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, 2001
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
incorporation or organization) identification no.)
425 METRO PLACE NORTH, SUITE 300, DUBLIN, OHIO 43017
(Address of principal executive offices)
614.793.7500
(Issuer's telephone number)
26,285,892 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, 2001)
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOPROBE CORPORATION
BALANCE SHEETS
ASSETS SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------- ------------
Current assets:
Cash and cash equivalents $4,863,507 $4,643,347
Accounts receivable, net 47,171 365,061
Inventory 1,651,368 941,120
Prepaid expenses and other 41,873 234,232
---------- ----------
Total current assets 6,603,919 6,183,760
---------- ----------
Property and equipment 2,121,601 2,039,187
Less accumulated depreciation and amortization 1,441,851 1,174,167
---------- ----------
679,750 865,020
---------- ----------
Intangible assets, net 516,665 524,035
---------- ----------
Total assets $7,800,334 $7,572,815
========== ==========
CONTINUED
2
NEOPROBE CORPORATION
BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------- ------------
Current liabilities:
Notes payable to finance company $ -- $ 105,332
Capital lease obligations, current 12,506 11,359
Accrued liabilities 1,190,787 725,674
Accounts payable 534,505 731,985
Deferred license revenue, current 800,000 800,000
------------- -------------
Total current liabilities 2,537,798 2,374,350
------------- -------------
Capital lease obligations 23,397 32,926
Deferred license revenue 1,600,000 2,200,000
------------- -------------
Total liabilities 4,161,195 4,607,276
------------- -------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at September
30, 2001 and December 31, 2000; none issued and outstanding (500,000 shares
designated as Series A, $.001 par value, at September 30, 2001 and
and December 31, 2000; none outstanding) -- --
Common stock; $.001 par value; 50,000,000 shares
authorized; 26,284,892 shares issued and
outstanding at September 30, 2001; 26,264,103
shares issued and outstanding at December 31, 2000 26,285 26,264
Additional paid-in capital 120,682,477 120,668,639
Accumulated deficit (117,069,623) (117,729,364)
------------- -------------
Total stockholders' equity 3,639,139 2,965,539
------------- -------------
Total liabilities and stockholders' equity $ 7,800,334 $ 7,572,815
============= =============
See accompanying notes to the financial statements
3
NEOPROBE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Net sales $ 1,592,303 $ 2,124,991 $ 5,064,271 $ 6,242,461
License revenue 200,000 200,000 625,000 650,000
------------ ------------ ------------ ------------
Total revenues 1,792,303 2,324,991 5,689,271 6,892,461
------------ ------------ ------------ ------------
Cost of goods sold 1,089,852 1,230,742 3,479,429 3,512,767
------------ ------------ ------------ ------------
Gross profit 702,451 1,094,249 2,209,842 3,379,694
------------ ------------ ------------ ------------
Operating expenses:
Research and development 30,206 60,266 201,373 435,620
Marketing and selling -- 42,397 -- 205,373
General and administrative 538,861 533,074 1,702,419 1,737,121
------------ ------------ ------------ ------------
Total operating expenses 569,067 635,737 1,903,792 2,378,114
------------ ------------ ------------ ------------
Income from operations 133,384 458,512 306,050 1,001,580
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 28,693 53,573 111,686 141,999
Interest expense (2,278) (4,468) (8,953) (20,435)
Other 241,470 22,769 250,958 19,693
------------ ------------ ------------ ------------
Total other income 267,885 71,874 353,691 141,257
------------ ------------ ------------ ------------
Net income before taxes 401,269 530,386 659,741 1,142,837
------------ ------------ ------------ ------------
Income taxes -- 26,296 -- 26,296
------------ ------------ ------------ ------------
Net income 401,269 504,090 659,741 1,116,541
------------ ------------ ------------ ------------
Loss on retirement of preferred stock -- -- -- 764,668
------------ ------------ ------------ ------------
Income attributable to common
stockholders $ 401,269 $ 504,090 $ 659,741 $ 351,873
============ ============ ============ ============
Income per common share:
Basic $ 0.02 $ 0.02 $ 0.03 $ 0.01
Diluted $ 0.02 $ 0.02 $ 0.03 $ 0.01
Weighted average shares outstanding:
Basic 25,898,264 25,855,341 25,896,342 25,628,355
Diluted 26,114,054 26,075,393 26,119,816 26,655,256
See accompanying notes to the financial statements
4
NEOPROBE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2001 2000
-------------- ------------
Cash flows from operating activities:
Net income $ 659,741 $ 1,116,541
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 314,074 289,985
Other 14,225 (38,788)
Change in operating assets and liabilities:
Accounts receivable 317,890 (623,348)
Inventory (768,336) 575,634
Accounts payable (197,480) (437,558)
Deferred license revenue (600,000) (600,000)
Other assets and liabilities 657,472 (50,235)
----------- -----------
Net cash provided by operating activities 397,586 232,231
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investment in affiliate -- 1,500,000
Purchases of property and equipment (52,533) (132,876)
Proceeds from sales of property and equipment 2,175 102,516
Patent costs (14,189) (19,726)
----------- -----------
Net cash (used in) provided by investing activities (64,547) 1,449,914
----------- -----------
Cash flows from financing activities:
Settlement of obligation to preferred stockholder -- (2,500,000)
Proceeds from issuance of common stock, net 834 803
Payments under line of credit -- (480,000)
Payments of notes payable (105,332) (154,626)
Payments under capital leases (8,382) (159,998)
----------- -----------
Net cash used in financing activities (112,880) (3,293,821)
----------- -----------
Net increase (decrease) in cash and cash equivalents 220,159 (1,611,676)
Cash and cash equivalents, beginning of period 4,643,347 4,882,537
----------- -----------
Cash and cash equivalents, end of period $ 4,863,507 $ 3,270,861
=========== ===========
See accompanying notes to the financial statements
5
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The information presented for September 30, 2001 and 2000, 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 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, 2000, which were included as part of the
Company's Annual Report on Form 10-KSB. Certain 2000 amounts have been
reclassified to conform with the 2001 presentation.
2. COMPREHENSIVE INCOME (LOSS):
The Company had no accumulated other comprehensive income (loss)
activity during the three-month and nine-month periods ended September
30, 2001 and 2000.
3. EARNINGS PER SHARE:
Basic earnings 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 NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
-------------------------------- --------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS PER EARNINGS PER EARNINGS PER EARNINGS PER
SHARE SHARE SHARE SHARE
------------- ------------ ------------- ------------
Outstanding shares 26,284,892 26,284,892 26,284,892 26,284,892
Effect of weighting changes
in outstanding shares (16,628) (16,628) (18,550) (18,550)
Contingently issuable shares (370,000) (370,000) (370,000) (370,000)
Stock options -- 215,790 -- 223,474
---------- ---------- ---------- ----------
Adjusted shares 25,898,264 26,114,054 25,896,342 26,119,816
========== ========== ========== ==========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
-------------------------------- --------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS PER EARNINGS PER EARNINGS PER EARNINGS PER
SHARE SHARE SHARE SHARE
------------- ------------ ------------- ------------
Outstanding shares 26,264,103 26,264,103 26,264,103 26,264,103
Effect of weighting changes
in outstanding shares (18,762) (18,762) (245,748) (245,748)
Contingently issuable shares (390,000) (390,000) (390,000) (390,000)
Stock options -- 215,599 -- 356,820
Warrants -- 4,453 -- 670,081
---------- ---------- ---------- ----------
Adjusted shares 25,855,341 26,075,393 25,628,355 26,655,256
========== ========== ========== ==========
6
The following table summarizes options to purchase common stock of the
Company that were outstanding during the three-month and nine-month periods
ended September 30, 2001 and 2000, but that were not included in the
computation of diluted income 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
======= =======
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
--------------------------------------------- --------------------------------------------
EXERCISE OPTIONS EXERCISE OPTIONS
PRICE OUTSTANDING PRICE OUTSTANDING
------------------- ------------- ------------------ ---------------------
$ 0.75 - $ 2.50 583,011 $ 1.03 - $ 2.50 602,288
$ 3.00 - $ 6.00 270,570 $ 3.00 - $ 6.00 406,819
$ 13.38 - $ 15.75 93,696 $ 13.38 - $ 17.44 131,604
------- ---------
947,277 1,140,711
======= =========
4. INVENTORY:
The components of inventory are as follows:
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------- ---------------
Materials and component parts $ 754,507 $ 418,087
Finished goods 1,186,374 696,432
Less obsolescence reserve (289,513) (173,399)
----------- -----------
$ 1,651,368 $ 941,120
=========== ===========
5. LINE OF CREDIT:
On January 26, 2001, the Company entered into a revolving credit
facility with a bank that provided for a maximum line of credit of $1.5
million. The Company terminated the line of credit on November 8, 2001.
There were no borrowings outstanding at any time while the credit
facility was in effect. No fees were incurred to terminate the credit
facility.
6. 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. As a
result, no current income tax expense is reflected in the statement of
operations for
7
the nine months ended September 30, 2001. The Company has provided a
full valuation allowance against net deferred tax assets at September
30, 2001 and December 31, 2000.
7. STOCK OPTIONS:
During the first half of 2001, the Board of Directors granted options
to employees and certain directors of the Company for 715,000 shares of
common stock, exercisable at an average price of $0.42 per share,
vesting over three years. On July 5, 2001, the Directors cancelled
337,500 options, all of which were priced above $3.00 per share. As of
September 30, 2001, the Company has 1.9 million non-qualified options
outstanding under two stock option plans. Of the outstanding options,
594,000 options have vested as of September 30, 2001, at an average
exercise price of $1.44 per share.
8. SEGMENT INFORMATION:
The Company owns or has rights to intellectual property involving three
primary areas of cancer diagnosis and treatment including: hand-held
gamma detection instruments currently used primarily in the application
of intraoperative lymphatic mapping (ILM), diagnostic
radiopharmaceutical products to be used in the Company's proprietary
RIGS(R) process, and cell expansion processes associated with activated
cellular therapy (ACT). The Company generated $25,000 and $50,000 in
revenue during the first nine months of 2001 and 2000, respectively,
under an option agreement to license its RIGS technology, but incurred
no significant RIGS-related expenses during those periods. The Company
had no significant revenue or expenses in either the first nine months
of 2001 or 2000 related to its ACT initiative. Other revenue and costs
included in the Company's financial statements for the nine-month
periods ended September 30, 2001 and 2000 relate to the Company's ILM
initiative.
9. ACQUISITION AGREEMENT:
On August 29, 2001, the Company entered into a memorandum of
understanding with Biosonix, Ltd. (Biosonix), an Israeli corporation,
and its shareholders to acquire all of the outstanding shares of
Biosonix. In exchange, the Company will issue up to 11.8 million shares
of common stock of the Company to the shareholders of Biosonix. The
Company expects to sign definitive agreements regarding the acquisition
during November 2001 and to close the acquisition on or before December
31, 2001, subject to the satisfaction of certain conditions, including
government approvals of the transaction in Israel and the United
States.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS AND DEVELOPMENT ACTIVITIES
During the first nine months of 2001, the Company continued development
work on enhancements to its current gamma detection instrument product
line. In addition, non-instrument-related research activities increased
significantly in 2001 over the first nine months of 2000. A significant
portion of these non-instrument-related activities are currently being
funded by outside sources.
The Company has an option to license a lymphatic targeting agent
currently being studied by a Phase I clinical trial being sponsored and
conducted by researchers at the University of California at San Diego
(UCSD). UCSD's Phase I trial is being funded through a grant from the
Susan G. Komen Breast Cancer Foundation. Enrollment in this study began
late in the second quarter and has continued during the third and
fourth quarters. The Company expects the trial to be completed in early
2002. The Company's option expires in August 2002. Should the Company,
based on its interpretation of preliminary or final results from the
trial, exercise its option rights, the Company and UCSD have agreed to
negotiate in good faith the terms of a definitive license agreement
within ninety days of the notification to exercise. There can be no
assurance that the clinical trial will be completed within the stated
time frame, or ever, or that results from the trial will support
further research or ultimately result in a marketable product, or that
the Company and UCSD will reach a satisfactory license agreement.
In addition, the Company was notified during the third quarter of 2001
that researchers had received clearance from the U.S. Food and Drug
Administration to begin patient enrollment in a Phase I clinical trial
involving a second generation of the RIGScan CR antibody for colorectal
cancer. This research is
8
being sponsored and funded by OncoSurg, Inc. (formerly NuRigs, Ltd.), a
Delaware company to whom the Company has optioned the development
rights for RIGScan CR. Although the option initially required periodic
payments to be made to the Company, because the preclinical activities
performed by OncoSurg over the past year cost significantly more than
had been originally estimated, the Company agreed to defer the
quarterly option payments due the Company during 2001 so that OncoSurg
may use these funds for clinical trial purposes. OncoSurg began
enrollment in the trial during the third quarter and hopes to complete
enrollment by the end of 2001. There can be no assurance that the
clinical trial will be completed within the stated time frame, or ever,
or that results from the trial will support further research or
ultimately result in a marketable product. See also Results of
Operations.
During the second quarter of 2001, the Company also announced a
research collaboration with Aastrom Biosciences (Aastrom). This
research is intended to determine whether Aastrom's Replicell(TM)
system is able to duplicate cell expansion results experienced in
previous Phase I clinical testing of Neoprobe's ACT technology for
oncology. The Company and Aastrom are collaborating in the preparation
of a protocol for the evaluation of the Replicell system in the ACT
process. The Company anticipates that preparations will not be complete
until later in 2001 and that the evaluation studies will not begin
until the first or second quarter of 2002 at the earliest. The Company
believes that positive results from this evaluation, if they occur,
would provide a more effective and efficient delivery mechanism for ACT
and potentially reinvigorate interest in the underlying ACT technology
platform. There can be no assurance that the evaluation will be
completed within the stated time frame, or ever, or that results from
the evaluation will support further research or ultimately result in a
marketable product.
During the third quarter of 2001, the Company entered into a memorandum
of understanding with Biosonix and its shareholders to acquire all of
the outstanding shares of Biosonix. In exchange, the Company will issue
up to 11.8 million shares of common stock of the Company to the
shareholders of Biosonix. The Company expects to sign definitive
agreements regarding the acquisition during November 2001 and to close
the acquisition on or before December 31, 2001, subject to the
satisfaction of certain conditions, including government approvals of
the transaction in Israel and the United States.
Biosonix has developed a novel Angle-independent Dual Beam Flow (ADBF)
technology that enables surgeons and other medical personnel to measure
in real-time, and in a simple non-invasive manner, the volume of blood
flowing in the vascular circulation as well as a range of additional
hemodynamic parameters. Based on the ADBF core technology that utilizes
digital multi-gated Doppler ultrasound, Biosonix is in the process of
commercialization of several blood flow devices to answer the specific
needs of different clinical settings, including the operating room,
intensive care unit, emergency room, neurosurgery and vascular surgery.
Biosonix' first product, the FlowGuard(TM), has received CE mark
clearance for distribution in certain European markets. Neoprobe and
Biosonix are preparing for the placement of Biosonix products in key
medical institutions in the United States and Europe to support
regulatory submissions and prepare for the commercial launch of the
products. However, there can be no assurance that the Biosonix products
will receive the necessary marketing approvals from the relevant
regulatory bodies or that if approved, that such products will achieve
market acceptance and produce a positive return.
RESULTS OF OPERATIONS
Revenue for the first nine months of 2001 decreased $1.2 million to
$5.7 million from $6.9 million for the same period in 2000. The primary
reason for the decrease in revenue relates to scheduled changes in the
transfer pricing to the Company's primary customer, Ethicon
Endo-Surgery, Inc. (Ethicon), that occurred following the end of the
first commercial year of the distribution agreement that ended December
31, 2000 and an approximate 6% decline in overall sales volumes of
control units and probes compared to the first nine months of the prior
year. The Company expects fourth quarter sales volumes to be consistent
with the first quarter of 2001 and product gross margins to remain
consistent with the first nine months of 2001.
Research and development expenses during the first nine months of 2001
were $201,000 or 11% of operating expenses as compared to 10% of
operating expenses for the first nine months of 2000, excluding
$190,000 in severance and non-recurring unreimbursed development costs
incurred in 2000. General and administrative expenses were $1.7 million
or 89% of operating expenses. Overall, operating
9
expenses for the first nine months of 2001 decreased $474,000 or 20%
over the same period in 2000. The Company anticipates that total
operating expenses for the remaining quarter of 2001 will be consistent
with the first nine months of 2001.
Three months ended September 30, 2001 and 2000
Revenues and Margins. Net product sales decreased $533,000 or 25% to
$1.6 million during the third quarter of 2001 from $2.1 million during
the same period in 2000. Gross margins on product sales decreased to
32% of net sales for the third quarter of 2001 from 42% of net sales
for the same period in 2000. The declines in net product sales and
gross margin in the third quarter of 2001 as compared to the same
period in 2000 are primarily attributable to decreases in product sales
volumes and the transfer prices at which the Company sells its products
to Ethicon.
The Company's distribution agreement with Ethicon provides for transfer
prices based on a percentage of the end customer average sales prices
(ASP) received by Ethicon, subject to certain floor transfer pricing
terms. The distribution agreement provided for a lower percentage of
ASP to be shared with the Company following the first full commercial
year of the distribution agreement that ended December 31, 2000. Due
primarily to the lower percentage of ASP, the Company's calculated
share of ASP fell below the floor price for substantially all products
beginning in the second quarter of 2001. As a result, revenue during
the third quarter was recorded based on the floor transfer prices for
substantially all products. In addition, the cost to manufacture the
Company's products also increased slightly from 2000 to 2001 due
largely to higher electronic and crystal component costs. Revenues in
the third quarters of 2001 and 2000 also included $200,000 from the
pro-rata recognition of license fees related to the distribution
agreement with Ethicon.
Research and Development Expenses. Research and development expenses
decreased $30,000 or 50% to $30,000 during the third quarter of 2001
from $60,000 during the same period in 2000. The decrease is a result
of lower externally contracted product development activities, offset
by additional internal headcount dedicated to activities associated
with the Company's gamma detection instrument product line.
Marketing and Selling Expenses. Marketing and selling expenses
decreased 100% during the third quarter of 2001 from $42,000 during the
same period in 2000 due to elimination of marketing personnel following
the commencement of the Company's distribution agreement with Ethicon
in the fourth quarter of 1999.
General and Administrative Expenses. General and administrative
expenses increased $6,000 or 1% to $539,000 during the third quarter of
2001 from $533,000 during the same period in 2000. The increase was
primarily the result of net reductions in various overhead cost
categories during the third quarter of 2001, and the inclusion of
$24,000 of gains on the sale of certain property and equipment during
the same period in 2000.
Other Income. Other income increased $196,000 or 273% to $268,000
during the third quarter of 2001 from $72,000 during the same period in
2000. 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. The
Company had requested a full accounting for the deposit following the
sale by the receiver earlier in the year of the Neoprobe Israel
facility. In connection with the refunded cash deposit, the bank also
granted the Company a general release from all obligations related to
the loan. Other income during the third quarter of 2000 consisted
primarily of interest income. Interest income decreased because the
Company received a lower interest rate on its invested cash during the
third quarter of 2001 as compared to the same period in 2000,
consistent with marketplace activity over the two periods.
10
Nine months ended September 30, 2001 and 2000
Revenues and Margins. Net product sales decreased $1.2 million or 19%
to $5.1 million during the first nine months of 2001 from $6.2 million
during the same period in 2000. Gross margins on product sales
decreased to 31% of net sales for the first nine months of 2001 from
44% of net sales for the same period in 2000. The declines in net
product sales and gross margin were the combined result of an
approximate 6% decrease in overall sales volumes of control units and
probes and the scheduled one-time reduction in transfer prices for the
first nine months of 2001 as compared to the same period in 2000.
The Company's distribution agreement with Ethicon provides for transfer
prices based on a percentage of the end customer average sales prices
(ASP) received by Ethicon, subject to certain floor transfer pricing
terms. The distribution agreement provided for a lower percentage of
ASP to be shared with the Company following the first full commercial
year of the distribution agreement that ended December 31, 2000. Due
primarily to the lower percentage of ASP, the Company's calculated
share of ASP fell below the floor price for substantially all products
beginning in the second quarter of 2001. As a result, revenue during
the second and third quarters was recorded based on the floor transfer
prices for substantially all products and thus affected year-to-date
revenue and margins for the first nine months of 2001. In addition, the
cost to manufacture the Company's products increased slightly from 2000
to 2001 due largely to higher electronic and crystal component costs.
Revenues in the first nine months of 2001 and 2000 also included
$600,000 from the pro-rata recognition of license fees related to the
distribution agreement with Ethicon and $25,000 and $50,000,
respectively, from the recognition of quarterly milestone fees related
to an option agreement to license certain of the Company's RIGS
technology.
Research and Development Expenses. Research and development expenses
decreased $234,000 or 54% to $201,000 during the first nine months of
2001 from $436,000 during the same period in 2000. The decrease is
primarily due to the inclusion of $40,000 in non-recurring severance
costs and $150,000 in unreimbursed costs related to development of
products in the first quarter of 2000.
Marketing and Selling Expenses. Marketing and selling expenses
decreased 100% during the first nine months of 2001 from $205,000
during the same period in 2000 primarily due to elimination of
marketing personnel and $40,000 of related severance charges incurred
during the first quarter of 2000 following the commencement of the
Company's distribution agreement with Ethicon in the fourth quarter of
1999.
General and Administrative Expenses. General and administrative
expenses decreased $35,000 or 2% to $1.7 million during the first nine
months of 2001 from $1.7 million during the same period in 2000. The
decrease was primarily the result of net reductions in various overhead
cost categories such as professional services, space costs, equipment
rental and insurance,offset by the establishment of a $46,000 allowance
for doubtful accounts related to the Company's license fee and expense
reimbursement receivable from OncoSurg during the first nine months of
2001, and the inclusion of $57,000 of gains on the sale of certain
property and equipment in the same period in 2000.
Other Income. Other income increased $212,000 or 150% to $354,000
during the first nine months of 2001 from $141,000 during the same
period in 2000. 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. The
Company had requested a full accounting for the deposit following the
sale by the receiver earlier in the year of the Neoprobe Israel
facility. In connection with the refunded cash deposit, the bank
granted the Company a release from all obligations related to the loan.
Other income during the first nine months of 2000 consisted primarily
of interest income. Interest income decreased because the Company
received a lower interest rate on its invested cash during the first
nine months of 2001 as compared to the same period in 2000, consistent
with marketplace activity over the two periods.
11
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash provided by operations increased $165,000 to
$398,000 during the first nine months of 2001 from $232,000 during the
same period in 2000. Working capital increased to $4.1 million at
September 30, 2001 from $3.8 million at December 31, 2000. The current
ratio remained constant at 2.6 at September 30, 2001 and December 31,
2000.
Accounts receivable decreased to $47,000 at September 30, 2001 from
$365,000 at December 31, 2000. The Company expects receivables levels
to fluctuate in 2001 depending on the timing of purchases and payments
by Ethicon. Inventory levels increased to $1.7 million at September 30,
2001 as compared to $941,000 at December 31, 2000. Inventory is
expected to increase slightly for the remainder of the year. The
Company has been building its stock of certain critical long-lead
components over 2001 in order to take advantage of significant quantity
price breaks, and has continued to maintain appropriate levels of
finished good safety stock to avoid interruption in supply of finished
products to Ethicon.
Investing Activities. Cash used in investing activities in the first
nine months of 2001 totaled $65,000 versus $1.4 million provided by
investing activities during the same period in 2000. During January
2000, the Company sold an investment in an Israeli biotechnology
company for $1.5 million. Capital expenditures in the first nine months
of 2001 consisted primarily of technology infrastructure, production
tooling, and loaner device upgrades. Capital expenditures in the first
nine months of 2000 were split between purchases of production tools
and equipment and technology infrastructure but were offset by the sale
of excess furniture and fixtures accumulated from prior year headcount
reductions. Capital needs to support instrument development and
manufacturing activities for the remainder of 2001 are expected to be
minimal.
Financing Activities. Financing activities used $113,000 in cash in the
first nine months of 2001 versus $3.3 million during the same period in
2000. During the first quarter of 2000, the Company paid holders of
Series B preferred stock $2.5 million in cash and issued them 3 million
each of common shares and warrants to purchase common shares in
exchange for retiring the outstanding preferred shares.
During January 2001, the Company executed a revolving line of credit
with a bank that will provide the Company with access to up to $1.5
million to finance general working capital needs, subject to certain
terms and covenants. The Company terminated the line of credit on
November 8, 2001. No fees were incurred to terminate the credit
facility.
In the event the Company significantly expands its product development
efforts, either through the addition of incremental internal research
or through the acquisition or licensing of complementary products, it
may need to seek other sources of additional financing. Such financing
may have a dilutive effect on current stockholders.
12
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
intends to adopt SFAS 141 and 142 according to their prescribed
deadlines but does not believe that adoption will have a material
impact on the Company's financial position or results of operations.
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 is required to adopt SFAS 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions
for the quarter ending March 31, 2002. Management does not expect the
adoption of SFAS 144 for long-lived assets held for use to have a
material impact on the Company's financial statements because the
impairment assessment under SFAS 144 is largely unchanged from SFAS
121. The provisions of the Statement for assets held for sale or other
disposal generally are required to be applied prospectively after the
adoption date to newly initiated disposal activities. Therefore,
management cannot determine the potential effects that adoption of SFAS
144 will have on the Company's financial statements.
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. Our Company and its representatives may from time to time
make written or verbal 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
which relate to other than strictly historical facts, such as
statements about the Company's plans and strategies, expectations for
future financial performance, new and existing products and
technologies, and markets for the Company's 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
13
be based on management's then current views and assumptions regarding
future events and operating performance, and speak only as of their
dates. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
The following are some of the factors that could affect our financial
performance or could cause actual results to differ materially from
estimates contained in or underlying our Company's forward-looking
statements:
- Neoprobe has suffered significant operating losses for several
years in its history and it may not be able to continue to
achieve profitability.
- Neoprobe products may not achieve the broad market acceptance
they need in order to be a commercial success.
- Neoprobe may not be successful in completing acquisitions to
expand its product line, or if completed, the acquired company
may not result in increased stockholder value.
- Neoprobe relies on a third party for its worldwide marketing
and distribution, who may not be successful in selling
Neoprobe's products.
- Neoprobe relies on third parties to manufacture its products
and Neoprobe will suffer if they do not perform.
- Neoprobe may have difficulty raising additional capital, which
could deprive it of necessary resources.
- Neoprobe may lose out to larger and better-established
competitors.
- Neoprobe's products may be displaced by newer technology.
- Neoprobe is in a highly regulated business and it could face
severe problems if does not comply with all regulatory
requirements in the global markets in which Neoprobe's
products are sold.
- Neoprobe's intellectual property may not have or provide
sufficient legal protections against infringement or loss of
trade secrets.
14
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) LIST OF EXHIBITS
10. MATERIAL CONTRACTS
Exhibit 10.2.59
Employment Agreement between the Company and David C. Bupp,
dated July 1, 2001.
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Exhibit 11.1
Computation of Income Per Share.
(b) REPORTS ON FORM 8-K
The registrant filed a current report on Form 8-K on September
12, 2001, reporting its entering into a memorandum of
understanding with Biosonix, Ltd. and its shareholders for the
acquisition of all the outstanding shares of Biosonix, Ltd.
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
Dated: November 14, 2001
By: /s/ DAVID C. BUPP
-----------------------
David C. Bupp
President and Chief
Executive Officer
(Principal Executive
Officer)
By: /s/ BRENT L. LARSON
------------------------
Brent L. Larson
Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15