UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 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 April 25, 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
ASSETS MARCH 31, DECEMBER 31,
2003 2002
(UNAUDITED)
----------------- ----------------
Current assets:
Cash and cash equivalents $ 352,673 $ 700,525
Accounts receivable, net 916,532 746,107
Inventory 969,692 1,191,918
Prepaid expenses and other 375,054 451,537
---------- ----------
Total current assets 2,613,951 3,090,087
---------- ----------
Property and equipment 2,360,933 2,346,445
Less accumulated depreciation and amortization 1,955,522 1,883,797
---------- ----------
405,411 462,648
---------- ----------
Patents and trademarks 3,138,973 3,129,031
Non-compete agreements 584,516 584,516
Acquired technology 237,271 237,271
---------- ----------
3,960,760 3,950,818
Less accumulated amortization 720,432 584,490
---------- ----------
3,240,328 3,366,328
---------- ----------
Other assets 179,302 160,778
---------- ----------
Total assets $6,438,992 $7,079,841
========== ==========
CONTINUED
2
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY MARCH 31, DECEMBER 31,
2003 2002
(UNAUDITED)
------------- -------------
Current liabilities:
Notes payable to finance company $ 93,007 $ 172,381
Capital lease obligation, current 15,162 14,683
Accrued liabilities 434,118 397,161
Accounts payable 441,023 432,140
Deferred revenue, current 960,770 933,860
------------- -------------
Total current liabilities 1,944,080 1,950,225
------------- -------------
Capital lease obligation 1,354 5,328
Deferred revenue 496,383 703,625
Contingent consideration for acquisition -- 288,053
Other liabilities 188,160 172,474
------------- -------------
Total liabilities 2,629,977 3,119,705
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at March 31,
2003 and December 31, 2002; none issued and outstanding (500,000 shares
designated as Series A, $.001 par value, at March 31, 2003 and
and December 31, 2002; none outstanding) -- --
Common stock; $.001 par value; 50,000,000 shares
authorized; 38,588,009 shares issued and outstanding
March 31, 2003; 36,502,183 shares issued and
outstanding at December 31, 2002 38,588 36,502
Additional paid-in capital 124,927,131 124,601,770
Accumulated deficit (121,156,704) (120,678,136)
------------- -------------
Total stockholders' equity 3,809,015 3,960,136
------------- -------------
Total liabilities and stockholders' equity $ 6,438,992 $ 7,079,841
============= =============
See accompanying notes to the consolidated financial statements
3
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2003 2002
------------ ------------
Revenues:
Net sales $ 1,303,646 $ 735,304
License and other revenue 235,390 325,000
------------ ------------
Total revenues 1,539,036 1,060,304
------------ ------------
Cost of goods sold 839,062 517,693
------------ ------------
Gross profit 699,974 542,611
------------ ------------
Operating expenses:
Research and development 418,769 539,756
Selling, general and administrative 754,083 850,624
------------ ------------
Total operating expenses 1,172,852 1,390,380
------------ ------------
Loss from operations (472,878) (847,769)
------------ ------------
Other income (expenses):
Interest income 2,550 16,952
Interest expense (4,636) (2,835)
Other (3,604) (11,473)
------------ ------------
Total other (expenses) income (5,690) 2,644
------------ ------------
Net loss $ (478,568) $ (845,125)
============ ============
Net loss per common share:
Basic $ (0.01) $ (0.02)
Diluted $ (0.01) $ (0.02)
Weighted average shares outstanding:
Basic 38,258,231 36,009,067
Diluted 38,258,231 36,009,067
See accompanying notes to the consolidated financial statements.
4
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (478,568) $ (845,125)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 216,048 248,912
Change in operating assets and liabilities:
Accounts receivable (170,425) 393,089
Inventory 217,602 100,229
Accounts payable 8,883 (207,356)
Deferred revenue (180,332) (200,000)
Other assets and liabilities 140,828 50,316
----------- -----------
Net cash used in operating activities (245,964) (459,935)
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (2,491,361)
Purchases of property and equipment (8,480) (29,328)
Patent and trademark costs (9,942) (3,871)
Subsidiary acquisition costs -- (23,826)
----------- -----------
Net cash used in investing activities (18,422) (2,548,386)
----------- -----------
Cash flows from financing activities:
Payment of offering costs (596) (2,426)
Payment of notes payable (79,374) (66,540)
Payments under capital lease (3,496) (3,075)
----------- -----------
Net cash used in financing activities (83,466) (72,041)
----------- -----------
Net decrease in cash and cash equivalents (347,852) (3,080,362)
Cash and cash equivalents, beginning of period 700,525 4,287,101
----------- -----------
Cash and cash equivalents, end of period $ 352,673 $ 1,206,739
=========== ===========
See accompanying notes to the consolidated financial statements.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information presented for March 31, 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) beginning
December 31, 2001. All significant inter-company accounts were eliminated
in consolidation.
2. COMPREHENSIVE INCOME (LOSS)
We had no accumulated other comprehensive income (loss) activity during the
three-month period ended March 31, 2003.
Due to our net operating loss position, there are no income tax effects on
comprehensive income (loss) components for the three months ended March 31,
2002.
THREE MONTHS
ENDED
MARCH 31, 2002
--------------
Net loss $845,125
Unrealized losses on securities 6,368
--------
Other comprehensive loss $851,493
========
3. EARNINGS PER SHARE
Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted earnings
(loss) per share is calculated using the weighted average number of common
shares outstanding during the periods, adjusted for the effects of
convertible securities, options and warrants, if dilutive.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 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 36,449,067 36,449,067
Effect of weighting changes
in outstanding shares (199,778) (199,778) -- --
Contingently issuable shares (130,000) (130,000) (440,000) (440,000)
----------- ----------- ----------- -----------
Adjusted shares 38,258,231 38,258,231 36,009,067 36,009,067
=========== =========== =========== ===========
6
There is no difference in basic and diluted loss per share related to the
three-month periods ended March 31, 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:
MARCH 31, DECEMBER 31,
2003 2002
(UNAUDITED)
------------ ------------
Materials and component parts $ 714,945 $ 760,540
Work in process 99,651 59,888
Finished goods 155,096 371,490
---------- ----------
$ 969,692 $1,191,918
========== ==========
5. INTANGIBLE ASSETS
The major classes of intangible assets are as follows:
MARCH 31, 2003 DECEMBER 31, 2002
(UNAUDITED)
------------------------------- -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ ---------- ------------
Patents and trademarks $3,138,973 $ 489,886 $3,129,031 $ 398,501
Non-compete agreements 584,516 187,099 584,516 150,970
Acquired technology 237,271 43,447 237,271 35,019
---------- ---------- ---------- ----------
Total $3,960,760 $ 720,432 $3,950,818 $ 584,490
========== ========== ========== ==========
The estimated future amortization expenses for the next five fiscal years
are as follows:
ESTIMATED
AMORTIZATION
EXPENSE
-------------
For the year ended 12/31/2004 $ 419,969
For the year ended 12/31/2005 416,329
For the year ended 12/31/2006 262,004
For the year ended 12/31/2007 230,825
For the year ended 12/31/2008 203,046
6. PRODUCT WARRANTY
We warrant our products against defects in design, materials, and
workmanship generally for a period of one year from the date of sale to the
end customer. Our accrual for warranty expenses is adjusted periodically to
reflect actual experience. Our primary marketing partner, Ethicon
Endo-Surgery, Inc. (EES), a Johnson and Johnson company, also reimburses us
for a portion of warranty expense incurred based on end customer sales they
make during a given fiscal year.
7
The activity in the warranty reserve account for the three-month periods
ended March 31, 2003 and 2002 are as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
-------- --------
Warranty reserve at beginning of period $ 35,000 $ 90,000
Provision for warranty claims and
changes in reserve for warranties 43,714 14,183
Payments charged against the reserve (13,714) (24,183)
-------- --------
Warranty reserve at end of period $ 65,000 $ 80,000
======== ========
7. STOCK OPTIONS AND RESTRICTED STOCK
During the first quarter of 2003, the Board of Directors granted options to
employees and certain 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 March 31, 2003, we have 3.0 million options outstanding under
three stock option plans. Of the outstanding options, 1.5 million options
have vested as of March 31, 2003, at an average exercise price of $0.71 per
share.
The following table illustrates the effect on net loss and net loss per
share if compensation cost for our stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under
those plans consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2002
--------- ---------
Net loss, as reported $(478,568) $(845,125)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (42,790) (79,208)
--------- ---------
Pro forma net loss $(521,358) $(924,333)
========= =========
Net loss per common share:
As reported (basic and diluted) $ (0.01) $ (0.02)
Pro forma (basic and diluted) $ (0.01) $ (0.03)
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.
8. 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 ILM, and blood flow measurement
devices.
8
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 MARCH 31, 2003 DETECTION FLOW UNALLOCATED TOTAL
---------------------------------------------- ------------ ------------ -------------- -----------
Net sales:
United States(1) $ 1,254 $ - $ - $ 1,254
International 1 49 - 50
License and other revenue 235 - - 235
Research and development expenses 136 283 - 419
Selling, general and administrative
expenses - - 754 754
Income (loss) from operations(2) 562 (281) (754) (473)
Other income - - (6) (6)
THREE MONTHS ENDED MARCH 31, 2002
----------------------------------------------
Net sales:
United States(1) $ 676 $ - $ - $ 676
International 59 - - 59
License and other revenue 325 - - 325
Research and development expenses 284 256 - 540
Selling, general and administrative
expenses - - 851 851
Income (loss) from operations(2) 259 (256) (851) (848)
Other income - - 3 3
(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.
9. 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
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 condition or results of operations.
9
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.
10. SUBSEQUENT EVENT - BRIDGE FINANCING
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 notes are also convertible 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the first quarter of 2003 increased $479,000 or 45% to $1.5 million
from $1.1 million for the same period in 2002. Major expense categories as a
percentage of net sales decreased in the first quarter 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 32% during the first
quarter of 2003 from 73% during the same period in 2002. Selling, general and
administrative expenses, as a percentage of net sales, decreased to 58% during
the first quarter of 2003 from 116% during the same period in 2002. We will
continue to control our costs and 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
commercial sales of our blood flow products.
Three Months Ended March 31, 2003 and 2002
Net Sales and Margins. Net sales, primarily of our gamma detection systems,
increased $568,000 or 77% to $1.3 million during the first quarter of 2003 from
$735,000 during the same period in 2002. Gross margins on net sales increased to
36% of net sales for the first quarter of 2003 compared to 30% of net sales for
the same period in 2002. The increase in net sales was the result of increased
demand from our primary marketing partner, Ethicon Endo-Surgery, Inc. (EES), for
the base neo2000(R) gamma detection system (i.e., a 14mm probe and neo2000
control unit) coupled with higher average revenue per system being recorded in
2003. The price at which Neoprobe sells its products to EES is based on a
percentage of the global average sales price (ASP) received by EES on sales to
end customers. During the first quarter of 2002, we recorded revenue at the
floor transfer prices per the distribution agreement due to perceived weakness
in the global ASP. However, over the course of 2002 and continuing into
10
2003, global ASP appears to be remaining stronger than expected such that
management believed it was more appropriate to record revenue at the provisional
transfer price per the distribution agreement for the first quarter of 2003. The
increase in gross margins was due to higher recorded revenue per system combined
with lower capitalized internal manufacturing costs contributing to lower
average costs for gamma detection products, offset by increased estimated
warranty costs related to initial sales of our blood flow devices during the
first quarter of 2003 as compared to the first quarter of 2002.
License and Other Revenue. License and other revenue in the first quarters of
2003 and 2002 included $200,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES and $35,000 and $125,000,
respectively, from the reimbursement by EES of certain product development
costs.
Research and Development Expenses. Research and development expenses decreased
$121,000 or 22% to $419,000 during the first quarter of 2003 from $540,000
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 product
development efforts related to the Cardiosonix line of blood flow measurement
products. Research and development expenses in the first quarter of 2002 also
included $55,000 in gamma detection drug development costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $97,000 or 11% to $754,000 during the first
quarter of 2003 from $851,000 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
first quarters 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 quarter
of 2002 also included $55,000 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 $8,000 to expenses of
$5,700 during the first quarter of 2003 from income of $2,600 during the same
period in 2002. Other income during the first quarters of 2003 and 2002
consisted primarily of interest income. Our interest income decreased because we
maintained a lower balance of cash and investments during the first quarter of
2003 as compared to the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash used in operations decreased $214,000 to $246,000
during the first quarter of 2003 from $460,000 during the same period in 2002.
Working capital decreased $470,000 to $670,000 at March 31, 2003 as compared to
$1.1 million at December 31, 2002. The current ratio decreased to 1:1.3 at March
31, 2003 from 1:1.6 at December 31, 2002. The decrease in working capital was
primarily related to cash used to fund development activities.
Cash balances decreased to $353,000 at March 31, 2003 from $701,000 at December
31, 2002, primarily due to the requirements of supporting the operations of
Cardiosonix, offset by the increase in net sales during the first quarter of
2003.
Accounts receivable increased to $917,000 at March 31, 2003 from $746,000 at
December 31, 2002. We expect receivable levels to continue to fluctuate in 2003
depending on the timing of purchases and payments by EES.
Inventory levels decreased to $970,000 at March 31, 2003 as compared to $1.2
million at December 31, 2002, primarily due to the increased demand from EES and
the use of certain long-lead gamma detection device components that were built
up during 2001 to take advantage of quantity price breaks. These decreases were
offset by the build-up of inventory related to our blood flow products in
preparation for
11
market launch. 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 2003 as the building of
initial inventory of blood flow products offsets the use of these long-lead
components.
Investing Activities. Cash used in investing activities decreased to $18,000
during the first quarter of 2003 from $2.5 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 quarters of
2003 and 2002 were split between purchases of production tools and equipment and
technology infrastructure. Capital needs for 2003 are expected to increase over
2002 to support blood flow product development and manufacturing activities,
although it is our intent to initially outsource manufacturing of blood flow
products as much as possible as is currently done for our gamma detection
devices. 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 2003 could approach $2.0 million.
Financing Activities. Financing activities used $83,000 in cash in the first
quarter of 2003 versus $72,000 during the same period in 2002. Payments of notes
payable were $13,000 higher during the first quarter 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 notes are
also convertible 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 commercialize 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.
12
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 million of additional funds to ensure we can complete the commercialization
of the Cardiosonix product line. 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. Any incremental
equity-based financing would also likely require our stockholders to approve an
increase in the number of authorized shares of our common stock that we can
issue. However, our stockholders have failed to approve such a measure twice in
the last five years and we cannot assure you that they will approve such a
measure at this year's annual meeting. 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 devices. We recognize sales revenue
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. The prices we charge our primary customer, EES, 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 quarter of 2002, we recorded revenue at the floor price due to perceived
weakness in the global ASP. However, over the course of 2002 and continuing into
2003, global ASP appears to be remaining stronger than expected such that
management believed it was more appropriate to record revenue at the provisional
transfer price per the distribution agreement for the first quarter of 2003.
Impairment or Disposal of Long-Lived Assets. We account for long-lived assets in
accordance with the provisions of SFAS No. 144. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. As of March
31, 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 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
13
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
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer, along with the Chief Financial Officer, concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to our company (including our consolidated
subsidiary) required to be included in our periodic SEC filings. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and we cannot assure you that
any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
Since the date of our evaluation to the filing date of this quarterly report,
there have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
99.1 Certification of CEO under Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of CFO under Section 906 of the Sarbanes-Oxley
Act of 2002
(b) REPORTS ON FORM 8-K
We did not file any Current Reports on Form 8-K with the Securities
and Exchange Commission during the 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: May 15, 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)
15
CERTIFICATION
I, David C. Bupp, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Neoprobe
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ David C. Bupp
-----------------------------------
David C. Bupp
President and Chief Executive Officer
May 15, 2003
16
CERTIFICATION
I, Brent L. Larson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Neoprobe
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Brent L. Larson
-------------------------------------
Brent L. Larson
Vice President, Finance and
Chief Financial Officer
May 15, 2003
17