Prospectus
Summary
|
2
|
Risk
Factors
|
4
|
Cautionary
Note Regarding Forward-Looking Statements
|
15
|
Use
of Proceeds
|
15
|
Market
for Common Equity and Related Stockholder Matters
|
16
|
Management’s
Discussion and Analysis of Financial Condition and
Results of Operations
|
17
|
Description
of Business
|
35
|
Description
of Property
|
53
|
Our
Management
|
53
|
Executive
Compensation
|
57
|
Security
Ownership of Certain Beneficial Owners and Management
|
63
|
Certain
Relationships and Related Transactions
|
64
|
Description
of Capital Stock
|
65
|
The
Fusion Transaction
|
68
|
Selling
Stockholder
|
71
|
Plan
of Distribution
|
72
|
Legal
Opinion
|
73
|
Experts
|
73
|
Additional
Information
|
74
|
Index
to Financial Statements
|
F-1
|
· |
ineffectiveness
of the product candidate;
|
· |
discovery
of unacceptable toxicities or side effects;
|
· |
development
of disease resistance or other physiological factors;
|
· |
delays
in patient enrollment; or
|
· |
other
reasons that are internal to the businesses of our potential collaborative
partners, which reasons they may not share with us.
|
· |
generate
cash flow and revenue;
|
· |
offset
some of the costs associated with our internal research and development,
preclinical testing, clinical trials and manufacturing;
|
· |
seek
and obtain regulatory approvals faster than we could on our own;
and,
|
· |
successfully
commercialize existing and future product candidates.
|
· |
delay
marketing of potential products for a considerable period of time;
|
· |
limit
the indicated uses for which potential products may be marketed;
|
· |
impose
costly requirements on our activities; and
|
· |
provide
competitive advantage to other pharmaceutical and biotechnology companies.
|
· |
restrictions
on the products, manufacturers or manufacturing processes;
|
· |
warning
letters;
|
· |
civil
or criminal penalties;
|
· |
fines;
|
· |
injunctions;
|
· |
product
seizures or detentions;
|
· |
import
bans;
|
· |
voluntary
or mandatory product recalls and publicity requirements;
|
· |
suspension
or withdrawal of regulatory approvals;
|
· |
total
or partial suspension of production; and
|
· |
refusal
to approve pending applications for marketing approval of new drugs
or
supplements to approved
applications.
|
· |
we
pay all principal, interest and other charges on the Notes when due;
|
· |
we
use the proceeds from the sale of the Notes only for permitted purposes,
such as Lymphoseek
development and general corporate purposes;
|
· |
we
nominate and recommend for election as a director a person designated
by
the holders of the Notes;
|
· |
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,
|
· |
we
indemnify the purchasers of the Notes against certain
liabilities.
|
· |
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;
|
· |
engaging
in transactions with any affiliate;
|
· |
entering
into any agreement inconsistent with our obligations under the Notes
and
related agreements;
|
· |
incurring
any indebtedness, capital leases, or contingent obligations outside
the
ordinary course of business;
|
· |
granting
or permitting liens against or security interests in our assets;
|
· |
making
any material dispositions of our assets outside the ordinary course
of
business;
|
· |
declaring
or paying any dividends or making any other restricted payments;
or
|
· |
making
any loans to or investments in other persons outside of the ordinary
course of business.
|
|
·
|
|
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.
|
High
|
Low
|
Close
|
||||||||
Fiscal
Year 2006:
|
||||||||||
First
Quarter
|
$
|
0.36
|
$
|
0.25
|
$
|
0.29
|
||||
Second
Quarter
|
0.30
|
0.23
|
0.26
|
|||||||
Third
Quarter
|
0.33
|
0.24
|
0.33
|
|||||||
Fourth
Quarter through
December 6, 2006
|
0.34
|
0.22
|
0.30
|
|||||||
|
||||||||||
Fiscal
Year 2005:
|
||||||||||
First
Quarter
|
$
|
0.72
|
$
|
0.37
|
$
|
0.46
|
||||
Second
Quarter
|
0.46
|
0.30
|
0.35
|
|||||||
Third
Quarter
|
0.40
|
0.25
|
0.30
|
|||||||
Fourth
Quarter
|
0.32
|
0.20
|
0.25
|
|||||||
|
||||||||||
Fiscal
Year 2004:
|
||||||||||
First
Quarter
|
$
|
1.10
|
$
|
0.28
|
$
|
0.90
|
||||
Second
Quarter
|
1.11
|
0.41
|
0.60
|
|||||||
Third
Quarter
|
0.60
|
0.35
|
0.53
|
|||||||
Fourth
Quarter
|
0.61
|
0.37
|
0.59
|
Payments
Due By Period
|
||||||||||||||||
Contractual
Cash
Obligations
|
Total
|
Less
than
1
Year
|
1
- 3
Years
|
4
- 5
Years
|
After
5
Years
|
|||||||||||
Capital
Leases(1)
|
$
|
61,151
|
$
|
24,769
|
$
|
33,897
|
$
|
2,485
|
$
|
-
|
||||||
Operating
Leases
|
208,819
|
100,129
|
108,690
|
-
|
-
|
|||||||||||
Unconditional
Purchase
Obligations(2)
|
1,869,255
|
1,869,255
|
-
|
-
|
-
|
|||||||||||
Long-Term
Debt(3)
|
10,012,043
|
648,000
|
9,364,043
|
-
|
-
|
|||||||||||
Total
Contractual Cash
Obligations
|
$
|
12,151,268
|
$
|
2,642,153
|
$
|
9,506,630
|
$
|
2,485
|
$
|
-
|
(1) |
These
amounts include interest at rates between 8% and
13%.
|
(2) |
These
amounts represent purchases under binding purchase orders for which
we are
required to take delivery of the product under the terms of the underlying
supply agreements going out approximately one
year.
|
(3) |
These
amounts include interest at 8% on $8.1 million in outstanding principal
due in December 2008, payable in either cash or common
stock.
|
· |
Received
notification of the renewal of our Marketing and Distribution agreement
with EES through December 2008;
|
· |
Completed
a submission to the U.S. Food and Drug Administration (FDA) to respond
to
information requested by FDA regarding both preclinical toxicity
studies
and the chemistry, manufacturing and control (CMC) issues surrounding
the
commercial production of Lymphoseek;
|
· |
Authorized
by FDA to commence patient enrollment in a Phase 2 clinical study
of
Lymphoseek;
|
· |
Received
cGMP-produced Lymphoseek
drug kits from Cardinal Health,
Inc.;
|
· |
Reviewed
Phase 2 Lymphoseek
protocol and clinical program with clinical investigators at the
Society
of Surgical Oncology meeting;
|
· |
Commenced
Phase 2 Lymphoseek
clinical study with cGMP-produced
drug;
|
· |
Completed
Investigational New Drug (IND) amendment submission for RIGScan
CR;
|
· |
Received
first commercial production of Quantix
devices from U.S.-based contract
manufacturer;
|
· |
Completed
an agreement with ESTECH, Inc. for the distribution of the Quantix/OR
in
the U.S. and Europe;
|
· |
Completed
a distribution agreement for the Quantix/OR
in
Asia and commenced the registration process for the product in key
Asian
markets; and
|
· |
Introduced
Bluetooth wireless
versions of our gamma detection probes and obtained purchase commitments
for the probes from our primary marketing
partner.
|
· |
Stock-Based
Compensation. Effective
January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment,
which is
a revision of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS
No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued
to
Employees , and amends SFAS No. 95, Statement of Cash Flows . SFAS
No.
123(R) requires all share-based payments to employees, including
grants of
employee stock options, to be recognized in the income statement
based on
their estimated fair values. Compensation cost arising from stock-based
awards is recognized as expense using the straight-line method over
the
vesting period. We used the modified prospective application method
in
adopting SFAS No. 123(R). We use the Black-Scholes option pricing
model to
value share-based payments. The valuation assumptions used have not
changed from those used under SFAS No. 123. Prior to the adoption
of SFAS
No. 123(R), we followed the guidance in APB No. 25 which resulted
in
disclosure only of the financial impact of stock options. Financial
statements of the Company for periods prior to January 1, 2006 do
not
reflect any recorded stock-based compensation expense. In adopting
SFAS
No. 123(R), we made no modifications to outstanding stock options,
nor do
we have any other outstanding share-based payment instruments subject
to
SFAS No. 123(R). Based in part on the anticipated adoption of SFAS
No.
123(R), the Company generally reduced the number of stock options
issued
to employees in 2005 and shortened the vesting periods, with a portion
of
the options vesting immediately and the remainder vesting over a
two-year
period as compared to our previous practice of issuing stock options
that
vested over a three-year period. We will continue to evaluate compensation
trends and may further revise our option granting practices in future
years.
|
· |
Allowance
for Doubtful Accounts. We
maintain an allowance for doubtful accounts receivable to cover estimated
losses resulting from the inability of our customers to make required
payments. We determine the adequacy of this allowance by regularly
reviewing our accounts receivable aging and evaluating individual
customer
receivables, considering customers' credit and financial condition,
payment history and relevant economic conditions. If the financial
condition of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances for doubtful
accounts may be required.
|
· |
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, 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
SFAS
No. 144 . This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events
or
changes in circumstances indicate that the carrying amount of an
asset may
not be recoverable. The recoverability of assets to be held and used
is
measured by a comparison of the carrying amount of an asset to future
net
undiscounted cash flows expected to be generated by the asset. If
such
assets are considered to be impaired, the impairment to be recognized
is
measured by the amount by which the carrying amount of the assets
exceeds
the fair value of the assets. Assets to be disposed of are reported
at the
lower of the carrying amount or fair value less costs to sell. As
of
September 30, 2006, the most significant long-lived assets on our
balance
sheet relate to assets recorded in connection with the acquisition
of
Cardiosonix and gamma detection device patents related to sentinel
lymph
node biopsy (SLNB). The recoverability of these assets is based on
the
financial projections and models related to the future sales success
of
Cardiosonix' products and the continuing success of our gamma detection
product line. As such, these assets could be subject to significant
adjustment should the Cardiosonix technology not be successfully
commercialized or the sales amounts in our current projections not
be
realized.
|
· |
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 Warrant Liability. U.S.
generally accepted accounting principles required us to classify
the
warrants issued in connection with our December 2004 placement of
convertible promissory notes as a liability due to penalty provisions
contained in the underlying securities purchase agreement. The penalty
provisions could have required us to pay a penalty of 0.0667% per
day of
the total debt amount if we failed to meet certain registration deadlines,
or if our stock was suspended from trading for more than 30 days.
As a
liability, the warrants were considered derivative instruments that
were
required to be periodically “marked to market” on our balance sheet. We
estimated the fair value of the warrants at December 31, 2004 using
the
Black-Scholes option pricing model. On February 16, 2005, Neoprobe
and the
investors confirmed in writing their intention that the penalty provisions
which led to this accounting treatment were intended to apply only
to the
$8.1 million principal balance of the promissory notes and underlying
conversion shares and not to the warrant shares. Because the value
of our
stock increased $0.19 per share from $0.40 per share at the closing
date
of the financing on December 14, 2004 to $0.59 per share at December
31,
2004, our year end, the effect of marking the warrant liability to
“market” at December 31, 2004 resulted in an increase in the estimated
fair value of the warrant liability of $1.2 million which was recorded
as
non-cash expense during the fourth quarter of 2004. Subsequently,
the
value of our stock increased $0.02 per share from $0.59 at December
31,
2004 to $0.61 per share at February 16, 2005, such that marking the
warrant liability to “market” at February 16, 2005 resulted in an increase
in the estimated fair value of the warrant liability of $142,427
which was
recorded as non-cash expense during the first quarter of 2005. The
estimated fair value of the warrant liability was then reclassified
to
additional paid-in capital during the first quarter of 2005.
|
· |
real-time
monitoring;
|
· |
intra-operative
quantification;
|
· |
non-invasive
diagnostics; and
|
· |
evaluation
of cardiac function.
|
Indication
|
Number
of Patients
|
Status
|
|||||
Breast
(peritumoral injection)
|
24
|
Completed
|
|||||
Melanoma
|
24
|
Completed
|
|||||
Breast
(intradermal injection, next day surgery)
|
60
|
Completed
|
|||||
Prostate
|
60
|
Ongoing
|
|||||
Colon
|
30
|
Ongoing
|
· |
intraoperative
assessment (Quantix/OR);
and,
|
· |
non-invasive
diagnostics (Quantix/ND).
|
Name
|
Age
|
Position
|
||
Anthony
K. Blair
|
46
|
Vice
President, Manufacturing Operations
|
||
Carl
M. Bosch
|
50
|
Vice
President, Research and Development
|
||
Rodger
A. Brown
|
56
|
Vice
President, Regulatory Affairs and Quality
Assurance
|
||
Brent
L. Larson
|
43
|
Vice
President, Finance; Chief Financial Officer;
Treasurer and Secretary
|
||
Douglas
L. Rash
|
63
|
Vice
President, Marketing
|
Long
Term
Compensation
Awards
|
|||||||||||||||||||
Annual
Compensation
|
Restricted
Stock
Awards
|
Securities
Underlying Options
|
|||||||||||||||||
Name and Principal Position |
Year
|
Salary
|
Bonus
(e)
|
Other
|
($)
|
(#)
|
|||||||||||||
Anthony
K. Blair
|
2005
|
|
$
115,000
|
|
$
1,875
|
|
$
2,204(a
|
) |
-
|
30,000
|
|||||||||
Vice
President,
Manufacturing
Operations
|
2004
2003
|
55,000
-
|
-
-
|
-
-
|
-
-
|
90,000
-
|
|||||||||||||
Carl
M. Bosch
Vice
President,
Research
and Development
|
2005
2004
2003
|
|
$
149,000
138,375
135,125
|
|
$
7,500
6,000
-
|
|
$
2,980(b
2,887(b
6,573(b
|
)
)
)
|
-
-
-
|
40,000
170,000
70,000
|
|||||||||
Rodger
A. Brown
Vice
President, Regulatory Affairs/
Quality
Assurance
|
2005
2004
2003
|
|
$
124,000
117,300
125,316
|
|
$
1,875
2,500
-
|
|
$
-
-
-
|
-
-
-
|
20,000
160,000
70,000
|
||||||||||
David
C. Bupp
President
and
Chief
Executive Officer
|
2005
2004
2003
|
|
$
290,000
271,250
222,167
|
|
$
45,000
15,000
32,500
|
|
$
5,744(c
5,770(c
32,566(c
|
)
)
)
|
-
-
-
|
200,000
500,000
170,000
|
|||||||||
Brent
L. Larson
Vice
President, Finance and
Chief
Financial Officer
|
2005
2004
2003
|
|
$
149,000
137,700
135,125
|
|
$ 7,500
6,000
-
|
|
$
2,986(d
2,874(d
11,733(d
|
)
)
)
|
-
-
-
|
40,000
170,000
70,000
|
(a)
|
Amount
represents solely matching contribution 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
five 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 is intended to qualify 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.
|
(b)
|
Amounts
represent solely matching contribution under the Plan, except for
2003,
which includes $3,870 related to the vesting of restricted
stock.
|
(c)
|
Amounts
represent matching contribution under the Plan and social luncheon
club
dues, except for 2003, which includes $27,090 related to the vesting
of
restricted stock.
|
(d)
|
Amounts
represent solely matching contribution under the Plan, except for
2003,
which includes $9,030 related to the vesting of restricted
stock.
|
(e)
|
Bonuses,
if any, have been disclosed for the year in which they were earned
(i.e.,
to year to which the service
relates).
|
Name
|
Number
of Securities
Underlying
Options
Granted
(shares)
|
Percent
of Total
Options
Granted
to
Employees in
Fiscal
Year
|
Exercise
Price
Per
Share
|
Expiration
Date(c)
|
|||||||||
Anthony
K. Blair
|
30,000(a)
|
|
6
|
%
|
|
$
0.26(b)
|
|
12/27/2015
|
|||||
Carl
M. Bosch
|
40,000(a)
|
|
8
|
%
|
|
$
0.26(b)
|
|
12/27/2015
|
|||||
Rodger
A. Brown
|
20,000(a)
|
|
4
|
%
|
|
$
0.26(b)
|
|
12/27/2015
|
|||||
David
C. Bupp
|
200,000(a)
|
|
41
|
%
|
|
$
0.26(b)
|
|
12/27/2015
|
|||||
Brent
L. Larson
|
40,000(a)
|
|
8
|
%
|
|
$
0.26(b)
|
|
12/27/2015
|
(a)
|
Vests
as to one-third of these shares immediately and on each of the first
two
anniversaries of the date of grant.
|
(b)
|
The
per share weighted average fair value of these stock options during
2005
was $0.22 on the date of grant using the Black-Scholes option pricing
model with the following assumptions: an expected life of 10 years,
an
average risk-free interest rate of 4.3%, volatility of 79% and no
expected
dividend rate.
|
(c)
|
The
options terminate on the earlier of the expiration date, nine months
after
death or disability, 90 days after termination of employment without
cause
or by resignation, or immediately upon termination of employment
for
cause.
|
Name
|
Number
of Securities Underlying Unexercised Options at Fiscal Year-End:
Exercisable/Unexercisable
|
Value
of Unexercised In-the-Money Options at Fiscal Year-End:
Exercisable/Unexercisable(1)
|
||
Anthony
K. Blair
|
40,021
/ 79,979
|
$0
/ $0
|
||
Carl
M. Bosch
|
286,695
/ 163,305
|
$5,333
/ $2,667
|
||
Rodger
A. Brown
|
271,182
/ 143,318
|
$5,333
/ $2,667
|
||
David
C. Bupp
|
886,801
/ 523,199
|
$12,933
/ $6,467
|
||
Brent
L. Larson
|
343,895
/ 163,305
|
$5,333
/ $2,667
|
(1) |
Represents
the total gain which would be realized if all in-the-money options
held at
year end were exercised, determined by multiplying the number of
shares
underlying the options by the difference between the per share option
exercise price and the per share fair market value at year end of
$0.25.
An option is in-the-money if the fair market value of the underlying
shares exceeds the exercise price of the
option.
|
· |
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);
|
· |
the
term of Mr. Bupp’s employment agreement expires; or
|
· |
Mr.
Bupp resigns because his authority, responsibilities or compensation
have
materially diminished, a material change occurs in his working conditions
or we breach the agreement;
|
· |
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 15 percent 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.
|
· |
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);
|
· |
the
term of Mr. Blair’s employment agreement expires;
or
|
· |
Mr.
Blair resigns because his authority, responsibili-ties or compensation
have materially diminished,
a material change occurs in his working conditions or we breach the
agreement;
|
· |
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 30 percent 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 Direc-tors 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 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.
|
Beneficial
Owner
|
Number
of Shares Beneficially Owned (*)
|
Percent
of
Class (**)
|
|||||
Carl
J. Aschinger, Jr.
|
174,000(a
|
)
|
(o
|
)
|
|||
Reuven
Avital
|
294,256(b
|
)
|
(o
|
)
|
|||
Anthony
K. Blair
|
135,622(c
|
)
|
(o
|
)
|
|||
Kirby
I. Bland
|
140,000(d
|
)
|
(o
|
)
|
|||
Carl
M. Bosch
|
495,118(e
|
)
|
(o
|
)
|
|||
Rodger
A. Brown
|
378,833(f
|
)
|
(o
|
)
|
|||
David
C. Bupp
|
3,041,178(g
|
)
|
4.9
|
%
|
|||
Julius
R. Krevans
|
392,000(h
|
)
|
(o
|
)
|
|||
Brent
L. Larson
|
612,646(i
|
)
|
(o
|
)
|
|||
Fred
B. Miller
|
266,000(j
|
)
|
(o
|
)
|
|||
Douglas
L. Rash
|
76,601(k
|
)
|
(o
|
)
|
|||
J.
Frank Whitley, Jr.
|
246,000(l
|
)
|
(o
|
)
|
|||
All
directors and officers as a group
|
6,252,254(m)(p
|
)
|
9.6
|
%
|
|||
(12
persons)
|
|||||||
Great
Point Partners, L.P.
2
Pickwick Plaza, Suite 450
Greenwich,
CT 06830
|
30,000,000(n
|
)
|
33.6
|
%
|
Authorized
and Issued Stock
|
||||||||||
Number
of Shares at December 7, 2006
|
||||||||||
Title
of Class
|
Authorized
|
Outstanding
|
Reserved
|
|||||||
Common
Stock, $0.001 par value per share
|
150,000,000
|
59,410,046
|
55,304,849
|
· |
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.
|
· |
the
lowest sale price of our common stock on the purchase date;
or
|
·
|
the
average of the three (3) lowest closing sale prices of our common
stock
during the twelve (12) consecutive business days prior to the date
of a
purchase by Fusion Capital.
|
· |
the
effectiveness of the registration statement of which this prospectus
is a
part of lapses for any reason (including, without limitation, the
issuance
of a stop order) or is unavailable to Fusion Capital for sale of
our
common stock offered hereby and such lapse or unavailability continues
for
a period of ten (10) consecutive business days or for more than an
aggregate of thirty (30) business days in any 365-day
period;
|
·
|
suspension
by our principal market of our common stock from trading for a period
of
three (3) consecutive business
days;
|
·
|
the
de-listing of our common stock from our principal market provided
our
common stock is not immediately thereafter trading on the Nasdaq
Global
Market, the Nasdaq Capital Market, the New York Stock Exchange or
the
American Stock Exchange;
|
·
|
the
transfer agent‘s failure for five (5) business days to issue to Fusion
Capital shares of our common stock which Fusion Capital is entitled
to
under the common stock purchase
agreement;
|
·
|
any
material breach of the representations or warranties or covenants
contained in the common stock purchase agreement or any related agreements
which has or which could have a material adverse effect on us subject
to a
cure period of ten (10) business
days;
|
·
|
any
participation or threatened participation in insolvency or bankruptcy
proceedings by or against us; or
|
·
|
any
change in our business properties, operations, financial condition
or
results of operations of the Company and its Subsidiaries that could
reasonably be expected to have a material adverse
effect.
|
Assumed
Average Purchase Price
|
|
Number
of Shares to be Issued if Full Purchase
|
|
Percentage
of Outstanding Shares After Giving Effect to the Issuance to Fusion
Capital(1)
|
|
Proceeds
from the Sale of Shares
to
Fusion Capital Under the
Common
Stock Purchase Agreement
|
|||||
$
|
0.20
|
12,000,000
|
18.0
|
%
|
$
|
2,400,000
|
|||||
$
|
0.25
|
(2)
|
12,000,000
|
18.0
|
%
|
$
|
3,000,000
|
||||
$
|
0.50
|
12,000,000
|
18.4
|
%
|
$
|
6,000,000
|
|||||
$
|
0.75
|
8,000,000
|
13.7
|
%
|
$
|
6,000,000
|
|||||
$
|
1.00
|
6,000,000
|
11.1
|
%
|
$
|
6,000,000
|
Selling
Stockholder
|
Shares
Owned Before Offering
|
Percentage
of Outstanding Shares Owned Before Offering (1)
|
Shares
to be Sold in the Offering
|
Percentage
of Outstanding Shares Owned After Offering (1)
|
|||||||||
Fusion
Capital Fund II, LLC (1)(2)
|
970,832
|
1.6
|
%
|
13,440,000
|
0.4
|
%
|
(1)
|
As
of the date hereof, 720,000 shares of our common stock have been
acquired
by Fusion Capital under the common stock purchase agreement. Additionally,
as of the date of the common stock purchase agreement Fusion Capital
beneficially owned 250,832 shares of our common stock. Fusion Capital
may
acquire up to an additional 12,720,000 shares under the common stock
purchase agreement. Percentage of outstanding shares is based on
59,410,046 shares of common stock outstanding as of December 7, 2006,
together with such additional 12,720,000 shares of common stock that
may
be acquired by Fusion Capital from us under the common stock purchase
agreement after the date hereof.
|
(2)
|
Steven
G. Martin and Joshua B. Scheinfeld, the principals of Fusion Capital,
are
deemed to be beneficial owners of all of the shares of common stock
owned
by Fusion Capital. Messrs. Martin and Scheinfeld have shared voting
and
disposition power over the shares being offered under this
prospectus.
|
Audited
Consolidated Financial Statements of Neoprobe Corporation
|
|
Report
of Independent Registered Public Accounting Firm BDO Seidman,
LLP
|
F-2
|
Report
of Independent Registered Public Accounting Firm KPMG LLP
|
F-3
|
Consolidated
Balance Sheets as of December 31, 2005 and December 31,
2004
|
F-4
|
Consolidated
Statements of Operations for the years ended December 31, 2005 and
December 31, 2004
|
F-6
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2005
and December 31, 2004
|
F-7
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2005 and
December 31, 2004
|
F-8
|
Notes
to the Consolidated Financial Statements
|
F-9
|
Unaudited
Consolidated Financial Statements of Neoprobe Corporation
|
|
Consolidated
Balance Sheets as of September 30, 2006 and December 31,
2005
|
F-30
|
Consolidated
Statements of Operations for the three-month and nine-month periods
ended
September 30, 2006 and September 30, 2005
|
F-32
|
Consolidated
Statements of Cash Flows for the nine-month periods ended September
30,
2006 and September 30, 2005
|
F-33
|
Notes
to the Consolidated Financial Statements (Unaudited)
|
F-34
|
2005
|
|
2004
|
|||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
4,940,946
|
$
|
9,842,658
|
|||
Available-for-sale
securities
|
1,529,259
|
-
|
|||||
Accounts
receivable, net
|
673,008
|
411,856
|
|||||
Inventory
|
803,703
|
855,022
|
|||||
Prepaid
expenses and other
|
501,557
|
327,408
|
|||||
Total
current assets
|
8,448,473
|
11,436,944
|
|||||
Property
and equipment
|
2,051,793
|
2,341,785
|
|||||
Less
accumulated depreciation and amortization
|
1,768,558
|
2,003,942
|
|||||
283,235
|
337,843
|
||||||
Patents
and trademarks
|
3,162,547
|
3,155,334
|
|||||
Non-compete
agreements
|
-
|
584,516
|
|||||
Acquired
technology
|
237,271
|
237,271
|
|||||
3,399,818
|
3,977,121
|
||||||
Less
accumulated amortization
|
1,300,908
|
1,458,012
|
|||||
2,098,910
|
2,519,109
|
||||||
Other
assets
|
739,823
|
1,071,999
|
|||||
Total
assets
|
$
|
11,570,441
|
$
|
15,365,895
|
2005
|
2004
|
||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Accounts
payable
|
$
|
207,824
|
$
|
198,912
|
|||
Accrued
liabilities and other
|
821,781
|
378,247
|
|||||
Capital
lease obligations, current
|
19,530
|
13,863
|
|||||
Deferred
revenue, current
|
252,494
|
176,192
|
|||||
Notes
payable to finance companies
|
200,054
|
242,722
|
|||||
Total
current liabilities
|
1,501,683
|
1,009,936
|
|||||
Capital
lease obligations
|
31,855
|
30,297
|
|||||
Deferred
revenue
|
41,132
|
57,591
|
|||||
Notes
payable to CEO, net of discounts of $26,249 and $32,204,
respectively
|
73,751
|
67,796
|
|||||
Notes
payable to investor, net of discounts of $2,099,898 and $2,576,302,
respectively
|
5,900,102
|
5,423,698
|
|||||
Liability
related to warrants to purchase common stock
|
-
|
2,560,307
|
|||||
Other
liabilities
|
5,122
|
52,440
|
|||||
|
|||||||
Total
liabilities
|
7,553,645
|
9,202,065
|
|||||
Commitments
and contingencies
|
|||||||
Stockholders’
equity:
|
|||||||
Preferred
stock; $.001 par value; 5,000,000 shares authorized at December 31,
2005
and 2004; none issued and outstanding (500,000 shares designated
as Series
A, $.001 par value, at December 31, 2004; none
outstanding)
|
-
|
-
|
|||||
Common
stock; $.001 par value; 150,000,000 shares authorized, 58,622,059
shares
issued and outstanding at December 31, 2005; 100,000,000 shares
authorized, 58,378,143 shares issued and outstanding at December
31,
2004
|
58,622
|
58,378
|
|||||
Additional
paid-in capital
|
134,903,259
|
132,123,605
|
|||||
Accumulated
deficit
|
(130,947,103
|
)
|
(126,018,153
|
)
|
|||
Accumulated
other comprehensive income
|
2,018
|
-
|
|||||
Total
stockholders’ equity
|
4,016,796
|
6,163,830
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
11,570,441
|
$
|
15,365,895
|
Years
Ended December 31,
|
|||||||
2005
|
2004
|
||||||
Revenues:
|
|||||||
Net
sales
|
$
|
5,919,473
|
$
|
5,352,640
|
|||
License
and other revenue
|
-
|
600,000
|
|||||
Total
revenues
|
5,919,473
|
5,952,640
|
|||||
Cost
of goods sold
|
2,376,211
|
2,344,925
|
|||||
Gross
profit
|
3,543,262
|
3,607,715
|
|||||
Operating
expenses:
|
|||||||
Research
and development
|
4,031,790
|
2,453,755
|
|||||
Selling,
general and administrative
|
3,155,674
|
3,153,059
|
|||||
Total
operating expenses
|
7,187,464
|
5,606,814
|
|||||
Loss
from operations
|
(3,644,202
|
)
|
(1,999,099
|
)
|
|||
Other
income (expense):
|
|||||||
Interest
income
|
226,663
|
28,869
|
|||||
Interest
expense
|
(1,350,592
|
)
|
(334,196
|
)
|
|||
Increase
in warrant liability
|
(142,427
|
)
|
(1,245,307
|
)
|
|||
Other
|
(18,392
|
)
|
8,711
|
||||
Total
other expenses
|
(1,284,748
|
)
|
(1,541,923
|
)
|
|||
Net
loss
|
$
|
(4,928,950
|
)
|
$
|
(3,541,022
|
)
|
|
Net
loss per common share:
|
|||||||
Basic
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
|
Diluted
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
|
Weighted
average shares outstanding:
|
|||||||
Basic
|
58,433,895
|
56,763,710
|
|||||
Diluted
|
58,433,895
|
56,763,710
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
|
Accumulated
Other
Comprehensive
|
||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Income
|
Total
|
||||||||||||||
Balance,
December 31, 2003
|
51,520,723
|
$
|
51,521
|
$
|
127,684,555
|
$
|
(122,477,131
|
)
|
$
|
-
|
$
|
5,258,945
|
|||||||
Issued
stock upon conversion of note
payable to investor
|
1,098,851
|
1,099
|
250,748
|
-
|
-
|
251,847
|
|||||||||||||
Issued
warrants in exchange for extension
of note payable to CEO
|
-
|
-
|
171,801
|
-
|
-
|
171,801
|
|||||||||||||
Issued
stock upon exercise of warrants
|
3,251,354
|
3,251
|
874,488
|
-
|
-
|
877,739
|
|||||||||||||
Issued
stock in connection with stock
purchase agreement
|
2,416,129
|
2,416
|
1,468,918
|
-
|
-
|
1,471,334
|
|||||||||||||
Issued
stock options to consultants
|
-
|
-
|
172,736
|
-
|
-
|
172,736
|
|||||||||||||
Effect
of beneficial conversion feature of
convertible promissory notes
|
-
|
-
|
1,315,000
|
-
|
-
|
1,315,000
|
|||||||||||||
Issued
warrants as fees to investment
banking firms
|
-
|
-
|
208,014
|
-
|
-
|
208,014
|
|||||||||||||
Issued
stock to 401(k) plan at $0.16
|
91,086
|
91
|
14,402
|
-
|
-
|
14,493
|
|||||||||||||
Paid
offering costs related to issuance of
stock and warrants
|
-
|
-
|
(37,057
|
)
|
-
|
-
|
(37,057
|
)
|
|||||||||||
Net
loss
|
-
|
-
|
-
|
(3,541,022
|
)
|
-
|
(3,541,022
|
)
|
|||||||||||
Balance,
December 31, 2004
|
58,378,143
|
58,378
|
132,123,605
|
(126,018,153
|
)
|
-
|
6,163,830
|
||||||||||||
Issued
stock upon exercise of warrants
|
206,865
|
207
|
57,715
|
-
|
-
|
57,922
|
|||||||||||||
Issued
stock to 401(k) plan at $0.39
|
37,051
|
37
|
19,205
|
-
|
-
|
19,242
|
|||||||||||||
Reclassified
liability related to warrants to
purchase common stock
|
-
|
-
|
2,702,734
|
-
|
-
|
2,702,734
|
|||||||||||||
Comprehensive
income (loss):
|
|||||||||||||||||||
Net
loss
|
-
|
-
|
-
|
(4,928,950
|
)
|
-
|
(4,928,950
|
)
|
|||||||||||
Unrealized
gain on available-for-sale securities
|
-
|
-
|
-
|
-
|
2,018
|
2,018
|
|||||||||||||
Total
comprehensive loss
|
(4,926,932
|
)
|
|||||||||||||||||
Balance,
December 31, 2005
|
58,622,059
|
$
|
58,622
|
$
|
134,903,259
|
$
|
(130,947,103
|
)
|
$
|
2,018
|
$
|
4,016,796
|
Years
Ended December 31,
|
|||||||
2005
|
2004
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
loss
|
$
|
(4,928,950
|
)
|
$
|
(3,541,022
|
)
|
|
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
|||||||
Depreciation
of property and equipment
|
163,121
|
154,703
|
|||||
Amortization
of intangible assets
|
440,629
|
434,728
|
|||||
Provision
for bad debts
|
320
|
79,718
|
|||||
Net
loss on disposal and abandonment of assets
|
6,650
|
11,467
|
|||||
Amortization
of debt discount and offering costs
|
687,370
|
266,580
|
|||||
Increase
in warrant liability
|
142,427
|
1,245,307
|
|||||
Stock
options granted for research and development
|
-
|
172,736
|
|||||
Other
|
(8,199
|
)
|
15,551
|
||||
Change
in operating assets and liabilities:
|
|||||||
Accounts
receivable
|
(261,472
|
)
|
616,226
|
||||
Inventory
|
34,163
|
131,532
|
|||||
Prepaid
expenses and other assets
|
257,005
|
169,001
|
|||||
Accounts
payable
|
8,912
|
(26,120
|
)
|
||||
Accrued
liabilities and other liabilities
|
396,201
|
166,026
|
|||||
Deferred
revenue
|
59,843
|
(721,804
|
)
|
||||
Net
cash used in operating activities
|
(3,001,980
|
)
|
(825,371
|
)
|
|||
Cash
flows from investing activities:
|
|||||||
Purchases
of available-for-sale securities
|
(5,480,787
|
)
|
-
|
||||
Maturities
of available-for-sale securities
|
3,950,000
|
-
|
|||||
Purchases
of property and equipment
|
(86,004
|
)
|
(87,923
|
)
|
|||
Proceeds
from sales of property and equipment
|
11,092
|
2,960
|
|||||
Patent
and trademark costs
|
(20,625
|
)
|
(25,779
|
)
|
|||
Net
cash used in investing activities
|
(1,626,324
|
)
|
(110,742
|
)
|
|||
Cash
flows from financing activities:
|
|||||||
Proceeds
from issuance of common stock
|
57,922
|
2,349,073
|
|||||
Payment
of offering costs
|
-
|
(37,057
|
)
|
||||
Proceeds
from notes payable
|
-
|
8,100,000
|
|||||
Payment
of debt issuance costs
|
(29,635
|
)
|
(729,978
|
)
|
|||
Payment
of notes payable
|
(286,035
|
)
|
(476,125
|
)
|
|||
Payments
under capital leases
|
(15,680
|
)
|
(15,902
|
)
|
|||
Other
|
20
|
-
|
|||||
Net
cash (used in) provided by financing activities
|
(273,408
|
)
|
9,190,011
|
||||
|
|||||||
Net
(decrease) increase in cash and cash equivalents
|
(4,901,712
|
)
|
8,253,898
|
||||
Cash
and cash equivalents, beginning of year
|
9,842,658
|
1,588,760
|
|||||
Cash
and cash equivalents, end of year
|
$
|
4,940,946
|
$
|
9,842,658
|
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 two
lines of
medical devices: the first is a line of gamma radiation detection
equipment used in the application of intraoperative lymphatic mapping
(ILM), and the second is a line of blood flow monitoring devices
for a
variety of diagnostic and surgical
applications.
|
b. |
Principles
of Consolidation:
Our consolidated financial statements include the accounts of Neoprobe,
our wholly-owned subsidiary, Cardiosonix, and our majority-owned
subsidiary, Cira Bio. All significant inter-company accounts were
eliminated in consolidation.
|
c. |
Fair
Value of Financial Instruments: The
following methods and assumptions were used to estimate the fair
value of
each class of financial
instruments:
|
(1) |
Cash
and cash equivalents, 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, net of the related tax effect,
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.
|
(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, 2005 and 2004, the carrying values of
these
instruments approximate fair value.
|
(4)
|
Notes
payable to CEO: The carrying value of our debt is presented as the
face
amount of the notes less the unamortized discounts related to the
value of
the beneficial conversion features and the initial estimated fair
value of
the warrants to purchase common stock issued in connection with the
notes.
At December 31, 2005, the carrying value of the note payable to our
CEO
approximates fair value. At December 31, 2004, the fair value of
the note
payable to our CEO was approximately $75,000, as determined by a
third-party valuation expert.
|
(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 value of the beneficial conversion features and the initial estimated
fair value of the warrants to purchase common stock issued in connection
with the notes. At December 31, 2005, the carrying value of the note
payable to outside investors approximates fair value. At December 31,
2004, the fair value of the note payable to outside investors was
approximately $6.0 million, as determined by a third-party valuation
expert.
|
d.
|
Cash
and Cash Equivalents: There
were no cash equivalents at December 31, 2005 or 2004. As of December
21,
2005 and 2004, $8,000 and $19,000, respectively, was restricted to
secure
bank guarantees related to sub-lease agreements for Cardiosonix’ office
space.
|
e. |
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. The
components of net inventory at December 31, 2005 and 2004 are as
follows:
|
2005
|
2004
|
||||||
Materials
and component parts
|
$
|
461,218
|
$
|
486,323
|
|||
Finished
goods
|
342,485
|
368,699
|
|||||
$
|
803,703
|
$
|
855,022
|
f. |
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
$78,000
and $56,000 of equipment under capital leases with accumulated
amortization of $33,000 and $14,000 at December 31, 2005 and 2004,
respectively. During 2005 and 2004, we recorded losses of $7,000
and
$4,000, respectively, on the disposal of property and
equipment.
|
Useful
Life
|
2005
|
2004
|
||||||||
Production
machinery and equipment
|
5
years
|
$
|
999,106
|
$
|
1,060,610
|
|||||
Other
machinery and equipment, primarily computers
and research equipment
|
2
- 5 years
|
543,313
|
663,772
|
|||||||
Furniture
and fixtures
|
7
years
|
334,275
|
360,663
|
|||||||
Leasehold
improvements
|
Life
of Lease1
|
74,682
|
134,856
|
|||||||
Software
|
3
years
|
100,417
|
121,884
|
|||||||
$
|
2,051,793
|
$
|
2,341,785
|
g. |
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. Non-compete
agreements were amortized using the straight-line method over their
estimated useful lives of four years. Non-compete agreements expired
as of
December 31, 2005. 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.
|
December
31, 2005
|
December
31, 2004
|
|||||||||||||||
Wtd
Avg Life
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
||||||||||||
Patents
and trademarks
|
10
yrs
|
$
|
3,162,547
|
$
|
1,164,763
|
$
|
3,155,334
|
$
|
915,571
|
|||||||
Non-compete
agreements
|
-
|
-
|
-
|
584,516
|
440,005
|
|||||||||||
Acquired
technology
|
3
yrs
|
237,271
|
136,145
|
237,271
|
102,436
|
|||||||||||
Total
|
$
|
3,399,818
|
$
|
1,300,908
|
$
|
3,977,121
|
$
|
1,458,012
|
Estimated
Amortization Expense
|
||||
For
the year ended 12/31/2006
|
$
|
262,992
|
||
For
the year ended 12/31/2007
|
226,830
|
|||
For
the year ended 12/31/2008
|
201,976
|
|||
For
the year ended 12/31/2009
|
168,267
|
|||
For
the year ended 12/31/2010
|
168,267
|
h. |
Other
Assets:
|
i. |
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 have no right to return products purchased in the ordinary
course of business.
|
(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.
|
(4)
|
License
Revenue: We
recognized license revenue in connection with our distribution agreement
with EES on a straight-line basis over the five-year initial term
of the
agreement based on our obligations to provide ongoing support for
the
intellectual property being licensed such as patent maintenance and
regulatory filings. As the license related to intellectual property
held
or licensed to us, we incurred no significant cost associated with
the
recognition of this revenue. The license revenue was fully recognized
as
of September 30, 2004.
|
Years
Ended December 31,
|
|||||||
2005
|
2004
|
||||||
Net
loss, as reported
|
$
|
(4,928,950
|
)
|
$
|
(3,541,022
|
)
|
|
Deduct:
Total stock-based employee compensation
expense determined under fair
value based method for all awards
|
(511,712
|
)
|
(304,266
|
)
|
|||
Pro
forma net loss
|
$
|
(5,440,662
|
)
|
$
|
(3,845,288
|
)
|
|
Loss
per common share:
|
|||||||
As
reported (basic and diluted)
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
|
Pro
forma (basic and diluted)
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
m.
|
Equity
Issued to Non-Employees: We
account for equity instruments granted to non-employees in accordance
with
the provisions of SFAS No. 123 and Emerging Issues Task Force Issue
No.
96-18, Accounting
for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services.
All transactions in which goods or services are the consideration
received
for the issuance of equity instruments are accounted for based on
the fair
value of the consideration received or the equity instrument issued,
whichever is more reliably measurable. The measurement date of the
fair
value of the equity instrument issued is the earlier of the date
on which
the counterparty’s performance is complete or the date on which it is
probable that performance will occur. During 2004, we issued 250,000
options to non-employee consultants and recognized $173,000 of research
and development expense related to options granted to
consultants.
|
n.
|
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.
|
o.
|
Comprehensive
Income (Loss): Due
to our net operating loss position, there are no income tax effects
on
comprehensive income (loss) components for the year ended December
31,
2005.
|
Year
Ended December 31, 2005
|
||||
Net
loss
|
$
|
(4,928,950
|
)
|
|
Unrealized
gains on available-for-sale securities
|
2,018
|
|||
Other
comprehensive loss
|
$
|
(4,926,932
|
)
|
p.
|
Impairment
or Disposal of Long-Lived Assets: We
account for long-lived assets in accordance with the provisions of
SFAS
No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes
in
circumstances indicate that the carrying amount of an asset may not
be
recoverable. 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.
|
q.
|
Recent
Accounting Developments: In
November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS
No. 151, Inventory
Costs - An Amendment of ARB No. 43, Chapter 4.
This statement amends the guidance in ARB No. 43 Chapter 4, Inventory
Pricing,
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Paragraph
5 of
ARB No. 43, Chapter 4, previously stated that “ . . . under some
circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs may be so abnormal to require
treatment as a current period charge….” This statement requires that those
items be recognized as current-period charges regardless of whether
they
meet the criterion of “so abnormal.” In addition, this statement requires
that allocation of fixed production overheads to the costs of conversion
be based on the normal capacity of the production facilities. The
provisions of this statement will be effective for inventory costs
during
fiscal years beginning after June 15, 2005. Neoprobe does not believe
that
the adoption of this statement will have a material impact on its
financial condition or results of
operations.
|
Year
Ended
December
31, 2005
|
Year
Ended
December
31, 2004
|
||||||||||||
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
||||||||||
Outstanding
shares
|
58,622,059
|
58,622,059
|
58,378,143
|
58,378,143
|
|||||||||
Effect
of weighting changes in
outstanding shares
|
(58,164
|
)
|
(58,164
|
)
|
(1,484,433
|
)
|
(1,484,433
|
)
|
|||||
Contingently
issuable shares
|
(130,000
|
)
|
(130,000
|
)
|
(130,000
|
)
|
(130,000
|
)
|
|||||
Adjusted
shares
|
58,433,895
|
58,433,895
|
56,763,710
|
56,763,710
|
3. |
Accounts
Receivable and Concentrations of Credit
Risk:
|
2005
|
2004
|
||||||
Trade
|
$
|
663,898
|
$
|
403,674
|
|||
Other
|
9,110
|
8,182
|
|||||
$
|
673,008
|
$
|
411,856
|
2005
|
2004
|
||||||
Allowance
for doubtful accounts at beginning of year
|
$
|
1,694
|
$
|
46,000
|
|||
Provision
for bad debts
|
320
|
8,718
|
|||||
Write-offs
charged against the allowance
|
(1,435
|
)
|
(53,024
|
)
|
|||
Recoveries
of amounts previously written off
|
287
|
-
|
|||||
Allowance
for doubtful accounts at end of year
|
$
|
866
|
$
|
1,694
|
4.
|
Accrued
Liabilities:
|
2005
|
2004
|
||||||
Contracted
services and other
|
$
|
540,932
|
$
|
241,608
|
|||
Compensation
|
204,421
|
56,547
|
|||||
Warranty
reserve
|
41,185
|
66,000
|
|||||
Inventory
purchases
|
35,243
|
14,092
|
|||||
$
|
821,781
|
$
|
378,247
|
5.
|
Product
Warranty:
|
2005
|
2004
|
||||||
Warranty
reserve, at beginning of year
|
$
|
66,000
|
$
|
53,000
|
|||
Provision
for warranty claims and changes
in reserve for warranties
|
24,539
|
20,849
|
|||||
Payments
charged against the reserve
|
(49,354
|
)
|
(7,849
|
)
|
|||
Warranty
reserve, at end of year
|
$
|
41,185
|
$
|
66,000
|
a.
|
Stock
Options: At
December 31, 2005, 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 2002
Stock Incentive Plan (the 2002 Plan), we may grant incentive stock
options, nonqualified stock options, and restricted stock awards
to
full-time employees, and nonqualified stock options and restricted
awards
may be granted to our consultants and agents. Total shares authorized
under each plan are 2 million shares, 1.5 million shares and 5 million
shares, respectively. The Amended Plan was approved by the stockholders
in
1994, and although options are still outstanding under this plan,
the
Amended Plan is considered expired and no new grants may be made
from it.
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.
|
2005
|
2004
|
||||||||||||
Options
|
Weighted
Average
Exercise
Price
|
Options
|
Weighted
Average
Exercise
Price
|
||||||||||
Outstanding
at beginning
of year
|
4,857,641
|
$
|
0.51
|
2,931,308
|
$
|
0.56
|
|||||||
Granted
|
993,000
|
$
|
0.40
|
2,278,000
|
$
|
0.41
|
|||||||
Forfeited
|
(326,667
|
)
|
$
|
1.42
|
(351,667
|
)
|
$
|
0.30
|
|||||
Exercised
|
-
|
-
|
-
|
-
|
|||||||||
Outstanding
at end
of year
|
5,523,974
|
$
|
0.44
|
4,857,641
|
$
|
0.51
|
|||||||
Exercisable
at end
of year
|
3,394,308
|
$
|
0.46
|
2,046,321
|
$
|
0.59
|
Range
of Exercise
Prices
|
Number
Outstanding
as of
December
31,
2005
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable as of
December
31,
2005
|
Weighted
Average
Exercise
Price
|
||||||||||||
$
|
0.13
- $ 0.30
|
1,960,001
|
6
years
|
$
|
0.24
|
966,992
|
$
|
0.22
|
|||||||||
$
|
0.31
- $ 0.41
|
1,230,500
|
7
years
|
$
|
0.39
|
762,507
|
$
|
0.40
|
|||||||||
$
|
0.42
- $ 0.50
|
1,468,000
|
6
years
|
$
|
0.47
|
1,232,668
|
$
|
0.46
|
|||||||||
$
|
0.59
- $ 5.63
|
865,473
|
7
years
|
$
|
0.89
|
432,141
|
$
|
1.10
|
|||||||||
5,523,974
|
7
years
|
$
|
0.44
|
3,394,308
|
$
|
0.46
|
b. |
Restricted
Stock: At
December 31, 2005, we have 130,000 restricted shares outstanding,
all of
which are pending cancellation due to failure to vest under the terms
of
issuance of these shares. Restricted shares, if any, generally vest
on a
change of control of our company as defined in the specific grant
agreements. As a result, we have not recorded any deferred compensation
related to past grants of restricted stock due to the inability to
assess
the probability of the vesting
event.
|
c. |
Stock
Warrants: At
December 31, 2005, there are 17.0 million warrants outstanding to
purchase
our common stock. The warrants are exercisable at prices ranging
from
$0.13 to $0.75 per share with a weighted average exercise price per
share
of $0.40.
|
Exercise
Price
|
Number
of Warrants
|
Expiration
Date
|
||||||||
Series
O
|
$
|
0.75
|
25,000
|
October
2006
|
||||||
Series
Q
|
$
|
0.13
|
875,000
|
April
2008
|
||||||
Series
Q
|
$
|
0.50
|
375,000
|
March
2009
|
||||||
Series
R
|
$
|
0.28
|
2,808,898
|
October
2008
|
||||||
Series
S
|
$
|
0.28
|
1,195,478
|
October
2008
|
||||||
Series
T
|
$
|
0.46
|
10,125,000
|
December
2009
|
||||||
Series
U
|
$
|
0.46
|
1,600,000
|
December
2009
|
||||||
$
|
0.40
|
17,004,376
|
d. |
Common
Stock Reserved:
We have reserved 42,778,350 shares of authorized common stock for
the
exercise of all outstanding options, warrants, and convertible
debt.
|
e. |
Common
Stock Purchase Agreement: On
November 19, 2001, we entered into a common stock purchase agreement
with
an investment fund, Fusion Capital Fund II, LLC (Fusion) for the
issuance
and purchase of our common stock. Under the stock purchase agreement,
Fusion committed to purchase up to $10 million of our common stock
over a
forty-month period that commenced in May 2002. A registration statement
registering for resale up to 5 million shares of our common stock
became
effective on April 15, 2002. Under the terms of the agreement, we
can
request daily drawdowns, subject to a daily base amount currently
set at
$12,500. The number of shares we are to issue to Fusion in return
for that money will be based on the lower of (a) the closing sale
price
for our common stock on the day of the draw request or (b) the average
of
the three lowest closing sales prices for our common stock during
a twelve
day period prior to the draw request. However, no shares may be sold
to
Fusion at lower than a floor price currently set at $0.30, which
may be
reduced by us, but in no case below $0.20 without Fusion’s prior consent.
Upon execution of the common stock purchase agreement in 2001, we
issued
449,438 shares of our common stock to Fusion as a partial payment
of the
commitment fee. During 2004, we sold Fusion a total of 2,350,000
shares of
our common stock and realized net proceeds of $1,468,874. We also
issued
Fusion 66,129 shares of our common stock for commitment fees related
to
the sales of our common stock to them during
2004.
|
f. |
Private
Placement: In
November 2003, we executed common stock purchase agreements with
certain
investors for the purchase of 12,173,914 shares of our common stock
at a
price of $0.23 per share for net proceeds of $2.4 million. In addition,
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 2005 and 2004, certain
investors
and placement agents exercised a total of 206,865 and 3,308,327 warrants
related to this placement, resulting in the issuance of 206,865 and
3,197,854 shares of our common stock and we realized net proceeds
of
$57,922 and $871,398,
respectively.
|
a.
|
Segments:
We
report information about our operating segments using the “management
approach” in accordance with SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. This
information is based on the way management organizes and reports
the
segments within the enterprise for making operating decisions and
assessing performance. Our reportable segments are identified based
on
differences in products, services and markets served. There were
no
inter-segment sales. We own or have rights to intellectual property
involving two primary types of medical device products, including
gamma
detection instruments currently used primarily in the application
of ILM,
and blood flow measurement devices. We also own or have rights to
intellectual property related to several drug and therapy
products.
|
($
amounts in thousands)
2005
|
Gamma
Detection
Devices
|
Blood
Flow Devices
|
Drug
and Therapy Products
|
Corporate
|
Total
|
|||||||||||
Net
sales:
|
||||||||||||||||
United
States1
|
$
|
5,459
|
$
|
58
|
$
|
-
|
$
|
-
|
$
|
5,517
|
||||||
International
|
120
|
282
|
-
|
-
|
402
|
|||||||||||
Research
and development expenses
|
276
|
1,414
|
2,342
|
-
|
4,032
|
|||||||||||
Selling,
general and administrative expenses,
excluding depreciation and
amortization2
|
-
|
-
|
-
|
2,572
|
2,572
|
|||||||||||
Depreciation
and amortization
|
183
|
401
|
-
|
-
|
584
|
|||||||||||
Income
(loss) from operations3
|
2,897
|
(1,627
|
)
|
(2,342
|
)
|
(2,572
|
)
|
(3,644
|
)
|
|||||||
Other
income (expense)4
|
-
|
-
|
-
|
(1,285
|
)
|
(1,285
|
)
|
|||||||||
Total
assets, net of depreciation and amortization:
|
||||||||||||||||
United
States operations
|
1,171
|
318
|
28
|
7,734
|
9,251
|
|||||||||||
Israeli
operations (Cardiosonix Ltd.)
|
-
|
2,319
|
-
|
-
|
2,319
|
|||||||||||
Capital
expenditures
|
27
|
58
|
1
|
-
|
86
|
|||||||||||
2004
|
||||||||||||||||
Net
sales
|
||||||||||||||||
United
States1
|
$
|
5,173
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
5,173
|
||||||
International
|
91
|
89
|
-
|
-
|
180
|
|||||||||||
License
and other revenue
|
600
|
-
|
-
|
-
|
600
|
|||||||||||
Research
and development expenses
|
404
|
1,561
|
489
|
-
|
2,454
|
|||||||||||
Selling,
general and administrative expenses,
excluding depreciation and
amortization2
|
-
|
-
|
-
|
2,566
|
2,566
|
|||||||||||
Depreciation
and amortization
|
173
|
414
|
-
|
-
|
587
|
|||||||||||
Income
(loss) from operations3
|
3,169
|
(2,113
|
)
|
(489
|
)
|
(2,566
|
)
|
(1,999
|
)
|
|||||||
Other
income (expense)
4
|
-
|
-
|
-
|
(1,542
|
)
|
(1,542
|
)
|
|||||||||
Total
assets, net of depreciation and amortization:
|
||||||||||||||||
United
States operations
|
1,160
|
64
|
3
|
11,240
|
12,467
|
|||||||||||
Israeli
operations (Cardiosonix Ltd.)
|
-
|
2,899
|
-
|
-
|
2,899
|
|||||||||||
Capital
expenditures
|
12
|
22
|
-
|
54
|
88
|
|||||||||||
1
All sales to EES are made in the United States. EES distributes the
product globally through its international affiliates.
|
||||||||||||||||
2
Selling,
general and administrative costs, excluding depreciation and amortization,
represent costs that relate to the general administration of the
Company
and as such are not currently allocated to our individual reportable
segments.
|
||||||||||||||||
3
Income (loss) from operations does not reflect the allocation of
selling,
general and administrative costs to our individual reportable
segments.
|
||||||||||||||||
4
Amounts
consist primarily of interest income and interest expense which are
currently not 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. The aggregate purchase
price
included common stock valued at $4,271,095; payment of vested options
of
Cardiosonix employees in the amount of $17,966; and acquisition costs
of
$167,348. We accounted for the acquisition under SFAS No. 141,
Business
Combinations,
and certain provisions of SFAS No. 142, Goodwill
and Other Intangible Assets.
The results of Cardiosonix’ operations have been included in our
consolidated results from the date of
acquisition.
|
a.
|
Supply
Agreements: In
December 1997, we entered into an exclusive supply agreement with
eV
Products (eV), a division of II-VI Incorporated, for the supply of
certain
crystals and associated electronics to be used in the manufacture
of our
proprietary line of hand-held gamma detection instruments. The original
term of the agreement expired on December 31, 2002 and was automatically
extended during 2002 through December 31, 2005; however, the agreement
was
no longer exclusive throughout the extended period. Total purchases
under
the supply agreement were $430,000 and $555,000 for the years ended
December 31, 2005 and 2004, respectively. We have issued purchase
orders
for $347,000 of crystal modules for delivery of product through September
2006 under the same terms as the original
agreement.
|
b.
|
Marketing
and Distribution Agreement: During
1999, we entered into a distribution agreement with EES covering
our gamma
detection devices used in ILM. The initial five-year term expired
December
31, 2004, with options to extend for two successive two-year terms.
See
Note 16(a). Under the agreement, we manufacture and sell our current
line
of ILM 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.
|
c. |
Research
and Development Agreements: Cardiosonix’
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 $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 if 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 2005, we have paid the OCS
a total
of $22,000 in royalties related to sales of products developed under
this
program. As of December 31, 2005, we have accrued obligations for
royalties totaling $2,000.
|
d. |
Employment
Agreements: We
maintain employment agreements with six of our officers. The employment
agreements contain change in control provisions that would entitle
each of
the officers to one to two 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. Our maximum contingent
liability under these agreements in such an event is approximately
$1.9
million. The employment agreements also provide for severance, disability
and death benefits. See Note 16(b).
|
Capital
Leases
|
Operating
Leases
|
||||||
2006
|
$
|
24,769
|
$
|
100,771
|
|||
2007
|
18,008
|
100,129
|
|||||
2008
|
15,889
|
8,561
|
|||||
2009
|
2,485
|
-
|
|||||
2010
|
-
|
-
|
|||||
61,151
|
$
|
209,461
|
|||||
Less
amount representing interest
|
9,766
|
||||||
Present
value of net minimum lease
payments
|
51,385
|
||||||
Less
current portion
|
19,530
|
||||||
Capital
lease obligations, excluding
current portion
|
$
|
31,855
|
a.
|
Distribution
Agreement: 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. See
Note
11(b).
|
b.
|
Employment
Agreements: Effective
January 1, 2006, we entered into new employment agreements with two
executive officers. The new agreements have substantially similar
terms to
the previous agreements. See Note
11(d).
|
(Amounts
in thousands, except per share data)
|
Years
Ended December 31,
|
|||||||||||||||
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
Statement
of Operations Data:
|
||||||||||||||||
Net
sales
|
$
|
5,919
|
$
|
5,353
|
$
|
5,564
|
$
|
3,383
|
$
|
6,764
|
||||||
License
and other revenue
|
-
|
600
|
946
|
1,538
|
1,428
|
|||||||||||
Gross
profit
|
3,543
|
3,608
|
3,385
|
2,570
|
3,802
|
|||||||||||
Research
and development expenses
|
4,032
|
2,454
|
1,894
|
2,324
|
948
|
|||||||||||
Selling,
general and administrative expenses
|
3,156
|
3,153
|
3,103
|
3,267
|
2,321
|
|||||||||||
Acquired
in-process research and development
|
-
|
-
|
-
|
(28
|
)
|
885
|
||||||||||
(Loss)
income from operations
|
(3,644
|
)
|
(1,999
|
)
|
(1,611
|
)
|
(2,993
|
)
|
(352
|
)
|
||||||
Other
(expenses) income
|
(1,285
|
)
|
(1,542
|
)
|
(188
|
)
|
29
|
370
|
||||||||
Net
(loss) income
|
$
|
(4,929
|
)
|
$
|
(3,541
|
)
|
$
|
(1,799
|
)
|
$
|
(2,964
|
)
|
$
|
15
|
||
(Loss)
income per common share:
|
||||||||||||||||
Basic
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
$
|
(0.08
|
)
|
$
|
0.00
|
||
Diluted
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
$
|
(0.08
|
)
|
$
|
0.00
|
||
Shares
used in computing (loss) income per common
share: (1)
|
||||||||||||||||
Basic
|
58,434
|
56,764
|
40,338
|
36,045
|
25,899
|
|||||||||||
Diluted
|
58,434
|
56,764
|
40,338
|
36,045
|
26,047
|
As
of December 31,
|
||||||||||||||||
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
Balance
Sheet Data:
|
||||||||||||||||
Total
assets
|
$
|
11,570
|
$
|
15,366
|
$
|
7,385
|
$
|
7,080
|
$
|
11,329
|
||||||
Long-term
obligations
|
6,052
|
8,192
|
585
|
1,169
|
1,981
|
|||||||||||
Accumulated
deficit
|
(130,947
|
)
|
(126,018
|
)
|
(122,477
|
)
|
(120,678
|
)
|
(117,714
|
)
|
(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 convertible
securities, options and warrants, if
dilutive.
|
September
30,
2006
(unaudited)
|
December
31,
2005
|
||||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
3,643,217
|
$
|
4,940,946
|
|||
Available-for-sale
securities
|
-
|
1,529,259
|
|||||
Accounts
receivable, net
|
662,793
|
673,008
|
|||||
Inventory
|
1,045,914
|
803,703
|
|||||
Prepaid
expenses and other
|
103,997
|
501,557
|
|||||
Total
current assets
|
5,455,921
|
8,448,473
|
|||||
Property
and equipment
|
2,178,894
|
2,051,793
|
|||||
Less
accumulated depreciation and amortization
|
1,857,546
|
1,768,558
|
|||||
321,348
|
283,235
|
||||||
Patents
and trademarks
|
3,180,318
|
3,162,547
|
|||||
Acquired
technology
|
237,271
|
237,271
|
|||||
3,417,589
|
3,399,818
|
||||||
Less
accumulated amortization
|
1,494,657
|
1,300,908
|
|||||
1,922,932
|
2,098,910
|
||||||
Other
assets
|
573,668
|
739,823
|
|||||
Total
assets
|
$
|
8,273,869
|
$
|
11,570,441
|
September
30,
2006
(unaudited)
|
December
31,
2005
|
||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Accounts
payable
|
$
|
443,564
|
$
|
207,824
|
|||
Accrued
liabilities and other
|
259,115
|
821,781
|
|||||
Capital
lease obligations, current
|
16,387
|
19,530
|
|||||
Deferred
revenue, current
|
315,698
|
252,494
|
|||||
Notes
payable to finance companies
|
-
|
200,054
|
|||||
Total
current liabilities
|
1,034,764
|
1,501,683
|
|||||
Capital
lease obligations
|
20,554
|
31,855
|
|||||
Deferred
revenue
|
37,270
|
41,132
|
|||||
Note
payable to CEO, net of discount of $20,948
|
|||||||
and
$26,249, respectively
|
79,052
|
73,751
|
|||||
Note
payable to investor, net of discount of $1,675,853
|
|||||||
and
$2,099,898, respectively
|
6,324,147
|
5,900,102
|
|||||
Other
liabilities
|
3,285
|
5,122
|
|||||
Total
liabilities
|
7,499,072
|
7,553,645
|
|||||
Commitments
and contingencies
|
|||||||
Stockholders’
equity:
|
|||||||
Preferred
stock; $.001 par value; 5,000,000 shares
|
|||||||
authorized
at September 30, 2006 and December 31, 2005;
|
|||||||
none
issued and outstanding
|
|||||||
Common
stock; $.001 par value; 150,000,000 shares
|
|||||||
authorized,
58,690,046 shares issued and outstanding
|
|||||||
at
September 30, 2006; 58,622,059 shares issued and
|
|||||||
outstanding
at December 31, 2005
|
58,690
|
58,622
|
|||||
Additional
paid-in capital
|
135,108,648
|
134,903,259
|
|||||
Accumulated
deficit
|
(134,392,541
|
)
|
(130,947,103
|
)
|
|||
Accumulated
other comprehensive income
|
-
|
2,018
|
|||||
Total
stockholders’ equity
|
774,797
|
4,016,796
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
8,273,869
|
$
|
11,570,441
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Net
sales
|
$
|
957,952
|
$
|
1,333,536
|
$
|
4,179,861
|
$
|
4,500,301
|
|||||
Cost
of goods sold
|
403,190
|
532,601
|
1,741,172
|
1,738,157
|
|||||||||
Gross
profit
|
554,762
|
800,935
|
2,438,689
|
2,762,144
|
|||||||||
Operating
expenses:
|
|||||||||||||
Research
and development
|
1,241,899
|
1,106,242
|
2,718,655
|
3,048,056
|
|||||||||
Selling,
general and administrative
|
651,419
|
689,030
|
2,257,714
|
2,352,977
|
|||||||||
Total
operating expenses
|
1,893,318
|
1,795,272
|
4,976,369
|
5,401,033
|
|||||||||
Loss
from operations
|
(1,338,556
|
)
|
(994,337
|
)
|
(2,537,680
|
)
|
(2,638,889
|
)
|
|||||
Other
income (expenses):
|
|||||||||||||
Interest
income
|
56,520
|
57,596
|
184,511
|
166,475
|
|||||||||
Interest
expense
|
(371,013
|
)
|
(340,366
|
)
|
(1,090,973
|
)
|
(1,001,844
|
)
|
|||||
Increase
in warrant liability
|
-
|
-
|
-
|
(142,427
|
)
|
||||||||
Other
|
(3,318
|
)
|
(7,360
|
)
|
(1,296
|
)
|
(14,964
|
)
|
|||||
Total
other expenses
|
(317,811
|
)
|
(290,130
|
)
|
(907,758
|
)
|
(992,760
|
)
|
|||||
Net
loss
|
$
|
(1,656,367
|
)
|
$
|
(1,284,467
|
)
|
$
|
(3,445,438
|
)
|
$
|
(3,631,649
|
)
|
|
Net
loss per common share:
|
|||||||||||||
Basic
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
|
Diluted
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
|
Weighted
average shares outstanding:
|
|||||||||||||
Basic
|
58,560,046
|
58,469,103
|
58,543,859
|
58,414,293
|
|||||||||
Diluted
|
58,560,046
|
58,469,103
|
58,543,859
|
58,414,293
|
Nine
Months Ended
September
30,
|
|||||||
2006
|
2005
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
loss
|
$
|
(3,445,438
|
)
|
$
|
(3,631,649
|
)
|
|
Adjustments
to reconcile net loss to
|
|||||||
net
cash used in operating activities:
|
|||||||
Depreciation
and amortization
|
301,877
|
457,986
|
|||||
Amortization
of debt discount and offering costs
|
595,500
|
504,819
|
|||||
Increase
in warrant liability
|
-
|
142,427
|
|||||
Stock
option expense
|
178,844
|
-
|
|||||
Other
|
30,146
|
386
|
|||||
Changes
in operating assets and liabilities:
|
|||||||
Accounts
receivable
|
10,215
|
(462,757
|
)
|
||||
Inventory
|
(319,433
|
)
|
22,236
|
||||
Prepaid
expenses and other assets
|
424,560
|
258,636
|
|||||
Accounts
payable
|
235,740
|
108,282
|
|||||
Accrued
liabilities and other liabilities
|
(564,501
|
)
|
(27,402
|
)
|
|||
Deferred
revenue
|
59,342
|
110,935
|
|||||
Net
cash used in operating activities
|
(2,493,148
|
)
|
(2,516,101
|
)
|
|||
Cash
flows from investing activities:
|
|||||||
Purchases
of available-for-sale securities
|
-
|
(5,480,787
|
)
|
||||
Maturities
of available-for-sale securities
|
1,531,000
|
2,000,000
|
|||||
Purchases
of property and equipment
|
(71,282
|
)
|
(71,011
|
)
|
|||
Proceeds
from sales of property and equipment
|
4,097
|
11,049
|
|||||
Patent
and trademark costs
|
(26,898
|
)
|
(17,208
|
)
|
|||
Net
cash provided by (used in) investing activities
|
1,436,917
|
(3,557,957
|
)
|
||||
Cash
flows from financing activities:
|
|||||||
Proceeds
from issuance of common stock
|
-
|
57,922
|
|||||
Payment
of debt issuance costs
|
(30,000
|
)
|
(29,635
|
)
|
|||
Payment
of notes payable
|
(197,054
|
)
|
(225,012
|
)
|
|||
Payments
under capital leases
|
(14,444
|
)
|
(11,124
|
)
|
|||
Other
|
-
|
20
|
|||||
Net
cash used in financing activities
|
(241,498
|
)
|
(207,829
|
)
|
|||
Net
decrease in cash and cash equivalents
|
(1,297,729
|
)
|
(6,281,887
|
)
|
|||
Cash
and cash equivalents, beginning of period
|
4,940,946
|
9,842,658
|
|||||
Cash
and cash equivalents, end of period
|
$
|
3,643,217
|
$
|
3,560,771
|
Three
Months Ended
September
30, 2005
|
Nine
Months Ended
September
30, 2005
|
||||||
Net
loss, as reported
|
$
|
(1,284,467
|
)
|
$
|
(3,631,649
|
)
|
|
Deduct:
Total stock-based employee compensation
expense determined under fair
value based method for all awards
|
(95,196
|
)
|
(400,966
|
)
|
|||
Pro
forma net loss
|
$
|
(1,379,663
|
)
|
$
|
(4,032,615
|
)
|
|
Loss
per common share:
|
|||||||
As
reported (basic and diluted)
|
$
|
(0.02
|
)
|
$
|
(0.06
|
)
|
|
Pro
forma (basic and diluted)
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
|
Number
of
Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life
|
|
Aggregate
Intrinsic
Value
|
||||||
|
|
|
|
|
|||||||||
Outstanding,
January 1, 2006
|
5,523,974
|
$
|
0.44
|
||||||||||
Granted
|
-
|
-
|
|||||||||||
Exercised
|
-
|
-
|
|||||||||||
Forfeited
|
(168,501
|
)
|
$
|
0.32
|
|||||||||
Expired
|
-
|
-
|
|||||||||||
Outstanding,
September 30, 2006
|
5,355,473
|
$
|
0.44
|
5.9
years
|
-
|
||||||||
Exercisable,
September 30, 2006
|
4,110,640
|
$
|
0.47
|
5.7
years
|
-
|
Three
Months Ended
September
30,
2006 |
Three
Months
Ended
September
30,
2005 |
||||||
Net
loss
|
$
|
(1,656,367
|
)
|
$
|
(1,284,467
|
)
|
|
Unrealized
gains on securities
|
-
|
3,370
|
|||||
Other
comprehensive loss
|
$
|
(1,656,367
|
)
|
$
|
(1,281,097
|
)
|
Nine
Months Ended
September
30,
2006 |
Nine
Months
Ended
September
30,
2005 |
||||||
Net
loss
|
$
|
(3,445,438
|
)
|
$
|
(3,631,649
|
)
|
|
Unrealized
losses on securities
|
(2,018
|
)
|
(2,790
|
)
|
|||
Other
comprehensive loss
|
$
|
(3,447,456
|
)
|
$
|
(3,634,439
|
)
|
Three
Months Ended
September
30, 2006
|
Three
Months Ended
September
30, 2005
|
||||||||||||
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
||||||||||
Outstanding
shares
|
58,690,046
|
58,690,046
|
58,622,059
|
58,622,059
|
|||||||||
Effect
of weighting changes in
outstanding shares
|
-
|
-
|
(22,956
|
)
|
(22,956
|
)
|
|||||||
Contingently
issuable shares
|
(130,000
|
)
|
(130,000
|
)
|
(130,000
|
)
|
(130,000
|
)
|
|||||
Adjusted
shares
|
58,560,046
|
58,560,046
|
58,469,103
|
58,469,103
|
Nine
Months Ended
September
30, 2006
|
Nine
Months Ended
September
30, 2005
|
||||||||||||
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
Basic
Earnings
Per
Share
|
Diluted
Earnings
Per
Share
|
||||||||||
Outstanding
shares
|
58,690,046
|
58,690,046
|
58,622,059
|
58,622,059
|
|||||||||
Effect
of weighting changes in
outstanding shares
|
(16,187
|
)
|
(16,187
|
)
|
(77,766
|
)
|
(77,766
|
)
|
|||||
Contingently
issuable shares
|
(130,000
|
)
|
(130,000
|
)
|
(130,000
|
)
|
(130,000
|
)
|
|||||
Adjusted
shares
|
58,543,859
|
58,543,859
|
58,414,293
|
58,414,293
|
5. |
Inventory
|
September
30,
2006
(unaudited)
|
December
31,
2005
|
||||||
Materials
and component parts
|
$
|
424,648
|
$
|
461,218
|
|||
Finished
goods
|
621,266
|
342,485
|
|||||
$
|
1,045,914
|
$
|
803,703
|
September
30, 2006
|
December
31, 2005
|
|||||||||||||||
Wtd
Avg Life
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
||||||||||||
Patents
and trademarks
|
9.8
yrs
|
$
|
3,180,318
|
$
|
1,333,230
|
$
|
3,162,547
|
$
|
1,164,763
|
|||||||
Acquired
technology
|
2.3
yrs
|
237,271
|
161,427
|
237,271
|
136,145
|
|||||||||||
Total
|
$
|
3,417,589
|
$
|
1,494,657
|
$
|
3,399,818
|
$
|
1,300,908
|
Estimated
Amortization Expense
|
||||
For
the year ended 12/31/2006
|
$
|
262,992
|
||
For
the year ended 12/31/2007
|
226,830
|
|||
For
the year ended 12/31/2008
|
201,976
|
|||
For
the year ended 12/31/2009
|
168,267
|
|||
For
the year ended 12/31/2010
|
168,267
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Warranty
reserve at beginning
of period
|
$
|
42,665
|
$
|
48,595
|
$
|
41,185
|
$
|
66,000
|
|||||
Provision
for warranty claims and changes
in reserve for warranties
|
4,812
|
12,117
|
28,086
|
42,730
|
|||||||||
Payments
charged against the reserve
|
(10,304
|
)
|
(12,117
|
)
|
(32,098
|
)
|
(60,135
|
)
|
|||||
Warranty
reserve at end of period
|
$
|
37,173
|
$
|
48,595
|
$
|
37,173
|
$
|
48,595
|
($
amounts in thousands)
Three
Months Ended
September
30, 2006
|
Gamma
Detection Devices
|
Blood
Flow Devices
|
Drug
and Therapy Products
|
Corporate
|
Total
|
|||||||||||
Net
sales:
|
||||||||||||||||
United
States1
|
$
|
877
|
$
|
16
|
$
|
-
|
$
|
-
|
$
|
893
|
||||||
International
|
51
|
14
|
-
|
-
|
65
|
|||||||||||
Research
and development expenses
|
279
|
131
|
832
|
-
|
1,242
|
|||||||||||
Selling,
general and administrative expenses,
excluding depreciation and
amortization2
|
-
|
-
|
-
|
547
|
547
|
|||||||||||
Depreciation
and amortization
|
24
|
66
|
-
|
15
|
105
|
|||||||||||
Income
(loss) from operations3
|
294
|
(239
|
)
|
(832
|
)
|
(562
|
)
|
(1,339
|
)
|
|||||||
Other
income (expenses)4
|
-
|
-
|
-
|
(318
|
)
|
(318
|
)
|
|||||||||
Total
assets, net of depreciation and
amortization:
|
||||||||||||||||
United
States operations
|
1,272
|
538
|
109
|
4,356
|
6,275
|
|||||||||||
Israeli
operations (Cardiosonix Ltd.)
|
-
|
1,999
|
-
|
-
|
1,999
|
|||||||||||
Capital
expenditures
|
33
|
5
|
-
|
10
|
48
|
|||||||||||
Three
Months Ended
September
30, 2005
|
||||||||||||||||
Net
sales:
|
||||||||||||||||
United
States1
|
$
|
1,237
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,237
|
||||||
International
|
38
|
58
|
-
|
-
|
96
|
|||||||||||
Research
and development expenses
|
79
|
302
|
725
|
-
|
1,106
|
|||||||||||
Selling,
general and administrative expenses,
excluding depreciation and
amortization2
|
-
|
-
|
-
|
532
|
532
|
|||||||||||
Depreciation
and amortization
|
33
|
110
|
-
|
14
|
157
|
|||||||||||
Income
(loss) from operations3
|
659
|
(382
|
)
|
(725
|
)
|
(546
|
)
|
(994
|
)
|
|||||||
Other
income (expenses)4
|
-
|
-
|
-
|
(290
|
)
|
(290
|
)
|
|||||||||
Total
assets, net of depreciation and
amortization:
|
||||||||||||||||
United
States operations
|
1,449
|
238
|
28
|
8,072
|
9,787
|
|||||||||||
Israeli
operations (Cardiosonix Ltd.)
|
-
|
2,492
|
-
|
-
|
2,492
|
|||||||||||
Capital
expenditures
|
-
|
8
|
-
|
19
|
27
|
($
amounts in thousands)
Nine
Months Ended
September
30, 2006
|
Gamma
Detection Devices
|
Blood
Flow Devices
|
Drug
and Therapy Products
|
Corporate
|
Total
|
|||||||||||
Net
sales:
|
||||||||||||||||
United
States1
|
$
|
3,608
|
$
|
68
|
$
|
-
|
$
|
-
|
$
|
3,676
|
||||||
International
|
179
|
325
|
-
|
-
|
504
|
|||||||||||
Research
and development expenses
|
626
|
589
|
1,504
|
-
|
2,719
|
|||||||||||
Selling,
general and administrative expenses,
excluding depreciation and
amortization2
|
-
|
-
|
-
|
1,956
|
1,956
|
|||||||||||
Depreciation
and amortization
|
74
|
184
|
-
|
44
|
302
|
|||||||||||
Income
(loss) from operations3
|
1,600
|
(634
|
)
|
(1,504
|
)
|
(2,000
|
)
|
(2,538
|
)
|
|||||||
Other
income (expenses)
4
|
-
|
-
|
-
|
(908
|
)
|
(908
|
)
|
|||||||||
Total
assets, net of depreciation and
amortization:
|
||||||||||||||||
United
States operations
|
1,272
|
538
|
109
|
4,356
|
6,275
|
|||||||||||
Israeli
operations (Cardiosonix Ltd.)
|
-
|
1,999
|
-
|
-
|
1,999
|
|||||||||||
Capital
expenditures
|
33
|
7
|
-
|
31
|
71
|
|||||||||||
Nine
Months Ended
September
30, 2005
|
||||||||||||||||
Net
sales:
|
||||||||||||||||
United
States1
|
$
|
4,186
|
$
|
56
|
$
|
-
|
$
|
-
|
$
|
4,242
|
||||||
International
|
97
|
161
|
-
|
-
|
258
|
|||||||||||
Research
and development expenses
|
201
|
1,042
|
1,805
|
-
|
3,048
|
|||||||||||
Selling,
general and administrative expenses,
excluding depreciation and
amortization2
|
-
|
-
|
-
|
1,895
|
1,895
|
|||||||||||
Depreciation
and amortization
|
97
|
317
|
1
|
43
|
458
|
|||||||||||
Income
(loss) from operations3
|
2,340
|
(1,235
|
)
|
(1,806
|
)
|
(1,938
|
)
|
(2,639
|
)
|
|||||||
Other
income (expenses)
4
|
-
|
-
|
-
|
(993
|
)
|
(993
|
)
|
|||||||||
Total
assets, net of depreciation and
amortization:
|
||||||||||||||||
United
States operations
|
1,449
|
238
|
28
|
8,072
|
9,787
|
|||||||||||
Israeli
operations (Cardiosonix Ltd.)
|
-
|
2,492
|
-
|
-
|
2,492
|
|||||||||||
Capital
expenditures
|
-
|
40
|
1
|
30
|
71
|