U.S. 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: JUNE 30, 1998
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
----- -----
22,885,017 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 August 7,1998)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1997 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,921,025 $ 6,018,878
Available-for-sale securities 14,672,496 5,019,968
Accounts receivable 793,376 971,332
Inventory 413,024 1,007,426
Note receivable 1,500,000 0
Prepaid expenses and other current assets 2,001,378 1,530,961
----------- -----------
Total current assets 29,301,299 14,548,565
----------- -----------
Property and equipment at cost:
Equipment, net of accumulated depreciation 6,667,763 7,378,558
Construction in progress 3,757,133 4,228,423
----------- -----------
10,424,896 11,606,981
----------- -----------
Intangible assets, net of accumulated amortization 1,715,834 2,019,936
Other assets 131,375 1,624,358
----------- -----------
Total assets $41,573,404 $29,799,840
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
2
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1997 1998
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,848,172 $ 1,906,817
Accrued expenses 2,743,293 2,296,644
Notes payable 202,615 492,813
Capital lease obligation, current 156,140 124,733
------------- -------------
Total current liabilities 6,950,220 4,821,007
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Long term debt 1,813,437 4,345,449
Capital lease obligation 255,355 205,952
------------- -------------
Total liabilities 9,019,012 9,372,408
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at December 31,
1997 and June 30, 1998; none outstanding (500,000 shares designated as
Series A, $.001 par value, at June 30, 1998; none outstanding) 0 0
Common stock; $.001 par value; 50,000,000 shares authorized; 22,763,430 shares
issued and outstanding at December 31, 1997; 22,840,017 shares issued and
outstanding at June 30, 1998 22,763 22,840
Additional paid in capital 120,034,876 120,231,097
Deficit accumulated during the development stage (87,362,531) (99,687,199)
Unrealized (loss) gain on available-for-sale securities (9,290) 2,142
Cumulative foreign currency translation adjustment (131,426) (141,448)
------------- -------------
Total stockholders' equity 32,554,392 20,427,432
------------- -------------
Total liabilities and stockholders' equity $ 41,573,404 $ 29,799,840
============= =============
The accompanying notes are an integral part
of the consolidated financial statements.
3
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
NOVEMBER 16,
1983
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION)
JUNE 30, JUNE 30, TO JUNE 30,
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
Net sales $ 1,051,871 $ 1,255,033 $ 2,176,845 $ 2,118,924 $ 11,305,838
Cost of goods sold 199,968 340,584 692,909 565,057 4,269,053
------------ ------------ ------------ ------------ -------------
Gross profit 851,903 914,449 1,483,936 1,553,867 7,036,785
------------ ------------ ------------ ------------ -------------
Operating expenses:
Research and development 5,734,054 3,615,469 9,184,988 8,842,165 73,398,303
Marketing and selling 955,442 1,122,537 1,812,347 2,218,514 8,056,820
General and administrative 1,992,687 1,561,934 3,626,969 3,166,536 34,246,151
------------ ------------ ------------ ------------ -------------
Total operating expenses 8,682,183 6,299,940 14,624,304 14,227,215 115,701,274
------------ ------------ ------------ ------------ -------------
Loss from operations (7,830,280) (5,385,491) (13,140,368) (12,673,348) (108,664,489)
------------ ------------ ------------ ------------ -------------
Other income (expenses):
Interest income 623,062 195,365 1,207,665 449,456 6,371,636
Interest expense (3,696) (41,473) (9,848) (52,096) (619,581)
Other (24,291) (29,457) (18,582) (48,680) 3,225,235
------------ ------------ ------------ ------------ -------------
Total other income 595,075 124,435 1,179,235 348,680 8,977,290
------------ ------------ ------------ ------------ -------------
Net loss $ (7,235,205) $ (5,261,056) $(11,961,133) $(12,324,668) $ (99,687,199)
============ ============ ============ ============ =============
Net loss per common share
(basic and diluted) $ (0.32) $ (0.23) $ (0.53) $ (0.54)
============ ============ ============ ============
Weighted average shares
outstanding during the period 22,749,713 22,824,342 22,701,093 22,793,243
============ ============ ============ ============
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NOVEMBER 16,
1983
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION)
JUNE 30, JUNE 30, TO JUNE 30,
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
Net loss $(7,235,205) $(5,261,056) $(11,961,133) $(12,324,668) $(99,687,199)
Other comprehensive (losses) gains (27,306) 10,599 (216,798) 1,410 (139,306)
----------- ----------- ------------ ------------ ------------
Comprehensive loss $(7,262,511) $(5,250,457) $(12,177,931) $(12,323,258) $(99,826,505)
=========== =========== ============ ============ ============
The accompanying notes are an integral par
of the consolidated financial statements.
4
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOVEMBER 16,
1983
SIX MONTHS ENDED (INCEPTION)
JUNE 30, TO JUNE 30,
1997 1998 1998
---- ---- ----
Net cash used in operating activities $(11,815,631) $(14,559,929) $ (90,923,523)
Cash flows from investing activities:
Purchases of available-for-sale securities (5,986,812) (1,738,512) (109,901,702)
Proceeds from sales of available-for-sale securities 1,793,963 2,121,775 49,996,037
Maturities of available-for-sale securities 7,739,201 9,300,000 55,003,943
Purchases of property and equipment (2,566,638) (1,641,658) (12,850,256)
Other (69,211) (314,102) (1,351,134)
------------ ------------ -------------
Net cash provided by (used in) investing activities 910,503 7,727,503 (19,103,112)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 705,571 196,298 102,731,988
Proceeds from bank loans 0 2,807,762 4,621,199
Repayments of bank loans 0 (275,750) (275,750)
Other 497,567 209,361 9,006,086
------------ ------------ -------------
Net cash provided by (used in) financing activities 1,203,138 2,937,671 116,083,523
------------ ------------ -------------
Effect of exchange rate changes on cash (9,606) (7,392) (38,010)
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents (9,711,596) (3,902,147) 6,018,878
Cash and cash equivalents at beginning of period 30,168,412 9,921,025 0
------------ ------------ -------------
Cash and cash equivalents at end of period $ 20,456,816 $ 6,018,878 $ 6,018,878
============ ============ =============
The accompanying notes are an integral part
of the consolidated financial statements.
5
NEOPROBE CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information presented for June 30, 1997 and 1998, 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, 1997, which were included as part of the
Company's Annual Report on Form 10-K. Certain 1997 amounts have been
reclassified to conform with the 1998 presentation.
Included in other assets at June 30, 1998 is an investment in XTL
Biopharmaceuticals Ltd. ("XTL"). The investment resulted from the
conversion of a note receivable from XTL which was held by the Company
related to an Investment Research and Development Agreement. The
debenture was due on February 13, 1998 and bore interest at 5% payable
annually. On January 30, 1998, the Company exercised its option to
convert the debentures into 443,690 shares of Class A Common stock of
XTL.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.130 ("FAS 130") "Reporting
Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income in a full set of general
purpose financial statements. The Company adopted FAS 130 as of January
1, 1998. Other comprehensive losses of the Company include the effects
of translation gain or loss related to the Company's foreign operations
and unrealized gains and losses on available-for-sale securities.
The Company is a development stage enterprise engaged in the
development and commercialization of technologies for the diagnosis and
treatment of cancers. There can be no assurance that the Company will
be able to commercialize its proposed products. There can also be no
assurance that adequate financing will be available when needed or on
terms attractive to the Company.
2. INVENTORY
The components of inventory are as follows:
DECEMBER 31, JUNE 30,
1997 1998
---- ----
Materials and component parts $ 36,890 $ 39,781
Work-in-process 145,234 295,525
Finished goods 230,900 672,120
---------- ----------
$ 413,024 $1,007,426
========== ==========
6
3. LONG-TERM DEBT
Neoprobe (Israel) Ltd. ("Neoprobe (Israel)"), a 95%-owned subsidiary of
the Company, is completing construction of a radiolabeling facility
near Dimona, Israel, for use in future operations of the Company.
Construction of the facility is being partially financed under a $9.9
million investment program approved by the state of Israel's Finance
Committee (the "Committee"). Under the approved program, Neoprobe
(Israel) is entitled to government grants and government loan
guarantees equal to a percentage of the total loan taken for the
construction and operation of the facility. Amounts received under the
agreement are collateralized by certain property obtained through the
use of proceeds received. The investment program is scheduled to expire
in September 1998; however, the Company is negotiating to extend the
grant portion of the program for an additional year. As of June 30,
1998, Neoprobe (Israel) has received $4.4 million and $1.2 million in
the form of loans and grants, respectively.
In April 1998, the Company executed a $3 million revolving line of
credit arrangement with a bank. Available borrowings under the line of
credit are based on a formula of eligible accounts receivable and
inventory. Interest on the line of credit is based on the prime rate or
LIBOR, as elected by the Company. As of June 30, 1998, approximately
$400,000 was outstanding under the line of credit. The line of credit
has restrictive covenants or limitations regarding permitted
indebtedness of the Company, the sale of assets, tangible net worth,
available cash and investment balances and other financial ratios. The
Company was in compliance with all covenants of the line of credit as
of June 30, 1998. As of July 31, 1998 the Company was in violation of
one of the covenants; however, the Company has obtained a waiver of the
covenant from the bank.
4. STOCK OPTIONS
During the first half of 1998, the Board granted options to employees
and certain directors of the Company under the 1996 Stock Incentive
Plan (the "Plan") for 399,000 shares of common stock, exercisable at
$5.63 per share, vesting over three to four years. The Company has 2.0
million options outstanding under two stock option plans. Of the
outstanding options, 1.1 million options have vested as of June 30,
1998, at an average exercise price of $6.97 per share.
5. AGREEMENTS
In April 1998, the Company executed an agreement with Ethicon
Endo-Surgery, Inc. ("EES"), a Johnson & Johnson company to market and
promote the Neoprobe(R) 1500 Portable Radioisotope Detector and its
14mm and 19mm reusable probes for gamma guided lymphatic mapping and
minimally invasive surgery. During the initial one-year term of the
agreement, EES will promote and sell the aforementioned products and
train physicians in the use of Neoprobe's devices. EES will immediately
begin marketing activities in the United States while the companies
discuss expanding the agreement to cover other geographic areas. In
exchange for promoting and selling the device products, EES will
receive sales commissions based on sales of the aforementioned
products.
The Company and Cira Technologies, Inc. ("Cira") entered into a License
and Option Agreement (the "Agreement") dated April 1, 1998 which
replaced the Technology Option Agreement between the Company and Cira
dated March 1996. The Company's chairman is a director and shareholder
of Cira. Under the terms of the Agreement, Cira granted the Company an
exclusive, royalty bearing license to make, have made, use and sell
products ("Licensed Products") containing activated lymph node derived
cells for the treatment of human immunodeficiency virus ("HIV")
infected human patients including HIV-infected human patients
co-infected with other viruses. In exchange for the license, the
Company agreed to continue funding of an ongoing pilot study on HIV, to
pay Cira up to $50,000 to fund research activities at Cira as incurred,
to pay royalties at variable rates based on sales of Licensed Product,
and to prepare a research plan outlining the research to be conducted
to support a Biologic License Application ("BLA") or a New Drug
Application ("NDA") to be filed with the United States Food and Drug
Administration ("FDA"). No royalties are due to Cira until the Company
recovers out-of-pocket expenditures for research and development
through net sales of Licensed Product, up to a maximum of $2 million.
7
6. CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position of the Company.
Due to anticipated changes in the production of RIGScan CR49, it was
determined that Neoprobe Europe AB ("Neoprobe Europe"), the Company's
biologics manufacturing and purification facility located in Lund,
Sweden, was no longer critical to the manufacturing process, and that
research and development activities being carried on at the facility
could be performed more efficiently elsewhere. As a result, the Company
took action in the second quarter to initiate the sale of Neoprobe
Europe. As of June 30, 1998, activities regarding the potential sale
are still in the preliminary stages, and management is unable to
estimate the effect on the Company's financial position. However,
management does not believe the $2.5 million book value of the net
assets of Neoprobe Europe to be impaired at this time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Report contain forward-looking statements
that involve risks and uncertainties. The Company's actual results in 1998 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, government regulations, absence of
government approval for marketing the Company's products, limited revenues,
continuing net losses, accumulated deficit, uncertainty of capital funding for
future capital needs, dependence on patents, proprietary technology and trade
secrets, limited marketing experience, limited manufacturing capacity and
experience, dependence on principal product line, uncertainty of market
acceptance, no assurance of continued rights to targeting agents, royalty
payments, competition, limited third party reimbursement, risk of technological
obsolescence, possible volatility of stock price, anti-takeover provisions,
product liability, dependence on key personnel, ability to attract new
personnel, and ability to manage a changing business.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private and public offerings of its equity securities, from which it has raised
gross proceeds of approximately $120 million. As of June 30, 1998, the Company
had cash, cash equivalents, and available-for-sale securities of $11 million. To
date, the Company has devoted substantially all of its efforts and resources to
research and clinical development of innovative systems for the intraoperative
diagnosis and treatment of cancers. During the first quarter of 1998, the
Company implemented a business plan to reduce operating expenses and focus on
three main business activities: commercializing the Company's first RIGS(R)
system (radioimmunoguided surgery) product, called RIGScan(R) CR49 (125)I - CC49
monoclonal antibody) for the surgical detection of metastatic colorectal cancer,
increasing the Company's market position in gamma guided surgery applications,
and developing activated cellular therapy products for cancer and viral
diseases. During the first half of 1998, the Company reduced its domestic staff
which decreased its projected annual compensation expense by approximately $1.5
million compared to prior year levels and postponed certain research projects
which were originally planned to be carried out in 1998.
The RIGS system integrates radiolabeled targeting agents and radiation detection
instruments. The Company is developing both the radiolabeled targeting agents
and radiation-detection instrument components of the RIGS technology. Prior to
1996, the Company completed testing in a Phase III clinical trial for the
detection of metastatic colorectal cancer. In addition, the Company has
completed testing in a separate Phase III clinical trial for the detection of
primary colorectal cancer. The Company must obtain regulatory approval to market
its products before commercial revenue can be generated. During 1996, the
Company submitted applications to the European regulatory agencies and to the
FDA to request permits to begin marketing and selling the Company's RIGS
products for the detection of metastatic colorectal cancer. In November 1997,
the Company withdrew its application from the
8
European Agency for the Evaluation of Medicinal Products ("EMEA") as a result of
additional requests for information from the European Committee for Proprietary
Medicinal Products ("CPMP"). In addition, in December 1997, the FDA's Center for
Biologics Evaluation and Research ("CBER") completed its review of data
submitted by the Company for its product and informed the Company in a
non-approvable response letter that additional information must be provided
before the FDA can further consider the approval of the Company's product. Both
agencies requested additional information to demonstrate the prospective
clinical benefit of RIGScan CR49 in addition to the diagnostic findings, which
led the Company to withdraw its European application.
During the first half of 1998, the Company has been in discussions with the FDA
to address the clinical and manufacturing questions outlined in their December
1997 response letter. The Company is completing preparation of action plans
which have been preliminarily reviewed and agreed to by the FDA. These action
plans involve a proposed clinical trial design which would involve both RIGS and
control group patients and involve interim analysis of clinical results. The
Company intends to submit amendments to its existing Biologic License
Application (BLA) in approximately 24 months following commencement of planned
clinical testing and manufacturing validation activity. However, the Company
does not currently intend to initiate activity under such action plans until a
development partner for the RIGS system has been engaged. The Company has
engaged the services of Lehman Brothers to assist in securing development
partners and in the strategic assessment of the Company's business. There can be
no assurance that the Company will be able to engage a development partner on a
timely basis, on favorable terms, or at all. The FDA has advised the Company
that the BLA will be reviewed within 90 days of the final amended submission.
The Company intends to submit a new European application for RIGScan CR49
concurrent with its final BLA amendment.
In October 1997, the Company launched the Neoprobe(R) 1500 Portable Radioisotope
Detector in response to an emerging new surgical technique called lymphatic
mapping for treating patients with melanoma, a potentially deadly form of skin
cancer. Lymphatic mapping represents a less invasive surgical technique than
existing techniques for staging cancer or determining whether the cancer has
spread to the lymph nodes. Surgeons are using the lymphatic mapping technique
for treating patients with melanoma and investigating its use in patients with
breast cancer as well. The Company is currently selling the Neoprobe 1500
Portable Radioisotope Detector for the lymphatic mapping application and
expanding its line of instruments to provide a variety of gamma-detecting probes
for specialized uses. In March 1998, the Company introduced a smaller (14mm
diameter) detection probe whose performance has been optimized for use in
lymphatic mapping procedures. The Company recorded revenue of $1.25 million and
$2.1 million during the second quarter and the first half of 1998, respectively,
predominantly related to sales of instruments used in application of the
lymphatic mapping technique.
As a result of its RIGScan CR49 research, the Company is studying the safety and
efficacy of a RIGS based autologous Activated Cellular Therapy (RIGS/ACT(TM))
for cancer, which boosts the patient's own immune system by removing lymph nodes
targeted by RIGScan CR49 during surgery and then, in a cell processing facility,
activating and expanding "helper" T-cells found in the nodes. Within 10 to 14
days, the patient's own immune cells, now activated and numbering more than 20
billion, are infused into the patient to trigger an effective immune response to
the cancer. An in vitro program has shown significant chemotherapy enhancement
in a number of tumor cell lines for a variety of chemotherapeutic agents. The in
vitro assessment correlates with an observation of potential chemotherapy
enhancement in an earlier Phase I clinical study of unresectable colorectal
patients. The Company recently opened its first Investigational New Drug (IND)
application for Phase I/II and Phase II multicenter trials with RIGS/ACT for
resectable and unresectable colorectal cancer patients.
In addition, the Company has begun to evaluate the application of a non-RIGS
based ACT therapy for the treatment of chronic viral diseases. Non-RIGS/ACT uses
peripheral lymph nodes, obtained in an outpatient setting, as its initial
culture material. After using the Company's activation and expansion procedures,
the cells are infused in 10-14 days. A Phase I study has been completed with
HIV/AIDS patients with encouraging results. Also, the Company recently opened a
new Phase I trial in additional viral diseases, extending the use of activated
cellular therapy in patients co-infected with HIV/AIDS and chronic active
hepatitis B or C. In addition, the Company has been working with researchers to
isolate and characterize a soluble factor which appears to be present in the
lymph nodes of both cancer and viral disease patients.
9
The Company and Cira entered into a License and Option Agreement (the
"Agreement") dated April 1, 1998 which replaced the Technology Option Agreement
between the Company and Cira dated March 1996. The Company's chairman is a
director and shareholder of Cira. Under the terms of the Agreement, Cira granted
the Company an exclusive, royalty bearing license to make, have made, use, and
sell products ("Licensed Products") containing activated lymph node derived
cells for the treatment of HIV infected human patients including HIV-infected
human patients co-infected with other viruses. In exchange for the license, the
Company agreed to continue funding of an ongoing study on HIV, pay Cira up to
$50,000 to fund research activities at Cira as incurred, to pay royalties at
variable rates based on sales of Licensed Product, and to prepare a research
plan outlining the research to be conducted to support a BLA or an NDA to be
filed with the FDA. No royalties are due to Cira until the Company recovers
out-of-pocket expenditures for research and development through net sales of
Licensed Product, up to a maximum of $2 million.
For the period from inception to June 30, 1998, the Company has incurred
cumulative net losses of approximately $99.7 million. The Company does not
currently have a RIGS product approved for commercial sale in any major market
and does not anticipate commercial sales of sufficient volume to generate
positive cash flow from operations until 2001, at the earliest. The Company has
incurred, and will continue to incur, substantial expenditures for research and
development activities related to bringing its products to the commercial
market. The Company intends to devote significant additional funds to clinical
testing, manufacturing validation, and other activities required for regulatory
review and commercialization of its products. The amount of funds and length of
time required to complete such testing will depend upon the outcome of
regulatory reviews. The regulatory bodies may require more testing than is
anticipated by the Company. There can be no assurance that the Company's RIGS
products will be approved for marketing by the FDA or any foreign government
agency, or that any such products will be successfully introduced or achieve
market acceptance.
As of June 30, 1998, the Company had cash and cash equivalents and
available-for-sale securities of $11 million. The Company currently anticipates
that approximately $3.5 million in cash will be used to finance operating
activities during the second half 1998 and that the Company will end the year
with a cash balance of approximately $7.5 million. The Company is actively
pursuing sources of improving its projected liquidity position as of December
31, 1998. In April 1998, the Company executed a $3 million revolving line of
credit arrangement with a bank. As of June 30, 1998, $424,000 was outstanding
under the line of credit. The line of credit has restrictive covenants or
limitations regarding permitted indebtedness of the Company, the sale of assets,
tangible net worth, available cash and investment balances and other financial
ratios. The Company was in compliance with all covenants of the line of credit
as of June 30, 1998. As of July 31, 1998 the Company was in violation of one of
the covenants; however, the Company has obtained a waiver of the covenant from
the bank.
The Company anticipates an approximately 70% increase in sales during the second
half of 1998 compared to the same period in 1997 due to increased sales volumes
to be developed in conjunction with EES, the Company's marketing partner for
ILM, at prices and margins similar to what has been achieved during the first
half of 1998. However, there can be no assurance that the increase in sales
volumes and revenue will occur or that the prices and margins achieved on
instrument sales in the first half of 1998 will be able to be maintained. The
Company also expects to receive approximately $3 million in milestone payments
and/or gain on the sale of long-term investments and other non-strategic assets
such as the Neoprobe Europe facility. However, there can be no assurance that
these milestones will be received or that the gains on the sale of long-term
investments or non-strategic assets will be realized. The Company also expects
to experience cost savings during the second half of 1998 as a result of the
delayed in initiation of activity related to its RIGS action plans until a
development partner for the RIGS system has been engaged. The Company has
engaged the services of Lehman Brothers to assist in securing development
partners and in the strategic assessment of the Company's business. There can be
no assurance that the Company will be able to engage a development partner or
partners on a timely basis, on favorable terms, or at all. If the Company does
not receive this anticipated cash, it will need to obtain additional financing
in 1999 in order to continue its present business plan or it will have to modify
its business plan. Such financing may require sales of equity securities that
could be dilutive to current holders of common stock, debt financing which may
be on unfavorable terms or asset dispositions that could force the Company to
change its business plan.
At December 31, 1997, the Company had U.S. net operating tax loss carryforwards
of approximately $75.8 million to offset future taxable income through 2012.
Additionally, the Company has U.S. tax credit carryforwards of approximately
$2.2 million available to reduce future income tax liability through 2012. Under
Section 382 of the Internal Revenue Code of 1986, as amended, use of prior tax
loss carryforwards is limited after an ownership change. As a result of
ownership changes which occurred in March 1989 and in September 1994, the
Company's tax loss carryforwards and tax credit carryforwards are subject to the
limitations described by Section 382. The
10
Company's international subsidiaries also have net operating tax loss
carryforwards in their respective foreign jurisdictions.
The Company cannot assure if marketing approvals will be received without
additional substantial expenses or delays, or at all. However, if and when the
Company receives permission from the regulatory authorities to begin marketing
its products, additional costs for marketing and distribution will be incurred.
The Company has executed various agreements with third parties that supplement
the technical and business capabilities of the Company. The Company is generally
obligated to such parties to pay royalties or commissions upon commercial sale
of the related product. The Company's estimate of its allocation of cash
resources is based on the current state of its business operations, its current
business plan, and current industry and economic conditions, and is subject to
revisions due to a variety of factors including without limitation, additional
expenses related to marketing and distribution, regulatory licensing and
research and development, and to reallocation among categories and to new
categories. The Company may need to supplement its funding sources from time to
time.
Neoprobe Europe AB, formerly called (New)MonoCarb AB, is a wholly-owned
subsidiary of the Company, located in Lund, Sweden, where it operates a
biologics manufacturing and purification facility. The Company uses the facility
to perform research and development activities and prepare the CC49 monoclonal
antibody produced by Bio-Intermediair BV for final radiolabeling. Due to
anticipated changes in the production of RIGScan CR49, it was determined that
the facility was no longer critical to the manufacturing process, and that
research and development activities being carried on at the facility could be
performed more efficiently elsewhere. As a result, the Company took action in
the second quarter to initiate the sale of Neoprobe Europe. As of June 30, 1998,
activities regarding the potential sale are in the preliminary stages and
management is unable to estimate the effect on the Company's financial position.
However, management does not believe the $2.5 million book value of the net
assets of Neoprobe Europe to be impaired at this time. The Company advanced
funds to Neoprobe Europe during the first half of 1998 to cover operating and
capital expenditures of approximately $773,000. The Company anticipates
advancing an additional $650,000 during the remainder of 1998 to cover operating
and capital expenditures.
In 1994, the Company formed Neoprobe (Israel) to construct and operate a
radiolabeling facility near Dimona, Israel, for radiolabeling of the Company's
targeting agents. The Company owns 95 percent of Neoprobe (Israel), with Rotem
Industries Ltd. ("Rotem"), the private arm of the Israeli atomic energy
authority, owning the balance and managing the facility. Construction of the
facility is being financed through a financial program approved by the state of
Israel's Finance Committee (the "Committee"). The total amount of the approved
program is $9.9 million. Neoprobe (Israel) is entitled to receive grants based
on a percentage of its investment and a government guarantee of 75% to 85% of
the principal balance of bank loans taken to build and operate the facility. The
investment program is scheduled to expire in September 1998; however, the
Company is negotiating to extend the grant portion of the program for an
additional year. During the first half of 1998, the Company received loan
proceeds of approximately $2.6 million under the government sponsored program.
The Company expects to receive an additional $800,000 in loan and grant proceeds
under the approved program during 1998. The Company does not anticipate
advancing any significant amount of funds to Neoprobe (Israel) during 1998.
The Company has performed a preliminary assessment of the year 2000 issue as it
relates to the Company's information systems and vendor supplied application
software. Based on these assessments, management does not anticipate any
significant impact on the Company as a result of implications associated with
that issue.
RESULTS OF OPERATIONS
Since inception, the Company has dedicated substantially all of its resources to
research and development of its RIGS system for the intraoperative diagnosis and
treatment of cancer. Until the appropriate regulatory approvals are received,
the Company is limited in its ability to generate revenue. During the second
quarter and first half of 1998, the Company generated sales of Neoprobe 1500
systems of $864,000 and $1.25 million, respectively. Results of operations for
the second quarter and first half of 1998 include approximately $800,000 in
reorganization costs associated with the adoption of the Company's new business
plan.
11
Research and development expenses during the first half of 1998 were $8.8
million, or 62% of operating expenses for the period. Marketing and selling
expenses were $2.2 million, or 16% of operating expenses during the period and
general and administrative expenses were $3.2 million, or 22% of operating
expenses for the period. The Company anticipates that 1998 total operating
expenses will decrease over 1997 in relation to expected increases in sales. The
Company expects research and development and general and administrative expenses
to decrease from 1997 levels as a result of the refocused business plan adopted
in February. However, the Company also expects marketing and selling expenses to
increase from 1997 levels.
Three Months ended June 30, 1998, and 1997.
Revenue and Other Income
The Company had net sales of approximately $1.25 million during the second
quarter of 1998, compared to $1.1 million during the same period in 1997. Net
sales in 1998 and 1997 were composed almost entirely of instrument sales.
Instrument sales in 1997 reflect contributions from the Company's marketing
arrangement with the United States Surgical Corporation which was terminated in
October 1997. Instrument sales during the second quarter of 1998 were based on
leads generated primarily by the Company's clinical specialists' sales force.
Other income during the second quarter of 1998 and 1997 was $124,000 and
$595,000, respectively, and represented primarily interest income earned during
both periods.
Research and Development Expenses
Research and development expenses decreased during the second quarter of 1998 to
$3.6 million from $5.7 million for the same period in 1997. The decrease in
research and development expenses reflects decreased activity in all phases of
the Company's development programs consistent with the implementation of the
Company's refocused business plan announced in February 1998. Expenses related
to RIGScan CR49 continued to decrease as clinical and manufacturing validation
activity declined pending identification of a development partner.
Instrument-related expenses decreased due to the wind-down of the design phase
of certain next-generation products. Pipeline projects decreased related to the
refocused business plan. Clinical trial activity related to the Company's
therapeutic projects remained constant over the two periods.
Marketing and Selling Expenses
During the second quarter of 1998, marketing and selling expenses increased by
$167,000 over the same period in 1997. The increase in marketing expenses during
the second quarter of 1998, as compared to the same period in 1997, relates to
increased internal marketing efforts to meet competitive pressure and further
penetrate the lymphatic mapping market. The increased expenses were the result
of a greater number of sales and marketing personnel in 1998, coupled with
relative increases in travel and entertainment as well as promotional costs
associated with the launch of new products. The increases in internal costs
offset decreases in commissions paid to marketing partners in 1998 versus 1997.
General and Administrative Expenses
General and administrative expenses were $1.6 million for the second quarter of
1998 compared to $2.0 million for the same period in 1997. The decrease is due
primarily to lower average headcount during the second quarter of 1998 compared
to the same period in 1997.
Six Months ended June 30, 1998 and 1997
Revenue and Other Income
The Company had net sales of approximately $2.1 million during the first six
months of 1998, compared to $2.2 million during the same period in 1997. Net
sales in 1998 were composed almost entirely of instrument sales. In 1997, net
sales included instrument sales of $2.1 million and blood serology products of
$100,000. Instrument sales in 1997 reflect contributions from the Company's
marketing arrangement with the United States Surgical Corporation which was
terminated in October 1997. Instrument sales during the first six months of 1998
were based on leads generated primarily by the Company's clinical specialists'
sales force. Other income during the first
12
six months of 1998 and 1997 was $349,000 and $1.2 million, respectively, and
represented primarily interest income earned during both periods.
Research and Development Expenses
Research and development expenses decreased during the second quarter of 1998 to
$8.8 million from $9.2 million for the same period in 1997. The decrease
reflects the Company's efforts to reduce costs consistent with the refocused
business plan announced in February 1998. Year-to-date costs in 1998 include
costs related to severance and other separation-related costs, but such costs
were offset by decreases in expenses related to RIGScan CR49 pending
identification of a development partner. Instrument-related expenses decreased
due to the wind-down of the design phase of next-generation products. Pipeline
projects decreased related to the refocused business plan. Clinical trial
activity related to the Company's therapeutic projects remained constant over
the two periods.
Marketing and Selling Expenses
During the first six months of 1998, marketing and selling expenses increased by
$406,000 over the same period in 1997. The increase in marketing expenses during
the first half of 1998, as compared to the same period in 1997, relates to an
increased marketing effort to meet competitive pressure and further penetrate
the lymphatic mapping market. The increased expenses were the result of a
greater number of sales and marketing personnel in 1998, coupled with relative
increases in travel and entertainment as well as promotional costs associated
with the launch of new products.
General and Administrative Expenses
General and administrative expenses were $3.2 million for the first six months
of 1998 compared to $3.6 million for the same period in 1997. Additional costs
related to the February reorganization were offset by an overall lower headcount
during the first half of 1998 than the same period in 1997.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An annual meeting of the stockholders of the Registrant was held on May
21, 1998. The matters voted upon at the annual meeting and the results
of the votes are set forth below.
(i) David C. Bupp was elected a director to serve for a term of
three years; 20,157,146 shares were voted for his election and
358,603 shares withheld authority.
(ii) Julius R. Krevans, M.D. was elected a director to serve for a
term of three years; 20,235,654 shares were voted for his
election and 280,095 shares withheld authority.
(iii) James F. Zid was elected a director to serve for a term of
three years; 20,223,382 shares were voted for his election and
292,367 shares withheld authority.
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 and June 3, 1996 (incorporated by
reference to Exhibit 99.2 to the Registrant's Current Report
on Form 8-K dated June 20, 1996; Commission File No. 0-26520).
` 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).
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).
10. MATERIAL CONTRACTS
Exhibit 10.2.44
Employment Agreement between David C. Bupp and the Registrant
dated January 1, 1998.
Exhibit 10.2.45
Restricted Stock Purchase Agreement dated May 20, 1998
between the Registrant and David C. Bupp.
Exhibit 10.3.47
License and Option Agreement between Cira Technologies Inc.,
and Neoprobe Corporation dated April 1, 1998.
Exhibit 10.3.48
Restated Subscription and Option Agreement between the
Registrant, Cira Technologies, Inc., Rigahrd G. Olsen, John L.
Ridihalgh, Richard McMorrow, James R. Blakeslee, Mueller &
Smith, Ltd., Pierre L. Triozzi and Gregory Noll, dated April
17, 1998.
Exhibit 10.3.49
Restated Stockholders Agreement between the Registrant, Cira
Technologies, Inc., Rigahrd G. Olsen, John L. Ridihalgh,
Richard McMorrow, James R. Blakeslee, Mueller & Smith, Ltd.,
Pierre L. Triozzi and Gregory Noll, dated April 17, 1998.
Exhibit 10.4.22.
Sales and Marketing Agreement dated April 21, 1998 between the
Registrant and Ethicon Endo-Surgery, Inc., an Ohio corporation
(filed pursuant to Rule 24b-2 under which the Registrant has
requested confidential treatment of certain portions of this
Exhibit).
Exhibit 10.4.23
Loan Agreement between the Registrant and Bank One, NA, dated
April 16, 1998.
Exhibit 10.4.24
Variable Rate Cognovit Promissory Note, dated April 16, 1998,
issued by Registrant to Bank One, NA.
15
Exhibit 10.4.25
Security Agreement between Registrant and Bank One, NA, dated
April 16, 1998.
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Exhibit 11.1
Computation of Net Loss Per Share.
27. FINANCIAL DATA SCHEDULE
Exhibit 27.1
Financial Data Schedule (submitted electronically for SEC
information only).
(b) REPORTS ON FORM 8-K.
No current report on Form 8-K was filed by the Registrant
during the second quarter of fiscal 1998.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEOPROBE CORPORATION
(the "Registrant"
Dated: August 14, 1998
By: /s/ DAVID C. BUPP
--------------------------------------------
David C. Bupp,
President and Chief Executive Officer
(principal executive officer)
By: /s/ BRENT LARSON
--------------------------------------------
Brent Larson
Vice President, Finance
(principal financial and accounting officer)
17
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
NEOPROBE CORPORATION
--------------------
FORM 10-Q QUARTERLY REPORT
FOR THE FISCAL QUARTER ENDED:
JUNE 30, 1998
--------------------
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 and June
3, 1996 (incorporated by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K dated June 20, 1996; Commission File No. 0-26520).
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 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 10.2.44
Employment Agreement between David C. Bupp and the Registrant dated January 1,
1998.
Page 21 in the manually signed original.
Exhibit 10.2.45
Restricted Stock Purchase Agreement dated May 20, 1998 between the Registrant
and David C. Bupp.
Page 28 in the manually signed original.
Exhibit 10.3.47
License and Option Agreement between Cira Technologies, Inc., and Neoprobe
Corporation dated April 1, 1998.
Page 31 in the manually signed original.
Exhibit 10.3.48
Restated Subscription and Option Agreement between the Registrant, Cira
Technologies, Inc., Rigahrd G. Olsen, John L. Ridihalgh, Richard McMorrow, James
R. Blakeslee, Mueller & Smith, Ltd., Pierre L. Triozzi and Gregory Noll, dated
April 17, 1998.
Page 63 in the manually signed original.
Exhibit 10.3.49
Restated Stockholders Agreement between the Registrant, Cira Technologies, Inc.,
Rigahrd G. Olsen, John L. Ridihalgh, Richard McMorrow, James R. Blakeslee,
Mueller & Smith, Ltd., Pierre L. Triozzi and Gregory Noll, dated April 17, 1998.
Page 75 in the manually signed original.
Exhibit 10.4.22
Sales and Marketing Agreement dated April 21, 1998 between the Registrant and
Ethicon Endo-Surgery, Inc., an Ohio corporation (filed pursuant to Rule 24b-2
under which the Registrant has requested confidential treatment of certain
portions of this Exhibit).
Page 80 in the manually signed original.
Exhibit 10.4.23
Loan Agreement between the Registrant and Bank One, NA, dated April 16, 1998.
Page 93 in the manually signed original.
Exhibit 10.4.24
Variable Rate Cognovit Promissory Note, dated April 16, 1998, issued by
Registrant to Bank One, NA.
Page 106 in the manually signed original.
Exhibit 10.4.25
Security Agreement between Registrant and Bank One, NA, dated April 16, 1998.
Page 116 in the manually signed original.
Exhibit 11.1
Computation of Net Loss Per Share.
Page 117 in the manually signed original.
Exhibit 27.1
Financial Data Schedule (submitted electronically for SEC information only).