SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-25210
NEOPATH, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1436093
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8271 - 154th Avenue NE, Redmond, Washington 98052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 869-7284
Indicate by check mark 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 [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at October 31, 1996
(Common stock, $.01 par value) 13,646,430
<PAGE>
NEOPATH, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION Page
Item 1. Financial Statements 1
Balance Sheets - September 30, 1996 (unaudited)
and December 31, 1995
Statements of Operations (unaudited) -- for the
three months and nine months ended September 30,
1996 and 1995
Statements of Cash Flows (unaudited) -- for the
three months and nine months ended September 30,
1996 and 1995
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
NEOPATH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,965,937 $ 4,150,923
Securities available-for-sale 62,679,884 19,278,839
Accounts receivable 800,468 -
Inventories 6,749,450 1,841,560
Other current assets 796,677 229,555
----------- ----------
Total current assets 72,992,416 25,500,877
Pay-per-use systems, net 3,270,181 -
Property and equipment, net 4,385,564 2,192,984
Deposits 255,298 245,068
Other assets - 77,227
----------- -----------
Total assets $80,903,459 $28,016,156
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,918,625 $ 987,977
Salaries and wages payable 1,944,068 1,443,131
Customer deposits 52,500 -
Deferred revenue 500,000 -
Current portion of obligations
under capital leases 87,517 193,442
----------- -----------
Total current liabilities 4,502,710 2,624,550
Obligations under capital leases,
less current portion 201,101 258,395
Shareholders' equity:
Common stock 136,220,839 71,649,971
Deferred compensation (79,883) (175,782)
Accumulated deficit (59,941,308) (46,340,978)
----------- ------------
Total shareholders' equity 76,199,648 25,133,211
----------- ------------
Total liabilities and shareholders' equity $80,903,459 $28,016,156
=========== ============
</TABLE>
See accompanying notes.
Page 1
<PAGE>
NEOPATH, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 877,424 $ - $ 1,504,051 $ -
Cost of revenues 414,017 - 979,725 -
---------- --------- ----------- ----------
Gross margin 463,407 - 524,326 -
Operating expenses:
Research and development 2,916,124 2,288,350 8,200,000 6,893,690
Selling, general and administrative 3,100,200 1,839,096 7,943,604 4,431,488
--------- --------- ---------- ----------
Total operating expenses 6,016,324 4,127,446 16,143,604 11,325,178
Loss from operations 5,552,917 4,127,446 15,619,278 11,325,178
Interest expense 10,889 19,525 38,465 62,554
Interest income (940,323) (544,794) (2,884,637) (1,368,363)
---------- ---------- ------------ -----------
Net loss $4,623,483 $3,602,177 $12,773,106 $10,019,369
========== ========== =========== ===========
Net loss per share $0.35 $0.37 $1.00 $1.15
===== ===== ===== ======
Shares used in computation of
net loss per share 13,284,449 9,684,305 12,823,190 8,732,957
========== ========= ========== =========
Pro forma, reflecting assumed
conversion of convertible
preferred stock:
Pro forma net loss per share $0.35 $0.37 $1.00 $1.08
===== ===== ===== =====
Shares used in computation of
pro forma net loss per share 13,284,449 9,684,305 12,823,190 9,272,277
========== ========= ========== =========
</TABLE>
See accompanying notes.
Page 2
<PAGE>
NEOPATH, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
---------- ----------
<S> <C> <C>
Operating activities
Net loss $(12,773,106) $(10,019,369)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,261,065 370,947
Deferred compensation 72,154 193,935
Common stock issued for services/donation 18,278 350,000
Accrued interest on securities available-for-sale 427,535 (468,976)
Net change in operating accounts:
Accounts receivable (800,468) -
Inventories and pay-per-use systems (8,464,786) (173,452)
Accounts payable and accrued liabilities 1,484,085 9,082
Deferred revenue 500,000 -
Other (558,063) (68,953)
------------ -----------
Net cash used in operating activities (18,833,306) (9,806,786)
Investing activities
Purchases of securities available-for-sale (75,750,434) (30,966,166)
Maturities of securities available-for-sale 31,094,630 7,928,751
Additions to property and equipment (3,175,989) (1,106,728)
Other 66,997 323,013
----------- ------------
Net cash used in investing activities (47,764,796) (23,821,130)
Financing activities
Proceeds from bank note - 500,000
Issuance of common stock, net 61,740,351 34,740,266
Exercise of stock options and warrants 2,835,984 394,348
Proceeds from sale/leaseback transactions - 317,594
Principal payments on obligations under
capital leases (163,219) (154,444)
----------- -----------
Net cash provided by financing activities 64,413,116 35,797,764
Net increase (decrease) in cash and cash
equivalents (2,184,986) 2,169,848
Cash and cash equivalents:
Beginning of period 4,150,923 -
------------ ------------
End of period $ 1,965,937 $ 2,169,848
============ ============
Supplemental disclosure of non-cash item --
during the nine months ended September 30, 1996,
$3,556,896 was transferred from
inventories to pay-per-use systems
</TABLE>
See accompanying notes.
Page 3
<PAGE>
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been
prepared by NeoPath, Inc. (the "Company") in accordance with
generally accepted accounting principles for interim financial
information and according to the rules and regulations of the
Securities and Exchange Commission (the "Commission").
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (which include only normal
recurring adjustments) considered necessary for a fair
presentation have been included. The balance sheet at December
31, 1995 has been derived from the audited financial statements
at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. The results of operations
for the three-month and nine-month periods ended September 30,
1996, are not necessarily indicative of results to be expected
for the entire year ending December 31, 1996 or for any other
fiscal period. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form
10-K for the year ended December 31, 1995.
Note 2 - Revenue Recognition
The Company recognizes pay-per-use revenue based on the
number of customer slides processed, subject to agreed-upon
minimum processing levels, beginning in the month an AutoPap
System is initially placed in commercial use at the customer
site and is accepted by the customer. Sales of AutoPap Systems
are recognized at date of shipment. In the event sales
contracts may establish commitments for installation and
testing prior to final customer acceptance, revenue is
recognized upon notification of customer acceptance.
Note 3 - Follow-On Public Offering
In January 1996, the Company completed its follow-on
public offering for the sale of 2,875,000 shares of common
stock at $23.00 per share. The net proceeds, after
underwriting discounts and offering expenses, from the sale of
the common stock was $61.7 million.
Note 4 - Inventories
Inventories consist of the following:
September 30, 1996 December 31, 1995
------------------- -----------------
Raw materials $2,966,529 $ 789,142
Work-in-process 1,272,412 343,306
Finished goods 2,510,509 709,112
---------- -----------
$6,749,450 $1,841,560
========== ==========
Page 4
<PAGE>
Note 5 - Litigation
On July 15, 1996, Neuromedical Systems, Inc. filed a
lawsuit against NeoPath, Inc. in the United States District
Court for the Southern District of New York. The complaint
alleges patent infringement, unfair competition, false
advertising, and related claims. On September 5, 1996, the
Company filed its answer and counter claims. The Company
believes it has a strong position in this action and will
defend itself vigorously.
Note 6 - Reclassifications
Certain prior-period amounts have been reclassified to
conform to the current-period presentation.
Page 5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
NeoPath, Inc. (the "Company") develops and markets
products that automate the interpretation of medical images.
The Company's initial products are two automated screening
systems used to analyze and classify Pap smear slides. In
September 1995, the United States Food and Drug Administration
(the "FDA") cleared for commercial use the Company's first
product, the AutoPap 300 QC Automatic Pap Screener System (the
"AutoPap QC"). The Company seeks FDA approval for the Company's
second product, the AutoPap 300 Automatic Pap Screener System
(the "AutoPap Screener" and, together with the AutoPap QC, the
"AutoPap Systems").
During the first quarter of 1996, the Health Care
Financing Administration officially allowed clinical
laboratories to use the AutoPap QC in the quality control
review of Pap smear slides that have been initially screened by
cytologists as normal. The decision allows AutoPap QCs to
replace the federally mandated rescreening requirement.
On September 27, 1996 a FDA Hematology and Pathology
Devices Advisory Panel recommended that the FDA not approve, at
that time, the supplement to the Company's premarket approval
(PMA) submission for the use of the AutoPap System as a primary
screener of Pap smear slides pending the completion of
additional premarket studies. The Company is working diligently
to answer the Panel's questions and resubmit this matter to the
FDA.
The Company is compensated on either a sale or pay-per-use
basis (subject to certain license agreements and minimum
payments). Under its pay-per-use program, the Company retains
ownership of AutoPap Systems placed at customer sites while
assessing customers a charge for each Pap smear slide analyzed.
The retention of ownership of the AutoPap Systems entails a
significant capital commitment to purchase the components of
and to manufacture AutoPap Systems. The cost of each AutoPap
System is reclassified from inventories to depreciable
equipment upon shipment to the clinical laboratory. Such
equipment, reflected on the balance sheet under "pay-per-use
systems, net" is depreciated on a straight-line basis over a
three-year period, commencing upon commercial operation.
Results of Operations
The Company began recognizing revenues in the first
quarter of 1996. In the third quarter of 1996, the Company
recognized revenues of $877,000, consisting of pay-per-use and
sale contracts. The $624,000 increase in revenues from the
second quarter was primarily a result of an AutoPap QC sale,
combined with moderate increases in the Company's pay-per-use
service contracts. Total revenues of $253,000 in the second
quarter of 1996 consisted entirely of pay-per-use service
contracts in the U.S. The Company recognized total revenues of
$1.5 million for the nine-month period ended September 30,
1996.
The primary components of cost of revenues include
depreciation on pay-per-use systems, allocated service and
support costs, and, with regard to AutoPap Systems sold, the
related cost of those devices. Because manufacturing, service
and support functions are at an early stage, cost of revenues
for the three and nine-month periods ended September 30, 1996
is not necessarily indicative of future cost of revenues.
Research and development expenses for the three months
ended September 30, 1996 increased 27.4 percent to $2.9 million
from the comparable period in 1995. For the nine months ended
September 30, 1996, research and development expenses increased
18.9 percent to $8.2 million from the amount recognized in the
nine months ended September 30, 1995. The increase from prior
periods is primarily a result of the Company's continued focus
on obtaining FDA approval for the AutoPap Screener as well as
improving the AutoPap Systems' performance.
Page 6
<PAGE>
Selling, general and administrative expenses increased
68.6 percent to $3.1 million for the three months ended
September 30, 1996 from the third quarter of 1995, and
increased 79.3 percent to $7.9 million for the nine months
ended September 30, 1996 from the comparable period in 1995.
The increase from prior periods reflects the Company's
continued expansion of its marketing, sales and service
functions to a level necessary for the worldwide roll-out of
the AutoPap Systems.
Interest income for the third quarter of 1996 increased to
$940,000 compared to $545,000 for the comparable quarter in
1995. For the nine months ended September 30, 1996, interest
income increased to $2.9 million from $1.4 million in the nine-
month period in 1995. The increase in interest income is due
primarily to the increase in cash equivalents and securities
available-for-sale as a result of the Company's follow-on
public stock offering completed in January 1996.
Liquidity and Capital Resources
The Company's cash, cash equivalents and securities
available-for-sale totaled $64.6 million as of September 30,
1996, which represents an increase of $41.2 million from
December 31, 1995. The increase is primarily a result of the
Company's follow-on public stock offering, completed in January
1996, net of cash used in the Company's operations during 1996.
The Company received $61.7 million in net proceeds from the
stock offering.
During the nine months ended September 30, 1996, $18.8
million was used to fund the Company's operating activities,
including $3.6 million for inventories subsequently classified
as pay-per-use systems, and $3.2 million was invested in
property and equipment. During the comparable nine-month
period in 1995, $9.8 million was used in operating activities,
and the Company purchased $1.1 million of property and
equipment. Negative cash flows in 1996 were partially offset by
the receipt of $2.8 million from the exercise of stock options
and warrants and by the receipt in the second quarter of a
$500,000 nonrefundable fee from a foreign distributor with
which the Company has entered into a letter of intent. The
Company has deferred revenue recognition of the nonrefundable
fee in accordance with generally accepted accounting
principles. The investment in pay-per-use systems is expected
to increase as the Company continues to place AutoPap Systems
into commercial service under pay-per-use service contracts.
The Company expects negative cash flow from operations to
continue for the next few years as it manufactures AutoPap
Systems that are placed under pay-per-use service contracts,
expands its marketing, sales, customer service and support
capabilities, continues its research and development
activities, and satisfies regulatory requirements to market its
products. The Company currently estimates that its existing
cash, cash equivalents and securities available-for-sale will
be sufficient to fund its operations for at least the next
seven quarters. There can be no assurance, however, that the
Company will not be required to seek additional capital at an
earlier date. The Company's future capital requirements will
depend on many factors, including those factors listed below.
Certain Factors Affecting Forward-Looking Statements
The forward-looking statements in this report are subject
to certain risks and uncertainties that could cause actual
results to differ materially, including without limitation,
market acceptance of the Company's products; the acceptance of
the Company's pay-per-use program; product and manufacturing
regulatory approvals; the Company's limited manufacturing,
marketing, customer service and support capabilities; the
Company's sole or limited source of supply of certain
components; the status of competing products; and
uncertainties relating to international transactions. These
and other risks are detailed in the Company's reports filed
with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Page 7
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
On July 15, 1996, Neuromedical Systems, Inc. filed a
lawsuit against NeoPath, Inc. in the United States District
Court for the Southern District of New York. The complaint
alleges patent infringement, unfair competition, false
advertising, and related claims. On September 5, 1996, the
Company filed its answer and counter claims. The Company
believes it has a strong position in this action and will
defend itself vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
Exhibit No. Description
-----------------------
11 Computation of net loss per share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
Page 8
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
NeoPath, Inc.
Date: November 11, 1996 By: /s/ ALAN C. NELSON
-------------------
Alan C. Nelson
President, Chief Executive Officer
By: /s/ ROBERT C. BATEMAN
---------------------
Robert C. Bateman
Corporate Controller
Acting Chief Accounting Officer
Page 9
<PAGE>
NEOPATH, INC.
INDEX TO EXHIBITS
Exhibit No. Description
----------------------
11 Computation of net loss per share
27 Financial Data Schedule
Page 10
NEOPATH, INC.
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Net loss $4,623,483 $3,602,177 $12,773,106 $10,019,369
========== ========== =========== ===========
Historical:
Shares used in calculating net loss per share -
Weighted average common shares outstanding 13,284,449 9,684,305 12,823,190 8,732,957
========== ========== ========== =========
Net loss per share $0.35 $0.37 $1.00 $1.15
===== ===== ===== =====
Pro forma:
Shares used in calculating pro forma net
net loss per share- Weighted average
common shares outstanding 13,284,449 9,684,305 12,823,190 8,732,957
Weighted average common shares giving effect to
conversion of convertible preferred stock for
all periods subsequent to issuance - - - 539,320
---------- --------- ---------- ---------
Total 13,284,449 9,684,305 12,823,190 9,272,277
========== ========= ========== =========
Pro forma net loss per share $0.35 $0.37 $1.00 $1.08
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the form
10Q as of September 30, 1996 and for the nine months then ended, and is
qualified in its entirety by reference to such financial statements and
footnotes.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,965,937
<SECURITIES> 62,679,884
<RECEIVABLES> 800,468
<ALLOWANCES> 0
<INVENTORY> 6,749,450
<CURRENT-ASSETS> 72,992,416
<PP&E> 4,385,564
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,903,459
<CURRENT-LIABILITIES> 4,502,710
<BONDS> 0
0
0
<COMMON> 136,220,839
<OTHER-SE> (60,021,191)
<TOTAL-LIABILITY-AND-EQUITY> 80,903,459
<SALES> 0
<TOTAL-REVENUES> 1,504,051
<CGS> 0
<TOTAL-COSTS> 979,725
<OTHER-EXPENSES> 16,143,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,465
<INCOME-PRETAX> (12,773,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,773,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,773,106)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> 0
</TABLE>
