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, 2005
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)
58,586,008 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 29, 2005)
Transitional Small Business Disclosure Format (check one) Yes |_| No |X|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Neoprobe Corporation and Subsidiaries
Consolidated Balance Sheets
ASSETS March 31, December 31,
2005 2004
(unaudited)
----------- -----------
Current assets:
Cash and cash equivalents $ 5,421,172 $ 9,842,658
Available-for-sale securities 3,475,911 --
Accounts receivable, net 912,101 411,856
Inventory 860,086 855,022
Prepaid expenses and other 255,795 327,408
----------- -----------
Total current assets 10,925,065 11,436,944
----------- -----------
Property and equipment 2,384,925 2,341,785
Less accumulated depreciation and amortization 2,041,180 2,003,942
----------- -----------
343,745 337,843
----------- -----------
Patents and trademarks 3,161,469 3,155,334
Non-compete agreements 584,516 584,516
Acquired technology 237,271 237,271
----------- -----------
3,983,256 3,977,121
Less accumulated amortization 1,563,887 1,458,012
----------- -----------
2,419,369 2,519,109
----------- -----------
Other assets 1,032,097 1,071,999
----------- -----------
Total assets $14,720,276 $15,365,895
=========== ===========
Continued
2
Neoprobe Corporation and Subsidiaries
Consolidated Balance Sheets, continued
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31,
2005 2004
(unaudited)
------------- -------------
Current liabilities:
Notes payable to finance companies $ 165,745 $ 242,722
Accounts payable 208,377 198,912
Accrued liabilities and other 309,565 378,247
Capital lease obligations, current 17,207 13,863
Deferred revenue, current 346,238 176,192
------------- -------------
Total current liabilities 1,047,132 1,009,936
------------- -------------
Capital lease obligations 43,377 30,297
Deferred revenue 60,523 57,591
Notes payable to CEO, net of discounts of $30,823
and $32,204, respectively 69,177 67,796
Notes payable to investors, net of discounts of $2,465,830
and $2,576,302, respectively 5,534,170 5,423,698
Liability related to warrants to purchase common stock -- 2,560,307
Other liabilities 46,380 52,440
------------- -------------
Total liabilities 6,800,759 9,202,065
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized at March 31, 2005 and December 31, 2004;
none issued and outstanding (500,000 shares
designated as Series A, $.001 par value, at
March 31, 2005 and and December 31, 2004;
none outstanding) -- --
Common stock; $.001 par value; 100,000,000 shares
authorized; 58,585,008 shares issued and outstanding
at March 31, 2005; 58,378,143 shares issued and
outstanding at December 31, 2004 58,585 58,378
Additional paid-in capital 134,884,054 132,123,605
Accumulated deficit (127,020,924) (126,018,153)
Accumulated other comprehensive loss (2,198) --
------------- -------------
Total stockholders' equity 7,919,517 6,163,830
------------- -------------
Total liabilities and stockholders' equity $ 14,720,276 $ 15,365,895
============= =============
See accompanying notes to the consolidated financial statements
3
Neoprobe Corporation and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three Months Ended
March 31,
------------------------------
2005 2004
------------ ------------
Revenues:
Net sales $ 1,465,887 $ 1,225,617
License and other revenue -- 200,000
------------ ------------
Total revenues 1,465,887 1,425,617
------------ ------------
Cost of goods sold 563,323 540,142
------------ ------------
Gross profit 902,564 885,475
------------ ------------
Operating expenses:
Research and development 638,445 583,100
Selling, general and administrative 836,115 813,393
------------ ------------
Total operating expenses 1,474,560 1,396,493
------------ ------------
Loss from operations (571,996) (511,018)
------------ ------------
Other income (expenses):
Interest income 40,963 533
Interest expense (327,573) (72,358)
Increase in warrant liability (142,427) --
Other (1,738) (5,734)
------------ ------------
Total other expenses (430,775) (77,559)
------------ ------------
Net loss $ (1,002,771) $ (588,577)
============ ============
Net loss per common share:
Basic $ (0.02) $ (0.01)
Diluted $ (0.02) $
(0.01)
Weighted average shares outstanding:
Basic 58,317,098 53,049,534
Diluted 58,317,098 53,049,534
See accompanying notes to the consolidated financial statements.
4
Neoprobe Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
-----------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $(1,002,771) $ (588,577)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 149,812 144,996
Amortization of debt discount and offering costs 161,391 60,665
Increase in warrant liability 142,427 --
Other (111) 22,949
Changes in operating assets and liabilities:
Accounts receivable (500,245) 286,090
Inventory (8,259) 83,477
Prepaid expenses and other assets 87,532 103,110
Accounts payable 9,465 104,877
Accrued liabilities and other liabilities (74,761) 45,933
Deferred revenue 172,978 (228,497)
----------- -----------
Net cash (used in) provided by operating activities (862,542) 35,023
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (3,494,029) --
Purchases of property and equipment (24,748) (16,015)
Proceeds from sales of property and equipment 154 150
Patent and trademark costs (8,470) (5,763)
----------- -----------
Net cash used in investing activities (3,527,093) (21,628)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 57,922 1,880,030
Payment of offering costs -- (7,874)
Payment of debt issuance costs (9,635) --
Payment of notes payable (76,977) (78,686)
Payments under capital leases (3,181) (5,341)
Minority interest in subsidiary 20 --
----------- -----------
Net cash (used in) provided by financing activities (31,851) 1,788,129
----------- -----------
Net (decrease) increase in cash and cash equivalents (4,421,486) 1,801,524
Cash and cash equivalents, beginning of period 9,842,658 1,588,760
----------- -----------
Cash and cash equivalents, end of period $ 5,421,172 $ 3,390,284
=========== ===========
See accompanying notes to the consolidated financial statements.
5
Notes to the Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The information presented for March 31, 2005 and 2004 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, the company, 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 U.S. 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 consolidated financial statements should be
read in conjunction with Neoprobe's audited consolidated financial
statements for the year ended December 31, 2004, which were included as
part of our Annual Report on Form 10-KSB.
Our consolidated financial statements include the accounts of Neoprobe,
our wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix), and our
90%-owned subsidiary, CIRA Biosciences, Inc. (CIRA Bio). All significant
inter-company accounts were eliminated in consolidation.
2. Comprehensive Income (Loss)
Due to our net operating loss position, there are no income tax effects on
comprehensive income (loss) components for the three-month period ended
March 31, 2005.
Three Months
Ended
March 31, 2005
---------------
Net loss $(1,002,771)
Unrealized losses on securities (2,198)
-----------
Other comprehensive loss $(1,004,969)
===========
We had no accumulated other comprehensive income (loss) activity during
the three-month period ended March 31, 2004.
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, 2005 March 31, 2004
------------------------------ -----------------------------
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Per Share Per Share Per Share Per Share
------------- -------------- ------------- -------------
Outstanding shares 58,585,008 58,585,008 57,047,285 57,047,285
Effect of weighting changes
in outstanding shares (137,910) (137,910) (3,867,751) (3,867,751)
Contingently issuable shares (130,000) (130,000) (130,000) (130,000)
----------- ----------- ----------- -----------
Adjusted shares 58,317,098 58,317,098 53,049,534 53,049,534
=========== =========== =========== ===========
6
There is no difference in basic and diluted loss per share related to the
three-month periods ended March 31, 2005 and 2004. 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
or upon the conversion of convertible debt since such inclusion would be
anti-dilutive.
4. Available-for-Sale Securities
Available-for-sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported
as a separate component of other comprehensive income (loss) until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale security below
cost that is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. Premiums and discounts are
amortized or accreted over the life of the related available-for-sale
security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned.
Available-for-sale securities are classified as current based on our
intent to use them to fund short-term working capital needs.
5. Inventory
The components of inventory are as follows:
March 31, December 31,
2005 2004
(unaudited)
----------------- -----------------
Materials and component parts $ 508,256 $ 486,323
Finished goods 351,830 368,699
----------------- -----------------
$ 860,086 $ 855,022
================= =================
6. Intangible Assets
The major classes of intangible assets are as follows:
March 31, 2005 December 31, 2004
(unaudited)
----------------------------- -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------- -------------- ----------- --------------
Patents and trademarks $3,161,469 $ 976,890 $3,155,334 $ 915,571
Non-compete agreements 584,516 476,134 584,516 440,005
Acquired technology 237,271 110,863 237,271 102,436
---------- ---------- ---------- ----------
Total $3,983,256 $1,563,887 $3,977,121 $1,458,012
========== ========== ========== ==========
7
The estimated future amortization expenses for the next five fiscal years are as
follows:
Estimated
Amortization
Expense
--------------
For the year ended 12/31/2005 $ 423,524
For the year ended 12/31/2006 267,576
For the year ended 12/31/2007 235,237
For the year ended 12/31/2008 205,170
For the year ended 12/31/2009 170,940
7. 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. Payments charged
against the reserve are disclosed net of EES' reimbursement.
The activity in the warranty reserve account for the three-month periods
ended March 31, 2005 and 2004 is as follows:
Three Months Ended March 31,
----------------------------
2005 2004
---------- -----------
Warranty reserve at beginning of period $ 66,000 $ 53,000
Provision for warranty claims and
changes in reserve for warranties 23,573 --
Payments charged against the reserve (23,073) --
-------- --------
Warranty reserve at end of period $ 66,500 $ 53,000
======== ========
8. Notes Payable
In December 2004, we completed a private placement of four-year
convertible promissory notes in an aggregate principal amount of $8.1
million with Biomedical Value Fund, L.P., Biomedical Offshore Value Fund,
Ltd. and David C. Bupp (our President and CEO). Biomedical Value Fund,
L.P. and Biomedical Offshore Value Fund, Ltd. are funds managed by Great
Point Partners, LLC. The notes bear interest at 8% per annum, payable
quarterly on each March 31, June 30, September 30 and December 31 of each
year, and are freely convertible into shares of our common stock at a
price of $0.40 per share. Neoprobe may force conversion of the notes prior
to their stated maturity under certain circumstances. All of our material
assets, except the intellectual property associated with our LymphoseekTM
and RIGS(R) products under development, have been pledged as collateral
for these notes.
In addition to the security interest in our assets, the notes carry
substantial covenants that impose significant requirements on us,
including, among others, requirements that: we pay all principal, interest
and other charges on the notes when due; we use the proceeds from the sale
of the notes only for permitted purposes such as Lymphoseek development
and general corporate purposes; we nominate and recommend for election as
a director a person designated by the holders of the notes (as of March
31, 2005, the holders of the notes have not designated a potential board
member); we keep reserved out of our authorized shares of common stock
sufficient shares to satisfy our obligation to issue shares on conversion
of the notes and the exercise of the warrants issued in connection with
the sale of the notes; we achieve annual revenues on a consolidated basis
of at least $5.4 million in 2005, $6.5 million in 2006, and $9.0 million
in each year thereafter; we maintain minimum cash balances of $4.5 million
at the end of the first six months of 2005, $4.0 million at the end of the
second six months of 2005, and $3.5 million at the end of each six-month
period thereafter; and we indemnify the purchasers of the notes against
certain liabilities. Additionally, with certain exceptions, the notes
prohibit us from: amending our organizational or governing agreements and
documents, entering into any merger or consolidation, dissolving the
company or liquidating its assets, or acquiring all or any substantial
part of the business or assets of any other person; engaging in
transactions with any affiliate; entering into any agreement inconsistent
with our obligations under the notes and related agreements; incurring any
indebtedness, capital leases, or contingent obligations outside the
ordinary course of business; granting or permitting liens against or
security interests in our assets; making any material dispositions of our
assets outside the ordinary course of business; declaring or paying any
dividends or making any other restricted payments; or making any loans to
or investments in other persons outside of the ordinary course of
business.
8
As part of this transaction, we issued the investors 10,125,000 Series T
warrants to purchase our common stock at an exercise price of $0.46,
expiring in December 2009. The fair value of the warrants issued to the
investors was $1,315,000 on the date of issuance and was determined by a
third-party valuation expert using the Black-Scholes option pricing model
with the following assumptions: an average risk-free interest rate of
3.4%, volatility of 50% and no expected dividend rate. In connection with
this financing, we also issued 1,600,000 warrants to purchase our common
stock to the placement agents, containing substantially the same terms as
the warrants issued to the investors. The fair value of the warrants
issued to the placement agents was $208,014 using the Black-Scholes option
pricing model with the same assumptions used to determine the fair value
of the warrants issued to the investors. The value of the beneficial
conversion feature of the notes was estimated at $1,315,000 based on the
effective conversion price at the date of issuance. The fair value of the
warrants issued to the investors and the value of the beneficial
conversion feature were recorded as discounts on the note and are being
amortized over the term of the notes using an effective interest rate of
19.8%. The fair value of the warrants issued to the placement agents was
recorded as a deferred debt issuance cost and is being amortized over the
term of the notes. If we issue equity at prices below the conversion rate
for the promissory notes (and for the warrants below the exercise price),
then we would be required to reset the exercise and conversion prices for
these securities. This provision results in a contingent beneficial
conversion feature that may require us to estimate an additional debt
discount if a reset occurs.
U.S. generally accepted accounting principles also required us to classify
the warrants issued in connection with the placement as a liability due to
penalty provisions contained in the securities purchase agreement. The
penalty provisions could have required us to pay a penalty of 0.0667% per
day of the total debt amount if we failed to meet certain registration
deadlines, or if our stock was suspended from trading for more than 30
days. As a liability, the warrants were considered a derivative instrument
that were required to be periodically "marked to market" on our
consolidated balance sheet. We estimated the fair value of the warrants at
December 31, 2004 using the Black-Scholes option pricing model with the
following assumptions: an average risk-free interest rate of 3.4%,
volatility of 50% and no expected dividend rate. On February 16, 2005,
Neoprobe and the investors confirmed in writing their intention that the
penalty provisions which led to this accounting treatment were intended to
apply only to the $8.1 million principal balance of the promissory notes
and underlying conversion shares and not to the warrant shares. Because
the value of our stock increased $0.02 per share from $0.59 per share at
December 31, 2004 to $0.61 per share at February 16, 2005, the effect of
marking the warrant liability to "market" resulted in an increase in the
estimated fair value of the warrant liability of $142,427 which was
recorded as non-cash expense during the first quarter of 2005. The
estimated fair value of the warrant liability was then reclassified to
additional paid-in capital during the first quarter of 2005.
9
9. Stock Options and Restricted Stock
During the first quarter of 2005, the Board of Directors granted options
to directors and certain employees to purchase 335,000 shares of our
common stock, exercisable at an average price of $0.68 per share, vesting
over three years. As of March 31, 2005, we have 5.0 million options
outstanding under three stock option plans. Of the outstanding options,
3.0 million options have vested as of March 31, 2005, at an average
exercise price of $0.47 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,
-------------------------------
2005 2004
----------- -----------
Net loss, as reported $(1,002,771) $ (588,577)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (214,301) (63,802)
----------- -----------
Pro forma net loss $(1,217,072) $ (652,379)
=========== ===========
Loss per common share:
As reported (basic and diluted) $ (0.02) $ (0.01)
Pro forma (basic and diluted) $ (0.02) $ (0.01)
10. Stock Warrants
During the first quarter of 2005, 143,278 of our Series R and 63,587 of
our Series S warrants that were issued in October 2003 were exercised and
we realized proceeds of $57,922.
At March 31, 2005, there are 17.1 million warrants outstanding to purchase
our common stock. The warrants are exercisable at prices ranging from
$0.13 to $0.75 per share with a weighted average exercise price of $0.40
per share.
11. Segment and Subsidiary Information
We own or have rights to intellectual property involving two primary types
of medical device products, including gamma detection instruments
currently used primarily in the application of intraoperative lymphatic
mapping (ILM), and blood flow measurement devices. We also own or have
rights to intellectual property related to several drug and therapy
products.
10
The information in the following table is derived directly from each
segment's internal financial reporting used for corporate management
purposes. Selling, general and administrative costs and other income and
expenses, including amortization, interest and other costs that relate
primarily to corporate activity, are not currently allocated to the
operating segments for financial reporting purposes.
Gamma Blood Drug and
($ amounts in thousands) Detection Flow Therapy
Three Months Ended March 31, 2005 Devices Devices Products Unallocated Total
--------------------------------------------------------------------------------------------------
Net sales:
United States(1) $ 1,354 $ 56 $ -- $ -- $ 1,410
International 42 14 -- -- 56
Research and development expenses 38 350 250 -- 638
Selling, general and administrative
expenses -- -- -- 836 836
Income (loss) from operations(2) 826 (312) (250) (836) (572)
Other expenses -- -- -- (431) (431)
Three Months Ended March 31, 2004
Net sales:
United States(1) $ 1,164 $ -- $ -- $ -- $ 1,164
International 24 38 -- -- 62
License and other revenue 200 -- -- -- 200
Research and development expenses 235 255 93 -- 583
Selling, general and administrative
expenses -- -- -- 813 813
Income (loss) from operations(2) 625 (230) (93) (813) (511)
Other expenses -- -- -- (78) (78)
(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.
12. Supplemental Disclosure for Statements of Cash Flows:
During the first quarter of 2005 and 2004, we purchased equipment under
capital leases totaling $20,000 and $27,000, respectively. During the
first quarter of 2004, an outside investor converted the entire balance of
a $250,000 note into 1.1 million shares of common stock. Also during the
first quarter of 2004, certain warrant holders exercised 139,305 warrants
on a cashless basis in exchange for 96,028 shares of common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Neoprobe Corporation is a biomedical technology company that provides innovative
surgical and diagnostic products that enhance patient care by meeting the
critical decision-making needs of physicians. The December 2001 acquisition of
Cardiosonix Ltd. (Cardiosonix) expanded our potential product offerings beyond
the neo2000 gamma detection device which is marketed in the oncology arena into
the area of blood flow measurement and cardiac care. Cardiosonix is in the
process of commercializing a unique line of proprietary blood flow monitoring
devices for a variety of diagnostic and surgical applications and has received
marketing clearance for two of its products, Quantix/ND(TM) and Quantix/OR(TM),
in Europe and in the U.S. In addition to our medical device products, we have
two radiopharmaceutical products, RIGScan(R) CR and Lymphoseek(TM), in the
advanced phases of clinical development, and in January 2005 we formed a new
subsidiary, CIRA Biosciences, Inc. (CIRA Bio) to advance our activated cellular
therapy (ACT) platform.
11
This Overview section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
Our financial performance is highly dependent on our ability to continue to
generate income and cash flow from our gamma device product line and on our
ability to successfully commercialize the blood flow products of our subsidiary,
Cardiosonix. We cannot assure you, however, that we will achieve the volume of
sales anticipated, or if achieved, that the margin on such sales will be
adequate to produce positive operating cash flow. We continue to be optimistic
about the longer-term potential for our other proprietary, procedural-based
technologies such as Lymphoseek and RIGS(R) (radioimmunoguided surgery);
however, these technologies are not anticipated to generate any significant
revenue for us during 2005. In addition, we cannot assure you that these
products will ever obtain marketing clearance from the appropriate regulatory
bodies.
Our revenue for the first quarter of 2005 was somewhat higher than our original
expectations. Unit sales of our gamma detection devices year-to-date were
consistent with our expectations; however, we experienced both an approximately
3% increase in average sales prices and higher than normal sales of extended
service agreements during the quarter. Our sales of blood flow measurement
devices reflect the launch of a redesigned Quantix/OR device late in the first
quarter of 2005. We continue to expect net sales of gamma detection devices for
2005 to be consistent with 2004 and that our sales of blood flow measurement
devices will continue to increase over the remainder of 2005, although the
ultimate amount of revenue achieved will be greatly dependent upon physician
response to the recently introduced product refinements.
Our operating expenses during the first quarter of 2005 were focused in two
primary areas, support for our Lymphoseek product development and the technology
assessment of our ACT technology being conducted by our subsidiary, CIRA Bio. In
addition, we continued to make significant investments in our Quantix(R) blood
flow measurement line and modest investments in neo2000(R) gamma detection
device line. We expect our development expenses to increase significantly over
the remainder of 2005 primarily due to manufacturing validation activities,
regulatory required non-human toxicology studies and clinical trial activities
related to Lymphoseek. In addition, we will continue to incur development
expenses to support and innovate our device product lines as well as to move our
other initiatives forward. We will continue to invest in marketing and
development support for our blood flow products during 2005 as we continue to
work with our distribution partners and independent sales representatives to
complete the commercialization of our Quantix product lines.
Our efforts thus far in 2005 have resulted in the following milestone
achievements:
o Received 501(k) and CE Mark clearances to market redesigned
Quantix/OR system;
o Established corporate Investigational New Drug (IND) application for
Lymphoseek and submitted multi-center clinical protocol and related
materials to FDA under the IND;
o Licensed methodology patents strengthening RIGS intellectual
property estate;
o Expanded Lymphoseek license to cover photodynamic and ultrasound
applications; and
o Received positive independent technology assessment of CIRA Bio's
ACT platform.
We are currently waiting for feedback from FDA related to a Phase II protocol
for Lymphoseek. We currently plan to initiate this multi-center trial by the end
of the second quarter or early third quarter if the feedback from FDA is
positive. We are also continuing our manufacturing and validation activities to
support both the Phase II and a Phase III clinical trial expected to commence
late this year or early next year. As a result of these activities, we expect
our development expenses related to Lymphoseek to increase significantly over
the remainder of 2005 although we continue to believe our estimate of $5 million
in out-of-pocket development costs remains appropriate. In addition, our
timeline for Lymphoseek remains focused on the filing of a New Drug Application
(NDA) by mid-2006.
With respect to our RIGS initiative, our current efforts are focused on
identifying and securing a development partner. At present, we estimate the
expenses to prepare for and conduct a Phase III clinical trial for RIGScan CR
will total approximately $25 million. However, expenses for these projects may
change based on feedback from the regulatory agencies and/or modifications made
to trial designs. It remains our intent to seek a development partner to assist
in or take full responsibility for funding of RIGScan CR development. In the
meantime, until a partner is secured, we are moving forward with our plans to
submit a request for a special protocol assessment (SPA) related to RIGS;
however, we do not expect to incur any significant expenses related to RIGS
until a partner is secured.
12
The commercial manufacturing assessment recently completed by the Battelle
Memorial Institute related to CIRA Bio's ACT technology coupled with the
clinical strategy recommendations recently made by CIRA Bio's scientific
advisors have set the stage for CIRA Bio to embark on the fundraising phase. We
anticipate having discussions with potential investment parties during the
second and third quarters as we look to move the platform forward.
We anticipate generating a net profit from the sale of our gamma detection
devices in 2005; however, we expect to show a loss for our blood flow device
product line for 2005 due to continued development and increased marketing and
administrative support costs that are still required to commercialize the
product line. Currently, we expect the loss on blood flow products for 2005 to
be less than the loss incurred in 2004. However, this expectation is based to a
large degree on our anticipation that we will achieve the necessary
developmental milestones required to achieve significant commercial sales of our
Quantix/OR product in a timely manner.
Our overall operating results for 2005 will be significantly affected by the
amount of development costs associated with the radiopharmaceutical products. If
we are unsuccessful in achieving significant commercial sales of the Quantix/OR
product in 2005, or if we modify our business plan and decide to carry out RIGS
development internally, our estimates and our business plan will likely need to
be modified. As a result of our decision to fund Lymphoseek development
internally, we do not expect to achieve operating profit during 2005. In
addition, our net loss and earnings per share will likely be significantly
impacted by the non-cash interest expense we expect to record related to the
accounting treatment for the beneficial conversion feature of the convertible
debt and for the warrants issued in connection with the private placement we
completed in December 2004. Also, we cannot assure you that our current or
potential new products will be successfully commercialized or that we will
achieve significant product revenues or that we will achieve or be able to
sustain profitability in the future.
Results of Operations
Revenue for the first quarter of 2005 increased $40,000, or 3%, to $1.5 million
from $1.4 million for the same period in 2004. Major expense categories as a
percentage of net sales decreased in the first quarter of 2005 as compared to
the same period in 2004, due primarily to the decreased development expenses
associated with our gamma detection drug initiatives coupled with the increase
in net sales. Research and development expenses, as a percentage of net sales,
decreased to 44% during the first quarter of 2005 from 48% during the same
period in 2004. Selling, general and administrative expenses, as a percentage of
net sales, decreased to 57% during the first quarter of 2005 from 66% during the
same period in 2004. Due to the ongoing drug and therapeutic development
activities of the company, research and development expenses are expected to be
higher as a percentage of sales in 2005 than they were in 2004. In addition, as
we move forward with commercialization activities related to the Quantix product
line, marketing and selling expenses, coupled with increased financial
compliance, investor relations and professional services costs, are expected to
push our selling, general and administrative expenses higher in 2005 than 2004
as a percentage of sales.
Three Months Ended March 31, 2005 and 2004
Net Sales and Margins. Net sales, primarily of our gamma detection systems,
increased $240,000, or 20%, to $1.5 million during the first quarter of 2005
from $1.2 million during the same period in 2004. Gross margins on net sales
increased to 62% of net sales for the first quarter of 2005 compared to 56% of
net sales for the same period in 2004. The increase in net sales was the
combined result of a modest strengthening in gamma detection device sales prices
influenced by the present Euro exchange rate and increased extended service
contract sales activity through our primary gamma detection device marketing
partner. The increase in gross margins was primarily due to the increase in
sales prices and increased extended service contract sales which generally
generate higher margins than sales of our devices, coupled with decreased unit
costs to manufacture our neo2000 control unit.
13
License and Other Revenue. License and other revenue in the first quarter of
2004 included $200,000 from the pro-rata recognition of license fees related to
the distribution agreement with Ethicon Endo-Surgery, Inc. (EES), a Johnson and
Johnson company. These license fees were fully amortized into income as of the
end of the third quarter of 2004.
Research and Development Expenses. Research and development expenses increased
$55,000 or 9% to $638,000 during the first quarter of 2005 from $583,000 during
the same period in 2004. The increase was primarily due to efforts to move
forward with development efforts for Lymphoseek and the ACT technology platform
of our CIRA Bio subsidiary, coupled with increased headcount in the U.S. offset
by decreased expenses of Cardiosonix. The first quarter of 2004 included final
development activities related to an updated version of our neo2000 system and
product development activities related to the Quantix/OR. Research and
development expenses in the first quarter of 2005 included approximately $38,000
in gamma detection device development costs, $350,000 in product design
activities for the Quantix/OR system and $250,000 in drug and therapy product
development costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $23,000 or 3% to $836,000 during the first
quarter of 2005 from $813,000 during the same period in 2004. Increases in
certain overhead costs such as investor relations and professional services
coupled with increased headcount in the U.S. were offset by decreased marketing
expenses in the U.S. and Israel.
Other Income (Expenses). Other expenses increased $353,000 to $431,000 of
expenses during the first quarter of 2005 from $78,000 during the same period in
2004. The primary reason for the increase was a $142,000 increase in warrant
liability resulting from the accounting treatment for the warrants we issued in
connection with the private placement of convertible debt we completed in
December 2004. In addition, we recorded an increase of $256,000 in interest
expense on debt financings we entered into during 2004 and 2003. Of this
interest expense, $161,000 and $63,000 in the first quarter of 2005 and 2004,
respectively, was non-cash in nature related to the amortization of debt
issuance costs and discounts resulting from the warrants and beneficial
conversion features of the convertible debt. These increases were offset by an
increase of $40,000 in interest income resulting from maintaining a higher
balance of cash and investments during the first quarter of 2005 compared to the
same period in 2004.
Liquidity and Capital Resources
Operating Activities. Cash used in operations increased $898,000 to $863,000
used during the first quarter of 2005 compared to $35,000 provided during the
same period in 2004. Working capital decreased $549,000 to $9.9 million at March
31, 2005 as compared to $10.4 million at December 31, 2004. The current ratio
decreased to 10.4:1 at March 31, 2005 from 11.3:1 at December 31, 2004. The
decrease in working capital was primarily related to cash used in operations.
Cash and investment balances decreased to $8.9 million at March 31, 2005 from
$9.8 million at December 31, 2004, primarily as a result of cash used to fund
operating activities and service our debt during the first quarter of 2005.
Accounts receivable increased to $912,000 at March 31, 2005 from $412,000 at
December 31, 2004. The increase was primarily a result of increased sales of
gamma detection devices, blood flow measurement devices and extended service
contracts during the first quarter of 2005. We expect overall receivable levels
will continue to fluctuate during 2005 depending on the timing of purchases and
payments by EES as well as the effects of sales of blood flow products.
Inventory levels increased slightly to $860,000 at March 31, 2005 as compared to
$855,000 at December 31, 2004. We expect inventory levels to increase over the
course of 2005.
14
Investing Activities. Cash used in investing activities increased to $3.5
million during the first quarter of 2005 from $22,000 during the same period in
2004. We purchased $3.5 million of available-for-sale securities during the
first quarter of 2005. Capital expenditures during the first quarter of 2005
were split between purchases of office equipment and production tools and
equipment. Capital expenditures in the first quarter of 2004 were related to
purchases of technology infrastructure. Capital needs for 2005 are expected to
increase over 2004 as we start up blood flow measurement device production at
our contract manufacturer.
Financing Activities. Financing activities used $32,000 in cash in the first
quarter of 2005 versus $1.8 million provided during the same period in 2004.
Proceeds from the issuance of common stock were $58,000 and $1.9 million during
the first quarter of 2005 and 2004, respectively. Payments of notes payable were
$77,000 and $79,000 during the first quarter of 2005 and 2004, respectively.
In November 2003, we executed common stock purchase agreements with third
parties introduced to us by another investment banking firm, Rockwood, Inc., for
the purchase of 12,173,914 shares of our common stock at a price of $0.23 per
share for net proceeds of $2.4 million. In addition, we issued the purchasers
warrants to purchase 6,086,959 shares of our common stock at an exercise price
of $0.28 per share, expiring in October 2008, and issued the placement agents
warrants to purchase 1,354,348 shares of our common stock on similar terms. The
per share value of these warrants was $0.31 on the date of issuance using the
Black-Scholes option pricing model with the following assumptions: an average
risk-free interest rate of 3.2%, volatility of 151% and no expected dividend
rate. During 2004, certain investors and placement agents exercised a total of
3,230,066 warrants related to this placement resulting in the issuance of
3,197,854 shares of our common stock and we realized net proceeds of $871,398.
During the first quarter of 2005, certain investors and placement agents
exercised a total of 206,865 warrants and we realized proceeds of $57,922.
In December 2004, we completed a private placement of Convertible Promissory
Notes in an aggregate principal amount of $8.1 million with Biomedical Value
Fund, L.P., Biomedical Offshore Value Fund, Ltd. and David C. Bupp (our
President and CEO). Biomedical Value Fund, L.P. and Biomedical Offshore Value
Fund, Ltd. are funds managed by Great Point Partners, LLC. The notes bear
interest at 8% per annum and are freely convertible into shares of our common
stock at a price of $0.40 per share. Neoprobe may force conversion of the notes
prior to their stated maturity under certain circumstances. The conversion price
represents the ten-day volume weighted average trading price of our common stock
through December 10, 2004. As part of this transaction, we issued the investors
10,125,000 Series T warrants to purchase our common stock at an exercise price
of $0.46, expiring in December 2009. The fair value of the warrants issued to
the investors was $1,315,000 on the date of issuance and was determined by a
third-party valuation expert using the Black-Scholes option pricing model with
the following assumptions: an average risk-free interest rate of 3.4%,
volatility of 50% and no expected dividend rate. In connection with this
financing, we also issued 1,600,000 Series U warrants to purchase our common
stock to the placement agents, containing substantially identical terms to the
warrants issued to the investors. The fair value of the warrants issued to the
placement agents was $208,014 using the Black-Scholes option pricing model with
the same assumptions used to determine the fair value of the warrants issued to
the investors. The value of the beneficial conversion feature of the notes was
estimated at $1,315,000 based on the effective conversion price at the date of
issuance.
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 of new products, 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 FDA and other international
regulatory bodies, and intellectual property protection. We believe we now have
adequate capital to assure that we can properly support our current business
goals and objectives for 2005 and into 2006. Our near-term priorities to
commence multi-center trials for our Lymphoseek product, support the launch of
the reengineered version of the Quantix/OR products, identify a development and
commercialization partner for our RIGS technology, complete a technology
assessment of our ACT technology and continue to innovate our gamma detection
product line. We cannot assure you that we will be able to achieve significant
product revenues from our current or potential new products. We also cannot
assure you that we will achieve profitability again.
15
Recent Accounting Developments
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This statement
amends the guidance in ARB No. 43 Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4,
previously stated that " . . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal to require treatment as a current period charge...." This
statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The provisions of this statement will be effective for inventory
costs during fiscal years beginning after June 15, 2005. Neoprobe does not
believe that the adoption of this statement will have a material impact on our
consolidated financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123R). SFAS No. 123R supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach
described in SFAS No. 123. However, SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. We must adopt SFAS No. 123R for annual
reporting periods beginning after December 15, 2005. Early adoption will be
permitted in periods in which financial statements have not yet been issued. We
expect to adopt SFAS No. 123R on January 1, 2006.
As permitted by SFAS No. 123, Neoprobe currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123R's fair value method will have a
significant impact on our result of operations, although it will have no impact
on our overall cash position. The impact of adoption of SFAS No. 123R cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future and the assumptions for the variables which impact the
computation. However, had we adopted SFAS No. 123R in prior periods, the impact
of that standard would have approximated the impact of SFAS No. 123 as described
in the disclosure of pro forma net loss and loss per share in Note 9 to our
consolidated financial statements. SFAS No. 123R also requires the benefits of
tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets--An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions (SFAS No. 153). SFAS No. 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions,
and replaces it with an exception for exchanges that do not have commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for fiscal
periods beginning after June 15, 2005 and is required to be adopted by Neoprobe
beginning January 1, 2006. Neoprobe is currently evaluating the effect that the
adoption of SFAS No. 153 will have on its consolidated results of operations and
financial condition but does not expect it to have a material impact.
Critical Accounting Policies
The following accounting policies are considered by us to be critical to our
results of operations and financial condition.
16
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 5% of total revenues for the first
quarter of 2005 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. The prices we charge our primary gamma detection device
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.
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 upon 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 as revenue ratably over the life of the
extended service agreement.
Use of Estimates. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We base these estimates and assumptions upon
historical experience and existing, known circumstances. Actual results could
differ from those estimates. Specifically, management may make significant
estimates in the following areas:
o Allowance for Doubtful Accounts. We maintain an allowance for
doubtful accounts receivable to cover estimated losses resulting
from the inability of our customers to make required payments. We
determine the adequacy of this allowance by regularly reviewing our
accounts receivable aging and evaluating individual customer
receivables, considering customers' credit and financial condition,
payment history and relevant economic conditions. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances
for doubtful accounts may be required.
o Inventory Valuation. We value our inventory at the lower of cost
(first-in, first-out method) or market. Our valuation reflects our
estimates of excess, slow moving and obsolete inventory as well as
inventory with a carrying value in excess of its net realizable
value. Write-offs are recorded when product is removed from saleable
inventory. We review inventory on hand at least quarterly and record
provisions for excess and obsolete inventory based on several
factors, including current assessment of future product demand,
anticipated release of new products into the market, historical
experience and product expiration. Our industry is characterized by
rapid product development and frequent new product introductions.
Uncertain timing of product approvals, variability in product launch
strategies, product recalls and variation in product utilization all
impact the estimates related to excess and obsolete inventory.
o 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, 2005, 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 the future sales success of
Cardiosonix' products 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.
17
o 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. EES
also reimburses us for a portion of warranty expense incurred based
on end customer sales they make during a given fiscal year.
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, anticipated clinical
and regulatory pathways, 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 continuing operating
losses, uncertainty of market acceptance of our products, reliance on third
party manufacturers, accumulated deficit, future capital needs, uncertainty of
capital funding, dependence on limited product line and distribution channels,
competition, limited marketing and manufacturing experience, risks of
development of new products, regulatory risks, 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 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-15. 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
subsidiaries) 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.
There were no changes in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
18
PART II - OTHER INFORMATION
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
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.*
* Filed herewith.
Items 1, 4 and 5 are not applicable and have been omitted.
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 16, 2005
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)
19