UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(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, 2000
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 registrant 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 614.793.7500
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
26,071,777 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 25, 2000)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOPROBE CORPORATION
BALANCE SHEETS
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
---------- ------------
Current assets:
Cash and cash equivalents $2,714,969 $ 4,882,537
Accounts receivable, net 1,232,211 453,406
Inventory 488,664 1,134,427
Prepaid expenses and other 546,050 674,165
---------- -----------
Total current assets 4,981,894 7,144,535
---------- -----------
Investment in affiliates -- 1,500,000
Property and equipment 2,175,022 2,167,245
Less accumulated depreciation and amortization 1,336,355 1,264,299
---------- -----------
838,667 902,946
---------- -----------
Intangible assets, net 775,081 775,088
---------- -----------
Total assets $6,595,642 $10,322,569
========== ===========
CONTINUED
2
NEOPROBE CORPORATION
BALANCE SHEETS, CONTINUED
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2000 1999
------------- -------------
Current liabilities:
Line of credit $ 100,000 $ 480,000
Notes payable to finance company 89,061 154,626
Capital lease obligations, current 75,137 87,007
Accrued liabilities 1,111,266 1,365,649
Accounts payable 451,284 759,961
Deferred license revenue, current 800,000 800,000
Obligation to preferred stockholder, current -- 2,500,000
------------- -------------
Total current liabilities 2,626,748 6,147,243
------------- -------------
Capital lease obligations 55,332 68,809
Deferred license revenue 2,800,000 3,000,000
Obligation to preferred stockholder -- 1,245,536
------------- -------------
Total liabilities 5,482,080 10,461,588
------------- -------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock; $.001 par value; 5,000,000 shares
authorized at March 31, 2000 and December 31, 1999;
none issued and outstanding (500,000 shares
designated as Series A, $.001 par value, at March
31, 2000 and and December 31, 1999; none outstanding) -- --
Common stock; $.001 par value; 50,000,000 shares
authorized; 26,070,777 shares issued and
outstanding at March 31, 2000; 23,046,644
shares issued and outstanding at December 31, 1999 26,071 23,047
Additional paid-in capital 120,683,623 119,407,204
Accumulated deficit (119,596,132) (119,569,270)
------------- -------------
Total stockholders' equity (deficit) 1,113,562 (139,019)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 6,595,642 $ 10,322,569
============= =============
See accompanying notes to the financial statements
3
NEOPROBE CORPORATION
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2000 1999
----------- -----------
Revenues:
Net sales $ 1,605,811 $ 1,910,971
License revenue 250,000 --
----------- -----------
Total revenues 1,855,811 1,910,971
----------- -----------
Cost of goods sold 837,614 619,653
----------- -----------
Gross profit 1,018,197 1,291,318
----------- -----------
Operating expenses:
Research and development 294,045 462,335
Marketing and selling 110,882 1,122,802
General and administrative 668,342 1,005,226
Losses related to subsidiaries in liquidation -- 86,825
----------- -----------
Total operating expenses 1,073,269 2,677,188
----------- -----------
Loss from operations (55,072) (1,385,870)
----------- -----------
Other income (expenses):
Interest income 45,361 26,659
Interest expense (10,056) (16,526)
Other (7,095) 70,990
----------- -----------
Total other income 28,210 81,123
----------- -----------
Net loss (26,862) (1,304,747)
----------- -----------
Conversion discount on preferred stock -- 1,795,775
Preferred stock dividend requirements -- 18,750
Loss on retirement of preferred stock 764,668 --
----------- -----------
Loss attributable to common stockholders $ (791,530) $(3,119,272)
=========== ===========
Loss per common share (basic and diluted) $ (0.03) $ (0.14)
=========== ===========
Weighted average number of shares
outstanding during the period (basic and diluted) 25,394,727 22,948,354
=========== ===========
See accompanying notes to the financial statements
4
NEOPROBE CORPORATION
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
----------- ----------
Net cash used in operating activities $ (712,540) $(2,231,289)
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities -- 443,729
Maturities of available-for-sale securities -- 4,467
Proceeds from sale of investment in affiliate 1,500,000 --
Purchases of property and equipment (12,055) (47,738)
Proceeds from sales of property and equipment 820 20,550
Patent costs (6,790) (12,436)
----------- ----------
Net cash provided by investing activities 1,481,975 408,572
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock and warrants,
net -- 2,810,573
Settlement of obligation to preferred stockholder (2,500,000) --
Proceeds from issuance of common stock, net 33,909 80
Payments under line of credit (380,000) --
Payments under notes payable (65,565) (79,580)
Payments under capital leases (25,347) (24,610)
----------- ----------
Net cash (used in) provided by financing activities (2,937,003) 2,706,463
----------- ----------
Effect of exchange rate changes on cash -- (4,853)
----------- ----------
Net (decrease) increase in cash and cash equivalents (2,167,568) 878,893
Cash and cash equivalents, beginning of period 4,882,537 1,061,936
----------- ----------
Cash and cash equivalents, end of period $ 2,714,969 $1,940,829
=========== ==========
See accompanying notes to the financial statements
5
1. BASIS OF PRESENTATION:
The information presented for March 31, 2000 and 1999, and for the
periods then ended is unaudited, but includes all adjustments (which
consist only of normal recurring adjustments) which the management of
Neoprobe Corporation (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 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, 1999, which were included as part of the
Company's Annual Report on Form 10-K. Certain 1999 amounts have been
reclassified to conform with the 2000 presentation.
2. COMPREHENSIVE INCOME (LOSS):
Due to the Company's net operating loss position, there are no income
tax effects on comprehensive income components for any of the periods
presented.
Other comprehensive income (loss) consists of the following:
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Net loss $ 26,862 $1,304,747
Foreign currency translation adjustment -- (983)
Gross unrealized gains on securities -- 219
-------- ----------
Other comprehensive loss $ 26,862 $1,303,983
======== ==========
3. INVENTORY:
The components of inventory are as follows:
MARCH 31, DECEMBER 31,
2000 1999
-------------- --------------
Materials and component parts $121,399 $ 104,441
Finished goods 367,265 1,029,986
-------- ----------
$488,664 $1,134,427
======== ==========
4. EQUITY:
REDEEMABLE PREFERRED STOCK: During the first quarter of 1999, the
Company completed the private placement of 30,000 shares of 5% Series B
convertible preferred stock (the "Series B") for gross proceeds of $3
million ($2.8 million, net of certain placement costs), 2.9 million
Class L warrants to purchase common stock of the Company at an initial
exercise price of $1.03 per share, and issued Unit Purchase Options
("UPOs") entitling the placement agent to purchase approximately
150,000 shares of common stock in the Company.
On November 12, 1999, the Company entered into a binding letter of
intent to retire the 30,000 outstanding shares of Series B preferred
stock, the related 2.9 million Class L warrants and Unit Purchase
Options ("UPOs") and to cancel the financial advisory agreement with
the placement agent for the Series B. he letter of intent committed the
Series B holders to surrender the Series B shares and Class L warrants
and for
6
the placement agent to surrender the UPOs and cancel the financial
advisory agreement as well as to grant the Company general releases
from potential litigation associated with the transaction. In exchange
for the retirement of the Series B preferred shares and surrendering
the Class L warrants and UPOs, the Company agreed to pay the Series B
holders a total of $2.5 million and issue the Series B holders 3
million shares of common stock and warrants to purchase 3 million
shares of common stock with an exercise price of $0.74 per share.
However, at December 31, 1999, final definitive agreements had not been
signed. Therefore, at December 31, 1999, the Company reclassified its
obligations to the Series B holders to reflect the $2.5 million payable
in cash as a current liability and the remaining book value of the
Series B, including dividends payable, as a long-term liability.
During January 2000, the Company executed a definitive settlement
agreement with terms consistent with the letter of intent, paid the
Series B holders the $2.5 million, and issued the related stock and
warrants. The transaction has been reported in the Company's first
quarter 2000 financial statements and was measured based on the market
price of the Company's common stock as of the execution of the
definitive agreement on January 20, 2000 (i.e., $0.59 per share). As a
result, the Company reflected a loss on the retirement of the preferred
shares of $765,000 (approximately $0.03 per share) below net income and
in its calculation of loss per share during the first quarter of 2000.
This amount represents the value of the cash given up plus the market
value of the stock issued and the estimated market value of the
warrants issued as valued on January 20, 2000 less the previously
recorded book value of the Series B preferred stock and warrants. In
addition, the long-term liability at December 31, 1999 was reclassified
during the first quarter of 2000 to additional paid-in capital as a
result of the definitive settlement.
B. STOCK OPTIONS: During the first quarter of 2000, the Board of
Directors granted options to employees and certain directors of the
Company for 690,000 shares of common stock, exercisable at $0.50 per
share, vesting over three years. As of March 31, 2000, the Company
has 2.3 million options outstanding under two stock option plans. Of
the outstanding options, 908,000 options have vested as of March 31,
2000, at an average exercise price of $5.49 per share.
C. RESTRICTED STOCK: On March 22, 2000, the Board of Directors
granted a total of 170,000 shares of restricted common stock to
officers of the Company under the 1996 Stock Incentive Plan. All of
the restricted shares granted vest on a change of control of the
Company as defined in the specific grant agreements. As a result,
the Company has not recorded any deferred compensation due to the
inability to assess the probability of the vesting event.
5. SEGMENTS AND SUBSIDIARIES INFORMATION:
A. SEGMENTS: 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 technology to be used in the
Company's proprietary RIGS process, and Activated Cellular Therapy
("ACT"). During 1998, the Company's business plan suspended ongoing
research activities related to RIGS and ACT to allow the Company to
focus primarily on the hand-held gamma detection instruments while
efforts are carried out to find partners or licensing parties to
fund future RIGS and ACT research and development. The Company
generated $50,000 in revenue during the first quarter of 2000 under
an option agreement to license its RIGS technology, but incurred no
RIGS-related expenses during that period. The Company did not
generate any revenue related to RIGS during the first quarter of
1999, but did incur $86,000 in overhead and interest expenses during
that period related to the RIGS segment. The Company had no revenue
or expenses in either the first quarter of 2000 or 1999 related to
its ACT initiative. All other revenue and costs included in the
Company's financial statements for the quarters ended March 31, 2000
and March 31, 1999 relate primarily to the Company's ILM initiative.
B. SUBSIDIARIES: The Company's suspended RIGS initiative included
the operations of the Company's two majority-owned international
subsidiaries, Neoprobe Europe and Neoprobe Israel. Neoprobe Europe
was acquired in 1993 primarily to perform a portion of the
manufacturing process of the monoclonal antibody used in the first
RIGS product to be used for colorectal cancer, RIGScan CR49.
Neoprobe
7
Israel was founded to radiolabel RIGScan CR49. Neoprobe Europe and
Neoprobe Israel also both performed limited research and development
activities related to the Company's RIGS process on behalf of the
U.S. parent company. Under SFAS No. 131, neither subsidiary is
considered a segment. During 1998, the Company initiated steps to
liquidate both Neoprobe Europe and Neoprobe Israel as a result of
the suspension of RIGS research and development activities. At
December 31, 1999, both subsidiaries were deconsolidated due to
statutory liquidation or receivership activities then underway.
6. AGREEMENTS:
A. PLEXUS MANUFACTURING AND SUPPLY AGREEMENT: In March 2000, the
Company entered into a manufacturing and supply agreement with
Plexus for the exclusive manufacture of the Company's 14mm probe
and neo2000 control unit. The original term of the agreement
expires on December 31, 2003 but may be extended for an additional
year given six months notice prior to December 31, 2003. The
Company has the right to terminate the agreement upon six months
written notice. The agreement may be terminated by either party in
the event of material breach or insolvency, or by the Company in
the event of failure to supply. The Company may also have the
covered product manufactured by other suppliers in the event of
failure to supply or if the Company is able to secure another
source of supply with significantly more favorable pricing terms
than those offered by Plexus. The agreement calls for the Company
to deliver rolling 12-month product forecasts to Plexus and to
place purchase orders 60 days prior to requested delivery in
accordance with the forecast. In the event the agreement is
terminated by Neoprobe or if Plexus ceases to be the exclusive
supplier of the covered products, the Company is required to
purchase all finished components on hand at Plexus plus raw
materials not able to be restocked with suppliers.
C. NURIGS OPTION AGREEMENT: During the first quarter of 2000, the
Company entered into a multi-step option agreement for the
development of its initial RIGS compound, RIGScan CR. The Company
recognized $50,000 in revenue related to the conclusion of the first
step of the option agreement. The option agreement is with a
newly-formed development entity, NuRigs, Ltd. ("NuRigs"). Based in
Tel Aviv, Israel, NuRigs has been organized for the express purpose
of developing a second-generation humanized RIGScan CR antibody
fragment. The option agreement calls for Neoprobe to receive, with
the execution of a definitive agreement, a license fee of $900,000
and a product royalty of approximately 5 percent on NuRigs'
commercial sales of the product. The Company and NuRigs are
negotiating a definitive license agreement that is expected to be
completed in the fourth quarter of 2000, at the earliest. However,
there can be no assurance that a definitive license agreement will
be completed, on terms consistent with the option agreement, or at
all. Under the terms of the option, NuRigs will assume all clinical
and other development costs for RIGScan CR. NuRigs expects to begin
clinical evaluation of the second-generation RIGScan CR agent during
the second quarter of 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Management Discussion and Analysis of Financial
Condition and Results of Operations and other parts of this Report that are not
purely historical or which might be considered an opinion or projection
concerning the Company or its business, whether express or implied, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may include statements regarding
the Company's expectations, intentions, plans or strategies regarding the future
which involve risks and uncertainties. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward looking
statements. It is important to note that the Company's actual results in 2000
and future periods may differ significantly from the prospects discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, limited revenues, continuing net
losses, accumulated deficit, future capital needs, uncertainty of capital
funding, dependence on exclusive distributor, competition, limited marketing
experience, limited manufacturing experience, dependence on principal product
line, uncertainty of market acceptance, patents, proprietary technology and
trade secrets, government regulation, risk of technological obsolescence,
limited third party reimbursement, product liability, need to manage a changing
business, possible volatility of stock, anti-takeover provisions, dependence on
key personnel, and no dividends.
8
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Through March 31, 2000, the Company's activities have
resulted in an accumulated deficit of $120 million. Substantially all of the
Company's efforts and resources through early 1999 were devoted to research and
clinical development of innovative systems for the intraoperative diagnosis and
treatment of cancers. To date, the Company's activities have been financed
primarily through the public and private sale of equity securities. Prior to
1999, the Company's research and development efforts were principally related to
the Company's proprietary RIGS system. Efforts since early 1997 have also
included activities related to development of the Company's ACT process and ILM
products. Beginning in the first half of 1998, due primarily to feedback
received from regulatory authorities in the U.S. and Europe related to the
Company's applications for marketing approval for its RIGScan CR49 product, the
Company began a series of changes to its business plan. Since that time, the
Company has continued to modify its business plan to one that is primarily
focused on the continued development of the Company's ILM business. During 1999,
the Company continued the operating expense reduction efforts started in 1998
and has nearly eliminated non-ILM-related research and development activities.
To further support the Company's goal of achieving operating profitability, the
Company entered into a multi-year distribution agreement with EES, a subsidiary
of Johnson & Johnson, effective October 1, 1999. As a result of entering the
agreement, the Company achieved its first quarter of operating profitability
during the fourth quarter of 1999. The Company expects to continue to achieve
operating profitability on an annual basis for 2000; however, the Company
anticipates there may be quarterly variations in profitability, such as occurred
in the first quarter of 2000, due to the timing of purchases by EES. There can
be no assurances that the Company will achieve the volume of sales anticipated
in connection with the agreement, or if achieved, that the margin on such sales
will be adequate to achieve operating profitability in the near term, or at all.
During the first quarter of 2000, the Company entered into a multi-step option
agreement for the development of its initial RIGS compound, RIGScan CR. The
Company recognized $50,000 in revenue related to the conclusion of the first
step of the option agreement. The option agreement is with a newly-formed
development entity, NuRigs, Ltd. ("NuRigs"). Based in Tel Aviv, Israel, NuRigs
has been organized for the express purpose of developing a second-generation
humanized RIGScan CR antibody fragment. The option agreement calls for Neoprobe
to receive, with the execution of a definitive agreement, a license fee of
$900,000 and a product royalty of approximately 5 percent on NuRigs' commercial
sales of the product. The Company and NuRigs are negotiating a definitive
license agreement that is expected to be completed in the fourth quarter of
2000, at the earliest. However, there can be no assurance that a definitive
license agreement will be completed, on terms consistent with the option
agreement, or at all. Under the terms of the option, NuRigs will assume all
clinical and other development costs for RIGScan CR. NuRigs expects to begin
clinical evaluation of the second-generation RIGScan CR agent during the second
quarter of 2000.
Accounts receivable increased significantly at March 31, 2000 from December 31,
1999 due primarily to the timing of sales to EES during the first quarter of
2000 versus the fourth quarter of 1999. Inventory levels declined at March 31,
2000 as compared to December 31, 1999. This is primarily due to the purchase by
EES of $600,000 of demonstrator units the Company had repurchased from KOL
BioMedical Instruments, Inc. in accordance with the termination of the marketing
agreement. The Company expects receivable levels to fluctuate in 2000 depending
on the timing of purchases by EES; however, inventory is expected to remain
relatively constant or decrease slightly over time as the strategic relationship
progresses and the Company manages its production and sales to meet EES's
forecasted needs.
Investing Activities. The Company's investing activities during the first
quarter of 2000 involved primarily the sale of its equity interest in XTL
Biopharmaceuticals Ltd. ("XTL") for $1.5 million. The Company's investing
activities during the first quarter of 1999 involved primarily the sale of
certain available-for-sale securities to fund operations.
Financing Activities. On February 16, 1999, the Company executed a Purchase
Agreement (the "Purchase Agreement") to complete the private placement of 30,000
shares of 5% Series B convertible preferred stock (the "Series B") for gross
proceeds of $3 million ($2.8 million, net). The Series B were issued with a $100
per share stated value and were convertible into common stock of the Company. In
connection with the private placement, the Company also issued 2.9 million Class
L warrants to purchase common stock of the Company at an initial
9
exercise price of $1.03 per share. The Series B paid a 5% annual dividend
payable in cash or common stock. The Series B were convertible at variable
prices based on the market price of the Company's common stock, subject to a
conversion price floor of $0.55. The Class L warrants were also subject to
variable exercise prices, subject to an exercise price floor of $0.62. Holders
of the Series B had certain liquidation preferences over other shareholders
under certain provisions as defined in the Purchase Agreement and had the right
to cast the same number of votes as if the owner had converted on the record
date. Pursuant to the private placement, the Company entered into a financial
advisory agreement with the placement agent providing the agent with Unit
Purchase Options ("UPOs") entitling the placement agent to purchase
approximately 150,000 shares of common stock in the Company. Under certain
conditions, the Company would have been obligated to redeem outstanding shares
of Series B for $120 per share (i.e., a total of $3.6 million ) such as the
delisting of the Company's common stock from the Nasdaq Stock Market as occurred
on July 27, 1999 and other conditions outlined in the Purchase Agreement.
The Series B were recorded by the Company during the first quarter of 1999 at
the amount of gross proceeds less the costs of the financing and the fair value
of the warrants and classified as mezzanine financing above the stockholders'
equity section on the Company's interim balance sheets for 1999. The calculated
conversion price at February 16, 1999, the first available conversion date, was
$1.03 per share. In accordance with the FASB's Emerging Issues Task Force Topic
D-60, the difference between the initial conversion price and the closing market
price on February 16, 1999 of $1.81 resulted in an implied incremental yield to
Series B holders of approximately $1.8 million that is reflected as conversion
discount in the Company's loss per share calculation for the first quarter of
1999.
On November 12, 1999, the Company entered into a binding letter of intent to
retire the 30,000 outstanding shares of Series B preferred stock, the related
2.9 million Class L warrants and the Unit Purchase Options ("UPOs") and to
cancel the financial advisory agreement with the placement agent for the Series
B. The letter of intent committed the Series B holders to surrender the Series B
shares and Class L warrants and for the placement agent to surrender the UPOs
and cancel the financial advisory agreement as well as to grant the Company
general releases from potential litigation associated with the transaction. In
exchange for the retirement of the Series B preferred shares and surrendering
the Class L warrants and UPOs, the Company agreed to pay the Series B holders a
total of $2.5 million and issue the Series B holders 3 million shares of common
stock and 3 million warrants to purchase common stock with an exercise price of
$0.74 per share. However, at December 31, 1999, final definitive agreements had
not been signed. Therefore, at December 31, 1999, the Company reclassified its
obligations to the Series B holders to reflect the $2.5 million payable in cash
as a current liability and the remaining book value of the Series B, including
dividends payable, as a long-term liability. In January 2000, the Company
executed a definitive settlement agreement with terms consistent with the letter
of intent, paid the Series B holders the $2.5 million, and issued the related
stock and warrants. The Company reported a loss on the retirement of the
preferred shares of $ 765,000 (approximately $0.03 per share) below net income
during the first quarter of 2000. This amount represents the value of the cash
given up plus the market value of the stock and warrants issued as valued on
January 20, 2000 less the previously recorded book value of the Series B
preferred stock and warrants.
Operational Outlook. The Company's only approved products are instruments and
related products used in gamma guided surgery. The Company does not currently
have a RIGS drug or ACT product approved for commercial sale in any major
market. The Company entered into a distribution agreement (the "Agreement") with
EES effective October 1, 1999, for an initial five-year term with options to
extend for two successive two-year terms. Under the Agreement, the Company will
manufacture and sell its ILM products (the "Products") exclusively to EES who
will distribute the Products globally. EES agreed to purchase minimum quantities
of the Company's Products over the first three years of the term of the
Agreement and to reimburse the Company for certain research and development
costs and a portion of the Company's warranty costs. The Company is obligated to
continue certain product maintenance activities and to provide ongoing
regulatory support for the Products. As a result of entering the Agreement, the
Company expects to achieve operating profitability on an annual basis in the
near term. However, there can be no assurances that the Company will achieve the
volume of sales anticipated in connection with the Agreement, or if achieved,
that the margin on such sales will be adequate to achieve operating
profitability on either an interim or annual basis in the near term, or at all.
Under the Agreement, EES received a worldwide paid-up license (the "License") to
the Company's ILM intellectual property to make and sell other products that may
be developed using the Company's ILM intellectual property. The term of the
License is the same as that of the Agreement. EES paid the Company a
non-refundable license fee
10
of $4 million. The Company intends to recognize the license fee as revenue
ratably over the five-year initial term of the Agreement. If the Agreement is
terminated by the Company as a result of a material breach by EES, EES would be
required to pay the Company a royalty on all products developed and sold by EES
using the Company's ILM intellectual property. In addition, the Company is
entitled to a royalty on any ILM product commercialized by EES that does not
infringe any of the Company's existing intellectual property.
During 1998, the Company began revising its business plan to focus on its ILM
technology and essentially suspended activities related to its RIGS and ACT
initiatives pending identification of a developing partner. The Company has
entered into a multi-step option agreement with a party interested in
commercializing a second-generation antibody for use in colorectal cancer
surgery. At this time, the Company has not reached definitive agreement with the
option party that would ensure the continued development of the RIGS process. In
addition, should the option party ultimately decide to exercise its license
option and reach an agreement satisfactory to the Company, the Company believes
that the likely timeframe required for the continued development, regulatory and
commercialization of a RIGS product would take a minimum of four to five years
before the Company would receive any significant product-related royalties.
However, there can be no assurance that the Company will be able to complete
definitive license agreements with the option partner for the RIGS technology,
on terms acceptable to the Company, or at all. To date, a partner for ACT has
not been identified or secured. Until definitive agreements with development
partners are reached and the appropriate regulatory approvals are received, the
Company is limited in its ability to generate revenue from RIGS or ACT. The
Company therefore intends to continue to focus on further development of the ILM
market in conjunction with its distribution partner, EES.
As of March 31, 2000, the Company had cash and cash equivalents of $2.7 million.
The Company expects to generate positive cash flow from operations in the near
term as a result of the Agreement with EES. However, there can be no assurances
that the Company will achieve the volume of sales anticipated in connection with
the Agreement, or if achieved that the margin on such sales will be adequate to
produce positive operating cash flow. The Company expects to continue to
experience cost savings during 2000 as a result of the transfer of marketing
responsibilities for the Company's ILM products to EES. In January 2000, the
Company sold its investment in XTL for $1.5 million. The Company believes its
March 31, 2000 cash balances and sources of future cash flow are adequate for
the Company to continue operating for the foreseeable future. However, if the
Company does not receive adequate funds from operations, it may need to further
modify its business plan and seek other financing alternatives. Such
alternatives may include asset dispositions that could force the Company to
further change its business plan.
The Company has, from time to time, been approached by entities interested in
acquiring some or all of the assets of the Company. The Company has, as
appropriate, engaged in discussions with certain of these entities; however,
such discussions to this point have been only preliminary in nature and none has
resulted in a definitive transaction for further consideration. The Company
anticipates that it may continue to be approached by such entities. At such time
as a definitive transaction is proposed, if any, it will be considered by
management and the Board of Directors, and if necessary, referred to the
shareholders of the Company for their consideration. However, there can be no
assurances that such a transaction will be proposed, or if proposed, that the
terms would be acceptable to the Company or its shareholders.
At December 31, 1999, the Company had U.S. net operating tax loss carryforwards
and tax credit carryforwards of approximately $93.3 million and $4.9 million,
respectively, available to offset or reduce future income tax liability, if any,
through 2019. However, under Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended, use of prior tax loss and credit carryforwards may be
limited after an ownership change. As a result of ownership changes as defined
by Sections 382 and 383, which have occurred at various points in the Company's
history, management believes utilization of the Company's tax loss carryforwards
and tax credit carryforwards may be limited. The Company's international
subsidiaries also have net operating tax loss carryforwards in their respective
foreign jurisdictions. However, as the Company is in the process of liquidating
its interests in both foreign subsidiaries as of March 31, 2000, the Company
does not anticipate that the foreign loss carryforwards will ever be utilized.
Impact of Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 was originally required to be adopted in years beginning after June
15, 1999;
11
however, SFAS No. 137 deferred the effective date to fiscal quarters beginning
after June 15, 2000. The Company expects to adopt SFAS No. 133 effective July 1,
2000. The Statement will require companies to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedge asset, liability or firm
commitment through earnings, or recognized in other comprehensive income until
the hedge item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101). SAB 101 was also amended
by SAB 101A. SAB 101 and SAB 101A summarize certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 adds new major Topic 13, "Revenue Recognition" and
Topic 13:A, "Views on Selected Revenue Recognition Issues" to the Staff
Accounting Bulletin Series. The Company expects to adopt SAB 101 during the
second quarter of 2000. Management is currently evaluating the potential impact,
if any, that the adoption of this SAB will have on its results of operations or
financial position.
RESULTS OF OPERATIONS
Revenue for the first quarter of 2000 was $1.9 million consistent with the $1.9
million for the same period in 1999. Research and development expenses during
the first quarter of 2000 were $294,000 or 27% of operating expenses for the
quarter. Marketing and selling expenses were $111,000 or 10% of operating
expenses during the quarter, and general and administrative expenses were
$668,000 or 62% of operating expenses for the quarter. Overall, operating
expenses for the first quarter of 2000 decreased $1.6 million or 60% over the
same quarter in 1999. The Company anticipates that total operating expenses for
the remainder of 2000 will also decrease over 1999 levels. The Company expects
research and development and general and administrative expenses to decrease
from 1999 levels as a result of cost containment measures implemented during
1999. Marketing expenses, as a percentage of sales, decreased to 7% of sales for
the first quarter of 2000 from 59% of sales for the same period in 1999. The
Company expects marketing and selling expenses for the remainder of 2000 to
decrease from 1999 levels.
Three months ended March 31, 2000 and 1999
Revenues and Margins. Net product sales decreased $305,000 or 16% to $1.6
million during the first quarter of 2000 from $1.9 million during the same
period in 1999. Sales during both periods were comprised almost entirely of
sales of the Company's hand-held gamma detection instruments. Gross margins
decreased to 48% of net sales for the first quarter of 2000 from 68% of net
sales for the same period in 1999. The decrease in instrument sales and gross
margins is primarily the result of the change in the type of sales made by the
Company related to entering the distribution agreement with EES at the end of
September 1999. Under the terms of this agreement, the Company's instrument
products are sold to EES at a wholesale transfer price. Prior to entering the
EES agreement, the Company sold its instrument products directly to end
customers at retail prices during the first quarter of 1999. The cost to
manufacture the Company's products did not change significantly from 1999 to
2000. The effect of the decrease in gross margins on profitability is offset by
the decline in marketing expenses discussed below. Revenues in the first quarter
of 2000 also included $200,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES and $50,000 from the recognition
of option fees related to an option agreement to license certain of the
Company's RIGS products.
Research and Development Expenses. Research and development expenses decreased
$168,000 or 36% to $294,000 during the first quarter of 2000 from $462,000
during the same period in 1999. The decrease is primarily due to the
reimbursement of certain research and development expenses associated with the
Company's distribution agreement with EES. First quarter research and
development expenses included approximately $40,000 in non-recurring severance
costs and $150,000 in unreimbursed costs for development of products to be
launched in fiscal year 2000.
Marketing and Selling Expenses. Marketing and selling expenses decreased $1.0
million or 90% to $111,000 during the first quarter of 2000 from $1.1 million
during the same period in 1999. Marketing and selling expenses, as a percentage
of sales, decreased to 7% of sales for the first quarter of 2000 from 59% of
sales for the same period in 1999. These results reflect lower internal
marketing headcount and out-of-pocket expense levels during the first quarter of
2000 as compared to the same period in 1999 as well as elimination of marketing
partner commissions over the same periods, due to entering the distribution
agreement with EES. The first quarter of 2000 also included approximately
$40,000 in non-recurring severance charges related to the separation of
marketing personnel.
General and Administrative Expenses. General and administrative expenses
decreased $337,000 or 34% to $668,000 during the first quarter of 2000 from $1.0
million during the same period in 1999. The decrease was primarily a result of
reductions in overhead costs such as space costs, taxes and insurance.
12
Losses Related to Subsidiaries in Liquidation. The Company incurred certain
charges during the first quarter of 1999 related to interest and other overhead
costs incurred during the wind-down process of subsidiaries in liquidation. No
such charges were incurred in the first quarter of 2000.
Other Income. Other income decreased $53,000 or 65% to $28,000 during the first
quarter of 2000 from $81,000 during the same period in 1999. Other income during
the first quarter of 2000 consisted primarily of interest income. Other income
during the first quarter of 1999 consisted primarily of gains from settlement of
liabilities at less than their face value. The Company's interest income
increased due to overall average levels of cash and investments during the first
quarter of 2000 as compared to the same period in 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently use derivative financial instruments, such as
interest rate swaps, to manage its exposure to changes in interest rates for its
debt instruments or investment securities. As of March 31, 2000 and December 31,
1999, the Company had outstanding debt instruments of $320,000 and $790,000,
respectively. Outstanding debt consisted primarily of a variable rate line of
credit and fixed rate financing instruments, with average interest rates of 6%
and 8% at March 31, 2000 and December 31, 1999, respectively. At March 31, 2000
and December 31, 1999, the fair market values of the Company's debt instruments
approximated their carrying values. A hypothetical 100-basis point change in
interest rates would not have a material effect on cash flows, income or market
values.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 16, 1999, the Registrant executed a purchase agreement to complete
the private placement of 30,000 shares of 5% Series B redeemable convertible
preferred stock (the "Series B"). The Series B were issued with a $100 per share
stated value and were convertible into common stock of the Registrant at the
option of the Series B holders. In connection with the private placement, the
Registrant also issued 2.9 million Class L warrants to purchase common stock of
the Registrant at an initial exercise price of $1.03 per share and the
Registrant entered into a financial advisory agreement with the placement agent
providing the agent with Unit Purchase Option ("UPOs") entitling the placement
agent to purchase approximately 150,000 shares of common stock in the
Registrant.
On January 20, 2000, the Registrant executed a definitive Settlement Agreement
with the Series B holders to retire the 30,000 shares of Series B preferred
stock issued in February 1999. In addition to retiring the preferred shares, the
Series B holders returned the Class L warrants issued in connection with the
Series B and the placement agent returned the UPOs. In exchange for the
retirement of the Series B preferred shares and surrendering the Class L
warrants and UPOs, the Registrant paid the Series B holders $2.5 million and
issued to the Series B Holders 3 million shares of common stock of the
Registrant and 3 million warrants to purchase common stock of the Registrant
with an exercise price of$0.74 per share.
On May 9, 2000 the Registrant filed a Certificate of Elimination with the
Secretary of State of the State of Delaware to remove all reference to the
Series B from the Registrant's Restated Certificate of Incorporation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS
3. ARTICLES OF INCORPORATION AND BY-LAWS
Exhibit 3.1
Complete Restated Certificate of Incorporation of Neoprobe
Corporation, as corrected February 18, 1994 and as amended
June 27, 1994, July 25, 1995, June 3, 1996, March 17, 1999 and
May 9, 2000.
Page 21 in the manually signed original.
Exhibit 3.2
Amended and Restated By-Laws dated July 21, 1993 as amended
July 18, 1995 and May 30, 1996 (incorporated by reference to
Exhibit 99.4 to the Registrant's Current Report on Form 8-K
dated June 20, 1996; Commission File No. 0-26520).
Exhibit 3.3
Certificate of Elimination of Neoprobe Corporation filed on
May 9, 2000 with the Secretary of State of Delaware.
Page 31 in the manually signed original
14
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
Exhibit 4.1
See Articles FOUR, FIVE, SIX and SEVEN of the Restated
Certificate of Incorporation of the Registrant (see Exhibit
3.1).
Exhibit 4.2
See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated By-Laws
of the Registrant (see Exhibit 3.2).
Exhibit 4.3
Rights Agreement dated as of July 18, 1995 between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 1 of the registration
statement on Form 8-A; Commission File No. 0-26520).
Exhibit 4.4
Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer and Trust Company
dated February 16, 1999 (incorporated by reference to Exhibit
4.4 of the 1998 Form 10-K/A).
10. MATERIAL CONTRACTS
Exhibit 10.1.39
Settlement Agreement among the Registrant, The Aries Master
Fund, The Aries Domestic Fund, L.P., Paramount Capital, Inc.
and Paramount Capital Asset Management, Inc. dated January 20,
2000.
Page 32 in the manually signed original.
Exhibit 10.1.40
Option Agreement between the Registrant and Reico Ltd. dated
February 1, 2000.
Page 67 in the manually signed original.
Exhibit 10.2.53
Non-Qualified Stock Option Agreement dated January 4, 2000
between the Registrant and David C. Bupp. This agreement is
one of three substantially identical agreements and is
accompanied by a schedule identifying the other agreements
omitted and setting forth the material details in which such
documents differ from the one that is filed herewith.
Page 76 in the manually signed original.
Exhibit 10.2.54
Restricted Stock Agreement dated March 22, 2000 between the
Registrant and David C. Bupp. This agreement is one of three
substantially identical agreements and is accompanied by a
schedule identifying the other agreements omitted and setting
forth the material details in which such documents differ from
the one that is filed herewith.
15
Page 80 in the manually signed original.
Exhibit 10.2.55
Agreement, Release and Waiver between the Registrant and
Matthew F. Bowman dated March 31, 2000.
Page 84 in the manually signed original.
Exhibit 10.2.56
Employment Agreement between the Registrant and Carl Bosch
dated April 1, 2000.
Page 90 in the manually signed original.
Exhibit 10.2.57
Employment Agreement between the Registrant and Brent L.
Larson dated April 1, 2000.
Page 95 in the manually signed original.
Exhibit 10.3.50
Share Purchase Agreement between the Registrant and Biomedical
Investments (1997) Ltd. dated January 19, 2000.
Page 100 in the manually signed original.
Exhibit 10.4.45
Manufacturing and Supply Agreement between the Registrant and
Plexus Corp. dated March 30, 2000 (filed pursuant to Rule
24b-2 under which the Registrant has requested confidential
treatment of certain portions of this Exhibit).
Page 112 in the manually signed original.
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Exhibit 11.1
Computation of Net Loss Per Share.
Page 134 in the manually signed original.
27. FINANCIAL DATA SCHEDULE
Exhibit 27.1
Financial Data Schedule (submitted electronically for SEC
information only).
16
(b) REPORTS ON FORM 8-K.
The Registrant filed a Current Report on Form 8-K on February
1, 2000 reporting the Registrant's disposition of its equity
investment in XTL Biopharmaceuticals Ltd. on January 19, 2000.
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 "Registrant")
Dated: May 12, 2000
By: /s/ David C. Bupp
-----------------------
David C. Bupp,
President and Chief Executive Officer
(duly authorized officer; principal
executive officer)
By: /s/ Brent Larson
-----------------------
Brent Larson
Vice President, Finance and Administration
(principal financial and accounting officer)
17
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
NEOPROBE CORPORATION
------------------------
FORM 10-QSB QUARTERLY REPORT
FOR THE FISCAL QUARTER ENDED:
MARCH 31, 2000
------------------------
EXHIBITS
------------------------
INDEX
Exhibit 3.1
Complete Restated Certificate of Incorporation of Neoprobe
Corporation, as corrected February 18, 1994 and as amended
June 27, 1994, July 25, 1995, June 3, 1996, March 17, 1999 and
May 9, 2000.
Exhibit 3.2
Amended and Restated By-Laws dated July 21, 1993 as amended
July 18, 1995 and May 30, 1996 (incorporated by reference to
Exhibit 99.4 to the Registrant's Current Report on Form 8-K
dated June 20, 1996; Commission File No. 0-26520).
Exhibit 3.3
Certificate of Elimination of Neoprobe Corporation filed on
May 9, 2000 with the Secretary of State of the State of
Delaware.
Exhibit 4.1
See Articles FOUR, FIVE, SIX and SEVEN of the Restated
Certificate of Incorporation of the Registrant (see Exhibit
3.1).
Exhibit 4.2
See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated By-Laws
of the Registrant (see Exhibit 3.2).
Exhibit 4.3
Rights Agreement dated as of July 18, 1995 between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 1 of the registration
statement on Form 8-A; Commission File No. 0-26520).
Exhibit 4.4
Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer and Trust Company
dated February 16, 1999 (incorporated by reference to Exhibit
4.4 of the 1998 Form 10-K/A).
Exhibit 10.1.39
Settlement Agreement among the Registrant, The Aries Master
Fund, The Aries Domestic Fund, L.P., Paramount Capital, Inc.,
and Paramount Capital Asset Management, Inc. dated January 20,
2000.
Exhibit 10.1.40
Option Agreement between the Registrant and Reico Ltd. dated
February 1, 2000.
Exhibit 10.2.53
Non-Qualified Stock Option Agreement between the Registrant
and David C. Bupp dated January 4, 2000. This Agreement is one
of three substantially identical agreements and is accompanied
by a schedule identifying the other agreements omitted and
setting forth the material details in which such agreements
differ from the one that is filed herewith.
Exhibit 10.2.54
Restricted Stock Agreement dated March 22, 2000 between the
Registrant and David C. Bupp. This Agreement is one of three
substantially identical agreements and is accompanied by a
schedule identifying the other agreements omitted and setting
forth the material details in which such agreements differ
from the one that is filed herewith.
Exhibit 10.2.55
Agreement, Release and Waiver between the Registrant and
Matthew F. Bowman dated March 31, 2000.
Exhibit 10.2.56
Employment Agreement between the Registrant and Carl Bosch
dated April 1, 2000.
Exhibit 10.2.57
Employment Agreement between the Registrant and Brent L.
Larson dated April 1, 2000.
Exhibit 10.3.50
Share Purchase Agreement between the Registrant and Biomedical
Investments (1997) Ltd. dated January 19, 2000.
Exhibit 10.4.45
Manufacturing and Supply Agreement between the Registrant and
Plexus Corp. dated March 30, 2000 (filed pursuant to Rule
24b-2 under which the Registrant has requested confidential
treatment of certain portions of this Exhibit).
Exhibit 11.1
Computation of Net Loss Per Share.
Exhibit 27.1
Financial Data Schedule (submitted electronically for SEC
information only).