Filed Pursuant to Rule 424(b)(3)
Registration No. 333-84782
PROSPECTUS SUPPLEMENT
Number 11
to
Prospectus dated May 3, 2002 and
Prospectus Supplements dated May 15, 2002,
September 10, 2002, November 21, 2002,
April 1, 2003, May 20, 2003, June 19, 2003,
August 20, 2003, November 18, 2003,
March 30, 2004, and May 20, 2004
of
NEOPROBE CORPORATION
5,898,876 SHARES OF COMMON STOCK
This Prospectus Supplement relates to the sale of up to 5,898,876 shares of
Neoprobe Corporation common stock (the "Shares"). The Shares are being
registered to permit public secondary trading of the shares that are being
offered by the selling shareholders named in the prospectus. We are not selling
any of the Shares in this offering and therefore will not receive any proceeds
from this offering.
This Prospectus Supplement No. 11 includes the attached Quarterly Report on Form
10-QSB (the "Form 10-QSB") of Neoprobe Corporation (the "Company"), for the
third quarter ended September 30, 2004, filed by the Company with the Securities
and Exchange Commission on November 15, 2004. The exhibits to the Form 10-QSB
are not included with this Prospectus Supplement No. 11 and are not incorporated
by reference herein. This Prospectus Supplement No. 11 should be read in
conjunction with the prospectus supplements dated May 15, 2002, September 10,
2002, November 21, 2002, April 1, 2003, May 20, 2003, June 19, 2003, August 20,
2003, November 18, 2003, March 30, 2004, and May 20, 2004.
Our common stock is traded on the Over-the-Counter Bulletin Board under the
symbol "NEOP".
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement No. 11 is November 17, 2004.
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: SEPTEMBER 30, 2004
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)
58,288,057 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, 2004)
Transitional Small Business Disclosure Format (check one) Yes |_| No |X|
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
---------- ----------
Current assets:
Cash and cash equivalents $3,008,201 $1,588,760
Accounts receivable, net 746,424 1,107,800
Inventory 946,664 1,008,326
Prepaid expenses and other 146,898 346,449
---------- ----------
Total current assets 4,848,187 4,051,335
---------- ----------
Property and equipment 2,317,282 2,237,741
Less accumulated depreciation and amortization 1,971,192 1,875,028
---------- ----------
346,090 362,713
---------- ----------
Patents and trademarks 3,173,608 3,156,101
Non-compete agreements 584,516 584,516
Acquired technology 237,271 237,271
---------- ----------
3,995,395 3,977,888
Less accumulated amortization 1,366,000 1,042,373
---------- ----------
2,629,395 2,935,515
---------- ----------
Other assets 137,515 35,479
---------- ----------
Total assets $7,961,187 $7,385,042
========== ==========
CONTINUED
2
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
------------- -------------
Current liabilities:
Note payable to CEO, net of discount of $101,520 $ 148,480 $ --
Notes payable to finance companies -- 192,272
Capital lease obligations, current 13,499 9,731
Accrued liabilities 302,331 227,306
Accounts payable 230,679 225,032
Deferred revenue, current 202,106 886,657
------------- -------------
Total current liabilities 897,095 1,540,998
------------- -------------
Note payable to CEO, net of discount of $12,702 -- 237,298
Note payable to investor, net of discount of $32,496 -- 217,504
Capital lease obligations 33,903 24,009
Deferred revenue 47,184 68,930
Other liabilities 51,452 37,358
------------- -------------
Total liabilities 1,029,634 2,126,097
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at September
30, 2004 and December 31, 2003; none issued and outstanding (500,000
shares designated as Series A, $.001 par value, at September 30, 2004 and
and December 31, 2003; none issued and outstanding) -- --
Common stock; $.001 par value; 100,000,000 shares
authorized, 58,287,057 shares issued and outstanding at September 30,
2004; 75,000,000 shares authorized, 51,520,723 shares issued and
outstanding at December 31, 2003 58,287 51,521
Additional paid-in capital 130,607,605 127,684,555
Accumulated deficit (123,734,339) (122,477,131)
------------- -------------
Total stockholders' equity 6,931,553 5,258,945
------------- -------------
Total liabilities and stockholders' equity $ 7,961,187 $ 7,385,042
============= =============
See accompanying notes to the consolidated financial statements.
3
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Net sales $ 1,525,134 $ 927,949 $ 4,098,679 $ 3,868,655
License and other revenue 200,000 257,588 600,000 745,633
------------ ------------ ------------ ------------
Total revenues 1,725,134 1,185,537 4,698,679 4,614,288
------------ ------------ ------------ ------------
Cost of goods sold 643,303 497,458 1,692,084 2,112,247
------------ ------------ ------------ ------------
Gross profit 1,081,831 688,079 3,006,595 2,502,041
------------ ------------ ------------ ------------
Operating expenses:
Research and development 588,435 508,693 1,766,265 1,365,277
Selling, general and administrative 695,399 755,104 2,361,941 2,230,693
------------ ------------ ------------ ------------
Total operating expenses 1,283,834 1,263,797 4,128,206 3,595,970
------------ ------------ ------------ ------------
Loss from operations (202,003) (575,718) (1,121,611) (1,093,929)
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 8,367 19,695 13,724 24,834
Interest expense (42,494) (99,520) (158,647) (140,182)
Other (2,628) (3,571) 9,326 (7,777)
------------ ------------ ------------ ------------
Total other expenses (36,755) (83,396) (135,597) (123,125)
------------ ------------ ------------ ------------
Net loss $ (238,758) $ (659,114) $ (1,257,208) $ (1,217,054)
============ ============ ============ ============
Net loss per common share:
Basic $ 0.00 $ (0.02) $ (0.02) $ (0.03)
Diluted $ 0.00 $ (0.02) $ (0.02) $ (0.03)
Weighted average shares outstanding:
Basic 58,076,622 38,555,261 56,290,885 38,454,446
Diluted 58,076,622 38,555,261 56,290,885 38,454,446
See accompanying notes to the consolidated financial statements.
4
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(1,257,208) $(1,217,054)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 444,021 555,388
Amortization of debt discount and offering costs 130,539 61,818
Other 130,831 107,599
Change in operating assets and liabilities:
Accounts receivable 361,376 (387,446)
Inventory 51,497 10,474
Prepaid expenses and other assets 125,857 160,733
Accrued and other liabilities 89,120 138,036
Accounts payable 5,647 119,631
Deferred revenue (706,297) (468,555)
----------- -----------
Net cash used in operating activities (624,617) (919,376)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (67,310) (63,195)
Proceeds from sales of property and equipment 375 --
Patent and trademark costs (17,506) (20,783)
----------- -----------
Net cash used in investing activities (84,441) (83,978)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,349,073 138,430
Payment of offering costs (15,642) (7,972)
Proceeds from notes payable, net of offering costs -- 458,334
Payment of notes payable (192,272) (172,381)
Proceeds from secured financing -- 319,813
Payments under capital leases (12,660) (10,834)
----------- -----------
Net cash provided by financing activities 2,128,499 725,390
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,419,441 (277,964)
Cash and cash equivalents, beginning of period 1,588,760 700,525
----------- -----------
Cash and cash equivalents, end of period $ 3,008,201 $ 422,561
=========== ===========
See accompanying notes to the consolidated financial statements.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information as of September 30, 2004 and 2003 and for the periods then
ended is unaudited, but includes all adjustments (which consist only of
normal recurring adjustments) that the management of Neoprobe Corporation
(Neoprobe or we) believes to be necessary for the fair presentation of
results for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. The results
for the interim period are not necessarily indicative of results to be
expected for the year. The financial statements should be read in
conjunction with Neoprobe's audited financial statements for the year
ended December 31, 2003, which were included as part of our Annual Report
on Form 10-KSB.
Our consolidated financial statements include the accounts of Neoprobe and
our wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix). All
significant inter-company accounts were eliminated in consolidation.
2. COMPREHENSIVE INCOME (LOSS)
We had no accumulated other comprehensive income (loss) activity during
the three-month and nine-month periods ended September 30, 2004 and 2003.
3. EARNINGS (LOSS) 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
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------------- -------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------
Outstanding shares 58,287,057 58,287,057 39,148,426 39,148,426
Effect of weighting changes
in outstanding shares (80,435) (80,435) (463,165) (463,165)
Contingently issuable shares (130,000) (130,000) (130,000) (130,000)
----------- ----------- ----------- -----------
Adjusted shares 58,076,622 58,076,622 38,555,261 38,555,261
=========== =========== =========== ===========
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------------- -------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------
Outstanding shares 58,287,057 58,287,057 39,148,426 39,148,426
Effect of weighting changes
in outstanding shares (1,866,172) (1,866,172) (563,980) (563,980)
Contingently issuable shares (130,000) (130,000) (130,000) (130,000)
----------- ----------- ----------- -----------
Adjusted shares 56,290,885 56,290,885 38,454,446 38,454,446
=========== =========== =========== ===========
6
There is no difference in basic and diluted loss per share related to the
three-month and nine-month periods ended September 30, 2004 and 2003. The
net loss per common share for these periods excludes the number of common
shares issuable upon exercise of outstanding stock options and warrants
into our common stock since such inclusion would be anti-dilutive.
4. INVENTORY
The components of inventory are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
---------- ----------
Materials and component parts $ 608,713 $ 747,788
Work in process 59,415 --
Finished goods 278,536 260,538
---------- ----------
$ 946,664 $1,008,326
========== ==========
5. INTANGIBLE ASSETS
The major classes of intangible assets are as follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
(UNAUDITED)
------------------------------ -------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ---------- ----------- ----------
Patents and trademarks $3,173,608 $ 868,115 $3,156,101 $ 678,160
Non-compete agreements 584,516 403,875 584,516 295,486
Acquired technology 237,271 94,010 237,271 68,727
---------- ---------- ---------- ----------
Total $3,995,395 $1,366,000 $3,977,888 $1,042,373
========== ========== ========== ==========
The estimated future amortization expenses for the next five fiscal years
are as follows:
ESTIMATED
AMORTIZATION
EXPENSE
----------------
For the year ended 12/31/2004 $ 427,285
For the year ended 12/31/2005 427,285
For the year ended 12/31/2006 282,770
For the year ended 12/31/2007 214,545
For the year ended 12/31/2008 204,002
6. PRODUCT WARRANTY
We warrant our products against defects in design, materials, and
workmanship generally for a period of one year from the date of sale to
the end customer. Our accrual for warranty expenses is adjusted
periodically to reflect actual experience. Our primary marketing partner,
Ethicon Endo-Surgery, Inc. (EES), a Johnson and Johnson company, also
reimburses us for a portion of warranty expense incurred on our gamma
detection devices based on end customer sales they make during a given
fiscal year. Payments charged against the reserve are disclosed net of
EES' reimbursement.
7
The activity in the warranty reserve account for the three-month and
nine-month periods ended June 30, 2004 and 2003 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Warranty reserve at
beginning of period $ 46,000 $ 58,000 $ 53,000 $ 35,000
Provision for warranty claims and
changes in reserve for
warranties (1,000) (4,914) (8,000) 31,615
Payments charged against the
reserve -- (86) -- (13,615)
-------- -------- -------- --------
Warranty reserve at end of period $ 45,000 $ 53,000 $ 45,000 $ 53,000
======== ======== ======== ========
7. NOTES PAYABLE
During April 2003, we completed a bridge loan agreement with our President
and CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced
us $250,000. In consideration for the loan, we issued a note to Mr. Bupp
in the principal amount of $250,000. The note is secured by general assets
of the company, excluding accounts receivable. In addition, we issued Mr.
Bupp 375,000 warrants to purchase common stock at an exercise price of
$0.13 per share, expiring in April 2008. The per share value of these
warrants was $0.10 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: an average risk-free
interest rate of 2.9%, volatility of 139% and no expected dividend rate.
Interest accrues on the note at 8.5% per annum, payable monthly, and the
note was originally due on June 30, 2004. On March 8, 2004, at the request
of the Board of Directors, Mr. Bupp agreed to extend the due date of the
note from June 30, 2004 to June 30, 2005. In exchange for extending the
due date of the note, we issued Mr. Bupp an additional 375,000 warrants
to purchase our common stock at an exercise price of $0.50 per share,
expiring in March 2009. The per share value of these warrants was $0.46
on the date of issuance using the Black-Scholes option pricing model with
the following assumptions: an average risk-free interest rate of 2.7%,
volatility of 152% and no expected dividend rate. The total estimated fair
values for the warrants issued to Mr. Bupp in April 2003 and March 2004
were $31,755 and $171,801, respectively. These amounts were recorded as
discounts on the note and are being amortized over the period of the note.
At September 30, 2004, the unamortized discounts related to Mr. Bupp's
note totaled $101,520.
During April 2003, we also completed a bridge loan agreement with an
outside investor for an additional $250,000. In consideration for the
loan, we issued a note to the investor in the principal amount of
$250,000. The note was secured by general assets of the company, excluding
accounts receivable. In addition, we issued the investor 500,000 warrants
to purchase common stock at an exercise price of $0.13 per share. The per
share value of these warrants was $0.10 on the date of issuance using the
Black-Scholes option pricing model with the following assumptions: an
average risk-free interest rate of 2.9%, volatility of 139% and no
expected dividend rate. The total estimated fair value for the warrants
issued to the outside investor was $40,620. Under the terms of the
agreement, the note bore interest at 9.5% per annum, payable monthly, was
convertible into common stock and was due on June 30, 2004. Fifty percent
of the principal and accrued interest of the note was convertible into
common stock at a 15% discount to the closing market price on the date of
conversion, subject to a floor conversion price of $0.10. The remaining
50% of the principal and accrued interest was convertible into common
stock based on a 15% discount to the closing market price on the date of
conversion, subject to a floor conversion price of $0.10 and a ceiling
conversion price of $0.20. The intrinsic value of the conversion feature
of the note to the outside investor was estimated at $40,620 based on the
effective conversion price at the date of issuance and was recorded as an
additional discount on the note. The estimated fair value of the warrants
and the intrinsic value of the conversion feature were recorded as
discounts on the note and were amortized over the term of the note. During
January 2004, the outside investor converted the entire balance of the
note into 1.1 million shares of common stock according to the conversion
terms of the agreement. The total value of the shares issued in conversion
of the note was $378,955 based on the closing market prices for our common
stock on the dates of conversion. The discount remaining at conversion
totaling $27,604 was recorded as interest expense.
8
8. STOCK OPTIONS AND RESTRICTED STOCK
During the first nine months of 2004, the Board of Directors granted
options to consultants, employees and certain non-employee directors to
purchase 1.7 million shares of common stock, exercisable at an average
price of $0.42 per share, vesting over three years. We recognized $129,000
of research and development expense related to options granted to
consultants in the first nine months of 2004. As of September 30, 2004, we
have 4.3 million options outstanding under three stock option plans. Of
the outstanding options, 2.0 million options have vested as of September
30, 2004, at an average exercise price of $0.60 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
SEPTEMBER 30,
-------------------------------
2004 2003
------------- -------------
Net loss, as reported $ (238,758) $ (659,114)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (78,228) (39,997)
------------ ------------
Pro forma net loss $ (316,986) $ (699,111)
============ ============
Loss per common share:
As reported (basic and diluted) $ (0.00) $ (0.02)
Pro forma (basic and diluted) $ (0.01) $ (0.02)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2004 2003
------------- -------------
Net loss, as reported $ (238,758) $ (659,114)
Net loss, as reported $ (1,257,208) $ (1,217,054)
Add: Total stock-based employee
compensation expense included
in reported net loss -- 39,990
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards (186,363) (164,970)
------------ ------------
Pro forma net loss $ (1,443,571) $ (1,342,034)
============ ============
Loss per common share:
As reported (basic and diluted) $ (0.02) $ (0.03)
Pro forma (basic and diluted) $ (0.03) $ (0.03)
9
During the first quarter of 2003, we vested 310,000 shares of previously
restricted stock related to new or amended employment agreements of three
of our officers. We recognized $39,990 of compensation expense related to
this in the first quarter of 2003.
9. STOCK WARRANTS
In November 2003, we completed a $2.8 million placement of common stock
and warrants for net proceeds of $2.4 million. In the placement, 12.2
million shares of common stock were issued at $0.23 per share, and Series
R warrants were issued to purchase an additional 6.1 million shares of
common stock at $0.28 per share. In addition, we paid $291,000 in cash and
issued 1.4 million Series S warrants to purchase common stock at $0.28 per
share as fees to the placement agents. All warrants issued in connection
with the placement expire in October 2008. 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. A
registration statement registering for resale the common stock and
warrants issued in the private placement was declared effective on
December 17, 2003. During the first nine months of 2004, 3,308,327 of
these warrants were exercised and we realized net proceeds of $865,563.
During 2003, an investment banking firm, Alberdale Capital LLC
(Alberdale), assisted us in arranging an accounts receivable financing
transaction. In exchange for Alberdale's services, we issued them warrants
to purchase 78,261 shares of our common stock. During the first quarter of
2004, Alberdale exercised these warrants on a cashless basis in exchange
for 53,500 shares of common stock.
At September 30, 2004 there are 5.6 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 per
share of $0.28.
10. COMMON STOCK PURCHASE AGREEMENT
On November 19, 2001, we entered into a common stock purchase agreement
with an investment fund, Fusion Capital Fund II, LLC (Fusion) for the
issuance and purchase of our common stock. Under the stock purchase
agreement, Fusion committed to purchase up to $10 million of our common
stock over a forty-month period that commenced in May 2002. A registration
statement registering for resale up to 5 million shares of our common
stock became effective on April 15, 2002. Under the terms of the
agreement, we can request daily drawdowns, subject to a daily base amount
currently set at $12,500. The number of shares we are to issue to Fusion
in return for that money will be based on the lower of (a) the closing
sale price for our common stock on the day of the draw request or (b) the
average of the three lowest closing sales prices for our common stock
during a twelve day period prior to the draw request. However, no shares
may be sold to Fusion at lower than a floor price currently set at $0.30,
which may be reduced by us, but in no case below $0.20 without Fusion's
prior consent. During the first nine months of 2004, we sold Fusion a
total of 2,350,000 shares of common stock and realized net proceeds of
$1,468,874. We also issued Fusion 66,129 shares of common stock for
commitment fees related to the sales of our common stock to them during
the first nine months of 2004.
11. SEGMENT AND SUBSIDIARY INFORMATION
We own or have rights to intellectual property related to gamma detection
drugs. We also own or have rights to intellectual property involving two
primary types of medical device products, including gamma detection
instruments currently used primarily in the application of intraoperative
lymphatic mapping (ILM), and blood flow measurement devices. Prior to
2004, gamma detection drugs and devices were reported as one segment.
Certain 2003 amounts have been reclassified to conform to the 2004
presentation.
10
The information in the following table is derived directly from each
segment's internal financial reporting used for corporate management
purposes. Selling, general and administrative costs and other income,
including amortization, interest and other costs that relate primarily to
corporate activity, are not currently allocated to the operating segments
for financial reporting purposes.
GAMMA GAMMA BLOOD
($ AMOUNTS IN THOUSANDS) DETECTION DETECTION FLOW
THREE MONTHS ENDED SEPT. 30, 2004 DRUGS DEVICES DEVICES UNALLOCATED TOTAL
----------------------------------------- -------------- ------------- ------------ --------------- --------------
Net sales:
United States1 $ -- $ 1,474 $ -- $ -- $ 1,474
International -- 24 27 -- 51
License and other revenue -- 200 -- -- 200
Research and development expenses 83 54 451 -- 588
Selling, general and administrative
expenses -- -- -- 695 695
Income (loss) from operations2 (83) 1,039 (463) (695) (202)
Other income (expenses) -- -- -- (37) (37)
THREE MONTHS ENDED SEPT. 30, 2003
---------------------------------
Net sales:
United States1 $ -- $ 900 $ -- $ -- $ 900
International -- 4 24 -- 28
License and other revenue -- 258 -- -- 258
Research and development expenses 8 150 351 -- 509
Selling, general and administrative
expenses -- -- -- 755 755
Income (loss) from operations2 (8) 524 (337) (755) (576)
Other income (expenses) -- -- -- (83) (83)
GAMMA GAMMA BLOOD
($ AMOUNTS IN THOUSANDS) DETECTION DETECTION FLOW
NINE MONTHS ENDED SEPT. 30, 2004 DRUGS DEVICES DEVICES UNALLOCATED TOTAL
----------------------------------------- -------------- ------------- ------------ --------------- ---------------
Net sales:
United States1 $ -- $ 3,970 $ -- $ -- $ 3,970
International -- 64 65 -- 129
License and other revenue -- 600 -- -- 600
Research and development expenses 310 335 1,121 -- 1,766
Selling, general and administrative
expenses -- -- -- 2,362 2,362
Income (loss) from operations2 (310) 2,713 (1,163) (2,362) (1,122)
Other income (expenses) -- -- (136) (136)
NINE MONTHS ENDED SEPT. 30, 2003
--------------------------------
Net sales:
United States1 $ -- $ 3,636 $ -- $ -- $ 3,636
International -- 8 225 -- 233
License and other revenue -- 746 -- -- 746
Research and development expenses 19 327 1,019 -- 1,365
Selling, general and administrative
expenses -- -- -- 2,231 2,231
Income (loss) from operations2 (19) 1,996 (840) (2,231) (1,094)
Other income (expenses) -- -- -- (123) (123)
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.
11
12. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
During the first nine months of 2004, we purchased equipment under capital
leases totaling $27,000. During the first nine months of 2004 and 2003, we
transferred $10,000 and $14,000, respectively, in inventory to fixed
assets related to the maintenance of a pool of service loaner equipment.
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 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 developing
and 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.
Our overall operating results for the first nine months of 2004 were below our
original expectations for the year. Revenue from our gamma detection device
product line year-to-date was in line to slightly higher than our expectations;
however, sales of our blood flow measurement devices were below our expectations
due, we believe, to the need for certain product enhancements which we are in
the process of completing and implementing. In addition, we incurred expenses
during the first nine months of 2004 related to our RIGScan CR and Lymphoseek
product development initiatives to continue to move clinical development efforts
forward in preparation for Phase III clinical trials that we hope will lead to
the approval of these products. The combination of these events contributed to a
greater than originally expected operating loss for the first nine months of
2004.
We will continue to invest in marketing and development support for our blood
flow products during 2004 as we complete the product refinement efforts
initiated during the second quarter and finalize regulatory activities related
to the refinements. In addition, we expect to incur expenses during the
remainder of 2004 in preparation for Phase III clinical trials for RIGScan CR
and Lymphoseek; however, the bulk of expenses related to these clinical trials
will not be incurred until after the clinical trials commence, currently
expected to be in the first half of 2005. We submitted a Phase III protocol for
RIGScan CR at the end of June 2004 and received feedback on the trial design in
October 2004. In addition, we are preparing a formal IND submission to the FDA
to propose the design of the pivotal evaluation of Lymphoseek as a lymphatic
tissue targeting agent and have already submitted the Pre-IND meeting request.
At present, we estimate the combined expenses to conduct Phase III clinical
trials for both drugs will total approximately $20 million. However, total
expenses for these projects may change based on feedback from the regulatory
agencies and/or modifications made to trial designs. Currently, it is our intent
to finance the estimated $5 million cost to complete the Phase III trial for
Lymphoseek through additional equity financing and to seek a development partner
to assist in or take full responsibility for funding of RIGScan CR development.
We anticipate generating a profit from the sale of our gamma detection devices
for 2004; however, we expect to continue to show a loss for our blood flow
device product line for 2004 due to continued development expenses and the
ongoing marketing and administrative support costs we believe are necessary to
effectively commercialize the product line. As a result of lower than expected
blood flow device sales thus far in 2004 coupled with the costs we have incurred
in modifications we have completed, we expect the overall loss for the year
related to blood flow products to be greater than the loss incurred in 2003. Our
overall operating results for 2004 will also be affected by the amount of
development costs for radiopharmaceutical development we fund prior to securing
a development partner. Given the delays in revenue from our Quantix(R) product
line and our current intent to fund all Lymphoseek clinical development and at
least some portion of RIGScan CR preparation and clinical trial costs prior to
securing a development partner, we do not expect to achieve operating
profitability before the end of 2004. In addition, we cannot assure you that we
will achieve or be able to sustain profitability in the future.
12
RESULTS OF OPERATIONS
Revenue for the first nine months of 2004 increased $84,000, or 2%, to $4.7
million from $4.6 million for the same period in 2003. Operating expenses as a
percentage of net sales increased in the first nine months of 2004 as compared
to the same period in 2003, due primarily to the increased development and
marketing expenses related to our blood flow measurement business coupled with
development of our radiopharmaceutical products. Research and development
expenses, as a percentage of net sales, increased to 43% during the first nine
months of 2004 from 35% during the same period in 2003. Selling, general and
administrative expenses, as a percentage of net sales, remained steady at 58%
during the first nine months of 2004 and 2003. Due to the ongoing development
activities of the company, research and development expenses are expected to be
higher as a percentage of sales for 2004 than they were in 2003. In addition, as
we move forward with commercialization activities related to the Quantix product
line, selling expenses are expected to push our selling, general and
administrative expenses as a percentage of sales higher in 2004 than 2003.
Three Months Ended September 30, 2004 and 2003
Net Sales and Margins. Net sales, primarily comprised of our gamma detection
systems, increased $597,000, or 64%, to $1.5 million during the third quarter of
2004 from $928,000 during the same period in 2003. Gross margins on net sales
increased to 58% of net sales for the third quarter of 2004 compared to 46% of
net sales for the same period in 2003.
The increase in net sales was primarily a result of a $570,000 increase in gamma
device sales and a $24,000 increase in gamma device service revenue. In 2003,
EES weighted their purchases of our gamma devices toward the first half of the
year. In 2004, EES has more evenly spread its purchases to-date and firmly
committed purchases for the remainder of the year. As a result, we expect gamma
device revenue for 2004 to be generally consistent with gamma device sales for
2003. During the fourth quarter of 2003 and the first half of 2004, we
identified a market need for certain product enhancements to our blood flow
measurement devices that we are in the process of implementing. As a result, our
sales efforts will be affected until the enhancements can be launched, which we
expect to occur in the fourth quarter of this year. We expect blood flow sales
to begin to pick up during the first quarter of 2005.
The increase in gross margins was primarily due to decreases in the unit costs
to manufacture our neo2000(R) control unit resulting from internal design
changes and a lower cost structure at the new contract manufacturer.
License and Other Revenue. License and other revenue in the third quarters of
2004 and 2003 included $200,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES. License and other revenue in the
third quarter of 2003 also included $58,000 from the reimbursement by EES of
certain product development costs. The license fees related to our distribution
agreement with EES have been fully amortized into income as of the end of the
third quarter of 2004.
Research and Development Expenses. Research and development expenses increased
$80,000 or 16% to $588,000 during the third quarter of 2004 from $509,000 during
the same period in 2003. Research and development expenses in the third quarter
of 2004 included approximately $71,000 in gamma detection drug development
costs, $29,000 related to our gamma detection devices and $286,000 in
development costs related to the Quantix products. This compares to expenses of
$28,000, $13,000 and $309,000 in these relative segment categories in the same
period in 2003. The changes within each segment were primarily due to (i)
efforts to support the re-initiation of our RIGScan CR research effort and to
move our development of Lymphoseek forward, (ii) development activities related
to updated versions of our neo2000 control unit and detector probes, and (iii)
the costs of product refinement activities related to the Quantix/OR offsetting
cost savings from headcount reductions at our facility in Israel, respectively.
13
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $60,000 or 8% to $695,000 during the third
quarter of 2004 from $755,000 during the same period in 2003. The decrease was
primarily due to decreases in consulting services, bad debt expenses,
depreciation and amortization, professional services, and space costs. These
decreases were partially offset by increases in board meeting expenses and
investor relations services.
Other Income (Expenses). Other expenses decreased $47,000 or 56% to $37,000
during the third quarter of 2004 from $83,000 during the same period in 2003.
The primary reason for the decrease was $30,000 in interest expense related to
the factoring of our accounts receivable during the third quarter of 2003. In
addition, we recorded decreased interest expense on debt financings entered into
during 2003. Of this interest expense, $35,000 and $39,000 in the third quarters
of 2004 and 2003, respectively, was non-cash in nature related to the
amortization of debt discounts resulting from the warrants and beneficial
conversion feature issued in connection with these debt financings.
Nine Months Ended September 30, 2004 and 2003
Net Sales and Margins. Net sales, primarily of our gamma detection systems,
increased $230,000, or 6%, to $4.1 million during the first nine months of 2004
from $3.9 million during the same period in 2003. Gross margins on net sales
increased to 59% of net sales for the first nine months of 2004 compared to 45%
of net sales for the same period in 2003.
The increase in net sales was primarily a result of a $302,000 increase in gamma
device sales and a $126,000 increase in gamma device service revenue, offset by
a $198,000 decrease in sales of our blood flow measurement devices. We expect
gamma device revenue for 2004 to be generally consistent with gamma device sales
for 2003. During the fourth quarter of 2003 and the first half of 2004, we
identified a market need for certain product enhancements to our blood flow
measurement devices that we are in the process of implementing. As a result, our
sales efforts will be affected until the enhancements can be launched, which we
expect to occur in the fourth quarter of this year. We expect blood flow sales
to begin to pick up during the first quarter of 2005.
The increase in gross margins was primarily due to decreases in the unit costs
to manufacture our neo2000 control unit resulting from internal design changes
and a lower cost structure at the new contract manufacturer. Cost of goods sold
for 2004 included a $78,000 charge for inventory obsolescence primarily related
to design changes in our Quantix product line.
License and Other Revenue. License and other revenue in the first nine months of
2004 and 2003 included $600,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES. License and other revenue in the
first nine months of 2003 also included $146,000 from the reimbursement by EES
of certain product development costs.
Research and Development Expenses. Research and development expenses increased
$401,000 or 29% to $1.8 million during the first nine months of 2004 from $1.4
million during the same period in 2003. Research and development expenses in the
first nine months of 2004 included approximately $270,000 in gamma detection
drug development costs, $159,000 related to our gamma detection devices and
$792,000 related to the Quantix products. This compares to expenses of $28,000,
$39,000 and $899,000 in these relative segment categories in the same period in
2003. The changes in each segment were primarily due to (i) efforts to support
the re-initiation of our RIGScan CR research effort and to move our development
of Lymphoseek forward, (ii) development activities related to updated versions
of our neo2000 control unit and detector probes, and (iii) the costs of product
refinement activities related to the Quantix/OR offsetting cost savings from
headcount reductions at our facility in Israel, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $131,000 or 6% to $2.4 million during the
first nine months of 2004 from $2.2 million during the same period in 2003. The
increase was primarily due to increases of $125,000 in marketing expenses
related to the marketing activities in support of the launch of our Quantix line
of blood flow products, $81,000 in increased wages and benefits, and $58,000 in
professional services coupled with increased investor relations services costs
and board meeting expenses, offset by decreases of $81,000 in depreciation and
amortization expenses, $51,000 in consulting services as well as decreases in
space costs and bad debt expense. Selling, general and administrative expenses
in the first nine months of 2003 also included $30,000 in impairment of
intellectual property that we did not believe had ongoing value to the business.
14
Other Income (Expenses). Other expenses increased $12,000 to $136,000 during the
first nine months of 2004 from $123,000 during the same period in 2003. The
primary reason for the increase was an increase in interest expense on debt
financings entered into during 2003. Of this interest expense, $132,000 and
$62,000 in the first nine months of 2004 and 2003, respectively, was non-cash in
nature related to the amortization of debt discounts resulting from the warrants
and beneficial conversion feature issued in connection with the underlying debt
agreements. Other expenses during the first nine months of 2004 also included
$17,000 in income related to miscellaneous refunds. Other expenses during the
first nine months of 2003 included $30,000 in interest expense related to the
factoring of our accounts receivable.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash used in operations decreased $295,000 to $625,000
used during the first nine months of 2004 from $919,000 used during the same
period in 2003. Working capital increased $1.4 million to $4.0 million at
September 30, 2004 as compared to $2.5 million at December 31, 2003. The current
ratio increased to 5.4:1 at September 30, 2004 from 2.6:1 at December 31, 2003.
The increase in working capital was primarily related to cash generated from the
sale of our common stock and the exercise of warrants combined with recognition
of non-cash license fees related to our distribution agreement with EES.
Cash balances increased to $3.0 million at September 30, 2004 from $1.6 million
at December 31, 2003, primarily due to the cash generated from the sale of our
common stock and the exercise of warrants, offset by increased operating
expenses during the first nine months of 2004.
Accounts receivable decreased to $746,000 at September 30, 2004 from $1.1
million at December 31, 2003. We expect receivable levels to continue to
fluctuate over the remainder of 2004 as the level of accounts receivable is
greatly dependent on the timing of purchases and payments by EES as well as the
potential effect of sales of blood flow products.
Inventory levels decreased to $947,000 at September 30, 2004 as compared to $1.0
million at December 31, 2003. We expect inventory levels to increase over the
remainder of 2004 as we re-establish our gamma device safety stock and build
finished units of our blood flow products in preparation for broader
distribution.
Investing Activities. Cash used in investing activities remained constant at
$84,000 during the first nine months of 2004 and 2003. Capital expenditures in
the first nine months of 2004 were primarily related to purchases of technology
infrastructure. Capital expenditures in the first nine months of 2003 were
primarily purchases of production tools and equipment in preparation for the
manufacture of our Quantix line of blood flow measurement devices. Capital needs
for the remainder of 2004 are expected to be consistent with 2003.
Financing Activities. Financing activities generated $2.1 million in cash in the
first nine months of 2004 versus $725,000 provided during the same period in
2003.
15
On November 19, 2001, we entered into a common stock purchase agreement with an
investment fund, Fusion Capital Fund II, LLC (Fusion) for the issuance and
purchase of our common stock. Under the stock purchase agreement, Fusion
committed to purchase up to $10 million of our common stock over a forty-month
period that commenced in May 2002. A registration statement registering for
resale up to 5 million shares of our common stock became effective on April 15,
2002. Under the terms of the agreement, we can request daily drawdowns, subject
to a daily base amount currently set at $12,500. The number of shares we are to
issue to Fusion in return for that money is based on the lower of (a) the
closing sale price for our common stock on the day of the draw request or (b)
the average of the three lowest closing sales prices for our common stock during
a twelve-day period prior to the draw request. However, no shares may be sold to
Fusion at lower than a floor price currently set at $0.30, which may be reduced
by us, but in no case below $0.20 without Fusion's prior consent. Upon execution
of the common stock purchase agreement, we issued 449,438 shares of our common
stock to Fusion as a commitment fee. During the second half of 2003, we sold
Fusion a total of 473,869 shares of common stock and realized net proceeds of
$143,693. We issued Fusion 6,462 shares of common stock for commitment fees
related to the sales of our common stock to them during 2003. During the first
nine months of 2004, we sold Fusion a total of 2,350,000 shares of common stock
and realized net proceeds of $1,468,874. We also issued Fusion 66,129 shares of
common stock for commitment fees related to the sales of our common stock to
them during the first nine months of 2004.
During April 2003, we completed a bridge loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. In consideration for the loan, we issued a note to Mr. Bupp in the
principal amount of $250,000. The note is secured by general assets of the
company, excluding accounts receivable. In addition, we issued Mr. Bupp 375,000
warrants to purchase shares of our common stock at an exercise price of $0.13
per share, expiring in April 2008. The per share value of these warrants was
$0.10 on the date of issuance using the Black-Scholes option pricing model with
the following assumptions: an average risk-free interest rate of 2.9%,
volatility of 139% and no expected dividend rate. Interest accrues on the note
at 8.5% per annum, payable monthly, and the note was originally due on June 30,
2004. On March 8, 2004, at the request of the Board of Directors, Mr. Bupp
agreed to extend the due date of the note to Mr. Bupp from June 30, 2004 to June
30, 2005. In exchange for extending the due date of the note, we issued Mr. Bupp
an additional 375,000 warrants to purchase our common stock at an exercise price
of $0.50 per share, expiring in March 2009. The per share value of these
warrants was $0.46 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: an average risk-free interest rate
of 2.7%, volatility of 152% and no expected dividend rate. Mr. Bupp's 750,000
warrants remain outstanding.
During April 2003, we also completed a convertible bridge loan agreement with an
investor for an additional $250,000. In consideration for the loan, we issued a
note to the investor in the principal amount of $250,000. The note was secured
by general assets of the company, excluding accounts receivable. In addition, we
issued the investor 500,000 warrants to purchase shares of our common stock at
an exercise price of $0.13 per share, expiring in April 2008. The per share
value of these warrants was $0.10 on the date of issuance using the
Black-Scholes option pricing model with the following assumptions: an average
risk-free interest rate of 2.9%, volatility of 139% and no expected dividend
rate. Under the terms of the agreement, the note bore interest at 9.5% per
annum, payable monthly, was convertible into common stock and was due on June
30, 2004. During January 2004, the investor converted the entire balance of the
note into 1.1 million shares of common stock according to the conversion terms
of the agreement. The investor's 500,000 warrants remain outstanding.
During 2003, an investment banking firm, Alberdale Capital, LLC (Alberdale),
assisted us in arranging an accounts receivable financing transaction. In
exchange for Alberdale's services, we issued them warrants to purchase 78,261
shares of our common stock. During the first quarter of 2004, Alberdale
exercised these warrants on a cashless basis in exchange for 53,500 shares of
common stock.
During October and 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
agreed to issue the purchasers warrants to purchase 6,086,959 shares of common
stock at an exercise price of $0.28 per share and agreed to issue the placement
agents warrants to purchase 1,354,348 shares of our common stock on similar
terms. All warrants issued in connection with the transaction expire in October
2008. 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 the first nine months of 2004, investors and placement
agents who participated in this placement exercised warrants representing a
total of 3,308,327 shares of common stock resulting in net proceeds of $865,563.
16
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 obtain milestone or development funds from potential development and
distribution partners, regulatory actions by the FDA and other international
regulatory bodies, and intellectual property protection. We believe we have
adequate capital to assure that we can properly support our current business
goals and objectives through the end of 2004 and into 2005. Our near-term
priorities include preparation for Phase III clinical trials for two
radiopharmaceutical products in our pipeline, RIGScan CR and Lymphoseek and the
identification of a potential development partner to assist and fund RIGS
development. In addition, we are moving forward with improvements to the Quantix
products based on thought leader feedback received in the US and EU. We believe
this will position us for improved commercial viability of the Quantix products
by the beginning of 2005. We intend to fund the estimated $5 million development
of Lymphoseek internally; however, the decision as to how much, if any, of the
estimated total of $15 million in RIGS development costs to fund internally
versus through a potential development partner has not yet been determined. As a
result, we will likely have to raise additional capital to fund the incremental
development of Lymphoseek. However, we cannot assure you that we will be able to
raise such capital on terms acceptable to us, or at all. We also cannot assure
you that we will be able to achieve significant product revenues from our
current or potential new products. In addition, we cannot assure you that we
will achieve profitability in 2004 or in the future.
CRITICAL ACCOUNTING POLICIES
THE FOLLOWING ACCOUNTING POLICIES ARE CONSIDERED BY US TO BE CRITICAL TO OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
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 1% of total revenues for the first nine
months of 2004 and are expected to increase in the future. We generally
recognize sales revenue related to sales of our products when the products are
shipped and the earnings process has been completed. Our customers have no right
to return products purchased in the ordinary course of business. However, in
cases where product is shipped but the earnings process is not yet completed,
revenue is deferred until it has been determined that the earnings process has
been completed. We also generate revenue from the service and repair of
out-of-warranty products. Fees charged for service and repair on products not
covered by an extended service agreement are recognized on completion of the
service process when the serviced or repaired product has been returned to the
customer. Fees charged for service or repair of products covered by an extended
warranty agreement are deferred and recognized as revenue ratably over the life
of the extended service agreement. The prices we charge our primary customer,
EES, related to sales of products are subject to retroactive annual adjustment
based on a fixed percentage of the actual sales prices achieved by EES on sales
to end customers made during each fiscal year. To the extent that we can
reasonably estimate the end-customer prices received by EES, we record sales to
EES based upon these estimates. If we are unable to reasonably estimate end
customer sales prices related to certain products sold to EES, we record revenue
related to these product sales at the minimum (i.e., floor) price provided for
under our distribution agreement with EES.
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
September 30, 2004, 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 the
capitalized cost 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
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.
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.
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 oral
forward-looking statements, including statements contained in this report and
other company filings with the SEC and in our reports to stockholders.
Statements that relate to other than strictly historical facts, such as
statements about our plans and strategies, expectations for future financial
performance, new and existing products and technologies, and markets for our
products are forward-looking statements within the meaning of the Act.
Generally, the words "believe," "expect," "intend," "estimate," "anticipate,"
"will" and other similar expressions identify forward-looking statements. The
forward-looking statements are and will be based on our then-current views and
assumptions regarding future events and operating performance, and speak only as
of their dates. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors including, but not limited
to, our limited revenues, accumulated deficit, future capital needs, uncertainty
of capital funding, dependence on limited product line and exclusive
distributor, uncertainty of market acceptance, competition, limited marketing
and manufacturing experience, and other risks detailed in our most recent Annual
Report on Form 10-KSB and other SEC filings. We undertake no obligation to
publicly update or revise any forward-looking statements.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of 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
subsidiary) required to be included in our periodic SEC filings. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and we cannot assure you that
any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
18
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 control over financial
reporting.
Since the date of our evaluation to the filing date of this quarterly report,
there have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
19
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2004, the company issued 200,000 shares
of its common stock, $0.01 par value, upon the exercise of Series R warrants
issued to investors in the November 2003 private placement. These shares were
issued without registration under the Securities Act of 1933. The company
received net proceeds of $52,799 from these warrant exercises, and no discounts
or commissions were paid by the company in connection therewith.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Neoprobe Corporation held its Annual Meeting of Stockholders on July 27,
2004, for the purpose of electing three directors and increasing the
authorized number of shares of the Company's stock.
(b) At the Annual Meeting of Stockholders, the directors nominated were
elected.
(c) The following table shows the voting tabulation for each matter voted upon
at the Annual Meeting of Stockholders.
ACTION FOR WITHHELD
Election of Directors
Reuven Avital 41,621,877 1,727,668
David C. Bupp 40,878,765 2,470,780
Julius R. Krevans, M.D. 40,949,167 2,400,378
ACTION FOR AGAINST ABSTAIN
Increase the authorized number of shares of the Company
from 80,000,000 to 105,000,000, consisting of
100,000,000 shares of common stock, $.001 par value,
and 5,000,000 shares of preferred stock, $.001 par value 40,416,200 2,805,554 127,791
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
(b) REPORTS ON FORM 8-K
On August 10, 2004, we furnished a Current Report on Form 8-K (dated
August 10, 2004) with the Securities and Exchange Commission pursuant to
Item 12 (under Item 9) in connection with our August 10, 2004 press
release announcing our consolidated financial results for the second
quarter ended June 30, 2004.
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ITEMS 1, 3 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: November 15, 2004
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)
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