoprobe Corporation and Platinum-Montaur Life Sciences, LLC (incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed April 18, 2008).
|
|
10.47
|
Third
Amendment to Registration Rights Agreement, dated July 10, 2008, between
Neoprobe Corporation and Platinum-Montaur Life Sciences, LLC (incorporated
by reference to Exhibit 10.55 to pre-effective amendment No. 2 to the
Company’s Registration Statement on Form S-1, filed July 24, 2008,
Registration file No. 333-150650).
|
|
10.48
|
Fourth
Amendment to Registration Rights Agreement, dated December 5, 2008,
between Neoprobe Corporation and Platinum-Montaur Life Sciences, LLC
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed December 9, 2008).
|
|
10.49
|
Fifth
Amendment to Registration Rights Agreement, dated December 21, 2009,
between Neoprobe Corporation and Platinum-Montaur Life Sciences, LLC
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed December 21, 2009).
|
|
10.50
|
Security
Agreement, dated December 26, 2007, between the Company and
Platinum-Montaur Life Sciences, LLC (incorporated by reference to Exhibit
10.8 to the Company’s Current Report on Form 8-K filed January 2,
2008).
|
II-9
10.51
|
Patent,
Trademark, and Copyright Security Agreement, dated December 25, 2007, by
and among Neoprobe Corporation, Cardiosonix Ltd., Cira Biosciences, Inc.
and Platinum-Montaur Life Sciences, LLC (incorporated by reference to
Exhibit 10.9 to the Company’s Current Report on Form 8-K filed January 2,
2008).
|
|
10.52
|
Agreement
Modifying the Interest and Dividend Payment Dates of the Neoprobe
Corporation Series A and B Promissory Notes and Series A Preferred Stock,
and Exercise and Conversion Price Adjustment Provisions of the Neoprobe
Corporation Series X and Y Warrants and Series A Preferred Stock, dated as
of March 31, 2009, by and between Neoprobe Corporation and
Platinum-Montaur Life Sciences, LLC (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed April 6,
2009).
|
|
10.53
|
Securities
Amendment and Exchange Agreement, dated July 24, 2009, by and between
Neoprobe Corporation and Platinum-Montaur Life Sciences, LLC (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed July 29, 2009).
|
|
21.1
|
Subsidiaries
of the registrant.*
|
|
23.1
|
Consent
of BDO Seidman, LLP.*
|
|
23.2
|
Consent
of Porter, Wright, Morris & Arthur LLP (included in Exhibit 5.1
hereto)
|
|
24.1
|
Power
of Attorney.*
|
* Filed herewith
Item
17. Undertakings.
The
undersigned hereby undertakes:
(1)
|
to
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement
to:
|
|
(i)
|
include
any prospectus required by section 10(a)(3) of the Securities Act of
1933;
|
(ii)
|
reflect
in the prospectus any facts or events arising after the effective date of
the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b)(§230.424(b) of this chapter) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement;
|
(iii)
|
include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration
statement.
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(2)
|
that
for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
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(3)
|
to
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
|
(4)
|
that
for purposes of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities:
|
|
the
undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by
means of any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
|
|
Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424(§230.424 of this chapter);
|
|
Any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
|
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
|
Any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to the directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a directors, officers
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-11
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Dublin,
Ohio, on December 29, 2009.
Neoprobe
Corporation
|
||
By:
|
/s/ Brent L. Larson
|
|
Brent L. Larson, Vice President, Finance and
|
||
Chief Financial Officer
|
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:
Signature
|
Title
|
Date
|
||
/s/ David C. Bupp*
|
President,
Chief Executive Officer
|
December
29, 2009
|
||
David
C. Bupp
|
and
Director
|
|||
(principal
executive officer)
|
||||
/s/ Brent L. Larson
|
Vice
President, Finance and Chief
|
December
29, 2009
|
||
Brent
L. Larson
|
Financial
Officer
|
|||
(principal
financial officer and
|
||||
principal
accounting officer)
|
||||
/s/ Carl J. Aschinger, Jr.*
|
Chairman
of the Board of
|
December
29, 2009
|
||
Carl
J. Aschinger, Jr.
|
Directors
|
|||
/s/ Reuven Avital*
|
Director
|
December
29, 2009
|
||
Reuven
Avital
|
||||
/s/ Kirby I. Bland*
|
Director
|
December
29, 2009
|
||
Kirby
I. Bland
|
||||
/s/ Owen E. Johnson*
|
Director
|
December
29, 2009
|
||
Owen
E. Johnson
|
||||
/s/ Fred B. Miller*
|
Director
|
December
29, 2009
|
||
Fred
B. Miller
|
||||
/s/ Gordon A. Troup*
|
Director
|
December
29, 2009
|
||
Gordon
A. Troup
|
||||
/s/ Frank Whitley, Jr.*
|
Director
|
December
29, 2009
|
||
J.
Frank Whitley, Jr.
|
*By:
|
/s/ Brent L. Larson
|
Brent
L. Larson, Attorney-in fact
|
II-12