UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______TO________
COMMISSION FILE NUMBER: 0-26520
NEOPROBE CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE 31-1080091
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
425 METRO PLACE NORTH, SUITE 300, DUBLIN, OHIO 43017
(Address of principal executive offices)
614.793.7500
(Issuer's telephone number)
36,503,183 SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE
(Number of shares of issuer's common equity outstanding as of the close
of business on November 1, 2002)
Transitional Small Business Disclosure Format (check one) Yes |_| No |X|
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------- -------------
Current assets:
Cash and cash equivalents $ 1,760,415 $ 4,287,101
Available-for-sale securities 1,497,772 --
Accounts receivable, net 420,424 561,129
Inventory 1,269,124 1,430,908
Prepaid expenses and other 222,282 268,445
------------- -------------
Total current assets 5,170,017 6,547,583
------------- -------------
Property and equipment 2,340,740 2,171,788
Less accumulated depreciation and amortization 1,812,641 1,502,676
------------- -------------
528,099 669,112
------------- -------------
Patents and trademarks 3,202,975 3,183,639
Non-compete agreements 603,880 603,880
Acquired technology 245,131 245,131
------------- -------------
4,051,986 4,032,650
Less accumulated amortization 471,419 122,697
------------- -------------
3,580,567 3,909,953
------------- -------------
Other assets 91,951 202,258
------------- -------------
Total assets $ 9,370,634 $ 11,328,906
============= =============
CONTINUED
2
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
---------------- ----------------
Current liabilities:
Line of credit $ 2,000,000 $ --
Notes payable to finance company -- 161,865
Capital lease obligations, current 14,219 12,914
Accrued liabilities 717,719 901,654
Accounts payable 169,263 489,688
Deferred license and other revenue, current 881,698 877,843
---------------- ----------------
Total current liabilities 3,782,899 2,443,964
---------------- ----------------
Capital lease obligations 9,178 20,011
Deferred license and other revenue 851,619 1,431,998
Contingent consideration for acquisition 429,574 453,602
Other liabilities 153,972 75,493
---------------- ----------------
Total liabilities 5,227,242 4,425,068
---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized at September 30, 2002 and December 31, 2001;
none issued and outstanding (500,000 shares designated
as Series A, $.001 par value, at September 30, 2002 and
and December 31, 2001; none outstanding) -- --
Common stock; $.001 par value; 50,000,000 shares
authorized; 36,502,183 shares issued and
outstanding at September 30, 2002; 36,449,067 shares
issued and outstanding at December 31, 2001 36,502 36,449
Additional paid-in capital 124,602,941 124,581,800
Accumulated deficit (120,513,438) (117,714,411)
Unrealized gain on available-for-sale securities 17,387 --
---------------- ----------------
Total stockholders' equity 4,143,392 6,903,838
---------------- ----------------
Total liabilities and stockholders' equity $ 9,370,634 $ 11,328,906
================ ================
See accompanying notes to the consolidated financial statements
3
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Net product sales $ 575,138 $ 1,593,723 $ 2,216,383 $ 5,069,011
License revenue and other 344,623 325,000 1,029,065 1,000,000
------------ ------------ ------------ ------------
Total revenues 919,761 1,918,723 3,245,448 6,069,011
------------ ------------ ------------ ------------
Cost of goods sold 628,754 1,093,094 1,828,450 3,484,205
------------ ------------ ------------ ------------
Gross profit 291,007 825,629 1,416,998 2,584,806
------------ ------------ ------------ ------------
Operating expenses:
Research and development 561,330 153,384 1,798,517 576,337
Selling, general and administrative 823,564 538,861 2,443,960 1,702,419
------------ ------------ ------------ ------------
Total operating expenses 1,384,894 692,245 4,242,477 2,278,756
------------ ------------ ------------ ------------
(Loss) income from operations (1,093,887) 133,384 (2,825,479) 306,050
------------ ------------ ------------ ------------
Other income (expense):
Interest income 26,092 28,693 63,430 111,686
Interest expense (11,734) (2,278) (19,786) (8,953)
Other (3,213) 241,470 (17,192) 250,958
------------ ------------ ------------ ------------
Total other income 11,145 267,885 26,452 353,691
------------ ------------ ------------ ------------
Net (loss) income $ (1,082,742) $ 401,269 $ (2,799,027) $ 659,741
============ ============ ============ ============
(Loss) income per common share:
Basic $ (0.03) $ 0.02 $ (0.08) $ 0.03
Diluted $ (0.03) $ 0.02 $ (0.08) $ 0.03
Weighted average shares:
Basic 36,062,183 25,898,264 36,031,831 25,896,342
Diluted 36,062,183 26,114,054 36,031,831 26,119,816
See accompanying notes to the consolidated financial statements
4
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
2002 2001
------------------ -----------------
Cash flows from operating activities:
Net (loss) income $ (2,799,027) $ 659,741
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization 740,749 314,074
Change in operating assets and liabilities:
Accounts receivable 155,971 317,890
Inventory 140,017 (768,336)
Accounts payable (325,625) (197,480)
Deferred license and other revenue (466,683) (601,875)
Other assets and liabilities 17,125 673,573
------------- -------------
Net cash (used in) provided by operating activities (2,537,473) 397,587
------------- -------------
Cash flows from investing activities:
Purchases of available-for-sale securities (2,491,361) --
Sales of available-for-sale securities 200,000 --
Maturities of available-for-sale securities 805,000 --
Purchases of property and equipment (240,638) (52,533)
Proceeds from sales of property and equipment -- 2,175
Patent and trademark costs (19,336) (14,189)
Subsidiary acquisition costs (24,028) --
------------- -------------
Net cash used in investing activities (1,770,363) (64,547)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 834
Payment of offering costs (47,456) --
Proceeds from line of credit 2,000,000 --
Payment of notes payable (161,865) (105,332)
Payments under capital leases (9,529) (8,382)
------------- -------------
Net cash provided by (used in) financing activities 1,781,150 (112,880)
------------- -------------
Net (decrease) increase in cash and cash equivalents (2,526,686) 220,160
Cash and cash equivalents, beginning of period 4,287,101 4,643,347
------------- -------------
Cash and cash equivalents, end of period $ 1,760,415 $ 4,863,507
============= =============
See accompanying notes to the consolidated financial statements
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information presented for September 30, 2002 and 2001, and for the
periods then ended is unaudited, but includes all adjustments (which
consist only of normal recurring adjustments) that the management of
Neoprobe Corporation (Neoprobe, we or the Company) 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 generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. The results for
the interim period are not necessarily indicative of results to be expected
for the year. The financial statements should be read in conjunction with
the Company's audited financial statements for the year ended December 31,
2001, which were included as part of the Company's Annual Report on Form
10-KSB. Certain 2001 amounts have been reclassified to conform to the 2002
presentation (see also Note 11).
The consolidated financial statements of the Company include the accounts
of the Company and its wholly owned subsidiary, Cardiosonix Ltd.
(Cardiosonix) beginning December 31, 2001 (see also Note 11). All
significant inter-company accounts were eliminated in consolidation.
2. COMPREHENSIVE INCOME (LOSS)
Due to the Company's 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, 2002.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Net loss $ (1,082,742) $ (2,799,027)
Unrealized gains on securities 3,926 17,387
-------------- --------------
Other comprehensive loss $ (1,078,816) $ (2,781,640)
============== ==============
The Company had no accumulated other comprehensive income (loss) activity
during the three-month and nine-month periods ended September 30, 2001.
3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted earnings
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.
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
--------------------------- --------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------
Outstanding shares 36,502,183 36,502,183 26,284,892 26,284,892
Effect of weighting changes
in outstanding shares -- -- (16,628) (16,628)
Contingently issuable shares (440,000) (440,000) (370,000) (370,000)
Stock options -- -- -- 215,790
----------- ----------- ----------- -----------
Adjusted shares 36,062,183 36,062,183 25,898,264 26,114,054
=========== =========== =========== ===========
6
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
--------------------------- ---------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------
Outstanding shares 36,502,183 36,502,183 26,284,892 26,284,892
Effect of weighting changes
in outstanding shares (30,352) (30,352) (18,550) (18,550)
Contingently issuable shares (440,000) (440,000) (370,000) (370,000)
Stock options -- -- -- 223,474
----------- ----------- ----------- -----------
Adjusted shares 36,031,831 36,031,831 25,896,342 26,119,816
=========== =========== =========== ===========
The following table summarizes options to purchase common stock of the
Company which were outstanding during the three-month and nine-month
periods ended September 30, 2001, but which were not included in the
computation of diluted earnings per share because their effect was
anti-dilutive.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
----------------------------------------------- ---------------------------------------------
EXERCISE OPTIONS EXERCISE OPTIONS
PRICE OUTSTANDING PRICE OUTSTANDING
------------------------ ------------------ ---------------------- -------------------
$ 0.60 - $ 1.25 387,551 $ 0.60 - $ 1.25 399,448
$ 1.50 - $ 2.50 227,373 $ 1.50 - $ 2.50 227,421
$ 3.25 - $ 6.00 35,651 $ 3.25 - $ 6.00 190,826
$ 13.38 - $ 15.75 16,848 $ 13.38 - $ 15.75 67,006
----------- ------------
667,423 884,701
=========== ============
There is no difference in basic and diluted earnings per share for the
Company related to the three- month and nine-month periods ended September
30, 2002. The net loss per common share for this period excludes the number
of common shares issuable upon exercise of outstanding stock options and
warrants into the Company's common stock since such inclusion would be
anti-dilutive.
4. INVENTORY
The components of inventory are as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
Materials and component parts $ 735,339 $ 807,393
Work in process 24,515 --
Finished goods 509,270 623,515
-------------- --------------
$ 1,269,124 $ 1,430,908
============== ==============
7
5. INTANGIBLE ASSETS
The major classes of intangible assets are as follows:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
(UNAUDITED)
------------------ -----------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ ---------- ------------
Patents and trademarks $3,202,975 $331,928 $3,183,639 $122,697
Non-compete agreements 603,880 113,227 603,880 -
Acquired technology 245,131 26,264 245,131 -
---------- -------- ---------- --------
Total $4,051,986 $471,419 $4,032,650 $122,697
========== ======== ========== ========
During the first nine months of 2002 and 2001, the Company recorded
general and administrative expenses of $349,000 and $22,000,
respectively, of intangible asset amortization expense. Of those
amounts, $54,000 and $6,000, respectively, related to the impairment
of patents and patent applications that were determined not to have
ongoing value to the business.
The estimated future amortization expense for the next five fiscal
years is as follows:
ESTIMATED
AMORTIZATION
EXPENSE
------------
For the year ended 12/31/2003 $ 402,346
For the year ended 12/31/2004 404,451
For the year ended 12/31/2005 406,662
For the year ended 12/31/2006 258,012
For the year ended 12/31/2007 260,449
----------
$1,731,921
==========
6. LINE OF CREDIT
During February 2002, the Company entered into a line of credit facility
with an investment management company. The facility provides for a maximum
line of credit of $2.0 million and is fully collateralized by pledged cash
and investments on deposit with the investment management company.
Availability under the facility is based on advance rates varying from 80%
to 92% of the underlying available collateral. Outstanding amounts under
the facility bear interest at LIBOR plus 175 basis points. The facility
expires in February 2007. There was $2.0 million outstanding under the line
of credit as of September 30, 2002. The line of credit was fully paid off
in October 2002.
7. INCOME TAXES
For the nine months ended September 30, 2001, the reversal of certain
temporary differences related to accrued expenses and deferred revenue
resulted in the generation of a loss for income tax purposes. The Company
also generated a loss for income tax purposes for the first nine months of
2002. All of the Company's net deferred tax assets have been fully offset
by a valuation allowance. No income tax effects are reflected in the
statement of operations for the nine-month periods ended September 30, 2002
and 2001.
8
8. STOCK OPTIONS
During the first nine months of 2002, the Board of Directors granted
options to employees and certain directors of the Company to purchase
905,000 shares of common stock, exercisable at an average price of $0.42
per share, vesting over three years. During the same period, the Company
cancelled 258,000 options, exercisable at an average price of $0.50 per
share. As of September 30, 2002, the Company has 2.5 million options
outstanding under three stock option plans. Of the outstanding options, 1.0
million options have vested as of September 30, 2002, at an average
exercise price of $0.88 per share.
9. AGREEMENTS
During January 2002, the Company completed a license agreement with the
University of California, San Diego (UCSD) for a proprietary compound that
the Company believes could be used as a lymph node locating agent in
intraoperative lymphatic mapping (ILM) procedures. The license agreement is
effective until the later of the expiration date of the longest-lived
underlying patent or January 30, 2023. Under the terms of the license
agreement, UCSD has granted the Company the exclusive rights to make, use,
sell, offer for sale and import Licensed Products as defined in the
agreement and to practice the defined Licensed Methods during the term of
the agreement. The Company may also sublicense the Patent Rights, subject
to the approval of certain sublicense terms by UCSD. In consideration for
the license rights, the Company agreed to pay UCSD a license issue fee of
$25,000 and license maintenance fees of $25,000 per year. The Company also
agreed to pay UCSD milestone payments related to successful regulatory
clearance for marketing of the Licensed Products, a royalty on Net Sales of
Licensed Products subject to a $25,000 minimum annual royalty, fifty
percent of all sublicense fees and fifty percent of sublicense royalties.
The Company also agreed to reimburse UCSD for all patent-related costs.
Patent-related costs for the first nine months of 2002 totaled $28,000 and
were recorded in research and development expenses in the statement of
operations.
UCSD also has the right to terminate the agreement or change the nature of
the agreement to a non-exclusive agreement if the Company is determined not
to have been diligent in developing and commercializing the covered
products, not marketing the products within six months of receiving
regulatory approval, reasonably filling market demand or obtaining all the
necessary government approvals.
10. SEGMENT AND SUBSIDIARY INFORMATION
The Company owns or has rights to intellectual property involving two
primary types of medical diagnostic products, including gamma detection
instruments currently used primarily in the application of intraoperative
lymphatic mapping (ILM), and blood flow measurement devices.
The information in the following table is derived directly from each
segment's internal financial reporting used for corporate management
purposes. Selling, general and administrative costs, including
amortization, interest and other costs that relate primarily to
corporate activity, are not currently allocated to the operating segments
for financial reporting purposes.
9
($ AMOUNTS IN THOUSANDS) GAMMA BLOOD
THREE MONTHS ENDED SEPTEMBER 30, 2002 DETECTION FLOW UNALLOCATED TOTAL
----------------------------------------------- ------------ ----------- ------------- ------------
Net sales:
United States(1) $ 573 $ -- $ -- $ 573
International 2 -- -- 2
License revenue and other 345 -- -- 345
Research and development expenses 248 313 -- 561
Selling, general and administrative expenses -- -- 824 824
Income (loss) from operations(2) 43 (313) (824) (1,094)
Other income -- -- 11 11
THREE MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------
Net sales:
United States(1) $ 1,578 $ -- $ -- $ 1,578
International 16 -- -- 16
License revenue and other 325 -- -- 325
Research and development expenses 153 -- -- 153
Selling, general and administrative expenses -- -- 539 539
Income (loss) from operations(2) 672 -- (539) 133
Other income -- -- 268 268
($ AMOUNTS IN THOUSANDS) GAMMA BLOOD
NINE MONTHS ENDED SEPTEMBER 30, 2002 DETECTION FLOW UNALLOCATED TOTAL
----------------------------------------------- ------------ ----------- ------------- ------------
Net sales:
United States(1) $ 2,154 $ -- $ -- $ 2,154
International 62 -- -- 62
License revenue and other 1,029 -- -- 1,029
Research and development expenses 744 1,055 -- 1,799
Selling, general and administrative expenses -- -- 2,444 2,444
Income (loss) from operations(2) 674 (1,055) (2,444) (2,825)
Other income -- -- 26 26
NINE MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------
Net sales:
United States(1) $ 4,985 $ -- $ -- $ 4,985
International 84 -- -- 84
License revenue and other 1,000 -- -- 1,000
Research and development expenses 576 -- -- 576
Selling, general and administrative expenses -- -- 1,702 1,702
Income (loss) from operations(2) 2,008 -- (1,702) 306
Other income -- -- 354 354
1 All sales to EES are made in the United States. EES distributes the
product globally through its international affiliates.
2 Income (loss) from operations does not reflect the allocation of
selling, general and administrative costs to the operating segments.
10
11. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Under
SFAS 141, any business combination initiated after June 30, 2001 must be
accounted for as a purchase. For purchase business combinations that are
consummated after June 30, 2001, goodwill and identifiable intangibles
should be recorded and amortized in accordance with SFAS 142, i.e.,
goodwill and intangible assets with indefinite lives are not amortized and
other identified intangibles are amortized. For any purchase business
combination consummated on or before June 30, 2001, the accounting under
APB 16 and APB 17 still applies. Goodwill and separately identifiable
intangibles should be recorded and amortized until adopting SFAS 142, which
is required for fiscal years beginning after December 15, 2001. A calendar
year-end company would continue to amortize goodwill and all separately
identifiable intangibles through December 31, 2001. Upon adoption of SFAS
142, a company would cease amortizing goodwill and separately identifiable
intangibles with indefinite lives and amortize other identifiable
intangibles in accordance with the guidelines set forth in the standard.
The Company adopted SFAS 141 and SFAS 142 as of December 31, 2001 related
to its acquisition of Cardiosonix. The adoption of these pronouncements
resulted in recording $3.5 million of acquired intangible assets with a
weighted average useful life of approximately 13 years. During the first
nine months of 2002, the Company recorded $270,000 in amortization expense
that is included in selling, general and administrative expenses, and
recorded a purchase price adjustment of $24,000 to the contingent
consideration liability related to net acquisition costs in excess of
initial estimates.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that Opinion). SFAS 144
retains the fundamental provisions in SFAS 121 for recognizing and
measuring impairment losses on long-lived assets held for use and
long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS 121. For example,
SFAS 144 provides guidance on how a long-lived asset that is used as part
of a group should be evaluated for impairment, establishes criteria for
when a long-lived asset is held for sale, and prescribes the accounting for
a long-lived asset that will be disposed of other than by sale. SFAS 144
retains the basic provisions of APB 30 on how to present discontinued
operations in the income statement but broadens that presentation to
include a component of an entity (rather than a segment of a business).
Unlike SFAS 121, an impairment assessment under SFAS 144 will never result
in a write-down of goodwill. Rather, goodwill is evaluated for impairment
under SFAS 142, Goodwill and Other Intangible Assets.
The Company adopted the provisions of SFAS 144 as of January 1, 2002. The
impairment assessment for long-lived assets held for use under SFAS 144 is
largely unchanged from SFAS 121. The provisions of SFAS 144 for assets held
for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal
activities. The adoption of SFAS 144 did not have a material effect on the
Company's financial statements for the first nine months of 2002.
In November 2001, the Emerging Issues Task Force of the FASB issued Topic
D-103, Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred. The FASB required Topic D-103 be applied
in financial reporting periods beginning after December 15, 2001. Topic
D-103 requires companies to characterize reimbursements received for
out-of-pocket expenses as revenue. The adoption of Topic D-103 requirements
resulted in the reclassification of the $125,000 per quarter reimbursement
by our marketing partner, Ethicon Endo-Surgery, Inc. (EES), of certain
research and development charges from research and development expenses to
license revenue and other for all periods presented.
11
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 will require the Company to
disclose information about its exit and disposal activities, the related
costs, and changes in those costs in the notes to the interim and annual
financial statements that include the period in which an exit or disposal
activity is initiated. SFAS 146 will require the Company to disclose, for
each reportable segment, the exit or disposal activity costs incurred in
the period and the cumulative amount incurred, net of any changes in the
liability, with an explanation of the reasons for the changes. SFAS 146
will also require the Company to disclose the total amount of costs
expected to be incurred in connection with the exit or disposal activity.
The new requirements are effective prospectively for exit and disposal
activities initiated after December 31, 2002. We do not anticipate that
adoption of SFAS 146 will have a material impact on our financial condition
or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the first nine months of 2002 decreased $2.8 million to $3.2 million
from $6.1 million for the same period in 2001. Research and development expenses
during the first nine months of 2002 were $1.8 million or 42% of operating
expenses for the period. Selling, general and administrative expenses were $2.4
million or 58% of operating expenses for the period. Overall, operating expenses
for the first nine months of 2002 increased $2.0 million or 86% over the same
period in 2001. The Company anticipates that total operating expenses for the
fourth quarter of 2002 will be consistent with expenses for the first nine
months of 2002.
Three months ended September 30, 2002 and 2001
Net Sales and Margins. Net product sales decreased $1.0 million or 64% to
$575,000 during the third quarter of 2002 from $1.6 million during the same
period in 2001. Gross margins on product sales for the third quarter of 2002
were -9% of net sales, as compared to 31% of net sales for the same period in
2001. Excluding the impairment of $214,000 of BlueTip(R) probe-related inventory
that the Company did not believe had ongoing value to the business, gross
margins in the third quarter of 2002 would have amounted to 28% of net sales.
The decline in net product sales was the result of lower overall demand for
gamma detection devices during the third quarter of 2002 as compared to the same
period in 2001. End customer (i.e., hospital) demand for the Company's
neo2000(R) gamma detection devices appears to be slowing in 2002 as compared to
2001. In addition, BlueTip probes do not appear to be achieving the end customer
acceptance originally anticipated when initial stocking orders for EES were
delivered in the first and second quarters of 2001, and as a result, EES
notified Neoprobe during the third quarter of its intent to shift product sales
emphasis to the 14mm probe and away from the BlueTip probes during 2003. The
decline in demand below EES's original expectations for neo2000 systems and
BlueTip probes, coupled with purchases they were required to make under the
terms of the Distribution Agreement, has resulted in an overstock position for
probes and control units at EES. EES began to take steps to decrease the
overstock position earlier in 2002. These steps have resulted in a combined
decrease in Neoprobe's sales of BlueTip probes and 14mm probes of 72% during the
third quarter of 2002 as compared to the prior year. Neoprobe's sales of control
units were also affected by the decline in end customer demand, resulting in a
net decrease of 63% in control unit sales over the two periods.
The decline in gross margins on product sales was primarily due to the
impairment of $214,000 in BlueTip probe-related raw materials and finished
components inventory. Excluding the effect of the inventory impairment, margins
decreased slightly compared to the prior year due to changes in the product
sales mix as noted above, with decreased sales volumes of higher-margin products
surpassing the decrease in sales volumes of lower-margin products during the
quarter.
The Company believes, based on EES's current purchase commitments and forecasts,
that sales volumes for the fourth quarter of 2002 will be more consistent with
first quarter 2002 levels and that EES will satisfy its minimum purchase
obligations by the end of 2002. Despite the declines in demand, the Company
believes, again based primarily on EES's current forecasts, that EES's overstock
position for 14mm probes and control units will be substantially eliminated by
the end of 2002 or early 2003 and that sales of 14mm probes and control units to
EES should begin to increase later in 2003 once the overstock position has been
eliminated. The Company expects gross margins on product sales for the fourth
quarter of 2002 to be consistent with margins experienced during the first nine
months of 2002.
12
License Revenue and Other. License revenue and other in the third quarters of
2002 and 2001 included $200,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES and $145,000 and $125,000,
respectively, from the reimbursement by EES of certain product development
costs.
Research and Development Expenses. Research and development expenses increased
$408,000 or 266% to $561,000 during the third quarter of 2002 from $153,000
during the same period in 2001. The increase is primarily due to the product
development efforts of Cardiosonix and $40,000 in separation costs related to a
headcount reduction of gamma product line personnel in the third quarter of
2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $285,000 or 53% to $824,000 during the third
quarter of 2002 from $539,000 during the same period in 2001. The increase was
primarily a result of the general and administrative costs incurred in the
operation and support of Cardiosonix, $90,000 in amortization of intangible
assets related to the acquisition of Cardiosonix, and $80,000 in impairment of
production equipment and intellectual property that the Company did not believe
had ongoing value to the business, offset by decreases in certain overhead
costs, such as bad debts and warranty expense.
Other Income. Other income decreased $257,000 or 96% to $11,000 during the third
quarter of 2002 from $268,000 during the same period in 2001. Other income
during the third quarter of 2002 consisted primarily of interest income. The
Company's interest income decreased because the Company maintained a lower
balance of cash and investments during the third quarter of 2002 as compared to
the same period in 2001.
Other income during the third quarter of 2001 consisted primarily of a $238,000
refund of a portion of the limited guarantee made by the Company related to a
loan made by a bank to Neoprobe (Israel) Ltd. (Neoprobe Israel). The Company had
previously put cash on deposit with the bank as security for the limited
guarantee. The full amount of the limited guarantee was written off in 1998 in
conjunction with the Company's decision to liquidate Neoprobe Israel, as the
Company did not expect to receive any of the cash deposit back from the bank. In
connection with the refunded cash deposit, the bank also granted the Company a
general release from all obligations related to the loan.
Nine months ended September 30, 2002 and 2001
Net Sales and Margins. Net product sales decreased $2.9 million or 56% to $2.2
million during the first nine months of 2002 from $5.1 million during the same
period in 2001. Gross margins on net product sales for the first nine months of
2002 were 18% of net sales, as compared to 31% of net sales for the same period
in 2001. Excluding the impairment of $214,000 of BlueTip probe-related inventory
that the Company did not believe had ongoing value to the business, gross
margins for the first nine months of 2002 would have amounted to 27% of net
sales.
The decline in net product sales was the result of lower overall demand for
gamma detection devices during the first nine months of 2002 as compared to the
same period in 2001. End customer (i.e., hospital) demand for the Company's
neo2000 gamma detection devices appears to be slowing year-to-date in 2002 as
compared to 2001. In addition, BlueTip probes do not appear to be achieving the
end customer acceptance originally anticipated when EES's initial stocking
orders were delivered in the first half of 2001, and as a result, EES notified
Neoprobe during the third quarter of its intent to shift product sales emphasis
to the 14mm probe and away from the BlueTip probes during 2003. The decline in
demand below EES's original expectations for neo2000 systems and BlueTip probes,
coupled with purchases they were required to make under the terms of the
Distribution Agreement, has resulted in an overstock position for probes and
control units at EES. In connection with delays in the transfer of manufacturing
of the neo2000 systems to a new contract manufacturer during the first quarter
of 2002, the Company began working with EES during the first quarter of 2002 to
decrease their overstock position. The steps taken have resulted in a combined
decrease in Neoprobe's sales of BlueTip probes and 14mm probes of 84% during the
first nine months of 2002 as compared to the prior year. Neoprobe's
13
sales of control units were also affected by the decline in demand, resulting in
a net decrease of 19% in control unit sales over the two periods.
The decline in gross margins on product sales was primarily due to the
impairment of $214,000 in BlueTip probe-related raw materials and finished
components inventory. Excluding the effect of the inventory impairment, margins
decreased slightly due to changes in the product sales mix as noted above with
decreased sales volumes of higher-margin products surpassing the decrease in
sales volumes of lower-margin products during the first nine months of 2002.
License Revenue and Other. License revenue and other in the first nine months of
2002 and 2001 included $600,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES and $429,000 and $375,000,
respectively, from the reimbursement by EES of certain product development
costs. License revenue and other in the first nine months of 2001 also included
$25,000 from the recognition of milestone fees related to an option agreement to
license certain of the Company's RIGS(R) technology.
Research and Development Expenses. Research and development expenses increased
$1.2 million or 212% to $1.8 million during the first nine months of 2002 from
$576,000 during the same period in 2001. The increase is primarily due to the
product development efforts related to the Cardiosonix line of blood flow
products, $93,000 in gamma detection drug development costs, and $40,000 in
separation costs related to a headcount reduction of gamma product line
personnel in the third quarter of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $742,000 or 44% to $2.4 million during the
first nine months of 2002 from $1.7 million during the same period in 2001. The
increase was primarily a result of the general and administrative costs incurred
in the operation and support of Cardiosonix, $270,000 in amortization of
intangible assets related to the acquisition of Cardiosonix, increased
consulting and professional services incurred by the Company related to
Cardiosonix, the transfer of manufacturing of certain components of the neo2000
gamma detection system to a new contract manufacturer, and $125,000 in
impairment of production equipment and intellectual property that the Company
did not believe had ongoing value to the business. These increases were offset
by decreases in certain overhead costs, such as bad debts and warranty expense.
Other Income. Other income decreased $327,000 or 93% to $26,000 during the first
nine months of 2002 from $354,000 during the same period in 2001. Other income
during the first nine months of 2002 consisted primarily of interest income. The
Company's interest income decreased because the Company maintained a lower
balance and received a lower interest rate on its cash and investments during
the first nine months of 2002 as compared to the same period in 2001, consistent
with marketplace activity over the two periods.
Other income during the first nine months of 2001 consisted primarily of a
$238,000 refund of a portion of the limited guarantee made by the Company
related to a loan made by a bank to Neoprobe Israel. The Company had previously
put cash on deposit with the bank as security for the limited guarantee. The
full amount of the limited guarantee was written off in 1998 in conjunction with
the Company's decision to liquidate Neoprobe Israel, as the Company did not
expect to receive any of the cash deposit back from the bank. In connection with
the refunded cash deposit, the bank also granted the Company a general release
from all obligations related to the loan.
14
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash used in operations increased $2.9 million to $2.5
million during the first nine months of 2002 from $398,000 provided by
operations during the same period in 2001. Working capital decreased $2.7
million to $1.4 million at September 30, 2002 as compared to $4.1 million at
December 31, 2001. The current ratio decreased to 1.4:1 at September 30, 2002
from 2.7:1 at December 31, 2001. The decrease in working capital was primarily
related to cash used to fund development activities.
Cash and investment balances decreased to $3.3 million at September 30, 2002
from $4.3 million at December 31, 2001, primarily due to the requirements of
supporting the operations of Cardiosonix and the decrease in net sales during
the first nine months of 2002.
Accounts receivable decreased to $420,000 at September 30, 2002 from $561,000 at
December 31, 2001. The Company expects receivable levels to continue to
fluctuate somewhat during the remainder of 2002 depending on the timing of
purchases and payments by EES.
Inventory levels decreased to $1.3 million at September 30, 2002 as compared to
$1.4 million at December 31, 2001, primarily due to the write-off of $214,000 of
inventory that the Company did not believe had ongoing value to the business,
offset by partial replenishment of our control unit safety stock following a
manufacturing transfer in the first quarter and acquiring materials in
preparation for production of blood flow products. During the remainder of 2002,
we will continue to work through our carryover stock of certain long-lead gamma
device components that were built up during 2001 as a result of quantity price
breaks. We expect inventory levels to increase slightly in the fourth quarter as
the use of these long-lead components is offset by the building of initial
inventory of blood flow products in preparation for commercial launch.
The Company had previously indicated it would spend a net amount of $3.5
million during 2002, primarily in support of development of its blood flow
product line. The Company believes this goal is still achievable despite the
declines in revenue from its original expectations, and to that end, made
certain organizational changes early in the third quarter in the resources that
support its gamma detection product line in order to keep its cash needs for
the remainder of 2002 in line with original expectations.
Investing Activities. Cash used in investing activities increased to $1.8
million during the first nine months of 2002 from $65,000 during the same period
in 2001. During the first nine months of 2002, the Company invested in $2.5
million of available-for-sale securities, offset by sales and maturities of
available-for-sale securities of $1.0 million. Capital expenditures in the first
nine months of 2002 were primarily for purchases of production tools and
equipment, product development equipment, and technology infrastructure. Capital
expenditures in the first nine months of 2001 were split between purchases of
production tools and equipment and technology infrastructure. Capital needs for
the remainder of 2002 are expected to decrease somewhat as compared to the
fourth quarter of 2001.
Financing Activities. Financing activities provided $1.8 million in cash in the
first nine months of 2002 versus $113,000 used during the same period in 2001.
During the second and third quarters of 2002, the Company drew $2.0 million
under a line of credit primarily to fund the development activities of
Cardiosonix. Payments of notes payable were 54% higher during the first nine
months of 2002 as compared to the same period in 2001, due to the increased cost
of financed insurance.
On November 19, 2001, the Company entered into a common stock purchase agreement
with an investment fund, Fusion Capital Fund II, LLC (Fusion) for the issuance
and purchase of Neoprobe common stock. Under the stock purchase agreement,
Fusion committed to purchase up to $10 million of Neoprobe common stock over a
forty-month period that commenced in May 2002. A registration statement
registering for resale of up to 5 million shares of Neoprobe common stock was
declared effective on April 15, 2002. The Company will be able to request daily
draw downs, subject to a daily base amount, currently set at $12,500. The number
of shares the Company is to issue to Fusion in return for that money will be
based on the lower of (a) the closing sale price for Neoprobe common stock on
the day of the draw request or (b) the average of the three lowest closing sales
prices during a twelve
15
day period prior to the draw request. No shares may be sold to Fusion at lower
than a floor price currently set at $0.30, but in no case below $0.20 without
Fusion's prior consent. Upon execution of the common stock purchase agreement,
the Company issued 449,438 shares of Neoprobe common stock to Fusion as a
commitment fee. Market conditions (i.e., share price) have effectively
prohibited the Company from drawing funds under the Fusion facility during the
first nine months of 2002, and in the absence of a change in those conditions,
the Fusion facility is unlikely to be drawn on in the foreseeable future.
During February 2002, the Company entered into a line of credit facility with an
investment management company. The facility provides for a maximum line of
credit of $2.0 million and is fully collateralized by pledged cash and
investments on deposit with the investment management company. Availability
under the facility is based on advance rates varying from 80% to 92% of the
underlying available collateral. Outstanding amounts under the facility bear
interest at LIBOR plus 175 basis points. The facility expires in February 2007.
There was $2.0 million outstanding under the line of credit as of September 30,
2002. The line of credit was fully paid off during October 2002.
The Company believes its current cash, available-for-sale securities, and cash
expected to be provided through sales of its gamma detection products are
adequate to sustain the Company's planned development and operations through the
fourth quarter of 2002. However, the Company's ability to execute its plans into
2003 significantly depends on its ability to raise additional funds from sources
other than operations. The Company's future liquidity and capital requirements
will depend on a number of factors, including its ability to raise additional
capital in a timely manner through additional investment, expanded market
acceptance of its current products, its ability to commercialize new products
such as its blood flow product line, its ability to monetize its investment in
non-core technologies, its ability to obtain milestone or development funds from
potential development and distribution partners, regulatory actions by the FDA
and other international regulatory bodies, and intellectual property protection.
Throughout 2002, Neoprobe has made minor modifications to its operating plan
and cut or delayed planned expenditures as a result of delays in its ability to
obtain additional sources of funding. To this point, such changes and cuts have
not had a significant impact on Neoprobe's ability to meet the operational
milestones it set at the beginning of the year. The Company continues to believe
it has adequate funding to finance its planned operations through the end of
2002 and into 2003. The Company is in discussions with several potential
financing sources; however, there can be no assurance that additional capital
will be available on acceptable terms, if at all. If additional funding is not
secured in the near future, the Company will have to further modify and/or
significantly curtail its current strategic and operating plans. There can be no
assurance that the Company will be able to achieve significant product revenues
from its current or potential new products. In addition, there can be no
assurance that the Company will achieve profitability again in the future.
FORWARD-LOOKING STATEMENTS
Our company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in this report and
other Company filings with the Securities and Exchange Commission and in our
reports to shareholders. Statements that relate to other than strictly
historical facts, such as statements about our plans and strategies,
expectations for future financial performance, new and existing products and
technologies, and markets for our products are forward-looking statements.
Generally, the words "believe," "expect," "intend," "estimate," "anticipate,"
"will" and other similar expressions identify forward-looking statements. The
forward-looking statements are and will be based on our management's
then-current views and assumptions regarding future events and operating
performance, and speak only as of their dates. Investors are cautioned that such
statements involve risks and uncertainties that could cause actual results to
differ materially from historical or anticipated results due to many factors
including, but not limited to, our company's limited revenues, accumulated
deficit, future capital needs, uncertainty of capital funding, dependence on
limited product line and exclusive distributor, uncertainty of market
acceptance, competition, limited marketing and manufacturing experience, and
other risks detailed in our company's most recent Annual Report on Form
16
10-KSB and other Securities and Exchange Commission filings. We undertake no
obligation to publicly update or revise any forward-looking statements.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer, along with the Chief Financial Officer, concluded that
the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiary) required to be included in its periodic SEC filings.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect its internal controls subsequent
to the date of this evaluation.
17
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) Neoprobe Corporation reconvened its Annual Meeting of Stockholders on
July 19, 2002, for the purpose of increasing the authorized number of
shares of the Company's stock.
(b) The table shows the voting tabulation for each matter voted upon at the
reconvened Annual Meeting of Stockholders.
ACTION FOR AGAINST ABSTAIN
------ --- ------- -------
Increase the authorized number of
shares of the Company from 55,000,000
to 80,000,000, consisting of 75,000,000
shares of common stock, $.001 par value,
and 5,000,000 shares of preferred stock,
$.001 par value
14,740,257 2,018,830 72,500
ITEM 6. Exhibits and Reports on Form 8-K
(a) LIST OF EXHIBITS
99. ADDITIONAL EXHIBITS
Exhibit 99.1 Certification Under Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 Certification Under Section 906 of the Sarbanes-Oxley
Act of 2002
(b) REPORTS ON FORM 8-K
None.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEOPROBE CORPORATION
(the Company)
Dated: November 13, 2002
By: /s/ DAVID C. BUPP
------------------------------------------
David C. Bupp
President and Chief Executive Officer
(duly authorized officer; principal executive officer)
By: /s/ BRENT L. LARSON
------------------------------------------
Brent L. Larson
Vice President, Finance and Chief Financial Officer
(principal financial and accounting officer)
19
CERTIFICATIONS
I, David C. Bupp, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Neoprobe Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ David C. Bupp
------------------------------------------
David C. Bupp
President and Chief Executive Officer
November 13, 2002
20
I, Brent L. Larson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Neoprobe
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Brent L. Larson
--------------------------------------------
Brent L. Larson
Vice President, Finance and
Chief Financial Officer
November 13, 2002
21