UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2003
OR
| | TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM _______TO________
COMMISSION FILE NUMBER: 0-26520
NEOPROBE CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE 31-1080091
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
425 METRO PLACE NORTH, SUITE 300, DUBLIN, OHIO 43017
(Address of principal executive offices)
614.793.7500
(Issuer's telephone number)
38,589,009 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 4, 2003)
Transitional Small Business Disclosure Format (check one) Yes | | No |X|
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
2003 DECEMBER 31,
ASSETS (UNAUDITED) 2002
------------- -------------
Current assets:
Cash and cash equivalents $ 368,703 $ 700,525
Accounts receivable, net 1,505,538 746,107
Inventory 953,095 1,191,918
Prepaid expenses and other 345,735 451,537
------------- -------------
Total current assets 3,173,071 3,090,087
------------- -------------
Property and equipment 2,369,646 2,346,445
Less accumulated depreciation and amortization 2,021,551 1,883,797
------------- -------------
348,095 462,648
------------- -------------
Patents and trademarks 3,144,900 3,129,031
Non-compete agreements 584,516 584,516
Acquired technology 237,271 237,271
------------- -------------
3,966,687 3,950,818
Less accumulated amortization 827,061 584,490
------------- -------------
3,139,626 3,366,328
------------- -------------
Other assets 216,099 160,778
------------- -------------
Total assets $ 6,876,891 $ 7,079,841
============= =============
CONTINUED
2
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- -------------
Current liabilities:
Note payable to CEO, net of discount $ 224,596 $ --
Other notes payable, net of discount 197,390 172,381
Capital lease obligation, current 12,905 14,683
Accrued liabilities 487,767 397,161
Accounts payable 554,342 432,140
Deferred revenue, current 1,061,647 933,860
------------- -------------
Total current liabilities 2,538,647 1,950,225
------------- -------------
Capital lease obligation -- 5,328
Deferred revenue 289,442 703,625
Contingent consideration for acquisition -- 288,053
Other liabilities 208,437 172,474
------------- -------------
Total liabilities 3,036,526 3,119,705
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized at June 30, 2003 and December 31, 2002;
none issued and outstanding (500,000 shares designated
as Series A, $.001 par value, at June 30, 2003 and
and December 31, 2002; none outstanding) -- --
Common stock; $.001 par value; 75,000,000 shares
authorized; 38,588,009 shares issued and outstanding
at June 30, 2003; 36,502,183 shares issued and
outstanding at December 31, 2002 38,588 36,502
Additional paid-in capital 125,037,853 124,601,770
Accumulated deficit (121,236,076) (120,678,136)
------------- -------------
Total stockholders' equity 3,840,365 3,960,136
------------- -------------
Total liabilities and stockholders' equity $ 6,876,891 $ 7,079,841
============= =============
See accompanying notes to the consolidated financial statements
3
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Net sales $ 1,637,060 $ 905,941 $ 2,940,706 $ 1,641,245
License and other revenue 252,655 359,442 488,045 684,442
------------ ------------ ------------ ------------
Total revenues 1,889,715 1,265,383 3,428,751 2,325,687
------------ ------------ ------------ ------------
Cost of goods sold 775,727 727,135 1,614,789 1,244,828
------------ ------------ ------------ ------------
Gross profit 1,113,988 538,248 1,813,962 1,080,859
------------ ------------ ------------ ------------
Operating expenses:
Research and development 437,815 697,431 856,584 1,237,187
Selling, general and administrative 721,506 724,640 1,475,589 1,575,264
------------ ------------ ------------ ------------
Total operating expenses 1,159,321 1,422,071 2,332,173 2,812,451
------------ ------------ ------------ ------------
Loss from operations (45,333) (883,823) (518,211) (1,731,592)
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 2,589 20,386 5,139 37,338
Interest expense (36,026) (5,217) (40,662) (8,052)
Other (602) (2,506) (4,206) (13,979)
------------ ------------ ------------ ------------
Total other (expenses) income (34,039) 12,663 (39,729) 15,307
------------ ------------ ------------ ------------
Net loss $ (79,372) $ (871,160) $ (557,940) $ (1,716,285)
============ ============ ============ ============
Net loss per common share:
Basic $ 0.00 $ (0.02) $ (0.01) $ (0.05)
Diluted $ 0.00 $ (0.02) $ (0.01) $ (0.05)
Weighted average shares outstanding:
Basic 38,458,009 36,023,659 38,403,202 36,016,403
Diluted 38,458,009 36,023,659 38,403,202 36,016,403
See accompanying notes to the consolidated financial statements.
4
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
--------- -----------
Cash flows from operating activities:
Net loss $(557,940) $(1,716,285)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 389,908 456,743
Amortization of debt discount 22,599 --
Change in operating assets and liabilities:
Accounts receivable (759,431) 108,252
Inventory 230,925 (111,681)
Accrued and other liabilities 116,567 13,318
Accounts payable 122,202 (185,331)
Deferred revenue (286,396) (400,000)
Other assets and liabilities 132,817 169,836
--------- -----------
Net cash used in operating activities (588,749) (1,665,148)
--------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (2,491,361)
Maturities of available-for-sale securities -- 250,000
Purchases of property and equipment (15,720) (165,216)
Patent and trademark costs (15,870) (13,020)
Subsidiary acquisition costs -- (24,028)
--------- -----------
Net cash used in investing activities (31,590) (2,443,625)
--------- -----------
Cash flows from financing activities:
Payment of common stock offering costs (2,867) (34,631)
Proceeds from notes payable, net of
offering costs 458,489 1,000,000
Payment of notes payable (159,999) (133,912)
Payments under capital lease (7,106) (6,250)
--------- -----------
Net cash provided by financing activities 288,517 825,207
--------- -----------
Net decrease in cash and cash equivalents (331,822) (3,283,566)
Cash and cash equivalents, beginning of period 700,525 4,287,101
--------- -----------
Cash and cash equivalents, end of period $ 368,703 $ 1,003,535
========= ===========
See accompanying notes to the consolidated financial statements.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information as of June 30, 2003 and 2002 and for the periods then
ended is unaudited, but includes all adjustments (which consist only of
normal recurring adjustments) that the management of Neoprobe Corporation
(Neoprobe or we) believes to be necessary for the fair presentation of
results for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. The results for the interim period are
not necessarily indicative of results to be expected for the year. The
financial statements should be read in conjunction with Neoprobe's audited
financial statements for the year ended December 31, 2002, which were
included as part of our Annual Report on Form 10-KSB. Certain 2002 amounts
have been reclassified to conform to the 2003 presentation.
Our consolidated financial statements include the accounts of Neoprobe and
our wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix). All
significant intercompany accounts were eliminated in consolidation.
2. COMPREHENSIVE INCOME (LOSS)
We had no accumulated other comprehensive income (loss) activity during
the three-month and six-month periods ended June 30, 2003.
Due to our net operating loss position, there are no income tax effects on
comprehensive income (loss) components for the three-month and six-month
periods ended June 30, 2002.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
--------- -----------
Net loss $(871,160) $(1,716,285)
Unrealized gains on securities 19,829 13,461
--------- -----------
Other comprehensive loss $(851,331) $(1,702,824)
========= ===========
3. EARNINGS PER SHARE
Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted earnings
(loss) per share is calculated using the weighted average number of common
shares outstanding during the periods, adjusted for the effects of
convertible securities, options and warrants, if dilutive.
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
----------------------------- -----------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------
Outstanding shares 38,588,009 38,588,009 36,502,183 36,502,183
Effect of weighting changes
in outstanding shares -- -- (38,524) (38,524)
Contingently issuable shares (130,000) (130,000) (440,000) (440,000)
----------- ----------- ----------- -----------
Adjusted shares 38,458,009 38,458,009 36,023,659 36,023,659
=========== =========== =========== ===========
6
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
----------------------------- -----------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------
Outstanding shares 38,588,009 38,588,009 36,502,183 36,502,183
Effect of weighting changes
in outstanding shares (54,807) (54,807) (45,780) (45,780)
Contingently issuable shares (130,000) (130,000) (440,000) (440,000)
----------- ----------- ----------- -----------
Adjusted shares 38,403,202 38,403,202 36,016,403 36,016,403
=========== =========== =========== ===========
There is no difference in basic and diluted loss per share related to the
three-month and six-month periods ended June 30, 2003 and 2002. The net
loss per common share for these periods excludes the number of common
shares issuable upon exercise of outstanding stock options and warrants
into our common stock since such inclusion would be anti-dilutive.
4. INVENTORY
The components of net inventory are as follows:
JUNE 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
---------- ----------
Materials and component parts $ 682,497 $ 760,540
Work in process -- 59,888
Finished goods 270,598 371,490
---------- ----------
$ 953,095 $1,191,918
========== ==========
5. INTANGIBLE ASSETS
The major classes of intangible assets are as follows:
JUNE 30, 2003
(UNAUDITED) DECEMBER 31, 2002
---------------------------- ----------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ ---------- ------------
Patents and trademarks $3,144,900 $551,960 $3,129,031 $398,501
Non-compete agreements 584,516 223,228 584,516 150,970
Acquired technology 237,271 51,873 237,271 35,019
---------- -------- ---------- --------
Total $3,966,687 $827,061 $3,950,818 $584,490
========== ======== ========== ========
7
The estimated future amortization expenses for the next five fiscal years
are as follows:
ESTIMATED
AMORTIZATION
EXPENSE
------------
For the year ended 12/31/2004 $415,991
For the year ended 12/31/2005 412,740
For the year ended 12/31/2006 259,368
For the year ended 12/31/2007 229,528
For the year ended 12/31/2008 203,128
6. DEBT FINANCING
During April 2003, we completed a loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. Interest is payable on the note at 8.5%, payable monthly, and
repayment of the note is due on June 30, 2004. In consideration for the
loan, we issued Mr. Bupp 375,000 warrants to purchase our common stock at
an exercise price of $0.13 per share. The warrants were recorded at their
estimated relative fair value of $32,000 along with a corresponding
discount to the face amount of the note. The discount is being amortized
into interest expense over the 15-month term of the note.
Also during April 2003, we completed a loan agreement with an outside
investor for an additional $250,000. Under the terms of the agreement,
interest is payable on the note at 9.5%, payable monthly, and repayment of
the note is due on June 30, 2004. In consideration for the loan, we issued
the investor 500,000 warrants to purchase our common stock at an exercise
price of $0.13 per share. Also, the outside investor's note is
convertible, at the option of the investor, into our common stock
beginning on July 1, 2003. Half of the principal is convertible into
common stock at a 15% discount to the 20-day average market price
preceding the conversion, but in no case greater than a $0.20 ceiling
conversion price or less than a $0.10 floor conversion price. The
remaining half of the principal is also convertible at a 15% discount to a
20-day average market price preceding the conversion, subject only to the
$0.10 floor conversion price. The warrants were recorded at their
estimated relative fair value of $41,000 along with a corresponding
discount to the face amount of the note. In addition, the beneficial
conversion feature of the note was recorded at its estimated fair value of
$41,000 along with an additional corresponding discount to the face value
of the note. The discounts are being amortized into interest expense over
the 15-month term of the note.
7. PRODUCT WARRANTY
We generally warrant our gamma detection products against defects in
design, materials, and workmanship generally for a period of one year from
the date of sale to the end customer. Our accrual for warranty expenses is
adjusted periodically to reflect actual experience. The primary marketing
partner of our gamma detection devices, Ethicon Endo-Surgery, Inc. (EES),
a Johnson and Johnson company, also reimburses us for a portion of
warranty expense incurred based on end customer sales they make during a
given fiscal year. We generally warrant our blood flow products, with the
exception of ultrasound probes, for one year from the date of sale to the
end customer.
8
The activity in the warranty reserve account for the three-month and
six-month periods ended June 30, 2003 and 2002 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Warranty reserve at
beginning of period $ 65,000 $ 80,000 $ 35,000 $ 90,000
Provision for warranty claims and
changes in reserve for
warranties 958 21,949 36,529 46,133
Costs charged against the
reserve, net (7,958) (31,949) (13,529) (66,133)
-------- -------- -------- --------
Warranty reserve at end of period $ 58,000 $ 70,000 $ 58,000 $ 70,000
======== ======== ======== ========
8. STOCK OPTIONS AND RESTRICTED STOCK
During the first six months of 2003, the Board of Directors granted
options to employees and certain non-employee directors to purchase
750,000 shares of common stock, exercisable at an average price of $0.14
per share, vesting over three years. As of June 30, 2003, we have 2.8
million options outstanding under three stock option plans. Of the
outstanding options, 1.4 million options have vested as of June 30, 2003,
at an average exercise price of $0.72 per share.
The following table illustrates the effect on net loss and net loss per
share if compensation cost for our stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under
those plans consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation:
THREE MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
--------- -----------
Net loss, as reported $ (79,372) $ (871,160)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (42,641) (73,014)
--------- -----------
Pro forma net loss $(122,013) $ (944,174)
========= ===========
Net loss per common share:
As reported (basic and diluted) $ 0.00 $ (0.02)
Pro forma (basic and diluted) $ 0.00 $ (0.03)
9
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
--------- -----------
Net loss, as reported $(557,940) $(1,716,285)
Add: Total stock-based employee
compensation expense included in
reported net loss 39,990 --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (124,973) (152,222)
--------- -----------
Pro forma net loss $(642,923) $(1,868,507)
========= ===========
Net loss per common share:
As reported (basic and diluted) $ (0.01) $ (0.05)
Pro forma (basic and diluted) $ (0.02) $ (0.05)
During the first quarter of 2003, we vested 310,000 shares of previously
restricted stock related to new or amended employment agreements of three
of our officers. We recognized $40,000 of compensation expense related to
this in the first quarter of 2003.
9. SEGMENT AND SUBSIDIARY INFORMATION
We own or have rights to intellectual property involving two primary types
of medical device products, including gamma detection instruments
currently used primarily in the application of intraoperative lymphatic
mapping (ILM), and blood flow measurement devices.
10
The information in the following table is derived directly from each
segment's internal financial reporting used for corporate management
purposes. Selling, general and administrative costs and other income,
including amortization, interest and other costs that relate primarily to
corporate activity, are not currently allocated to the operating segments
for financial reporting purposes.
($ AMOUNTS IN THOUSANDS) GAMMA BLOOD
THREE MONTHS ENDED JUNE 30, 2003 DETECTION FLOW UNALLOCATED TOTAL
-------------------------------- --------- ----- ----------- -------
Net sales:
United States(1) $1,444 $ -- $ -- $ 1,444
International 3 190 -- 193
License and other revenue 253 -- -- 253
Research and development expenses 134 304 -- 438
Selling, general and administrative
expenses -- -- 722 722
Income (loss) from operations(2) 817 (140) (722) (45)
Other income -- -- (34) (34)
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------
Net sales:
United States(1) $ 905 $ -- $ -- $ 905
International 1 -- -- 1
License and other revenue 359 -- -- 359
Research and development expenses 212 485 -- 697
Selling, general and administrative
expenses -- -- 725 725
Income (loss) from operations(2) 347 (485) (725) (884)
Other income -- -- 13 13
11
($ AMOUNTS IN THOUSANDS) GAMMA BLOOD
SIX MONTHS ENDED JUNE 30, 2003 DETECTION FLOW UNALLOCATED TOTAL
-------------------------------- --------- ----- ----------- -------
Net sales:
United States(1) $2,698 $ -- $ -- $ 2,698
International 4 239 -- 243
License and other revenue 488 -- -- 488
Research and development expenses 270 587 -- 857
Selling, general and administrative
expenses -- -- 1,476 1,476
Income (loss) from operations(2) 1,379 (421) (1,476) (518)
Other income -- -- (40) (40)
SIX MONTHS ENDED JUNE 30, 2002
------------------------------
Net sales:
United States(1) $1,581 $ -- $ -- $ 1,581
International 60 -- -- 60
License and other revenue 684 -- -- 684
Research and development expenses 495 742 -- 1,237
Selling, general and administrative
Expenses -- -- 1,575 1,575
Income (loss) from operations(2) 630 (742) (1,575) (1,732)
Other income -- -- 15 15
(1) All sales to EES are made in the United States. EES distributes the
product globally through its international affiliates.
(2) Income (loss) from operations does not reflect the allocation of selling,
general and administrative costs to the operating segments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS 143 requires us
to record the fair value of an asset retirement obligation as a liability
in the period in which we incur a legal obligation associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets. We are also
required to record a corresponding asset that is depreciated over the life
of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the end of each
period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. We adopted SFAS 143 on January 1,
2003. The adoption of SFAS 143 did not have a material effect on our
financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 requires us to
disclose information about our exit and disposal activities, the related
costs, and changes in those costs in the notes to the interim and annual
financial statements that include the period in which an exit or disposal
activity is initiated. SFAS 146 requires us to disclose, for each
reportable segment, the exit or disposal activity costs incurred in the
period and the cumulative amount incurred, net of any changes in the
liability, with an explanation of the reasons for the changes. SFAS 146
also requires us to disclose the total amount of costs expected to be
incurred in connection with the exit or disposal activity. The new
requirements are effective
12
prospectively for exit and disposal activities initiated after December
31, 2002. The adoption of SFAS 146 did not have a material impact on our
financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statement
Nos. 5,57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees
issued or modified after December 31, 2002, and did not have a material
effect on our financial statements. The disclosure requirements are
effective for financial statements of interim and annual periods ending
after December 15, 2002.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
The Statement requires issuers to classify as liabilities (or assets in
some circumstances) three classes of freestanding financial instruments
that embody obligations for the issuer. Generally, the Statement is
effective for financial instruments entered into or modified after May 31,
2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. We adopted the provisions of the
Statement on July 1, 2003. The adoption of SFAS No. 150 did not have a
material effect on our financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the first six months of 2003 increased $1.1 million or 47% to $3.4
million from $2.3 million for the same period in 2002. Major expense categories
as a percentage of net sales decreased in the first six months of 2003 as
compared to the same period in 2002, due primarily to the increase in net sales
coupled with a lower overall cost structure for our gamma business. Research and
development expenses, as a percentage of net sales, decreased to 29% during the
first six months of 2003 from 75% during the same period in 2002. Selling,
general and administrative expenses, as a percentage of net sales, decreased to
50% during the first quarter of 2003 from 96% during the same period in 2002.
Controlling our costs remains a high priority for us as we endeavor to return to
profitability. We expect these major expense categories, as a percentage of net
sales, to continue to decrease for 2003 as compared to 2002; however, this
decrease will depend greatly on our success in achieving additional commercial
sales of our blood flow products.
Three Months Ended June 30, 2003 and 2002
Net Sales and Margins. Net sales increased $731,000 or 81% to $1.6 million
during the second quarter of 2003 from $906,000 during the same period in 2002.
Gross margins on net sales increased to 53% of net sales for the second quarter
of 2003 compared to 20% of net sales for the same period in 2002. Approximately
$540,000 of the increase in net sales was the result of increased revenue
related to our gamma detection products with the remaining $190,000 generated
from our blood flow products. We had no revenues from blood flow products during
the same period in 2002. Of the increased revenue from gamma detection products,
approximately 55% was due to increased prices realized on our neo2000 control
unit and 14mm probes, with approximately 30% due to increased sales volumes of
these products. The remaining 15% was due to various changes in other products
and product mix. The price at which Neoprobe sells its gamma detection products
to EES is based on a percentage of the global average sales price (ASP) received
by EES on sales of Neoprobe products to end customers, subject to a minimum
floor price. During the second quarter of 2002, we recorded revenue at the floor
sales prices per the distribution agreement due to perceived weakness in the
global ASP. However, during the second half of 2002 we began to note a
strengthening in global ASP. This trend in ASP has continued in 2003 to the
point that management believed it was more appropriate to record revenue for
the second quarter of 2003 at the estimated 2003 sales price calculated
consistently with prior periods per the terms
13
of the distribution agreement. The increase in gross margins was primarily due
to the higher recorded revenue per gamma detection system combined with lower
capitalized internal manufacturing costs due to headcount reductions
contributing to lower average costs.
License and Other Revenue. License and other revenue in the second quarters of
2003 and 2002 included $200,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES and $53,000 and $159,000,
respectively, from the reimbursement by EES of certain product development
costs.
Research and Development Expenses. Research and development expenses decreased
$260,000 or 37% to $438,000 during the second quarter of 2003 from $697,000
during the same period in 2002. The decrease was primarily due to lower
compensation costs resulting from headcount reductions of gamma product line
personnel in the third and fourth quarters of 2002 coupled with decreased use
of external design consultants and decreased prototype expenses related to the
blood flow product line.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased slightly to $722,000 during the second quarter
of 2003 from $725,000 during the same period in 2002. The decrease was primarily
due to lower compensation costs resulting from headcount reductions of gamma
product line personnel in the third and fourth quarters of 2002, offset by
increased selling, general and administrative expenses incurred in the operation
and support of Cardiosonix. Selling, general and administrative expenses in the
second quarter of 2002 also included $24,000 for the transfer of manufacturing
of certain components of the neo2000 gamma detection system to a new contract
manufacturer.
Other Income (Expenses). Other income (expenses) decreased $47,000 to expenses
of $34,000 during the second quarter of 2003 from income of $13,000 during the
same period in 2002. Other expenses during the second quarter of 2003 consisted
primarily of interest expense related to the bridge financing agreements. Other
income during the second quarter of 2002 consisted primarily of interest income.
Our interest income decreased because we maintained a lower balance of cash and
investments during the second quarter of 2003 as compared to the same period in
2002.
Six Months Ended June 30, 2003 and 2002
Net Sales and Margins. Net sales increased $1.3 million or 79% to $2.9 million
during the first six months of 2003 from $1.6 million during the same period in
2002. Gross margins on net sales increased to 45% of net sales for the first six
months of 2003 compared to 24% of net sales for the same period in 2002.
Approximately $1.1 million of the increase in net sales was the result of
increased revenue related to our gamma detection products with the remaining
$239,000 generated from our blood flow products. We had no revenues from blood
flow products during the same period in 2002. Of the increased revenue from
gamma detection products, approximately 35% was due to increased prices realized
on our neo2000 control unit and 14mm probes, with approximately 50% due to
increased sales volumes of these products. The remaining 15% was due to various
changes in other products and product mix. The price at which Neoprobe sells its
gamma detection products to EES is based on a percentage of the global average
sales price (ASP) received by EES on sales of Neoprobe products to end
customers, subject to a minimum floor price. During the first half of 2002, we
recorded revenue at the floor sales prices per the distribution agreement due to
perceived weakness in the global ASP. However, during the second half of 2002,
we began to note a strengthening in global ASP. This trend in ASP has continued
in 2003 to the point that management believed it was more appropriate to record
revenue for the first half of 2003 at the estimated 2003 sales price calculated
consistently with prior periods per the terms of the distribution agreement. The
increase in gross margins was primarily due to the higher recorded revenue per
gamma detection system combined with lower capitalized internal manufacturing
costs due to headcount reductions contributing to lower average costs.
License and Other Revenue. License and other revenue in the first six months of
2003 and 2002 included $400,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES and $88,000 and $284,000,
respectively, from the reimbursement by EES of certain product development
costs.
14
Research and Development Expenses. Research and development expenses decreased
$381,000 or 31% to $857,000 during the first six months of 2003 from $1.2
million during the same period in 2002. The decrease was primarily due to lower
compensation costs resulting from headcount reductions of gamma product line
personnel in the third and fourth quarters of 2002 coupled with decreased use
of external design consultants and decreased prototype expenses related to the
blood flow product line.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $100,000 or 6% to $1.5 million during the
first months of 2003 from $1.6 million during the same period in 2002. The
decrease was primarily due to lower compensation costs resulting from headcount
reductions of gamma product line personnel in the third and fourth quarters of
2002, offset by increased selling, general and administrative expenses incurred
in the operation and support of Cardiosonix. Selling, general and administrative
expenses in the first six months of 2003 and 2002 included $30,000 and $45,000,
respectively; in impairment of intellectual property that we did not believe had
ongoing value to the business. Selling, general and administrative expenses in
the first six months of 2002 also included $79,000 for the transfer of
manufacturing of certain components of the neo2000 gamma detection system to a
new contract manufacturer.
Other Income (Expenses). Other income (expenses) decreased $55,000 to expenses
of $40,000 during the first six months of 2003 from income of $15,000 during the
same period in 2002. Other expenses during the first six months of 2003
consisted primarily of interest expense related to the bridge financing
agreements. Other income during the first six months of 2002 consisted primarily
of interest income. Our interest income decreased because we maintained a lower
balance of cash and investments during the first six months of 2003 as compared
to the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash used in operations decreased $1.1 million to $589,000
during the first six months of 2003 from $1.7 million during the same period in
2002. Working capital decreased $505,000 to $634,000 at June 30, 2003 as
compared to $1.1 million at December 31, 2002. The current ratio decreased to
1:1.2 at June 30, 2003 from 1:1.6 at December 31, 2002. The decrease in working
capital was primarily related to cash used to fund blood flow development
activities offset slightly by net changes in other working capital components.
Cash balances decreased to $369,000 at June 30, 2003 from $701,000 at December
31, 2002, primarily due to the requirements of supporting the operations of
Cardiosonix, offset by the cash obtained from the bridge financing arrangements
and the increased net sales experienced during the first six months of 2003.
Accounts receivable increased to $1.5 million at June 30, 2003 from $746,000 at
December 31, 2002 due primarily to greater sales in June 2003 than December
2002. We expect receivable levels will continue to fluctuate in 2003 depending
on the timing of purchases and payments by EES. However, on average, we expect
accounts receivable balances will start to increase commensurate with
anticipated increases in sales of blood flow products to our distributors, many
of whom are foreign-domiciled entities who typically pay at a slower rate than
domestic companies.
Inventory levels decreased to $953,000 at June 30, 2003 as compared to $1.2
million at December 31, 2002, primarily related to decreases in finished goods
of gamma detection products due to greater than originally anticipated demand
from EES during the second quarter as well as the continued decreases in certain
long-lead gamma detection device components that were built up in prior periods
to take advantage of quantity price breaks. These decreases were offset by the
build-up of inventory related to our blood flow products as we continue market
launch preparations. During the remainder of 2003, we will continue to work
through our carryover stock of certain long-lead components of gamma detection
materials. We expect inventory levels to increase during the remainder of 2003
as the build-up of initial stocking inventory of blood flow products offsets the
use of these long-lead components and as we restore our safety stock of gamma
detection products to more normal levels.
15
We estimate that the additional costs to complete planned development
activities, respond to initial customer feedback, and support initial marketing
efforts for our blood flow products for the year ended December 31, 2003 could
approach $2.0 million.
Investing Activities. Cash used in investing activities decreased to $32,000
during the first six months of 2003 from $2.4 million during the same period in
2002. During February and March 2002, we invested in $2.5 million of
available-for-sale securities. Capital expenditures in the first six months of
2003 and 2002 were split between purchases of production tools and equipment and
technology infrastructure. Capital needs for 2003 are now expected to decrease
over 2002 as the Company plans to defer the more significant expenditures
originally anticipated related to blood flow product development until 2004
following the transfer of primary manufacturing activities for the blood flow
products to a contract manufacturer.
Financing Activities. Financing activities provided $289,000 in cash in the
first six months of 2003 versus $825,000 during the same period in 2002.
Payments of notes payable were $26,000 higher during the first six months of
2003 as compared to the same period in 2002 due to the increased cost of
financed insurance.
On November 19, 2001, we entered into a common stock purchase agreement with an
investment fund, Fusion Capital Fund II, LLC (Fusion) for the issuance and
purchase of our common stock. Under the stock purchase agreement, Fusion
committed to purchase up to $10 million of our common stock over a forty-month
period that commenced in May 2002. A registration statement registering for
resale up to 5 million shares of our common stock became effective on April 15,
2002. Under the terms of the agreement, we can request daily drawdowns, subject
to a daily base amount currently set at $12,500. The number of shares we are to
issue to Fusion in return for that money will be based on the lower of (a) the
closing sale price for our common stock on the day of the draw request or (b)
the average of the three lowest closing sales prices for our common stock during
a twelve day period prior to the draw request. However, no shares may be sold to
Fusion at lower than a floor price currently set at $0.30, but in no case below
$0.20 without Fusion's prior consent. Upon execution of the common stock
purchase agreement, we issued 449,438 shares of our common stock to Fusion as a
commitment fee. Market conditions (i.e., share price) have effectively
prohibited us from drawing funds under the Fusion facility, and in the absence
of a change in those conditions, the Fusion facility is unlikely to be drawn on
in the foreseeable future.
During April 2003, we completed a bridge loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. Interest is payable on the note at 8.5%, payable monthly, and the note
is due on June 30, 2004. In consideration for the loan, we issued Mr. Bupp
375,000 warrants to purchase our common stock at an exercise price of $0.13 per
share.
During April 2003, we also completed a bridge loan agreement with an outside
investor for an additional $250,000. Under the terms of the agreement, interest
is payable on the note at 9.5%, payable monthly, and the note is due on June 30,
2004. In consideration for the loan, we issued the investor 500,000 warrants to
purchase our common stock at an exercise price of $0.13 per share. The outside
investor's note is also convertible, at the option of the investor, into our
common stock beginning on July 1, 2003. Half of the principal is convertible
into common stock at a 15% discount to the 20-day average market price preceding
the conversion, but in no case greater than a $0.20 ceiling conversion price or
less than a $0.10 floor conversion price. The remaining half of the principal is
also convertible at a 15% discount to a 20-day average market price preceding
the conversion, subject only to the $0.10 floor conversion price.
Our future liquidity and capital requirements will depend on a number of
factors, including our ability to raise additional capital in a timely manner
through additional investment, expanded market acceptance of our current
products, our ability to complete the commercialization new products such as our
blood flow product line, our ability to monetize our investment in non-core
technologies, our ability to obtain milestone or development funds from
potential development and distribution partners, regulatory actions by the U.S.
FDA and other international regulatory bodies, and intellectual property
protection.
16
Throughout 2002, we made modifications to our operating plan and cut or delayed
planned expenditures as a result of delays in our ability to obtain additional
sources of financing. To this point, such changes and cuts have not had a
significant impact on our ability to meet the operational milestones we set at
the beginning of the year. Despite the bridge loans we completed with Mr. Bupp
and the outside investor, we continue to believe we will need to raise at least
$1.0 - $1.5 million of additional funds to ensure we can complete the
development and commercialization of the Cardiosonix product line. To that end,
we have engaged the services of an investment banking firm to assist us in
obtaining the funds. In exchange for their services, we agreed to pay the firm a
monthly retainer of $10,000, half payable in cash and half payable in common
stock, and we have agreed to pay them a percentage of the funds received, if
any, as a success fee. We continue to have discussions with potential external
financing sources; however, we cannot assure you that additional capital will be
available on acceptable terms, if at all. If additional funding is not secured
in the near future, we will have to further modify and/or significantly curtail
our current strategic and operating plans. We cannot assure you that we will be
able to achieve significant product revenues from our current or potential new
products. In addition, we cannot assure you that we will achieve profitability
again in the future.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition Related to Net Sales. We currently generate revenue
primarily from sales of our gamma detection products; however, sales of blood
flow products constituted approximately 7% of total revenues for the first half
of 2003 and are expected to increase in the future. We generally recognize sales
revenue related to sales of our products when the products are shipped and the
earnings process has been completed. Our customers have no right to return
products purchased in the ordinary course of business. However, in cases where
product is shipped but the earnings process is not yet completed, revenue is
deferred until it has been determined that the earnings process has been
completed. We also generate revenue from the service and repair of
out-of-warranty products. Fees charged for service and repair on products not
covered by an extended service agreement are recognized on completion of the
service process when the serviced or repaired product has been returned to the
customer. Fees charged for service or repair of products covered by an extended
warranty agreement are deferred and recognized into revenue ratably over the
life of the extended service agreement. The prices we charge our primary
customer, EES, related to sales of products are subject to retroactive annual
adjustment based on a fixed percentage of the actual sales prices achieved by
EES on sales to end customers made during each fiscal year. To the extent that
we can reasonably estimate the end-customer prices received by EES, we record
sales to EES based upon these estimates. If we are unable to reasonably estimate
end customer sales prices related to certain products sold to EES, we record
revenue related to these product sales at the minimum (i.e., floor) price
provided for under our distribution agreement with EES. During the first half of
2002, we recorded revenue at the floor sales prices per the distribution
agreement due to perceived weakness in the global ASP. However, during the
second half of 2002, we began to note a strengthening in global ASP. This trend
in ASP has continued in 2003, to the point that management believed it was more
appropriate to record revenue for the first half of 2003 at the estimated 2003
sales price calculated consistently with prior periods per the terms of the
distribution agreement.
Impairment or Disposal of Long-Lived Assets. We account for long-lived assets in
accordance with the provisions of SFAS No. 144. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. As of June
30, 2003, the most significant long-lived assets on our balance sheet relate to
assets recorded in connection with the acquisition of Cardiosonix and gamma
detection device patents related to ILM. The recoverability of these assets is
based on the financial projections and models related to future sales of
Cardiosonix' products which have yet to begin and the continuing success of our
gamma detection product line. As such, these assets could be subject to
significant
17
adjustment should the Cardiosonix technology not be successfully commercialized
or the sales amounts in our current projections not be realized.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of our company. From
time to time, our representatives and we may make written or verbal
forward-looking statements, including statements contained in this report and
other company filings with the SEC and in our reports to stockholders.
Statements that relate to other than strictly historical facts, such as
statements about our plans and strategies, expectations for future financial
performance, new and existing products and technologies, and markets for our
products are forward-looking statements within the meaning of the Act.
Generally, the words "believe," "expect," "intend," "estimate," "anticipate,"
"will" and other similar expressions identify forward-looking statements. The
forward-looking statements are and will be based on our then-current views and
assumptions regarding future events and operating performance, and speak only as
of their dates. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors including, but not limited
to, our limited revenues, accumulated deficit, future capital needs, uncertainty
of capital funding, dependence on limited product line and exclusive
distributor, uncertainty of market acceptance, competition, limited marketing
and manufacturing experience, and other risks detailed in our most recent Annual
Report on Form 10-KSB and other SEC filings. We undertake no obligation to
publicly update or revise any forward-looking statements.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective to provide
reasonable assurance that our disclosure controls and procedures will timely
alert them to material information required to be included in our periodic SEC
reports. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events, and we
cannot assure you that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
As of the end of the period covered by this report, there has been no change in
our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934, as amended) during the quarter
to which this report relates that has materially affected or is reasonably
likely to materially affect, our internal control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Neoprobe Corporation held its Annual Meeting of Stockholders on June 12,
2003, for the purpose of electing a director and increasing the authorized
number of shares of the Company's stock.
(b) At the Annual Meeting of Stockholders, the director nominated was elected.
(c) The following table shows the voting tabulation for each matter voted upon
at the Annual Meeting of Stockholders.
ACTION FOR WITHHELD
- ------ --- --------
Election of Director
J. Frank Whitley, Jr. 28,752,566 1,039,710
ACTION FOR AGAINST ABSTAIN
- ------ --- ------- -------
Increase the authorized number of shares of the
Company from 55,000,000 to 80,000,000,
consisting of 75,000,000 shares of common stock,
$.001 par value, and 5,000,000 shares of
preferred stock, $.001 par value 30,805,974 1,329,060 6,427,600
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1.42 Senior Secured Note Purchase Agreement dated March 26, 2003
between the Company and David C. Bupp.*
10.1.43 8.5% Senior Note dated April 2, 2003 between the Company and
David C. Bupp.*
10.1.44 Convertible Preferred Note Purchase Agreement dated March 26,
2003 between the Company and Donald E. Garlikov.*
10.1.45 9.5% Convertible Secured Note dated April 2, 2003 between the
Company and Donald E. Garlikov.*
10.1.46 Warrant to Purchase Common Stock of Neoprobe Corporation dated
April 2, 2003 between the Company and David C. Bupp.*
10.1.47 Warrant to Purchase Common Stock of Neoprobe Corporation dated
April 2, 2003 between the Company and Donald E. Garlikov.*
10.1.48 Security Agreement dated April 2, 2003 between the Company,
David C. Bupp and Donald E. Garlikov.*
10.1.49 Registration Rights Agreement dated April 2, 2003 between the
Company, David C. Bupp and Donald E. Garlikov.*
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
19
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
32.2 Certification of Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
* Incorporated by reference to Exhibits 99(b) through 99(i) to
the Company's Current Report on Form 8-K filed April 2, 2003.
(b) REPORTS ON FORM 8-K
On April 2, 2003, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission pursuant to Item 5 reporting $500,000
in bridge loan financing that we received, including $250,000 from our
President and CEO.
On May 9, 2003, we filed a Current Report on Form 8-K (dated May 8, 2003)
with the Securities and Exchange Commission pursuant to Item 12 (under
Item 9) in connection with our May 8, 2003, press release announcing our
consolidated financial results for the first quarter ended March 31, 2003.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEOPROBE CORPORATION
(the Company)
Dated: August 14, 2003
By: /s/ DAVID C. BUPP
----------------------------------------
David C. Bupp
President and Chief Executive Officer
(duly authorized officer; principal executive officer)
By: /s/ BRENT L. LARSON
-------------------------------
Brent L. Larson
Vice President, Finance and Chief Financial Officer
(principal financial and accounting officer)
20