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 March 31, 1997
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: (425) 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 April 29, 1997
(Common stock, $.01 par value) 14,269,511
<PAGE>
NEOPATH, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION Page
Item 1. Financial Statements 1
Balance Sheets -- March 31, 1997
(unaudited) and December 31, 1996
Statements of Operations (unaudited) --
for the three months ended March 31,
1997 and 1996
Statements of Cash Flows (unaudited) --
for the three months ended March 31,
1997 and 1996
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 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
NEOPATH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $12,979,624 $ 7,871,401
Securities available-for-sale 39,558,456 50,616,477
Accounts receivable,net 1,937,802 840,256
Inventories 7,224,027 5,641,914
Other current assets 570,199 197,726
---------- ----------
Total current assets 62,270,108 65,167,774
Fee-per-use systems, net 6,564,944 5,994,137
Property and equipment, net 4,922,865 4,813,745
Deposits and other assets 156,939 155,899
----------- -----------
Total assets $73,914,856 $76,131,555
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,923,627 $ 1,496,630
Salaries and wages payable 1,341,625 2,208,454
Other accrued liabilities 1,499,827 565,939
Current portion of obligations under capital leases 74,369 75,861
----------- -----------
Total current liabilities 4,839,448 4,346,884
Obligations under capital leases, less current portion 162,071 182,535
Shareholders' equity:
Common stock 139,879,171 136,255,746
Deferred compensation - (74,246)
Accumulated deficit (70,965,834) (64,579,364)
------------ ------------
Total shareholders' equity 68,913,337 71,602,136
------------ -----------
Total liabilities and shareholders' equity $73,914,856 $76,131,555
============ ===========
</TABLE>
See accompanying notes.
Page 1
<PAGE>
NEOPATH, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
1997 1996
------------ -----------
Revenues $ 2,234,552 $ 373,619
Cost of revenues 1,077,512 336,840
----------- -----------
Gross margin 1,157,040 36,779
Operating expenses:
Research and development 4,386,856 2,692,234
Selling, general and administrative 3,695,671 2,038,176
---------- ----------
8,082,527 4,730,410
Loss from operations (6,925,487) (4,693,631)
Interest income 745,666 1,108,053
Interest expense (6,485) (16,496)
------------ ------------
Net loss $(6,186,306) $(3,602,074)
============ ============
Net loss per share $(0.45) $(0.30)
======= =======
Shares used in computation of
net loss per share 13,771,635 12,122,092
=========== ===========
See accompanying notes.
Page 2
<PAGE>
NEOPATH, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Net loss $ (6,186,306) $ (3,602,074)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 758,877 226,250
Deferred compensation 74,246 60,820
Accrued interest on securities available-for-sale 458,950 182,384
Net change in operating accounts:
Accounts receivable (1,097,546) (206,217)
Inventories and fee-per-use systems (2,715,121) (2,021,931)
Accounts payable and accrued liabilities 494,056 352,249
Other (372,473) (217,444)
------------- ------------
Net cash used in operating activities (8,585,317) (5,225,963)
Investing activities
Purchases of securities available-for-sale (1,101,093) (67,508,365)
Maturities of securities available-for-sale 11,500,000 11,780,541
Additions to property and equipment (305,796) (428,547)
Other (1,040) 73,639
------------ -------------
Net cash provided by (used in) investing activities 10,092,071 (56,082,732)
Financing activities
Issuance of common stock, net - 61,740,351
Exercise of stock options and warrants 3,623,425 1,350,765
Principal payments on obligations under capital leases (21,956) (57,555)
------------- -------------
Net cash provided by financing activities 3,601,469 63,033,561
------------- -------------
Net increase in cash and cash equivalents 5,108,223 1,724,866
Cash and cash equivalents:
Beginning of period 7,871,401 4,150,923
------------ -------------
End of period $ 12,979,624 $ 5,875,789
============ =============
Noncash transactions and supplemental disclosures
Cash paid for interest $ 6,485 $ 16,496
Inventories transferred to fee-per-use systems 802,834 1,499,496
Inventories transferred to property and equipment 330,174 -
</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.
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, 1996 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 period ended March 31, 1997, are
not necessarily indicative of results to be expected for the entire year
ending December 31, 1997 or for any other fiscal period. For further
information, refer to the financial statements and footnotes thereto
incorporated by reference in the Company's Form 10-K for the year ended
December 31, 1996.
Note 2 - Revenue Recognition
The Company recognizes fee-per-use revenues 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 as revenues at date of shipment.
Note 3 - Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. The new Statement requires that companies change the
method currently used to compute earnings per share and restate all prior
periods, if necessary. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded.
Because the Company's stock options are not dilutive (due to net losses),
the impact of Statement No. 128 on the Company's calculation of net loss per
share is not expected to be material.
Note 4 - Inventories
Inventories consist of the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials $ 2,886,840 $ 2,725,725
Work-in-process 1,282,428 166,437
Finished goods 3,054,759 2,749,752
------------- --------------
$ 7,224,027 $ 5,641,914
============= ==============
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 is defending itself vigorously.
On March 31, 1997, the Company filed a patent infringement lawsuit
against Neuromedical Systems, Inc. in the United States District Court for
the Western District of Washington. The complaint alleges patent
infringement and seeks preliminary and permanent injunctions against
Neuromedical Systems, Inc.
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" or "NeoPath") develops and markets
products that automate the interpretation of medical images. The Company's
initial products are two automated screening systems that integrate
proprietary high-speed image processing computers, video imaging technology
and sophisticated visual intelligence software to capture and analyze
thousands of microscopic images from a Papanicolaou ("Pap") smear slide. 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"). In early 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 be used in meeting the federally mandated rescreening
requirement.
NeoPath is seeking FDA approval for the Company's second product, the
AutoPap Automatic Pap Screener System (the "AutoPap Screener" and, in
combination with the AutoPap QC, the "AutoPap System"). The Company is in
the process of completing clinical studies involving over 30,000 cases that
support an amendment to the Company's Pre-Market Approval ("PMA") supplement
for the use of the AutoPap Screener as a primary screener of Pap smear
slides. The Company will be analyzing the data from these clinical studies
and plans to submit the amended PMA supplement to the FDA in 1997. During
the first quarter of 1997, the Ministry of Health and Welfare in Japan
approved the AutoPap System for sale as a primary screener.
The Company is compensated on either a sale or fee-per-use basis
(subject to certain license agreements and minimum payments). Under its fee-
per-use program, the Company retains ownership of AutoPap Systems placed at
customer sites and assesses customers a charge for each Pap smear slide
analyzed. The fee-per-use program entails a significant capital commitment
since the Company retains ownership of the AutoPap Systems. The cost of
each AutoPap System is reclassified from inventories to depreciable
equipment upon shipment to a fee-per-use customer site. Such equipment,
reflected on the balance sheet under "fee-per-use systems, net," is
depreciated on a straight-line basis over a four-year period, commencing
upon commercial operation. The Company's product placements have primarily
consisted of fee-per-use contracts in the United States and sale contracts
internationally. The Company anticipates that future product placements
will continue to consist of a mixture of fee-per-use and sale contracts.
Results of Operations
The Company recorded $2.2 million in revenues for the first quarter of
1997, representing a significant increase from $374,000 recognized in the
first quarter of 1996, the quarter in which NeoPath recognized its first
product revenues. Revenues increased 43 percent from $1.6 million
recognized in the fourth quarter of 1996, due primarily to increased sales
of AutoPap Systems in Japan, combined with an increase in U.S. fee-per-use
revenues. AutoPap Systems are sold in Japan through a distribution
agreement with Nikon Corporation.
The Company's gross margin was 52 percent for the first quarter,
compared to gross margins of 41 percent in the fourth quarter of 1996 and 38
percent for all of 1996. The primary components of cost of revenues include
depreciation on fee-per-use systems, allocated service and support costs,
and, with regard to AutoPap Systems sold, the related manufacturing cost and
estimated one-year warranty expense. Gross margin is expected to fluctuate
depending on the mix of fee-per-use and sale revenues, as well as the
continued development of the manufacturing, service and support functions.
Research and development expenses for the three months ended March 31,
1997 increased $1.7 million to $4.4 million from the comparable period in
1996, and increased $1.4 million from the fourth quarter of 1996. The
increases are primarily a result of the incremental third-party expenses
incurred in connection with clinical studies. Research and development
expenses are expected to remain at or near current levels in the second
Page 6
<PAGE>
quarter, as a result of continuing clinical studies, and then decrease in the
third quarter of 1997. Research and development expenses are then expected to
increase over time due to additional FDA submissions for future enhancements
to the AutoPap System. Based on the uncertainty of the FDA approval process,
actual expenses may differ from the Company's expectations.
Selling, general and administrative expenses for the first quarter of
1997 increased $1.7 million to $3.7 million from the first quarter of 1996,
and increased $344,000 from the fourth quarter of 1996. The increases
reflect the Company's continued investment in marketing and sales
initiatives, as well as investments in the necessary infrastructure to
support continued placements of AutoPap Systems.
Interest income for the first quarter of 1997 decreased to $746,000,
compared to $1.1 million for the comparable quarter in 1996 and $857,000 in
the fourth quarter of 1996. The decreases in interest income are due
primarily to decreased cash equivalents and securities available-for-sale
resulting from NeoPath's negative operating cash flow.
Liquidity and Capital Resources
The Company's cash, cash equivalents and securities available-for-sale
totaled $52.5 million as of March 31, 1997, which represents a decrease of
$5.9 million from December 31, 1996. The decrease is a result of cash used
in the Company's operations for the three months ended March 31, 1997,
offset by the receipt of $3.6 million from the exercise of stock options and
warrants.
During the three months ended March 31, 1997, the Company used $8.6
million to fund operating activities, including $1.1 million for inventories
subsequently classified as either fee-per-use systems or transferred to
property and equipment, and used $306,000 to purchase other property and
equipment. During the comparable three-month period in 1996, the Company
used $5.2 million in its operating activities, including $1.5 million for
inventories subsequently classified as fee-per-use systems, and the Company
purchased $429,000 of property and equipment. The investment in fee-per-use
systems is expected to increase as the Company continues to place AutoPap
Systems into commercial service under fee-per-use service contracts.
The Company expects negative cash flow from operations to continue at
least through 1997 as it manufactures AutoPap Systems to support fee-per-use
product placements, continues to expand its marketing, sales, and customer
service and support capabilities, continues its research and development
activities, and conducts and analyzes data from the AutoPap Screener
clinical studies. The Company currently estimates that its existing capital
resources and interest income will enable it to sustain operations for
approximately the next six 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 the extent and rate of adoption of use of the AutoPap QC
and, if the requisite regulatory approvals are obtained, the AutoPap
Screener; the adoption of the Company's fee-per-use program; the mix of fee-
per-use and sale placements; the extent and rate of development of the
Company's marketing, sales, and customer service and support capabilities;
and the status of competing products. The Company may, from time to time,
seek additional funding through public or private financing, including
equity financing. There can be no assurance that adequate funding will be
available as needed or on terms acceptable to the Company. If additional
funds are raised by issuing equity securities, existing shareholders will
experience dilution. Insufficient funds may require the Company to delay,
scale back or eliminate some or all of its manufacturing, research and
development and clinical programs.
Factors Affecting Future Results and Forward-Looking Statements
The preceding Management's Discussion and Analysis of Financial
Condition and Results of Operations contains "forward-looking statements"
which reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical results or those anticipated. The words "plan,"
"expect," "anticipate," and similar expressions identify forward-looking
statements. Readers are
Page 7
<PAGE>
cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise. Factors that could cause actual results to differ
materially from historical results or those anticipated include, without
limitation, the following: the Company's limited operating history and
history of losses; market acceptance of the Company's products; the
acceptance of the Company's fee-per-use or sale programs; product and
manufacturing regulatory approvals; the Company's limited marketing, sales,
customer service and support capabilities; uncertainties relating to
international transactions; the Company's sole or limited source of supply
of certain components; the status of competing products; dependence on
reimbursement; dependence on single product line; product liability;
dependence on patents and property rights; the risk of third-party claims of
infringement; and dependence on key personnel. For a more detailed
discussion of these factors, see "Factors Affecting Future Results and
Forward-Looking Statements" of the Company's Form 10-K for the fiscal year
ended December 31, 1996.
Page 8
<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 is defending itself vigorously.
On March 31, 1997, the Company filed a patent infringement lawsuit
against Neuromedical Systems, Inc. in the United States District Court for
the Western District of Washington. The complaint alleges patent
infringement and seeks preliminary and permanent injunctions against
Neuromedical Systems, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
Exhibit No. Description
----------- ------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1997.
Page 9
<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: May 13, 1997 By: /s/ ALAN C. NELSON
---------------------
Alan C. Nelson
President and Chief Executive Officer
By: /s/ WILLIAM L. SCOTT
-----------------------
William L. Scott
Vice President and Chief Financial Officer
By: /s/ ROBERT C. BATEMAN
-----------------------
Robert C. Bateman
Corporate Controller
Page 10
<PAGE>
NEOPATH, INC.
INDEX TO EXHIBITS
Exhibit No. Description
---------- ------------------------
27 Financial Data Schedule
Page 11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1997 Form 10-Q and is qualified in its entirety by reference to such
financial statements and footnotes.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,979,624
<SECURITIES> 39,558,456
<RECEIVABLES> 1,937,802
<ALLOWANCES> 0
<INVENTORY> 7,224,027
<CURRENT-ASSETS> 62,270,108
<PP&E> 4,922,865
<DEPRECIATION> 0
<TOTAL-ASSETS> 73,914,856
<CURRENT-LIABILITIES> 4,839,448
<BONDS> 0
0
0
<COMMON> 139,879,171
<OTHER-SE> (70,965,834)
<TOTAL-LIABILITY-AND-EQUITY> 73,914,856
<SALES> 0
<TOTAL-REVENUES> 2,234,552
<CGS> 0
<TOTAL-COSTS> 1,077,512
<OTHER-EXPENSES> 8,082,527
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,485
<INCOME-PRETAX> (6,186,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,186,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,186,306)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> 0
</TABLE>
