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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______TO________
COMMISSION FILE NUMBER: 0-26520
NEOPROBE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-1080091
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
425 METRO PLACE NORTH, SUITE 300, DUBLIN, OHIO 43017
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 614.793.7500
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No___
23,047,644 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 November 1, 1999
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------- --------------------
Current assets:
Cash and cash equivalents $ 4,783,354 $3,054,936
Available-for-sale securities - 448,563
Accounts receivable, net 1,914,199 2,069,633
Inventory 1,944,460 1,578,912
Prepaid expenses 414,875 720,420
Other current assets 39,830 147,008
------------------- --------------------
Total current assets 9,096,718 8,019,472
------------------- --------------------
Investment in affiliates 1,500,000 1,500,000
Property and equipment 3,085,859 3,073,931
Less accumulated depreciation and amortization 1,904,816 1,654,661
------------------- --------------------
1,181,043 1,419,270
------------------- --------------------
Intangible assets, net 776,911 773,863
Other assets 1,552 281,594
------------------- --------------------
Total assets $ 12,556,224 $ 11,994,199
=================== ====================
CONTINUED
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NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------- -------------------
Current liabilities:
Line of credit $ 480,000 $ 1,000,000
Notes payable to finance company - 242,163
Capital lease obligations, current 98,831 99,539
Unearned license fees, current 800,000 -
Accounts payable 1,398,280 2,857,717
Accrued liabilities 3,247,892 2,813,321
------------------- --------------------
Total current liabilities 6,025,003 7,012,740
------------------- --------------------
Capital lease obligations 82,146 155,816
Unearned license fees 3,200,000 -
------------------- --------------------
Total liabilities 9,307,149 7,168,556
------------------- --------------------
Commitments and contingencies - -
Redeemable convertible preferred stock:
Series B; $.001 par value; 63,000 shares and no shares
authorized at September 30, 1999 and
December 31, 1998, respectively; 30,000 shares and
no shares issued and outstanding at September 30, 1999
and December 31, 1998, respectively 3,708,036 -
Stockholders' equity (deficit):
Preferred stock; $.001 par value; 5,000,000 shares
authorized at September 30, 1999 and
December 31, 1998; none issued and outstanding
(500,000 shares designated as Series A, $.001 par
value, at September 30, 1999 and December 31, 1998;
none outstanding) - -
Common stock; $.001 par value; 50,000,000 shares
authorized; 23,046,644 shares issued and
outstanding at September 30, 1999; 22,887,910
shares issued and outstanding at December 31, 1998 23,047 22,888
Additional paid-in capital 119,419,704 120,272,899
Accumulated deficit (119,814,294) (115,395,283)
Accumulated other comprehensive loss (87,418) (74,861)
------------------- --------------------
Total stockholders' equity (deficit) (458,961) 4,825,643
------------------- --------------------
Total liabilities and stockholders' equity $ 12,556,224 $ 11,994,199
=================== ====================
See accompanying notes to consolidated financial statements
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NEOPROBE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------------- ---------------- --------------- -----------------
Net sales $ 1,400,785 $ 1,702,338 $ 5,226,406 $ 3,821,262
Cost of goods sold 468,553 454,024 1,745,476 1,019,081
----------------- ---------------- --------------- -----------------
Gross profit 932,232 1,248,314 3,480,930 2,802,181
----------------- ---------------- --------------- -----------------
Operating expenses:
Research and development 77,807 2,732,569 892,103 10,659,296
Marketing and selling 1,623,874 1,561,904 3,881,296 3,780,418
General and administrative 1,077,589 1,256,487 2,893,814 4,008,141
Losses related to subsidiaries in liquidation - 1,441,974 475,231 2,772,294
----------------- ---------------- --------------- -----------------
Total operating expenses 2,779,270 6,992,934 8,142,444 21,220,149
----------------- ---------------- --------------- -----------------
Loss from operations (1,847,038) (5,744,620) (4,661,514) (18,417,968)
----------------- ---------------- --------------- -----------------
Other income (expense):
Interest income 15,916 105,861 63,906 555,317
Interest expense (25,838) (100,886) (68,783) (152,982)
Other 176,139 134,682 247,380 86,002
----------------- ---------------- --------------- -----------------
Total other income (expense) 166,217 139,657 242,503 488,337
----------------- ---------------- --------------- -----------------
Net loss (1,680,821) (5,604,963) (4,419,011) (17,929,631)
----------------- ---------------- --------------- -----------------
Conversion discount on preferred stock - - 1,795,775 -
Accretion to potential redemption value 1,804,225 - 1,804,225 -
Preferred stock dividend requirements 51,786 - 108,036 -
----------------- ---------------- --------------- -----------------
Loss attributable to common stockholders $ (3,536,832) $ (5,604,963) $ (8,127,047) $ (17,929,631)
================= ================ =============== =================
Loss per common share
(basic and diluted)
$ (0.15) $ (0.24) $ (0.35) $ (0.79)
================= ================ =============== =================
Weighted average shares
outstanding during the period
(basic and diluted) 23,044,405 22,884,528 22,988,908 22,823,382
================= ================ =============== =================
See accompanying notes to consolidated financial statements
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NEOPROBE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------------- --------------------
Net cash used in operating activities $ (631,700) $ (18,674,539)
Cash flows from investing activities:
Purchases of available-for-sale securities - (1,738,512)
Proceeds from sales of available-for-sale securities 443,729 3,741,357
Maturities of available-for-sale securities 4,467 11,050,000
Purchases of property and equipment (67,065) (2,405,865)
Proceeds from sales of property and equipment 23,439 -
Patent costs (21,195) (430,870)
------------------- --------------------
Net cash provided by investing activities 383,375 10,216,110
------------------- --------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 145 196,343
Proceeds from issuance of redeemable convertible
preferred stock, net 2,818,065 -
Proceeds from line of credit 480,000 700,000
Payments under line of credit (1,000,000) (275,750)
Payments under notes payable (242,163) (202,615)
Payments under capital leases (74,378) (118,271)
Proceeds from long-term debt - 2,666,118
------------------- --------------------
Net cash provided by financing activities 1,981,669 2,965,825
------------------- --------------------
Effect of exchange rate changes on cash ( 4,926) (6,169)
------------------- --------------------
Net increase (decrease) in cash and cash equivalents 1,728,418 (5,498,773)
Cash and cash equivalents at beginning of period 3,054,936 9,921,025
------------------- --------------------
Cash and cash equivalents at end of period $ 4,783,354 $ 4,422,252
=================== ====================
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The information presented for September 30, 1999 and 1998, and for the
periods then ended is unaudited, but includes all adjustments (which
consist only of normal recurring adjustments) which the management of
Neoprobe Corporation (the "Company") believes to be necessary for the
fair presentation of results for the periods presented. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results for
the interim period are not necessarily indicative of results to be
expected for the year. The financial statements should be read in
conjunction with the Company's audited financial statements for the
year ended December 31, 1998, which were included as part of the
Company's Annual Report on Form 10-K, as amended. Certain 1998 amounts
have been reclassified to conform with the 1999 presentation.
2. COMPREHENSIVE INCOME (LOSS): Other comprehensive income (loss) consists of
the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
Net loss $1,680,821 $5,604,963 $4,419,011 $17,929,631
Foreign currency translation adjustment 11,134 (15,224) 12,338 (5,202)
Unrealized (gains) losses on securities - (11,737) 219 (23,169)
-------------- -------------- ------------- ---------------
Other comprehensive loss $1,691,955 $5,578,002 $4,431,568 $17,901,260
============== ============== ============= ===============
3. INVENTORY:
The components of inventory are as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- -----------------
Materials and component parts $ 140,314 $ 277,505
Finished goods 1,804,146 1,301,407
---------------- -----------------
$ 1,944,460 $ 1,578,912
================ =================
4. DEBT:
At December 31, 1998, the Company had a $1 million revolving line of
credit arrangement with a bank, which was secured by $1 million in
pledged cash and investments of the Company. This line of credit
expired under its terms on August 31, 1999. During August 1999, the
Company negotiated a new line of credit with another bank. The new line
of credit matures on December 31, 1999, provides for a maximum
outstanding principal of $500,000 and bears interest at the bank's
prime rate plus one percent. The new line of credit is secured by the
assets of the Company, excluding intellectual property and equipment
related to the Company's ILM technology. As of September 30, 1999,
$480,000 was outstanding under the new line of credit.
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5. EQUITY:
A. PRIVATE PLACEMENT: On February 16, 1999, the Company executed a
Preferred Stock and Warrant Purchase Agreement (the "Purchase
Agreement") to complete the private placement of 30,000 shares of
5% Series B Convertible preferred stock (the "Series B") for gross
proceeds of $3 million ($2.8 million, net of transaction costs).
The Series B have a $100 per share stated value and are
convertible into common stock of the Company. In connection with
the private placement, the Company also issued warrants to
purchase 2.9 million shares of common stock of the Company at an
initial exercise price of $1.03 per share.
The Company is required to pay a cumulative 5% annual dividend on
the Series B. Dividends accrue daily and are payable on each
six-month and one-year anniversary of the initial closing.
Neoprobe has the option of paying these dividends in cash or in
shares of common stock. On any day the common stock trades below
$0.55 per share, the annual dividend rate will be 10%. The
dividends are recorded as incremental yield to the preferred
stockholders in the Company's loss per share calculation and are
included in the carrying value of the Series B at September 30,
1999.
Generally, each share of the Series B may be converted, at the
option of the owner, into the number of shares of common stock
calculated by dividing the sum of $100 and any unpaid dividends on
the share of Series B by the conversion price. The initial
conversion price of the Series B sold is $1.03 per share of common
stock. If, on February 16, 2000, the market value of common stock
is less than $1.03, the conversion price will be reset to the
market value of a share of common stock on February 16, 2000, but
not less than $0.515. If the market value of common stock is less
than $1.03, the conversion price will be the average of the three
lowest closing bid prices for a share of common stock during the
previous 10 trading days. The Company may refuse to convert a
share of Series B that the Company sold if its conversion price is
less than $0.55. However, if the conversion price of a share is
less than $0.55 for more than 60 trading days in any 12-month
period, then the Company must either convert a share at the
share's conversion price or pay the owner cash based on the
highest closing price for common stock during the period from the
date of the owner's conversion request until the payment. The
conversion price may also be adjusted to prevent dilution of the
economic interests of the owners of Series B in the event certain
other equity transactions are consummated by the Company. The
exercise price of the warrants is also subject to adjustment based
on terms defined in the Agreement, subject to a floor price of
$0.62 per share.
Holders of the Series B (the "Series B Holders") have certain
liquidation preferences over other stockholders under certain
provisions as defined in the Purchase Agreement and have the right
to cast the same number of votes as if the owner had converted on
the record date.
Pursuant to the private placement, the Company signed a financial
advisory agreement with the placement agent providing the agent
with the right to purchase 1,500 shares of Series B convertible
into common stock, initially at $1.03 per share, and warrants to
purchase 145,631 shares of common stock of the Company initially
exercisable at $1.03 per share. Both the Series B and the warrants
issuable under the financial advisory agreement are subject to
repricing features similar to the outstanding Series B and related
warrants. In addition, the Company agreed to pay the agent a
monthly financial advisory fee and success fees based on certain
investment transactions consummated during the 24-month term of
the agreement, if any.
The Series B and the related warrants issued were recorded at the
amount of gross proceeds less the costs of the financing based
upon their relative fair values. The preferred stock, due to its
redemption provisions, is classified as mezzanine financing above
the stockholders' equity section on the balance sheet. The
calculated conversion price at February 16, 1999, the first
available conversion date, was $1.03 per share. In accordance with
the FASB's Emerging Issues Task Force Topic D-60, the difference
between this conversion price and the closing market price of
$1.81 on February 16, 1999, not to exceed the amount allocated to
the preferred stock, was reflected as incremental yield to the
preferred stockholders in the Company's loss per common share
calculation for the quarter ended March 31, 1999.
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Under certain conditions, the Company may be obligated to redeem
outstanding shares of Series B for $120 per share. Conditions
under which redemption may be required include: failure to meet
filing deadlines for a registration statement for common stock
into which the Series B may be converted, a material breach of the
Purchase Agreement, delisting from the NASDAQ Stock Market, a
material qualification of the audit opinion on the consolidated
financial statements, or the liquidation or merger of the Company
or the sale of substantially all of the Company's assets.
The Company obtained a waiver from the Series B Holders related to
redemption requirements associated with the issuance by the
Company's auditors of a going concern opinion on the Company's
consolidated financial statements for the year ended December 31,
1998. However, on July 28, 1999, the NASDAQ Stock Market, Inc.
delisted the Company's common stock from the NASDAQ National
Market System ("NASDAQ NMS"). Management believes that the
likelihood that the Series B Holders will request redemption has
increased as a result of the delisting and other events that
occurred during the third quarter of 1999. Accordingly, the
Company recorded a charge of $1.8 million during the quarter ended
September 30, 1999 to accrete the originally recorded book value
of $1.8 million up to the potential redemption value, stipulated
in the Purchase Agreement, of $3.6 million.
b. STOCK OPTIONS: During the first quarter of 1999, the Board
granted options to employees and certain directors of the Company
under the 1996 Stock Incentive Plan (the "Plan") for 412,500
shares of common stock, exercisable at $1.25 per share, vesting
over three to four years. During the second quarter of 1999, the
Board of Directors granted 105,000 options to non-employee
directors under the Plan, exercisable at $0.72 per share, in lieu
of waived cash compensation. As of September 30, 1999, the
Company has 1.4 million options outstanding under two stock
option plans. Of the outstanding options, 614,000 options have
vested as of September 30, 1999, at an average exercise price of
$6.49 per share.
6. SEGMENTS AND SUBSIDIARIES INFORMATION:
Prior to the changes in the Company's business plan made starting in
early 1998 and continuing through September 30, 1999, the Company's
business was operated based on product development initiatives started
under the Company's prior business plan. These strategic initiatives
originally included development and commercialization of: hand-held
gamma detection instruments currently used primarily in the application
of Intraoperative Lymphatic Mapping ("ILM"), diagnostic
radiopharmaceutical products to be used in the Company's proprietary
RIGS(R) (radioimmunoguided surgery) process, and a therapeutic process
using a patient's own cancer fighting cells referred to as Activated
Cellular Therapy ("ACT"). The Company's current business plan focuses
primarily on the hand-held gamma detection instruments while efforts
are carried out to find partners or licensing parties to fund RIGS and
ACT research, development and commercialization activities.
The Company's United States operations included activities for 1998 and
prior years that benefited all three strategic initiatives. The
suspended RIGS initiative included the operations of the Company's two
subsidiaries, Neoprobe Europe AB ("Neoprobe Europe") and Neoprobe
(Israel) Ltd. ("Neoprobe Israel"). Neoprobe Europe was acquired in 1993
primarily to perform a portion of the manufacturing process of the
monoclonal antibody used in the first RIGS product to be used for
colorectal cancer, RIGScan CR49. Neoprobe Israel was founded to
radiolabel RIGScan CR49. Neoprobe Europe and Neoprobe Israel also both
performed limited research and development activities related to the
Company's RIGS process on behalf of the Company.
Under Statement of Financial Accounting Standards ("SFAS") No. 131,
neither subsidiary has been considered a segment. Both Neoprobe Europe
and Neoprobe Israel have been accounted for under the liquidation
method of accounting as of December 31, 1998. The results of the
operations of Neoprobe Europe and Neoprobe Israel for 1998, as well as
the effects of adjustment of their related assets in conformity with
the liquidation basis of accounting, have been reclassified from prior
year presentations to
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be presented as losses relating to subsidiaries in liquidation in the
consolidated statements of operations. Accordingly, the consolidated
balance sheet includes $13,000 and $96,000 in current assets at their
net realizable values and $4,000 and $893,000 in liabilities at the
amounts expected to settle the obligations due as of September 30, 1999
related to Neoprobe Europe and Neoprobe Israel, respectively. Neoprobe
Europe is expected to file its final liquidation reports with the
Swedish government as of October 31, 1999 at which time any residual
net assets will be returned to the Company by the liquidator. The
Company also believes that the appointment of a Receiver for Neoprobe
Israel on October 24, 1999 (See Note 8.) may result in the settlement
of the liabilities of Neoprobe Israel at substantially less than their
recorded values. However, there can be no assurance that a settlement
will occur, or if it occurs, that the settlement will result in a gain
for the Company.
The information in the following table is derived directly from the
segments' internal financial reporting used for corporate management
purposes. The expenses attributable to corporate activity, including
amortization and interest, and other general and administrative costs
are not allocated to the individual segments.
Three months ended September 30, 1999 and 1998
($ AMOUNTS IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30, 1999
RIGS ILM ACT UNALLOCATED TOTAL
---- --- --- ----------- -----
Revenue
U.S. customers $ - $1,229 $ - $ - $ 1,229
International customers - 172 - - 172
Research and development expenses - 78 - - 78
Marketing and selling expenses - 1,624 - - 1,624
General and administrative expenses - - - 1,078 1,078
Losses related to subsidiaries in liquidation - - - - -
Other income - - - 166 166
THREE MONTHS ENDED SEPTEMBER 30, 1998
RIGS ILM ACT UNALLOCATED TOTAL
---- --- --- ----------- -----
Revenue
U.S. customers $ - $ 1,621 $ - $ - $ 1,621
International customers - 81 - - 81
Research and development expenses 1,650 707 376 - 2,733
Marketing and selling expenses - 1,562 - - 1,562
General and administrative expenses - - - 1,256 1,256
Losses related to subsidiaries in liquidation 1,442 - - - 1,442
Other income - - - 140 140
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Nine months ended September 30, 1999 and 1998
($ AMOUNTS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 1999
RIGS ILM ACT UNALLOCATED TOTAL
---- --- --- ----------- -----
Revenue
U.S. customers $ - $4,107 $ - $ - $ 4,107
International customers - 1,119 - - 1,119
Research and development expenses - 892 - - 892
Marketing and selling expenses - 3,881 - - 3,881
General and administrative expenses - - - 2,894 2,894
Losses related to subsidiaries in liquidation 475 - - - 475
Other income - - - 243 243
NINE MONTHS ENDED SEPTEMBER 30, 1998
RIGS ILM ACT UNALLOCATED TOTAL
---- --- --- ----------- -----
Revenue
U.S. customers $ - $ 3,581 $ - $ - $ 3,581
International customers - 240 - - 240
Research and development expenses 6,667 2,727 1,265 - 10,659
Marketing and selling expenses - 3,780 - - 3,780
General and administrative expenses - - - 4,008 4,008
Losses related to subsidiaries in liquidation 2,772 - - - 2,772
Other income - - - 488 488
7. AGREEMENTS:
In April 1998, the Company executed a non-exclusive Sales and Marketing
Agreement with Ethicon Endo-Surgery, Inc. ("EES"), a subsidiary of
Johnson & Johnson, to market and promote certain of the Company's line
of hand-held gamma detection instruments. On January 29, 1999, the
Company provided EES with notice of the Company's intent to terminate
the Agreement effective March 1, 1999.
Effective February 1, 1999, the Company executed a Sales and Marketing
Agreement with KOL BioMedical Instruments, Inc. ("KOL") to market the
Company's current and future gamma guided surgery products in the U.S.
The Company terminated the Sales and Marketing Agreement with KOL
effective October 31, 1999. In connection with the termination, the
Company agreed to pay KOL any outstanding commission amounts due as
well as a fee to terminate the agreement. The $700,000 termination fee
was accrued at September 30, 1999 and is included in Marketing and
selling expenses for the quarter then ended. The Company also agreed to
repurchase any unsold demonstration units that had been purchased by
KOL for approximately $1 million.
The Company entered into a new Distribution Agreement (the "Agreement")
with EES effective October 1, 1999 for an initial five-year term with
options to extend for two successive two-year terms. Under the
Agreement, the Company will manufacture and sell its ILM products (the
"Products") exclusively to EES who will distribute the Products
globally. EES agreed to purchase minimum quantities of the Company's
Products over the first three years of the term of the Agreement and to
reimburse the Company for certain research and development costs and a
portion of the Company's warranty costs. EES also agreed to purchase
the demonstration units returned from KOL. The Company is obligated to
continue certain product maintenance activities and to provide ongoing
regulatory support for the Products.
EES may terminate the Agreement if the Company fails to supply Products
for specified periods, commits a material breach of the Agreement,
suffers a change of control of the Company, or becomes insolvent. If
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termination is due to failure to supply or a material breach by the
Company, EES would have the right to use the Company's intellectual
property and regulatory information to manufacture and sell the
Products exclusively on a global basis for the remaining term of the
Agreement with no additional financial obligation to the Company. If
termination is due to insolvency or a change of control that does not
affect supply of the Products, EES has the right to continue to sell
the Products on an exclusive global basis for a period of six months or
require the Company to repurchase any unsold Product in its inventory.
Under the Agreement, Ethicon received a non-exclusive, worldwide
paid-up license (the "License") to the Company's ILM intellectual
property to make and sell other products that may be developed using
the Company's ILM intellectual property. The term of the License is the
same as that of the Agreement. EES paid the Company a non-refundable
license fee of $4 million. The Company intends to recognize the license
fee as revenue over the five-year initial term of the Agreement. If the
Agreement is terminated by the Company as a result of a material breach
by EES, EES would be required to pay the Company a royalty on all
products developed and sold by EES using the Company's ILM intellectual
property. In addition, the Company is entitled to a royalty on any ILM
product commercialized by EES that does not infringe any of the
Company's existing intellectual property.
8. CONTINGENCIES:
a. POTENTIAL REDEMPTION OF SERIES B: On July 28, 1999, the NASDAQ Stock
Market, Inc. delisted the Company's common stock from the NASDAQ
NMS. Management believes that as a result of events which occurred
subsequent to June 30, 1999, the holders of the Series B have the
option to request redemption of the Series B. If the Series B
holders decide to request redemption, the Purchase Agreement would
appear to require the Company to pay the Series B holders
approximately $3.6 million. Management of the Company has approached
the holders of the Series B in an attempt to restructure the Series
B transaction. However, there can be no assurances that the Company
will be able to restructure the Series B transaction at terms
acceptable to the Company or at all. Management believes the best
estimate of the potential settlement value to be an amount
consistent with the $3.6 million redemption value stipulated in the
Purchase Agreement.
b. NEOPROBE ISRAEL: Pursuant to the Company's decision to liquidate
Neoprobe Israel, management of the Company believes Neoprobe Israel
may be subject to claims from the State of Israel, a bank, and
various unsecured vendors. On October 17, 1999 one of the unsecured
vendors filed a motion with the Israeli courts for a "winding up" of
Neoprobe Israel. On October 24, 1999, based on the bank's secured
interest in the facility, the Israeli courts appointed a
representative of the bank as Receiver for Neoprobe Israel. The
appointment of a Receiver has superceded the motion from the
unsecured vendor. The Company expects the Receiver to attempt to
sell the facility and/or its equipment and to use any proceeds to
repay the creditors of Neoprobe Israel to the extent possible.
Management of the Company continues to believe that Neoprobe
Corporation's only ongoing contractual obligation related to
Neoprobe Israel relates to the limited amount guarantee which is
fully secured through $993,000 in restricted cash and investments on
deposit with the bank. However, it is possible that the Company may
be subject to additional claims related to Neoprobe Israel.
Management does not believe such claims, if any, would have a
material adverse affect on the Company's financial position or
results of operations.
9. LIQUIDITY:
Through September 30, 1999, the Company's activities have resulted in
an accumulated deficit of $120 million. However, beginning in the first
half of 1998, the Company began a series of changes to its business
plan. Since that time, the Company has continued to modify its business
plan to one that is almost solely focused on the continued development
of the Company's ILM business. As of September 30, 1999, the Company
had cash and cash equivalents of $4.8 million. This amount includes the
$4 million up-front license payment received from EES. Of the $4.8
million, approximately $1.0 million is restricted related to the debt
outstanding under the financing program for the construction of
Neoprobe Israel's radiolabeling
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facility. At September 30, 1999, the Company had access to
approximately $3.8 million in unrestricted funds to finance its
operating activities. The Company expects to generate positive cash
flow from operations in the near term, possibly as early as the fourth
quarter of 1999, as a result of the Distribution Agreement with EES.
However, there can be no assurances that the Company will achieve the
volume of sales anticipated in connection with the Agreement, or if
achieved that the margin on such sales will be adequate to produce
positive operating cash flow. The Company expects to continue to
experience cost savings during the fourth quarter of 1999 as a result
of the transfer of marketing responsibilities for the Company's ILM
products to EES. The Company is also attempting to sell its $1.5
million investment in XTL Biopharmaceuticals Ltd. However, there can be
no assurance that this asset will be sold during 1999, on terms
acceptable to the Company, or at all. The Company believes that the
aforementioned cash balances and sources of future cash flow are
adequate for the Company to continue operating for the foreseeable
future. If the Company does not receive adequate funds from the
aforementioned sources, it may need to further modify its business plan
and seek other financing alternatives. Such alternatives may include
asset dispositions that could force the Company to further change its
business plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Management Discussion and Analysis of Financial
Condition and Results of Operations and other parts of this Report that are not
purely historical or which might be considered an opinion or projection
concerning the Company or its business, whether express or implied, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may include statements regarding
the Company's expectations, intentions, plans or strategies regarding the future
which involve risks and uncertainties. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward looking
statements. It is important to note that the Company's actual results in 1999
and future periods may differ significantly from the prospects discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, limited revenues, continuing net
losses, accumulated deficit, future capital needs, uncertainty of capital
funding, competition, limited marketing experience, limited manufacturing
experience, dependence on principal product line, uncertainty of market
acceptance, patents, proprietary technology and trade secrets, government
regulation, risk of technological obsolescence, limited third party
reimbursement, product liability, need to manage a changing business, possible
volatility of stock, anti-takeover provisions, dependence on key personnel, and
no dividends.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Through September 30, 1999, the Company's activities have
resulted in an accumulated deficit of $120 million. Substantially all of the
Company's efforts and resources through early 1999 were devoted to research and
clinical development of innovative systems for the intraoperative diagnosis and
treatment of cancers. These efforts were principally related to the Company's
proprietary RIGS system. Efforts in recent years also included activities
related to development of the Company's ACT process and ILM products. To-date,
the Company's activities have been financed primarily through the public and
private sale of equity securities.
Beginning in the first half of 1998, due primarily to feedback received from
regulatory authorities in the U.S. and Europe related to the Company's
applications for marketing approval for its RIGScan CR49 product, the Company
began a series of changes to its business plan. Since that time, the Company has
continued to modify its business plan to one that is almost solely focused on
the continued development of the Company's ILM business. During the first nine
months of 1999, the Company has continued the operating expense reduction
efforts started in 1998 and has almost entirely eliminated non-ILM-related
research and development activities. To further support the Company's goal of
achieving operating profitability, the Company entered into a multi-year
Distribution Agreement with EES, a subsidiary of Johnson & Johnson, effective
October 1, 1999. As a result of entering the Agreement, the Company expects to
achieve operating profitability in the near term, possibly as early as the
fourth quarter of 1999. However, there can be no assurances that the Company
will achieve the volume of sales anticipated in connection with the Agreement,
or if achieved, that the margin on such sales will be adequate to achieve
operating profitability in the near term, or at all. In order to support the
anticipated increase in demand for the Company's ILM products
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expected in connection with entering the Agreement, the Company increased its
inventory levels during the third quarter of 1999. However, the Company expects
both inventory and receivable levels to decrease over time as the strategic
relationship progresses and the Company manages its production and sales to meet
EES's ongoing needs.
Investing Activities. The Company's investing activities during the first nine
months of 1999 involved primarily the sale of certain available-for-sale
securities to fund operations. The Company engaged in similar activities in
1998. However, in the first nine months of 1998, the Company made significant
capital expenditures on construction at Neoprobe Israel. Neoprobe Israel was
founded by the Company and Rotem Industries Ltd. ("Rotem") in 1994 to construct
and operate a radiolabeling facility near Dimona, Israel. Rotem, the private arm
of the Israeli atomic energy authority, owns a 5% equity interest in Neoprobe
Israel. Based on the status of the Company's marketing applications in the U.S.
and Europe, and the Company's inability to find a development partner for its
RIGS products, the Company decided during 1998 to suspend construction and
validation activities at Neoprobe Israel. Following suspension of RIGS
development activities at Neoprobe Israel and unsuccessful attempts to market
the facility, the Company initiated actions during the fourth quarter of 1998 to
liquidate Neoprobe Israel. The Company, therefore, adopted the liquidation basis
of accounting for Neoprobe Israel as of December 31, 1998. As the Company
anticipated that Neoprobe Israel may have to relinquish ownership of the
facility to the bank if a suitable buyer cannot be found on a timely basis, the
Company wrote down the value of the fixed assets of the facility and reduced the
recorded balance of the related debt to zero on the basis that the bank would
assume ownership of the facility under the collateralization terms of the debt
agreement. On October 24, 1999, due to the bank's secured interest in the
facility, the Israeli courts appointed a representative of the bank as Receiver
for Neoprobe Israel. The Company expects the Receiver to attempt to sell the
facility and/or its equipment and to use any proceeds to repay the creditors of
Neoprobe Israel to the extent possible. Management of the Company continues to
believe that Neoprobe Corporation's only ongoing contractual obligation related
to Neoprobe Israel relates to the limited amount guarantee which is fully
secured through $993,000 in restricted cash and investments and that the
appointment of a Receiver for Neoprobe Israel may result in the settlement of
the liabilities of Neoprobe Israel at substantially less than their recorded
values. However, there can be no assurance that a settlement will occur, or if
it occurs, that the settlement will result in a gain for the Company. It is also
possible that the Company may be subject to additional claims related to
Neoprobe Israel. Management does not believe such claims, if any, would have a
material adverse affect on the Company's financial position or results of
operations.
Financing Activities. On February 16, 1999, the Company completed the private
placement of $3.0 million of convertible preferred stock (i.e., the Series B).
Under certain conditions, the Company may be obligated to redeem outstanding
shares of Series B for $120 per share (or a total of $3.6 million). Conditions
under which redemption may be required include: failure to meet filing deadlines
for a registration statement for common stock into which the Series B may be
converted, delisting from the NASDAQ Stock Market, a material qualification of
the audit opinion on the consolidated financial statements, or the liquidation
or merger of the Company or the sale of substantially all of the assets of the
Company.
The Company obtained a waiver from the Series B Holders related to redemption
requirements associated with the issuance by the Company's auditors of a going
concern opinion on the Company's consolidated financial statements for the year
ended December 31, 1998. However, on July 28, 1999, the NASDAQ Stock Market,
Inc. delisted the Company's common stock from the NASDAQ National Market System
("NASDAQ NMS"). Management believes that the likelihood that the Series B
Holders will request redemption of the Series B increased as a result of the
delisting and other events that occurred during the third quarter of 1999.
Accordingly, the Company recorded a charge of $1.8 million during the quarter
ended September 30, 1999 to accrete the originally recorded book value of $1.8
million up to the potential redemption value of $3.6 million.
Operational Outlook. The Company's only approved products are instruments and
related products used in gamma guided surgery. The Company does not currently
have a RIGS drug or ACT product approved for commercial sale in any major
market. The Company entered into a Distribution Agreement (the "Agreement") with
Ethicon Endo-Surgery, Inc. ("EES"), a subsidiary of Johnson & Johnson, effective
October 1, 1999, for an initial five-year term with options, on the part of EES,
to extend for two successive two-year terms. Under the Agreement, the Company
will manufacture and sell its ILM products (the "Products") exclusively to EES
who will distribute the Products globally. EES agreed to purchase minimum
quantities of the Company's Products over the first three years of the term of
the Agreement and to reimburse the Company for certain research and development
costs and a portion of
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the Company's warranty costs. EES also agreed to purchase the demonstration
units returned from KOL. The Company is obligated to continue certain product
maintenance activities and to provide ongoing regulatory support for the
Products. As a result of entering the Agreement, the Company expects to achieve
operating profitability in the near term, possibly as early as the fourth
quarter of 1999. However, there can be no assurances that the Company will
achieve the volume of sales anticipated in connection with the Agreement, or if
achieved, that the margin on such sales will be adequate to achieve operating
profitability in the near term, or at all.
EES may terminate the Agreement if the Company fails to supply Products for
specified periods, commits a material breach of the Agreement, suffers a change
of control of the Company, or becomes insolvent. If termination is due to
failure to supply or a material breach by the Company, EES would have the right
to use the Company's intellectual property and regulatory information to
manufacture and sell the Products exclusively on a global basis for the
remaining term of the Agreement with no additional financial obligation to the
Company. If termination is due to insolvency or a change of control that does
not affect supply of the Products, EES has the right to continue to sell the
Products on an exclusive global basis for a period of six months or require the
Company to repurchase any unsold Product in its inventory.
Under the Agreement, Ethicon received a non-exclusive, worldwide paid-up license
(the "License") to the Company's ILM intellectual property to make and sell
other products that may be developed using the Company's ILM intellectual
property. The term of the License is the same as that of the Agreement. EES paid
the Company a non-refundable license fee of $4 million. The Company intends to
recognize the license fee as revenue ratably over the five-year initial term of
the Agreement. If the Agreement is terminated by the Company as a result of a
material breach by EES, EES would be required to pay the Company a royalty on
all products developed and sold by EES using the Company's ILM intellectual
property. In addition, the Company is entitled to a royalty on any ILM product
commercialized by EES that does not infringe any of the Company's existing
intellectual property.
As of September 30, 1999, the Company had cash and cash equivalents of $4.8
million. This amount includes the $4 million up-front license payment received
from EES. Of the $4.8 million, approximately $1.0 million is restricted related
to the debt outstanding under the financing program for the construction of
Neoprobe Israel's radiolabeling facility. At September 30, 1999, the Company had
access to approximately $3.8 million in unrestricted funds to finance its
operating activities. The Company expects to generate positive cash flow from
operations in the near term, possibly as early as the fourth quarter of 1999, as
a result of the Distribution Agreement with EES. However, there can be no
assurances that the Company will achieve the volume of sales anticipated in
connection with the Agreement, or if achieved that the margin on such sales will
be adequate to produce positive operating cash flow. The Company expects to
continue to experience cost savings during the fourth quarter of 1999 as a
result of the transfer of marketing responsibilities for the Company's ILM
products to EES. The Company is also attempting to sell its $1.5 million
investment in XTL Biopharmaceuticals Ltd. However, there can be no assurance
that this asset will be sold during 1999, on terms acceptable to the Company, or
at all. The Company believes that the aforementioned cash balances and sources
of future cash flow are adequate for the Company to continue operating for the
foreseeable future. If the Company does not receive adequate funds from the
aforementioned sources, it may need to further modify its business plan and seek
other financing alternatives. Such alternatives may include asset dispositions
that could force the Company to further change its business plan.
The Company has also entered into preliminary discussions regarding the
potential sale of the Company's ILM technology. If these discussions were to
result in an offer to purchase the Company's ILM technology, the offer would be
subject to the approval of the Series B Holders and Company's shareholders.
However, as such discussions are only in the preliminary stages, there can be no
assurances that the discussions will result in an offer to purchase the ILM
technology or that such an offer, if made, would be at a price acceptable to the
Series B Holders or the shareholders. Speculation that a potential sale of the
Company's ILM technology could result in shareholder values in excess of the
pre-filing trading range of the Company's common stock could be unwarranted.
At December 31, 1998, the Company had U.S. net operating tax loss carryforwards
of approximately $95.5 million to offset future taxable income through 2018.
Additionally, the Company has U.S. tax credit carryforwards of approximately
$3.3 million available to reduce future income tax liability through 2018. Under
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, use of
prior tax loss and credit carryforwards is limited after an ownership change. As
a result of ownership changes as defined by Sections 382 and 383, which have
occurred at
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various points in the Company's history, management believes utilization of the
Company's tax loss carryforwards and tax credit carryforwards may be limited.
The Company's international subsidiaries also have net operating tax loss
carryforwards in their respective foreign jurisdictions. However, as the Company
is in the process of liquidating its interests in both foreign subsidiaries as
of December 31, 1998, the Company does not anticipate that the foreign loss
carryforwards will ever be utilized.
Impact of Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 was originally required to be adopted in years beginning after June
15, 1999; however, SFAS No. 137 deferred the effective date to fiscal quarters
beginning after June 15, 2000. The Company expects to adopt SFAS No. 133
effective July 1, 2000. The Statement will require companies to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedge
asset, liability or firm commitment through earnings, or recognized in other
comprehensive income until the hedge item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
Y2K. As many computer systems and other equipment with embedded chips or
processors (collectively, "Business Systems") use only two digits to represent
the year, they may be unable to process accurately certain data before, during
or after the year 2000. As a result, business and governmental entities are at
risk for possible miscalculations or system failures causing disruptions in
their business operations. This is commonly known as the Year 2000 ("Y2K")
issue. The Y2K issue can arise at any point in the Company's supply,
manufacturing, distribution, and financial chains. The Company has assessed its
Y2K exposure and implemented a readiness plan with the objective of having all
its significant internal Business Systems functioning properly with respect to
the Y2K issue before January 1, 2000, and minimizing the possible disruptions to
the Company's business which could result from the Y2K problem.
As part of its readiness plan, the Company has conducted a company-wide
assessment of its Business Systems to identify elements that are not Y2K
compliant. Based on the results of the assessment, the Company continues to
believe that the majority of its critical Business Systems, most of which have
been purchased and installed in recent years, are Y2K compliant. The Company's
internal Business Systems do not have internally generated programmed software
coding to correct, as substantially all of the software utilized by the Company
has been recently purchased or licensed from external vendors. The Company has
finalized the testing of its Business Systems that have been identified as
critical to the operations of the Company and noted no major areas of
non-compliance.
Those Business Systems which were initially identified as not being Y2K
compliant have been replaced, upgraded or modified in the normal replacement
cycle during the past nine months. The total cost to the Company of completing
the required modifications, upgrades, or replacements of its internal systems
was approximately $20,000. The Company does not believe these costs or the
remaining anticipated costs associated with its Y2K final testing plan have had
or will have a material adverse effect on the Company's business. This estimate
is being monitored and will be revised, as additional information becomes
available.
The Company also continues communications with third parties whose Business
Systems functionality could impact the Company. These communications will
facilitate coordination of Y2K solutions and will permit the Company to
determine the extent of which it may be vulnerable to failures of third parties
to address their own Y2K issues. Because the manufacturing and distribution of
the Company's products are almost entirely outsourced to other entities, the
failure of these third parties to achieve Y2K compliance could have a material
impact on the Company's business, financial position, results of operations and
cash flows. The Company has attempted, where possible, to establish contractual
requirements or request certification or other assurances regarding Y2K
compliance by such third parties. However, the Company has limited control over
the actions of these third parties on which the Company directly or indirectly
places reliance. There can be no guarantee that such systems that are not now
Y2K compliant will be timely converted to Y2K compliance.
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The Company has also assessed the potential Y2K related exposure it may have
with respect to gamma detection instrumentation which it has delivered to
customers. The Company does not believe products it has distributed, to date or
that may be distributed in the future, face any significant Y2K problems which
will affect their functionality or utility by the customer. The Company provides
assurances of the Y2K compliance of its products to customers at the time of
sale.
The Company has developed a preliminary contingency plan with respect to the Y2K
issue and intends to finalize such a plan during the fourth quarter 1999.
The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimates at the present time and could change
substantially. The assessment is based on numerous assumptions as to future
events. There can be no guarantee that these estimates will prove accurate, and
actual results could differ from those estimates if these assumptions prove
inaccurate.
RESULTS OF OPERATIONS
During 1998, the Company began revising its business plan to focus on its ILM
technology and essentially suspended activities related to its RIGS and ACT
initiatives pending identification of a development partner. To-date, a partner
for RIGS and ACT has not been secured. Until a partner is obtained and the
appropriate regulatory approvals are received, the Company is limited in its
ability to generate revenue from RIGS or ACT. The Company therefore intends to
continue to focus on further development of the ILM market in conjunction with
its new distribution partner, EES.
Research and development expenses during the first nine months of 1999 were
$892,000, or 11% of operating expenses. Marketing and selling expenses were $3.9
million, or 48% of operating expenses, and general and administrative expenses
were $2.9 million, or 36% of operating expenses. Overall, operating expenses for
the first nine months of 1999 decreased $13.1 million or 62% over the same
period in 1998. The Company anticipates that total operating expenses for the
remainder of 1999 will also decrease from 1998 levels. The Company expects
research and development and general and administrative expenses to decrease
from 1998 levels as a result of the modifications to the business plan adopted
during 1998. Marketing expenses, as a percentage of sales, decreased to 74% of
sales for the first nine months of 1999 from 99% of sales for the same period in
1998. The Company expects marketing and selling expenses for the remainder of
1999 to decrease from 1998 levels as a result of entering the distribution
agreement with EES.
Three months ended September 30, 1999 and 1998
Revenues and Margins. Net sales decreased $302,000 or 18% to $1.4 million during
the third quarter of 1999 from $1.7 million during the same period in 1998.
Sales during both periods were comprised almost entirely of sales of the
Company's hand-held gamma detection instruments. Management believes the
decrease in instrument sales is due primarily to customer confidence issues
surrounding the continuing viability of the Company due to the going concern
opinion received during the second quarter and the delisting of the Company's
common stock during the third quarter. Management believes that these customer
confidence issues have been substantially addressed through the execution of the
global distribution agreement with EES. Gross margins decreased to 67% of net
sales in the third quarter of 1999 from 73% during the same period in 1998 due
to a higher proportion of sales made in 1999 under various distributor
arrangements that were not in place in 1998.
Research and Development Expenses. Research and development expenses decreased
$2.7 million or 97% to $78,000 during the third quarter of 1999 from $2.7
million during the same period in 1998. Over $2.0 million of the decrease can be
primarily attributed to changes to the Company's business plan implemented
during 1998 which suspended substantially all research and development
activities related to the Company's RIGS and ACT initiatives. The remainder of
the decrease is due to development costs related to the neo2000(tm) that were
incurred in 1998, but for which similar costs were not incurred in 1999.
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Marketing and Selling Expenses. Marketing and selling expenses, excluding a
one-time $700,000 charge related to termination of the Company's agreement with
KOL, decreased $638,000 or 41% to $924,000 during the third quarter of 1999
compared to $1.6 million during the same period in 1998. Excluding the KOL
charge, marketing expenses, as a percentage of sales, decreased to 66% of sales
for the third quarter of 1999 from 92% of sales for the same period in 1998.
This decrease reflects lower internal marketing expense levels during the third
quarter of 1999 as compared to the same period in 1998, offset by increases in
marketing partner commissions over the same periods. Marketing expenses during
the third quarter of 1999 also included $150,000 in accrued severance charges
related to personnel to be severed in connection with the signing of the EES
Agreement.
General and Administrative Expenses. General and administrative expenses
decreased $179,000 or 14% to $1.1 million during the third quarter of 1999 from
$1.3 million during the same period in 1998. The decrease was primarily a result
of reductions in headcount and other overhead costs such as space costs, taxes
and insurance. However, general and administrative expenses during the third
quarter of 1999 included $103,000 in accrued severance charges related to
personnel to be severed in connection with the signing of the EES Agreement.
Other Income. Other income increased $27,000 or 19% to $166,000 during the third
quarter of 1999 compared to $140,000 during the same period in 1998. Other
income during the third quarter of 1999 consisted primarily of one-time gains
from the settlement of certain previously recorded liabilities at less than
their original face value. Other income during the third quarter of 1998
consisted primarily of interest income. The Company's interest income declined
due to overall levels of investments during the third quarter of 1999 as
compared to the same period of 1998.
Losses related to subsidiaries in liquidation. The losses decreased $1.4 million
or 100% to $0 during the third quarter of 1999 from $1.4 million during the same
period in 1998. Losses in 1998 represent the reclassified costs of operating the
Company's two international subsidiaries related to the decision in the third
quarter of 1998 to shutdown and liquidate Neoprobe Europe and in the fourth
quarter of 1998 to shutdown and liquidate Neoprobe Israel.
Nine months ended September 30, 1999 and 1998
Revenues and Margins. Net sales increased $1.4 million or 37% to $5.2 million
during the first nine months of 1999 from $3.8 million during the same period in
1998. Sales during both periods were comprised almost entirely of sales of the
Company's hand-held gamma detection instruments. The increase in instrument
sales is the result of the introduction during the fourth quarter of 1998 of the
neo2000(TM) system and the continuing growth of the lymphatic mapping technique
offset by customer confidence issues regarding the Company's viability due
primarily to the going concern opinion issued by the Company's independent
accountants and the delisting of the Company's common stock. Gross margins
decreased to 67% of net sales in the first nine months of 1999 from 73% during
the same period in 1998 due to a higher proportion of sales made in 1999 under
various distributor arrangements that were not in place in 1998.
Research and Development Expenses. Research and development expenses decreased
$9.8 million or 92% to $892,000 during the first nine months of 1999 from $10.7
million during the same period in 1998. Approximately $5.9 million of the
decrease is primarily a result of changes to the Company's business plan
implemented during 1998 which suspended substantially all research and
development activities related to the Company's RIGS and ACT initiatives. The
remainder of the decrease is due to expenses incurred during the first nine
months of 1998 related to the neo2000 system and related devices which were
commercially launched during the fourth quarter of 1998. Expenses during the
first nine months of 1999 also included a non-cash write-off of approximately
$218,000 in capitalized pre-production written off as a result of recent
accounting recommendations issued by the EITF.
Marketing and Selling Expenses. Marketing and selling expenses, excluding a
one-time $700,000 charge related to termination of the Company's agreement with
KOL, decreased $599,000 or 16% to $3.2 million during the first nine months of
1999 compared to $3.8 million during the same period in 1998. Excluding the KOL
charge, marketing expenses, as a percentage of sales, decreased to 61% of sales
for the first nine months of 1999 from 99% of sales for the same period in 1998.
These results reflect lower internal marketing expense levels during the first
nine months of 1999 as compared to the same period in 1998, offset by increases
in marketing partner commissions over the
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same periods. Marketing expenses during the first nine months of 1999 also
included $150,000 in accrued severance charges related to personnel to be
severed in connection with the signing of the EES Agreement.
General and Administrative Expenses. General and administrative expenses
decreased $1.1 million or 28% to $2.9 million during the first nine months of
1999 from $4.0 million during the same period in 1998. The decrease was
primarily a result of reductions in headcount and other overhead costs such as
space costs, taxes and insurance, offset by $103,000 in accrued severance
charges in 1999 related to personnel to be severed in connection with the
signing of the EES Agreement.
Other Income. Other income decreased $246,000 or 50% to $243,000 during the
first nine months of 1999 from $488,000 during the same period in 1998. Other
income during 1999 included $200,000 in one-time gains from the settlement of
certain previously recorded liabilities at less than their original face value
and interest income on the Company's investments. Other income during the first
nine months of 1998 consisted primarily of interest income. The Company's
interest income declined due to overall average levels of investments during the
first nine months of 1999 as compared to the same period of 1998.
Losses related to subsidiaries in liquidation. The losses decreased $2.3 million
or 83% to $475,000 during the first nine months of 1999 from $2.8 million during
the same period in 1998. During 1999, the losses relate to interest and other
overhead costs incurred during the wind-down process. Costs in 1998 represent
the reclassified costs of operating the Company's two international subsidiaries
related to the decision in the third quarter of 1998 to shutdown and liquidate
Neoprobe Europe and in the fourth quarter of 1998 to shutdown and liquidate
Neoprobe Israel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently use derivative financial instruments, such as
interest rate swaps, to manage its exposure to changes in interest rates for its
debt instruments or investment securities. As of September 30, 1999 and December
31, 1998, the Company had, excluding convertible preferred stock, outstanding
debt securities of $661,000 and $1.5 million respectively. These debt securities
consisted primarily of a variable rate line of credit and fixed rate financing
instruments, with average interest rates of 9.25% and 3.5% at September 30,
1999, respectively. At September 30, 1999 and December 31, 1998, the fair market
values of these debt instruments approximated their carrying values. A
hypothetical 100-basis point change in interest rates would not have a material
effect on cash flows, income or market values.
The Company has maintained investment portfolios of available-for-sale corporate
and U.S. government debt securities purchased with proceeds from the Company's
public and private placements of equity securities. At December 31, 1998, the
Company held $449,000 of these available-for-sale securities; however, all such
securities were sold during the nine months ended September 30, 1999.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company was a party to Della Jules Bryant v. Neoprobe Corporation
which was described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. The Company and Ms. Bryant entered into a Settlement
and Release Agreement dated September 28, 1999 which ended the matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS
3. ARTICLES OF INCORPORATION AND BY-LAWS
Exhibit 3.1
Complete Restated Certificate of Incorporation of Neoprobe
Corporation, as corrected February 18, 1994 and as amended
June 27, 1994, July 25, 1995, June 3, 1996 and March 17, 1999
(incorporated by reference to Exhibit 3.1 to Amendment Number
1 to the Registrant's Annual Report on Form 10-K for the year
ending December 31, 1998 (Commission File No. 0-26520; (the
"1998 Form 10-K/A")).
Exhibit 3.2
Amended and Restated By-Laws dated July 21, 1993 as amended
July 18, 1995 and May 30, 1996 (incorporated by reference to
Exhibit 99.4 to the Registrant's Current Report on Form 8-K
dated June 20, 1996; Commission File No. 0-26520).
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
Exhibit 4.1
See Articles FOUR, FIVE, SIX and SEVEN of the Restated
Certificate of Incorporation of the Registrant (see Exhibit
3.1).
Exhibit 4.2
See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated By-Laws
of the Registrant (see Exhibit 3.2).
Exhibit 4.3
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Rights Agreement dated as of July 18, 1995 between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 1 of the registration
statement on Form 8-A; Commission File No. 0-26520).
Exhibit 4.4
Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer and Trust Company
dated February 16, 1999 (incorporated by reference to Exhibit
4.4 of the 1998 Form 10-K/A).
10. MATERIAL CONTRACTS
Exhibit 10.2.51
Employment Agreement between the Registrant and David C. Bupp
dated July 1, 1999.
Page 25 in the manually signed original.
Exhibit 10.4.34
Revolving Credit Note between the Registrant and The Provident
Bank dated August 31, 1999.
Page 33 in the manually signed original.
Exhibit 10.4.35
Tennessee Revolving Credit Agreement between the Registrant
and The Provident Bank dated August 31, 1999.
Page 46 in the manually signed original.
Exhibit 10.4.36
Security Agreement between the Registrant and The Provident
Bank dated August 31, 1999.
Page 57 in the manually signed original.
Exhibit 10.4.37
Termination Agreement between the Registrant and Kol
Bio-Medical Instruments, Inc. dated September 30, 1999 (filed
pursuant to Rule 24b-2 under which the Registrant has
requested confidential treatment of certain portions of this
exhibit).
Page 70 in the manually signed original.
Exhibit 10.4.38
20
21
Amendment to Termination Agreement between the Registrant and
Kol Bio-Medical Instruments, Inc. dated October 1, 1999 (filed
pursuant to Rule 24b-2 under which the Registrant has
requested confidential treatment of certain portions of this
exhibit).
Page 83 in the manually signed original.
Exhibit 10.4.39
Distribution Agreement between the Registrant and Ethicon
Endo-Surgery, Inc. dated October 1, 1999 (filed pursuant to
Rule 24b-2 under which the Registrant has requested
confidential treatment of certain portions of this exhibit).
Page 85 in the manually signed original.
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Exhibit 11.1
Computation of Net Loss Per Share.
Page 133 in the manually signed original.
27. FINANCIAL DATE SCHEDULE
Exhibit 27.1
Financial Data Schedule (submitted electronically for SEC
information only).
(b) REPORTS ON FORM 8-K.
No current report on Form 8-K was filed by the Registrant
during the third quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEOPROBE CORPORATION
(the "Registrant")
Dated: November 12, 1999
By: /s/ David C. Bupp
-------------------------------------------------------------
David C. Bupp,
President and Chief Executive Officer
(duly authorized officer; principal executive officer)
By: /s/ Brent Larson
-------------------------------------------------------------
Brent Larson
Vice President, Finance and Administration
(principal financial and accounting officer)
21
22
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
NEOPROBE CORPORATION
------------------------------
FORM 10-Q QUARTERLY REPORT
FOR THE FISCAL QUARTER ENDED:
SEPTEMBER 30, 1999
------------------------------
EXHIBITS
------------------------------
23
INDEX
Exhibit 4.1
See Articles FOUR, FIVE, SIX and SEVEN of the Restated
Certificate of Incorporation of the Registrant (see Exhibit
3.1).
Exhibit 4.2
See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated By-Laws
of the Registrant (see Exhibit 3.2).
Exhibit 4.3
Rights Agreement dated as of July 18, 1995 between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 1 of the registration
statement on Form 8-A; Commission File No. 0-26520).
Exhibit 4.4
Amendment Number 1 to the Rights Agreement between the
Registrant and Continental Stock Transfer and Trust Company
dated February 16, 1999 (incorporated by reference to Exhibit
4.4 of the 1998 Form 10-K/A).
Exhibit 10.2.51
Employment Agreement between the Registrant and David C. Bupp
dated July 1, 1999.
Exhibit 10.4.34
Revolving Credit Note between the Registrant and The Provident
Bank dated August 31, 1999.
Exhibit 10.4.35
Tennessee Revolving Credit Agreement between the Registrant
and The Provident Bank dated August 31, 1999.
Exhibit 10.4.36
Security Agreement between the Registrant and The Provident
Bank dated August 31, 1999.
Exhibit 10.4.37
Termination Agreement between the Registrant and Kol
Bio-Medical Instruments, Inc. dated September 30, 1999 (filed
pursuant to Rule 24b-2 under which the Registrant has
requested confidential treatment of certain portions of this
exhibit).
Exhibit 10.4.38
Amendment to Termination Agreement between the Registrant and
Kol Bio-Medical Instruments, Inc. dated October 1, 1999 (filed
pursuant to Rule 24b-2 under which the Registrant has
requested confidential treatment of certain portions of this
exhibit).
Exhibit 10.4.39
Distribution Agreement between the Registrant and Ethicon
Endo-Surgery, Inc. dated October 1, 1999 (filed pursuant to
Rule 24b-2 under which the Registrant has requested
confidential treatment of certain portions of this exhibit).
Exhibit 11.1
24
Computation of Net Loss Per Share.
Exhibit 27.1
Financial Data Schedule (submitted electronically for SEC
information only).