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: MARCH 31, 2004
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)
57,381,535 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 April 30, 2004)
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
MARCH 31,
2004 DECEMBER 31,
ASSETS (UNAUDITED) 2003
----------- ------------
Current assets:
Cash and cash equivalents $ 3,390,284 $ 1,588,760
Accounts receivable, net 821,710 1,107,800
Inventory 921,454 1,008,326
Prepaid expenses and other 383,841 346,449
----------- ------------
Total current assets 5,517,289 4,051,335
----------- ------------
Property and equipment 2,273,486 2,237,741
Less accumulated depreciation and amortization 1,901,810 1,875,028
----------- ------------
371,676 362,713
----------- ------------
Patents and trademarks 3,161,865 3,156,101
Non-compete agreements 584,516 584,516
Acquired technology 237,271 237,271
----------- ------------
3,983,652 3,977,888
Less accumulated amortization 1,149,978 1,042,373
----------- ------------
2,833,674 2,935,515
----------- ------------
Other assets 32,973 35,479
----------- ------------
Total assets $ 8,755,612 $ 7,385,042
=========== ============
CONTINUED
2
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
MARCH 31,
2004 DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 2003
------------- ------------
Current liabilities:
Notes payable to finance companies $ 113,586 $ 192,272
Capital lease obligations, current 13,889 9,731
Accrued liabilities 271,395 227,306
Accounts payable 329,909 225,032
Deferred revenue, current 670,851 886,657
------------- ------------
Total current liabilities 1,399,630 1,540,998
------------- ------------
Note payable to CEO, net of discount of $169,200 and $12,702, respectively 80,800 237,298
Note payable to investor, net of discount of $32,496 - 217,504
Capital lease obligations 40,831 24,009
Deferred revenue 56,240 68,930
Other liabilities 39,203 37,358
------------- ------------
Total liabilities 1,616,704 2,126,097
------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at March 31,
2004 and December 31, 2003; none issued and outstanding (500,000 shares
designated as Series A, $.001 par value, at March 31, 2004 and
and December 31, 2003; none outstanding) - -
Common stock; $.001 par value; 75,000,000 shares
authorized; 57,047,285 shares issued and outstanding
at March 31, 2004; 51,520,723 shares issued and
outstanding at December 31, 2003 57,047 51,521
Additional paid-in capital 130,147,569 127,684,555
Accumulated deficit (123,065,708) (122,477,131)
------------- ------------
Total stockholders' equity 7,138,908 5,258,945
------------- ------------
Total liabilities and stockholders' equity $ 8,755,612 $ 7,385,042
============= ============
See accompanying notes to the consolidated financial statements
3
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
----------- -----------
Revenues:
Net sales $ 1,225,617 $ 1,303,646
License and other revenue 200,000 235,390
----------- -----------
Total revenues 1,425,617 1,539,036
----------- -----------
Cost of goods sold 540,142 839,062
----------- -----------
Gross profit 885,475 699,974
----------- -----------
Operating expenses:
Research and development 583,100 418,769
Selling, general and administrative 813,393 754,083
----------- -----------
Total operating expenses 1,396,493 1,172,852
----------- -----------
Loss from operations (511,018) (472,878)
----------- -----------
Other income (expenses):
Interest income 533 2,550
Interest expense (72,358) (4,636)
Other (5,734) (3,604)
----------- -----------
Total other expenses (77,559) (5,690)
----------- -----------
Net loss $ (588,577) $ (478,568)
=========== ===========
Net loss per common share:
Basic $ (0.01) $ (0.01)
Diluted $ (0.01) $ (0.01)
Weighted average shares outstanding:
Basic 53,049,534 38,258,231
Diluted 53,049,534 38,258,231
See accompanying notes to the consolidated financial statements.
4
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
------------ ----------
Cash flows from operating activities:
Net loss $ (588,577) $ (478,568)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 144,996 216,048
Amortization of debt discount and offering costs 60,665 -
Other 22,949 40,225
Change in operating assets and liabilities:
Accounts receivable 286,090 (170,425)
Inventory 83,477 217,602
Prepaid expenses and other assets 103,110 57,959
Accrued and other liabilities 45,933 42,644
Accounts payable 104,877 8,883
Deferred revenue (228,497) (180,332)
------------ ----------
Net cash provided by (used in) operating activities 35,023 (245,964)
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment (16,015) (8,480)
Proceeds from sales of property and equipment 150 -
Patent and trademark costs (5,763) (9,942)
------------ ----------
Net cash used in investing activities (21,628) (18,422)
------------ ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,880,030 -
Payment of offering costs (7,874) (596)
Payment of notes payable (78,686) (79,374)
Payments under capital leases (5,341) (3,496)
------------ ----------
Net cash provided by (used in) financing activities 1,788,129 (83,466)
------------ ----------
Net increase (decrease) in cash and cash equivalents 1,801,524 (347,852)
Cash and cash equivalents, beginning of period 1,588,760 700,525
------------ ----------
Cash and cash equivalents, end of period $ 3,390,284 $ 352,673
============ ==========
See accompanying notes to the consolidated financial statements.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The information presented for March 31, 2004 and 2003 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 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 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 Neoprobe's audited
financial statements for the year ended December 31, 2003, which were
included as part of our Annual Report on Form 10-KSB.
Our consolidated financial statements include the accounts of Neoprobe and
our wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix). All
significant inter-company accounts were eliminated in consolidation.
2. COMPREHENSIVE INCOME (LOSS)
We had no accumulated other comprehensive income (loss) activity during
the three-month periods ended March 31, 2004 and 2003.
3. EARNINGS PER SHARE
Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted earnings
(loss) per share is calculated using the weighted average number of common
shares outstanding during the periods, adjusted for the effects of
convertible securities, options and warrants, if dilutive.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
---------------------- ----------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
---------- ---------- ---------- ----------
Outstanding shares 57,047,285 57,047,285 38,588,009 38,588,009
Effect of weighting changes
in outstanding shares (3,867,751) (3,867,751) (199,778) (199,778)
Contingently issuable shares (130,000) (130,000) (130,000) (130,000)
---------- ---------- ---------- ----------
Adjusted shares 53,049,534 53,049,534 38,258,231 38,258,231
========== ========== ========== ==========
There is no difference in basic and diluted loss per share related to the
three-month periods ended March 31, 2004 and 2003. The net loss per common
share for these periods excludes the number of common shares issuable upon
exercise of outstanding stock options and warrants into our common stock
since such inclusion would be anti-dilutive.
6
4. INVENTORY
The components of net inventory are as follows:
MARCH 31,
2004 DECEMBER 31,
(UNAUDITED) 2003
---------- ------------
Materials and component parts $ 713,245 $ 747,788
Work in process 884 -
Finished goods 207,325 260,538
---------- ------------
$ 921,454 $ 1,008,326
========== ============
5. INTANGIBLE ASSETS
The major classes of intangible assets are as follows:
MARCH 31, 2004
(UNAUDITED) DECEMBER 31, 2003
------------------------- -------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ------------ ----------- ------------
Patents and trademarks $ 3,161,865 $ 741,207 $ 3,156,101 $ 678,160
Non-compete agreements 584,516 331,616 584,516 295,486
Acquired technology 237,271 77,155 237,271 68,727
----------- ------------ ----------- ------------
Total $ 3,983,652 $ 1,149,978 $ 3,977,888 $ 1,042,373
=========== ============ =========== ============
The estimated future amortization expenses for the next five fiscal years
are as follows:
ESTIMATED
AMORTIZATION
EXPENSE
------------
For the year ended 12/31/2004 $ 427,285
For the year ended 12/31/2005 427,285
For the year ended 12/31/2006 282,770
For the year ended 12/31/2007 214,545
For the year ended 12/31/2008 204,002
6. PRODUCT WARRANTY
We warrant our products against defects in design, materials, and
workmanship generally for a period of one year from the date of sale to
the end customer. Our accrual for warranty expenses is adjusted
periodically to reflect actual experience. Our primary marketing partner,
Ethicon Endo-Surgery, Inc. (EES), a Johnson and 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' reimbursement.
7
The activity in the warranty reserve account for the three-month periods
ended March 31, 2004 and 2003 is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
------------- -------------
Warranty reserve at beginning of period $ 53,000 $ 35,000
Provision for warranty claims and
changes in reserve for warranties - 43,714
Payments charged against the reserve - (13,714)
------------- -------------
Warranty reserve at end of period $ 53,000 $ 65,000
============= =============
7. NOTES PAYABLE
During April 2003, we completed a bridge loan agreement with our President
and CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced
us $250,000. In consideration for the loan, we issued a note in the
principal amount of $250,000. The note is secured by general assets of the
company, excluding accounts receivable. In addition, we issued Mr. Bupp
375,000 warrants to purchase common stock at an exercise price of $0.13
per share, expiring in April 2008. The per share value of these warrants
was $0.10 on the date of issuance using the Black-Scholes option pricing
model with the following assumptions: an average risk-free interest rate
of 2.9%, volatility of 139% and no expected dividend rate. Interest
accrues on the note at 8.5% per annum, payable monthly, and the note was
originally due on June 30, 2004. On March 8, 2004, the due date of the
note to Mr. Bupp was extended from June 30, 2004 to June 30, 2005. In
exchange for extending the due date of the note, we issued Mr. Bupp an
additional 375,000 warrants to purchase our common stock at an exercise
price of $0.50 per share, expiring in March 2009. The per share value of
these warrants was $0.46 on the date of issuance using the Black-Scholes
option pricing model with the following assumptions: an average risk-free
interest rate of 2.7%, volatility of 152% and no expected dividend rate.
The total estimated fair values for the warrants issued to Mr. Bupp in
April 2003 and March 2004 were $31,755 and $171,801, respectively. These
amounts were recorded as discounts on the note and are being amortized
over the period of the note. At March 31, 2004, the unamortized discounts
related to Mr. Bupp's note totaled $169,200.
During April 2003, we also completed a bridge loan agreement with an
outside investor for an additional $250,000. In consideration for the
loan, we issued a note in the principal amount of $250,000. The note was
secured by general assets of the company, excluding accounts receivable.
In addition, we issued the investor 500,000 warrants to purchase common
stock at an exercise price of $0.13 per share. The per share value of
these warrants was $0.10 on the date of issuance using the Black-Scholes
option pricing model with the following assumptions: an average risk-free
interest rate of 2.9%, volatility of 139% and no expected dividend rate.
The total estimated fair value for the warrants issued to the outside
investor was $40,620. Under the terms of the agreement, the note bore
interest at 9.5% per annum, payable monthly, was convertible into common
stock and was due on June 30, 2004. Fifty percent of the principal and
accrued interest of the note was convertible into common stock at a 15%
discount to the closing market price on the date of conversion, subject to
a floor conversion price of $0.10. The remaining 50% of the principal and
accrued interest was convertible into common stock based on a 15% discount
to the closing market price on the date of conversion, subject to a floor
conversion price of $0.10 and a ceiling conversion price of $0.20. The
intrinsic value of the conversion feature of the note to the outside
investor was estimated at $40,620 based on the effective conversion price
at the date of issuance and was recorded as an additional discount on the
note. The estimated fair value of the warrants and the intrinsic value of
the conversion feature were recorded as discounts on the note and were
amortized over the term of the note. During January 2004, the outside
investor converted the entire balance of the note into 1.1 million shares
of common stock according to the conversion terms of the agreement. The
total value of the shares issued in conversion of the note was $378,955
based on the closing market prices for our common stock on the dates of
conversion. The discount remaining at conversion totaling $27,604 was
recorded as interest expense.
8
8. STOCK OPTIONS AND RESTRICTED STOCK
During the first quarter of 2004, the Board of Directors granted options
to consultants, employees and certain directors to purchase 1.2 million
shares of our common stock, exercisable at an average price of $0.38 per
share, vesting over three years. We recognized $22,000 of research and
development expense related to options granted to consultants in the first
quarter of 2004. As of March 31, 2004, we have 4.0 million options
outstanding under three stock option plans. Of the outstanding options,
2.0 million options have vested as of March 31, 2004, at an average
exercise price of $0.60 per share.
The following table illustrates the effect on net loss and net loss per
share if compensation cost for our stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under
those plans consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
------------- -------------
Net loss, as reported $ (588,577) $ (478,568)
Add: Total stock-based employee compensation
expense included in reported net loss - 39,990
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (66,001) (82,780)
------------- -------------
Pro forma net loss $ (654,578) $ (521,358)
============= =============
Loss per common share:
As reported (basic and diluted) $ (0.01) $ (0.01)
Pro forma (basic and diluted) $ (0.01) $ (0.01)
During the first quarter of 2003, we vested 310,000 shares of previously
restricted stock related to new or amended employment agreements of three
of our officers. We recognized $39,990 of compensation expense related to
this transaction in the first quarter of 2003.
9. STOCK WARRANTS
In November 2003, we completed a $2.8 million placement of common stock
and warrants for net proceeds of $2.4 million. In the placement, 12.2
million shares of common stock were issued at $0.23 per share, and Series
R warrants were issued to purchase an additional 6.1 million shares of
common stock at $0.28 per share. In addition, we paid $291,000 in cash and
issued 1.4 million Series S warrants to purchase common stock at $0.28 per
share as fees to the placement agents. All warrants issued in connection
with the placement expire in October 2008. The per share value of these
warrants was $0.31 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: an average risk-free
interest rate of 3.2%, volatility of 151% and no expected dividend rate. A
registration statement registering for resale the common stock and
warrants issued in the private placement was declared effective on
December 17, 2003. During the first quarter of 2004, 2.2 million of these
warrants were exercised and we realized net proceeds of $608,000.
During 2003, an investment banking firm, Alberdale Capital, LLC
(Alberdale), assisted us in arranging an accounts receivable financing
transaction. In exchange for Alberdale's services, we issued them warrants
to purchase 78,261 shares of our common stock. During the first quarter of
2004, Alberdale exercised these warrants on a cashless basis in exchange
for 53,500 shares of common stock.
At March 31, 2004 there are 6.6 million warrants outstanding to purchase
our common stock. The warrants are exercisable at prices ranging from
$0.13 to $0.75 per share with a weighted average exercise price per share
of $0.28. See Note 13(a).
10. COMMON STOCK PURCHASE AGREEMENT
On November 19, 2001, we entered into a common stock purchase agreement
with an investment fund, Fusion Capital Fund II, LLC (Fusion) for the
issuance and purchase of our common stock.
9
Under the stock purchase agreement, Fusion committed to purchase up to $10
million of our common stock over a forty-month period that commenced in
May 2002. A registration statement registering for resale up to 5 million
shares of our common stock became effective on April 15, 2002. Under the
terms of the agreement, we can request daily drawdowns, subject to a daily
base amount currently set at $12,500. The number of shares we are to issue
to Fusion in return for that money will be based on the lower of (a) the
closing sale price for our common stock on the day of the draw request or
(b) the average of the three lowest closing sales prices for our common
stock during a twelve day period prior to the draw request. However, no
shares may be sold to Fusion at lower than a floor price currently set at
$0.30, which may be reduced by us, but in no case below $0.20 without
Fusion's prior consent. During the first quarter of 2004, we sold Fusion a
total of 2,100,000 shares of common stock and realized net proceeds of
$1,271,334. We also issued Fusion 57,140 shares of common stock for
commitment fees related to the sales of our common stock to them during
the first quarter of 2004. See Note 13(b).
11. SEGMENT AND SUBSIDIARY INFORMATION
We own or have rights to intellectual property related to gamma detection
drugs. We also own or have rights to intellectual property involving two
primary types of medical device products, including gamma detection
instruments currently used primarily in the application of ILM, and blood
flow measurement devices. Prior to 2004, gamma detection drugs and
devices were reported as one segment. Certain 2003 amounts have been
reclassified to conform to the 2004 presentation.
The information in the following table is derived directly from each
segment's internal financial reporting used for corporate management
purposes. Selling, general and administrative costs and other income,
including amortization, interest and other costs that relate primarily to
corporate activity, are not currently allocated to the operating segments
for financial reporting purposes.
GAMMA GAMMA BLOOD
($ AMOUNTS IN THOUSANDS) DETECTION DETECTION FLOW
THREE MONTHS ENDED MARCH 31, 2004 DRUGS DEVICES DEVICES UNALLOCATED TOTAL
--------------------------------- --------- --------- ------- ----------- -------
Net sales:
United States(1) $ - $ 1,164 $ - $ - $ 1,164
International - 24 38 - 62
License and other revenue - 200 - - 200
Research and development expenses 93 235 255 - 583
Selling, general and administrative
expenses - - - 813 813
Income (loss) from operations(2) (93) 625 (230) (813) (511)
Other income - - - (78) (78)
THREE MONTHS ENDED MARCH 31, 2003
Net sales:
United States(1) $ - $ 1,254 $ - $ - $ 1,254
International - 1 49 - 50
License and other revenue - 235 - - 235
Research and development expenses 1 135 283 - 419
Selling, general and administrative
expenses - - - 754 754
Income (loss) from operations(2) (1) 563 (281) (754) (473)
Other income - - - (6) (6)
(1) All sales to EES are made in the United States. EES distributes the product
globally through its international affiliates.
10
(2) Income (loss) from operations does not reflect the allocation of selling,
general and administrative costs to the operating segments.
12. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
During the first quarter of 2004, we purchased equipment under capital
leases totaling $27,000. During the first quarter of 2004 and 2003, we
transferred $3,000 and $5,000, respectively, in inventory to fixed assets
related to the maintenance of a pool of service loaner equipment.
13. SUBSEQUENT EVENTS
A. WARRANT EXERCISES: From April 1 through May 12, 2004, certain
investors exercised a total of 795,000 warrants to purchase our
common stock and we realized proceeds of $213,000. See Note 9.
B. COMMON STOCK PURCHASE AGREEMENT: From April 1 through May 12, 2004,
we sold Fusion a total of 250,000 shares of common stock and
realized proceeds of $200,000. We also issued Fusion 8,989 shares of
common stock for commitment fees related to the sale of our
common stock to them. See Note 10.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our operating results were below our original expectations for the quarter.
Revenue from our gamma detection device product line was, with the exception of
a temporary backorder to our primary distributor at the end of the quarter
related to the transfer of manufacturing, in line with our original
expectations; however, sales of our blood flow measurement devices were behind
our expectations due, we believe, to the need for certain product enhancements
for which we are in the process of implementing near-term solutions. In addition
we incurred expenses during the first quarter of 2004 related to our RIGS(R) and
Lymphoseek(TM) initiatives in order to move those development efforts forward to
the next stage of development. The combination of these events contributed to a
greater than expected operating loss for the first quarter of 2004.
RESULTS OF OPERATIONS
Revenue for the first quarter of 2004 decreased $113,000, or 7%, to $1.4 million
from $1.5 million for the same period in 2003. Major expense categories as a
percentage of net sales increased in the first quarter of 2004 as compared to
the same period in 2003, due primarily to the increased development and
marketing expenses coupled with the decrease in net sales. Research and
development expenses, as a percentage of net sales, increased to 48% during the
first quarter of 2004 from 32% during the same period in 2003. Selling, general
and administrative expenses, as a percentage of net sales, increased to 66%
during the first quarter of 2004 from 58% during the same period in 2003. Due to
the ongoing
11
development activities of the company, research and development expenses are
expected to be higher as a percentage of sales in 2004 than they were in 2003.
In addition, as we move forward with commercialization activities related to the
Quantix(R) product line, selling expenses are expected to push our selling,
general and administrative expenses higher in 2004 than 2003 as a percentage of
sales.
Three Months Ended March 31, 2004 and 2003
Net Sales and Margins. Net sales, primarily of our gamma detection systems,
decreased $78,000, or 6%, to $1.2 million during the first quarter of 2004 from
$1.3 million during the same period in 2003. Gross margins on net sales
increased to 56% of net sales for the first quarter of 2004 compared to 36% of
net sales for the same period in 2003. The decrease in net sales was the result
of delays in the transfer of manufacturing of our neo2000(R) gamma detection
device to a new contract manufacturer that resulted in a backorder position to
our primary distributor of over $125,000 at March 31, 2004. If we had not been
in backorder, which our contract manufacturer has since corrected, our gamma
device revenue would have been consistent with or slightly higher than last year
as expected. The increase in gross margins was primarily due to decreases in the
unit costs to manufacture our neo2000 control unit resulting from internal
design changes and a lower cost structure at the new contract manufacturer.
Sales of blood flow devices did not contribute significantly to revenue in
either period.
License and Other Revenue. License and other revenue in the first quarters of
2004 and 2003 included $200,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES and $35,000 in 2003 from the
reimbursement by EES of certain product development costs.
Research and Development Expenses. Research and development expenses increased
$164,000 or 39% to $583,000 during the first quarter of 2004 from $419,000
during the same period in 2003. The increase was primarily due to efforts to
support the re-initiation of our RIGS research effort and to move our
development of Lymphoseek forward, final development activities related to an
updated version of our neo2000 system and product refinement activities related
to the Quantix/OR(TM). Research and development expenses in the first quarter of
2004 included approximately $90,000 in gamma detection drug development costs,
$55,000 in final development costs of the current Model 2200 of our neo2000
system and $73,000 in external project costs related to product design
improvements for the Quantix/OR system.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $59,000 or 8% to $813,000 during the first
quarter of 2004 from $754,000 during the same period in 2003. The increase was
primarily due to an increase of $66,000 in marketing expenses related to the
planned increase in marketing activities to support the launch of our Quantix
line of blood flow products. Selling, general and administrative expenses in the
first quarter of 2003 included $30,000 in impairment of intellectual property
that we did not believe had ongoing value to the business.
Other Income (Expenses). Other expenses increased $72,000 to $78,000 of expenses
during the first quarter of 2004 from $6,000 during the same period in 2003. The
primary reason for the increase was $68,000 in interest expense on debt
financings we entered into during 2003. Of this interest expense, $61,000 was
non-cash in nature related to the amortization of debt discounts resulting from
the warrants and beneficial conversion feature issued in connection with the
underlying debt agreements.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash provided by (used in) operations increased $281,000
to $35,000 provided during the first quarter of 2004 from $246,000 used during
the same period in 2003. Working capital increased $1.6 million to $4.1 million
at March 31, 2004 as compared to $2.5 million at December 31, 2003. The current
ratio increased to 3.9:1 at March 31, 2004 from 2.6:1 at December 31, 2003. The
increase in working capital was primarily related to cash received from the sale
of our common stock and the exercise of warrants.
12
Cash balances increased to $3.4 million at March 31, 2004 from $1.6 million at
December 31, 2003, primarily due to the cash received from the sale of our
common stock and the exercise of warrants, offset by increased operating
expenses during the first quarter of 2004.
Accounts receivable decreased to $822,000 at March 31, 2004 from $1.1 million at
December 31, 2003. We expect receivable levels to increase during 2004 depending
on the timing of purchases and payments by EES as well as the potential effect
of sales of blood flow products.
Inventory levels decreased to $921,000 at March 31, 2004 as compared to $1.0
million at December 31, 2003. The decrease in inventory was the result of delays
in the manufacturing transfer of our neo2000 gamma detection device to our new
contract manufacturer that resulted in a backorder position to our primary
distributor at March 31, 2004. We expect inventory levels to increase over the
course of 2004 as we re-establish our gamma device safety stock and build
finished units of our blood flow products in preparation for broader
distribution.
Investing Activities. Cash used in investing activities increased $3,000 to
$22,000 during the first quarter of 2004 from $18,000 during the same period in
2003. Capital expenditures in the first quarter of 2004 were related to
purchases of technology infrastructure. Capital expenditures in the first
quarter of 2003 were split between purchases of production tools and equipment
and technology infrastructure. Capital needs for 2004 are expected to increase
over 2003 as we start up blood flow device production at our contract
manufacturer.
Financing Activities. Financing activities generated $1.8 million in cash in the
first quarter of 2004 versus $83,000 used during the same period in 2003.
On November 19, 2001, we entered into a common stock purchase agreement with an
investment fund, Fusion Capital Fund II, LLC (Fusion) for the issuance and
purchase of our common stock. Under the stock purchase agreement, Fusion
committed to purchase up to $10 million of our common stock over a forty-month
period that commenced in May 2002. A registration statement registering for
resale up to 5 million shares of our common stock became effective on April 15,
2002. Under the terms of the agreement, we can request daily drawdowns, subject
to a daily base amount currently set at $12,500. The number of shares we are to
issue to Fusion in return for that money is based on the lower of (a) the
closing sale price for our common stock on the day of the draw request or (b)
the average of the three lowest closing sales prices for our common stock during
a twelve-day period prior to the draw request. However, no shares may be sold to
Fusion at lower than a floor price currently set at $0.30, which may be reduced
by us, but in no case below $0.20 without Fusion's prior consent. Upon execution
of the common stock purchase agreement, we issued 449,438 shares of our common
stock to Fusion as a commitment fee. During the second half of 2003, we sold
Fusion a total of 473,869 shares of common stock and realized net proceeds of
$143,693. We issued Fusion 6,462 shares of common stock for commitment fees
related to the sales of our common stock to them during 2003. During the first
quarter of 2004, we sold Fusion a total of 2,100,000 shares of common stock and
realized net proceeds of $1,271,334. We also issued Fusion 57,140 shares of
common stock for commitment fees related to the sales of our common stock to
them during the first quarter of 2004.
During April 2003, we completed a bridge loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. In consideration for the loan, we issued a note in the principal
amount of $250,000. The note is secured by general assets of the company,
excluding accounts receivable. In addition, we issued Mr. Bupp 375,000 warrants
to purchase shares of our common stock at an exercise price of $0.13 per share,
expiring in April 2008. The per share value of these warrants was $0.10 on the
date of issuance using the Black-Scholes option pricing model with the following
assumptions: an average risk-free interest rate of 2.9%, volatility of 139% and
no expected dividend rate. Interest accrues on the note at 8.5% per annum,
payable monthly, and the note was originally due on June 30, 2004. On March 8,
2004, the due date of the note to Mr. Bupp was extended from June 30, 2004 to
June 30, 2005. In exchange for extending the due date of the note, we issued Mr.
Bupp an additional 375,000 warrants to purchase our common stock at an exercise
price of $0.50 per share, expiring in March 2009. The per share value of these
warrants was $0.46 on the date of
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issuance using the Black-Scholes option pricing model with the following
assumptions: an average risk-free interest rate of 2.7%, volatility of 152% and
no expected dividend rate. Mr. Bupp's 750,000 warrants remain outstanding.
During April 2003, we also completed a convertible bridge loan agreement with an
investor for an additional $250,000. In consideration for the loan, we issued a
note in the principal amount of $250,000. The note was secured by general assets
of the company, excluding accounts receivable. In addition, we issued the
investor 500,000 warrants to purchase shares of our common stock at an exercise
price of $0.13 per share, expiring in April 2008. The per share value of these
warrants was $0.10 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: an average risk-free interest rate
of 2.9%, volatility of 139% and no expected dividend rate. Under the terms of
the agreement, the note bore interest at 9.5% per annum, payable monthly, was
convertible into common stock and was due on June 30, 2004. During January 2004,
the investor converted the entire balance of the note into 1.1 million shares of
common stock according to the conversion terms of the agreement. The investor's
500,000 warrants remain outstanding.
During 2003, an investment banking firm, Alberdale Capital, LLC (Alberdale),
assisted us in arranging an accounts receivable financing transaction. In
exchange for Alberdale's services, we issued them warrants to purchase 78,261
shares of our common stock. During the first quarter of 2004, Alberdale
exercised these warrants on a cashless basis in exchange for 53,500 shares of
common stock.
During October and November 2003, we executed common stock purchase agreements
with third parties introduced to us by a third investment banking firm,
Rockwood, Inc., for the purchase of 12,173,914 shares of our common stock at a
price of $0.23 per share for net proceeds of $2.4 million. In addition, we
agreed to issue the purchasers warrants to purchase 6,086,959 shares of common
stock at an exercise price of $0.28 per share and agreed to issue the placement
agents warrants to purchase 1,354,348 shares of our common stock on similar
terms. All warrants issued in connection with the transaction expire in October
2008. The per share value of these warrants was $0.31 on the date of issuance
using the Black-Scholes option pricing model with the following assumptions: an
average risk-free interest rate of 3.2%, volatility of 151% and no expected
dividend rate. During the first quarter investors and placement agents who
participated in this placement exercised warrants representing a total of
2,234,957 shares of common stock resulting in net proceeds of $608,000.
Our future liquidity and capital requirements will depend on a number of
factors, including our ability to raise additional capital in a timely manner
through additional investment, expanded market acceptance of our current
products, our ability to complete the commercialization of new products such as
our blood flow product line, our ability to monetize our investment in non-core
technologies, our ability to obtain milestone or development funds from
potential development and distribution partners, regulatory actions by the FDA
and other international regulatory bodies, and intellectual property protection.
We believe we have adequate capital to assure that we can properly support our
current business goals and objectives for 2004. Our near-term priorities are
improvements to the Quantix products based on thought leader feedback in the
U.S. and EU. We believe this will position us for improved commercial viability
of the product by the fourth quarter of this year. In addition, we are moving
forward with efforts to develop other products in our pipeline such as RIGS and
Lymphoseek. However, we cannot assure you that we will be able to achieve
significant product revenues from our current or potential new products. We also
cannot assure you that we will achieve profitability in 2004 or in the future.
CRITICAL ACCOUNTING POLICIES
THE FOLLOWING ACCOUNTING POLICIES ARE CONSIDERED BY US TO BE CRITICAL TO OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
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Revenue Recognition Related to Net Sales. We currently generate revenue
primarily from sales of our gamma detection products; however, sales of blood
flow products constituted approximately 3% of total revenues for the first
quarter of 2004 and are expected to increase in the future. We generally
recognize sales revenue related to sales of our products when the products are
shipped and the earnings process has been completed. Our customers have no right
to return products purchased in the ordinary course of business. However, in
cases where product is shipped but the earnings process is not yet completed,
revenue is deferred until it has been determined that the earnings process has
been completed. We also generate revenue from the service and repair of
out-of-warranty products. Fees charged for service and repair on products not
covered by an extended service agreement are recognized on completion of the
service process when the serviced or repaired product has been returned to the
customer. Fees charged for service or repair of products covered by an extended
warranty agreement are deferred and recognized as revenue ratably over the life
of the extended service agreement. The prices we charge our primary customer,
EES, related to sales of products are subject to retroactive annual adjustment
based on a fixed percentage of the actual sales prices achieved by EES on sales
to end customers made during each fiscal year. To the extent that we can
reasonably estimate the end-customer prices received by EES, we record sales to
EES based upon these estimates. If we are unable to reasonably estimate end
customer sales prices related to certain products sold to EES, we record revenue
related to these product sales at the minimum (i.e., floor) price provided for
under our distribution agreement with EES.
Impairment or Disposal of Long-Lived Assets. We account for long-lived assets in
accordance with the provisions of SFAS No. 144. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. As of March
31, 2004, the most significant long-lived assets on our balance sheet relate to
assets recorded in connection with the acquisition of Cardiosonix and gamma
detection device patents related to ILM. The recoverability of these assets is
based on the financial projections and models related to the future sales
success of Cardiosonix' products and the continuing success of our gamma
detection product line. As such, these assets could be subject to significant
adjustment should the Cardiosonix technology not be successfully commercialized
or the sales amounts in our current projections not be realized.
Inventory Reserves. We value our inventory at the lower of cost (first-in,
first-out method) or market. Reserves are estimated for excess, slow moving and
obsolete inventory as well as inventory with a carrying value in excess of its
net realizable value. Write-offs are recorded when product is removed from
saleable inventory. We review inventory on hand at least quarterly and record
provisions for excess and obsolete inventory based on several factors, including
current assessment of future product demand, anticipated release of new products
into the market, historical experience and product expiration. Our industry is
characterized by rapid product development and frequent new product
introductions. Uncertain timing of product approvals, variability in product
launch strategies, product recalls and variation in product utilization all
impact the estimates related to excess and obsolete inventory.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts
receivable to cover estimated losses resulting from the inability of our
customers to make required payments. We determine the adequacy of this allowance
by regularly reviewing our accounts receivable aging and evaluating individual
customer receivables, considering customers' credit and financial condition,
payment history and relevant economic conditions. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances for doubtful accounts may be required.
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FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of our company. From
time to time, our representatives and we may make written or verbal
forward-looking statements, including statements contained in this report and
other company filings with the SEC and in our reports to stockholders.
Statements that relate to other than strictly historical facts, such as
statements about our plans and strategies, expectations for future financial
performance, new and existing products and technologies, and markets for our
products are forward-looking statements within the meaning of the Act.
Generally, the words "believe," "expect," "intend," "estimate," "anticipate,"
"will" and other similar expressions identify forward-looking statements. The
forward-looking statements are and will be based on our then-current views and
assumptions regarding future events and operating performance, and speak only as
of their dates. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors including, but not limited
to, our 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 most recent Annual
Report on Form 10-KSB and other SEC filings. We undertake no obligation to
publicly update or revise any forward-looking statements.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer, along with the Chief Financial Officer, concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to our company (including our consolidated
subsidiary) required to be included in our periodic SEC filings. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and we cannot assure you that
any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
There were no changes in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Since the date of our evaluation to the filing date of this quarterly report,
there have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.36 Employment Agreement between the Company and Richard N. Linder, Jr.,
dated November 1, 2003.*
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.*
32.2 Certification of Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.*
* Filed herewith.
(b) REPORTS ON FORM 8-K
On March 10, 2004, we filed a Current Report on Form 8-K (dated March 10,
2004) with the Securities and Exchange Commission pursuant to Item 12
(under Item 9) in connection with our March 10, 2004, press release
announcing our consolidated financial results for the fiscal year ended
December 31, 2003.
On February 25, 2004, we filed a Current Report on Form 8-K (dated
February 25, 2004) with the Securities and Exchange Commission pursuant to
Items 5 and 7 in connection with our February 24, 2004, press release
announcing a scheduled a meeting with the United States Food and Drug
Administration on April 15, 2004.
ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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: May 14, 2004
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)
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