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

FORM 10-Q

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended     September 30, 2009                                                                           
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to _____________________________ to _____________________________
 
Commission File Number:        0-26520 

NEOPROBE CORPORATION
(Exact name of  registrant as specified in its charter)

Delaware
  
31-1080091
(State or other jurisdiction of incorporation or organization)
  
(IRS Employer Identification No.)

425 Metro Place North, Suite 300, Dublin, Ohio
  
43017-1367
(Address of principal executive offices)
  
(Zip Code)

(614) 793-7500
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Act.)     Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  79,650,270 shares of common stock, par value $.001 per share (as of the close of business on November 6, 2009).
 
 
NEOPROBE CORPORATION and SUBSIDIARIES

INDEX

PART I – Financial Information
  
     
Item 1.
Financial Statements
  3
     
 
Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
  3
     
 
Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2009 and September 30, 2008 (unaudited)
  5
     
 
Consolidated Statement of Stockholders’ Deficit for the Nine-Month Period Ended September 30, 2009 (unaudited)
  6
     
 
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2009 and September 30, 2008 (unaudited)
  7
     
 
Notes to the Consolidated Financial Statements (unaudited)
  8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
     
 
Forward-Looking Statements
26
     
 
The Company
26
     
 
Product Line Overview
26
     
 
Results of Operations
29
     
 
Liquidity and Capital Resources
31
     
 
Recent Accounting Developments
35
     
 
Critical Accounting Policies
37
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38
     
Item 4T.
Controls and Procedures
38
     
PART II – Other Information
  
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
40
     
Item 6.
Exhibits
40

 
2
 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Neoprobe Corporation and Subsidiaries
Consolidated Balance Sheets

 
  
September 30,
2009
(unaudited)
    
December 31,
2008
  
ASSETS
            
             
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

 
3
 

Neoprobe Corporation and Subsidiaries
Consolidated Balance Sheets, continued

 
  
September 30,
2009
(unaudited)
    
December 31,
2008
  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
             
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

 
4
 

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.

 
5
 

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.

 
6
 

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.

 
7
 
 
Notes to Consolidated Financial Statements
(unaudited)
 
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 November 16, 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.

 
8
 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 
(1)
Cash, accounts receivable, accounts payable, and accrued liabilities:  The carrying amounts approximate fair value because of the short maturity of these instruments.

 
(2)
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.

 
9
 

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  
Property and equipment, net of accumulated depreciation
     —       43,545  
Patents and trademarks, net of accumulated amortization
     —       1,367,412  
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.

 
10
 

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  

 
11
 

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  

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  

 
12
 

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.

 
13
 

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.

 
14
 

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  

 
15
 
 
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  

 
16
 

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.

 
17
 

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.

 
18
 

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.

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.

 
19
 

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 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.

 
20
 

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.

 
21
 

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.

 
22
 

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