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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO ----------- ---------
COMMISSION FILE NUMBER: 0-22179
SPECTRX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE | 58-2029543 |
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) | (I.R.S. EMPLOYER IDENTIFICATION NUMBER) |
6025A UNITY DRIVE
NORCROSS, GEORGIA 30071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(770) 242-8723
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
The number of issued and outstanding shares of the Registrant's Common Stock, $0.001 par value, as of September 30, 2003, was 11,324,708
SPECTRX, INC.
INDEX
SPECTRX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, | December 31, 2002 | |||||
| ASSETS | ||||||
| CURRENT ASSETS | ||||||
| Cash and cash equivalents | $501 | $1,165 | ||||
| Restricted cash | 0 | 122 | ||||
| Accounts receivable, net | 90 | 291 | ||||
| Inventories | 181 | 643 | ||||
| Other current assets | 1,194 | 776 | ||||
| Total Current Assets | 1,966 | 2,997 | ||||
| NON-CURRENT ASSETS | ||||||
| Property & equipment, net | 587 | 546 | ||||
| Intangible assets | 3,600 | 3,852 | ||||
| Due from related parties | 0 | 77 | ||||
| Total Non-Current Assets | 4,187 | 4,475 | ||||
| TOTAL ASSETS | $6,153 | $7,472 | ||||
| LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) | ||||||
| CURRENT LIABILITIES | ||||||
| Accounts payable | $522 | $565 | ||||
| Accrued liabilities | 794 | 666 | ||||
| Deferred gain | 2,000 | 0 | ||||
| Redeemable preferred stock - current portion | 1,050 | 700 | ||||
| Notes payable | 1,000 | 0 | ||||
| Total Current Liabilities | 5,366 | 1,931 | ||||
| COLLABORATIVE PARTNER ADVANCE | 381 | 381 | ||||
| REDEEMABLE PREFERRED STOCK, LESS CURRENT PORTION | 3,755 | 4,324 | ||||
STOCKHOLDERS' EQUITY (DEFICIT) | ||||||
| Preferred stock | 1,230 | 1,185 | ||||
| Common stock | 11 | 11 | ||||
| Additional paid-in-capital | 48,036 | 47,913 | ||||
| Treasury stock | (95) | (38) | ||||
| Deferred compensation | (79) | (88) | ||||
| Notes receivable from officers | (16) | (47) | ||||
| Accumulated deficit | (52,436) | (48,100) | ||||
| Total Stockholders' Equity (Deficit) | (3,349) | 836 | ||||
| TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) | $6,153 | $7,472 | ||||
The accompanying notes are an integral part of the financial statements.
SPECTRX, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30, | Nine Months Ended | ||||||||
2003 | 2002 | 2003 | 2002 | ||||||
| REVENUE | |||||||||
| Product sales | $209 | $598 | $1,136 | $1,924 | |||||
| Collaborative agreements | 0 | 1,000 | 0 | 1,100 | |||||
| Total | 209 | 1,598 | 1,136 | 3,024 | |||||
| EXPENSES | |||||||||
| Cost of sales | 216 | 356 | 708 | 1,173 | |||||
| Research & development | 1,091 | 1,332 | 3,310 | 4,658 | |||||
| Sales & marketing | 191 | 414 | 560 | 1,454 | |||||
| General & administrative | 555 | 569 | 1,632 | 2,414 | |||||
| Total | 2,053 | 2,671 | 6,210 | 9,699 | |||||
| Operating loss | (1,844) | (1,073) | (5,074) | (6,675) | |||||
| GAIN ON SALE OF BILICHEK PRODUCT LINE | 0 | 0 | 1,062 | 0 | |||||
| INTEREST & OTHER INCOME (EXPENSE) | (29) | 24 | (98) | 81 | |||||
| NET LOSS | (1,873) | (1,049) | (4,110) | (6,594) | |||||
| Preferred stock dividends | (73) | (78) | (226) | (236) | |||||
| LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | ($1,946) | ($1,127) | ($4,336) | ($6,830) | |||||
| Net Loss Per Share | |||||||||
| Basic | ($0.17) | ($0.10) | ($0.39) | ($0.61) | |||||
| Diluted | ($0.17) | ($0.10) | ($0.39) | ($0.61) | |||||
| Common Equivalent Shares Outstanding | |||||||||
| Basic | 11,248 | 11,210 | 11,258 | 11,196 | |||||
| Diluted | 11,248 | 11,210 | 11,258 | 11,196 | |||||
The accompanying notes are an integral part of the financial statements.
SPECTRX, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months | ||||||||||
2003 | 2002 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
| Net loss | ($4,110) | ($6,594) | ||||||||
| Adjustments to reconcile net loss to net cash used in | ||||||||||
| operating activities: | ||||||||||
| Depreciation & amortization | 365 | 410 | ||||||||
| Loss on retirement of assets | 0 | 4 | ||||||||
| Amortization of deferred compensation | 87 | (61) | ||||||||
| Gain on sale of BiliChek product line | (1,062) | 0 | ||||||||
| Changes in assets and liabilities: | ||||||||||
| Accounts receivable | 201 | 799 | ||||||||
| Inventory | (212) | (338) | ||||||||
| Other current assets | (400) | (668) | ||||||||
| Other assets | 0 | (22) | ||||||||
| Accounts payable | (43) | (453) | ||||||||
| Accrued liabilities | (98) | (329) | ||||||||
| Total adjustments | (1,162) | (658) | ||||||||
| Net cash used in operating activities | (5,272) | (7,252) | ||||||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||
| Purchase of property & equipment | (163) | (157) | ||||||||
| Cash proceeds from sale of BiliChek product line | 4,000 | 0 | ||||||||
| Net cash (used in) provided by investing activities | 3,837 | (157) | ||||||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||
| Due from related parties | 31 | 0 | ||||||||
| Proceeds from issuance of notes payable | 1,000 | 0 | ||||||||
| Payment on debt | (400) | 0 | ||||||||
| Proceeds from issuance of common stock (net of issuance costs) | 18 | 241 | ||||||||
| Net cash provided by financing activities | 649 | 241 | ||||||||
| NET DECREASE IN CASH AND | ||||||||||
| CASH EQUIVALENTS | (786) | (7,168) | ||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 1,287 | 9,458 | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $501 | $2,290 | ||||||||
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited interim financial statements included herein have been prepared by SpectRx. These statements reflect all adjustments, all of which are of a normal, recurring nature, and which are, in the opinion of management, necessary to present fairly the financial position as of September 30, 2003, the results of operations for the three months and nine months ended September 30, 2003 and 2002, and the cash flows for the nine months ended September 30, 2003 and 2002. The results of operations for the three months and nine months ended September 30, 2003 and 2002 are not necessarily indicative of the results for a full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Preparing financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Our accounting policies continue unchanged from December 31, 2002. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.
We have a limited operating history upon which our prospects can be evaluated. Our prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate. We have experienced operating losses since our inception, and, as of September 30, 2003, we have an accumulated deficit of $52.4 million. To date, we have engaged primarily in research and development efforts. We first generated revenues from product sales in 1998, but do not have significant experience in manufacturing, marketing or selling our products. Our development efforts may not result in commercially viable products, and we may not be successful in introducing our products. Moreover, required regulatory clearances or approvals may not be obtained in a timely manner, or at all. Our products may not ever gain market acceptance, and we may not ever generate significant revenues or achieve profitability. The development and commercialization of our products will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. We expect operating losses to continue through at least 2003 as we continue to expend substantial resources to complete development of our products, obtain regulatory clearances or approvals, build our marketing, sales, manufacturing and finance organizations and conduct further research and development.
In addition, a portion of our revenues and profits are expected to be derived from (a) royalties that we will receive from Respironics, Inc. resulting from sales of the BiliChek® infant jaundice products and (b) from the insulin delivery products developed by our subsidiary, Sterling Medivations, Inc. ("Sterling"). The royalties that we expect to receive from Respironics and profits from Sterling products depend on sales of these products. We intend to market our insulin delivery products directly to distributors and other customers. Respironics may not be able to sell sufficient volumes of the infant jaundice products to generate substantial royalties for us.
Our financial statements have been prepared and presented on a basis assuming we will continue as a going concern. Management is evaluating various funding alternatives and believes funds will be available from obtaining additional financing and from sales and royalty revenue sufficient to support planned operations through December 31, 2003. However, there can be no assurance that we will be able to raise additional funds or achieve planned sales volumes. These conditions raise substantial doubt about our ability to continue as a going concern through at least December 31, 2003. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
2. SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are included in the audited financial statements and notes thereto for the year ended December 31, 2002 included in our annual report on Form 10-K filed with the Securities and Exchange Commission.
In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," although it retains the fundamental provisions of SFAS No. 121 related to the recognition and measurement of the impairment of long-lived assets to be "held and used." We adopted SFAS No. 144 on January 1, 2002. The March 6, 2003 sale of the BiliChek assets has been accounted for in accordance with SFAS No. 144 (see Note 7).
We use the intrinsic value method for valuing our awards of stock options and restricted stock and recording the related compensation expense, if any, in accordance with Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations. FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," amends the disclosure provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," and APB Opinion No. 28, "Interim Financial Reporting," to require disclosure in the summary of significant accounting policies of the effects of an entity's policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information follows (in thousands, except per share data):
Three Months | Nine Months | ||||||
2003 | 2002 | 2003 | 2002 | ||||
| Net loss attributable to common stockholders, as reported | ($1,946) | ($1,127) | ($4,336) | ($6,830) | |||
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 0 | 0 | 0 | 0 | |||
| Deduct: Total stock-based employee compensation expense determined under fair value based method of all awards, net of related tax effects | (161) | (192) | (493) | (575) | |||
| Pro forma net loss | ($2,107) | ($1,319) | ($4,829) | ($7,405) | |||
| Loss per share: | |||||||
| Basic & diluted, as reported | ($0.17) | ($0.10) | ($0.39) | ($0.61) | |||
| Basic & diluted, pro forma | ($0.19) | ($0.12) | ($0.43) | ($0.66) | |||
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and have not had a material effect on our financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002 and are discussed in Note 8.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51." This Interpretation provides clarification on the consolidation of certain entities in which equity investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Such entities are defined as variable interest entities ("VIEs"). This Interpretation requires that VIEs be consolidated by the entity considered to be the primary beneficiary of the VIE. The Interpretation is effective immediately for newly created VIEs after January 31, 2003 and effective July 1, 2003 for any VIEs created prior to February 1, 2003. We adopted Interpretation No. 46 on July 1, 2003. We believe we have no VIEs, but we are evaluating the impact that it may have on any future activities.
3. STERLING MEDIVATIONS
On December 31, 2001, we purchased the outstanding shares of Sterling, now doing business as SimpleChoice®. Sterling was a developer of innovative insulin delivery products for people with diabetes. The acquisition of Sterling expanded our diabetes business by adding a portfolio of insulin delivery products, cleared by the Food and Drug Administration, including consumables for the rapidly growing insulin pump market. As a result of the merger, we issued a total of 612,562 shares of our common stock in exchange for all of the outstanding Sterling common stock and preferred stock and reserved 22,151 shares of our common stock for issuance upon exercise of stock options assumed in the merger with an estimated fair market value of $62,159. Sterling stockholders and option holders will be entitled to receive up to an aggregate of 1,234,567 additional shares of our common stock in the future if the SimpleChoice product line achieves specified financial goals. In connection with the acquisition of Sterling, we entered into employment agreements with four employees for terms, which expired in June 2003. The excess of the cost over the estimated fair value of net tangible assets acquired amounts to approximately $4.1 million and has been included in intangible assets in the accompanying consolidated balance sheets. The $4.1 million purchase price excess has been allocated between patents and non-compete agreements. Accumulated amortization of the Company's intangible assets as of September 30, 2003 is approximately $589,000. The acquisition has been accounted for as a purchase in accordance with SFAS No. 141, "Accounting for Business Combinations."
4. LITIGATION
We are involved in certain litigation arising in the ordinary course of business. In management's opinion, the ultimate resolution of these matters will not have a material adverse effect on our results of operations or financial position. See Part II, Item 1, "Legal Proceedings," for a discussion of significant litigation matters.
5. STOCKHOLDERS' EQUITY
Common Stock
In connection with a June 1994 sale of approximately 325,500 shares of restricted stock, we loaned two of our officers $48,000, of which $31,000 was outstanding at December 31, 2002. These full recourse loans were secured by the related shares of our common stock held by the officers, bore interest at 6% per annum, and became payable on December 31, 2002. Outstanding balances are classified as a reduction of stockholders' equity in the accompanying balance sheet at December 31, 2002. These notes were fully satisfied in January and February 2003, and the collateral was released.
In November 2002, we issued a note to a former employee for the exercise of options for 21,000 shares of common stock. The shares are held in escrow for collateral on the note. The note is payable upon sale of all the shares or December 31, 2003, whichever occurs earlier. The outstanding note balance as of September 30, 2003 of approximately $16,000 is reflected in stockholders' equity.
In October 1996, we loaned two officers a total of $400,000. The loans were secured by shares of common stock of Laser Atlanta Optics, Inc. ("LAO") and shares of our common stock. We and LAO are related through a common group of shareholders. The loans, which were recourse only to the extent of the collateral, bore interest at 6.72% per annum and became due and payable on December 31, 2002. During February 2003, we took possession of the collateral. The then current fair value of the shares of our common stock of $57,000 is recorded as treasury stock in the accompanying September 30, 2003 balance sheet. Subsequently, LAO entered into an agreement to sell its assets; SpectRx has received $18,000 to date in settlement of that sale.
During the three months ended September 30, 2003, we recorded stock compensation expense of approximately $12,000 for the issuance of options to non-employees
6. PREFERRED STOCK
In January 1997, we authorized 5,000,000 shares of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to fix dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions.
In November 1999, the board of directors designated 525,000 shares of the preferred stock as redeemable convertible preferred stock. Dividends are payable annually in cash or additional shares of the preferred stock at a rate of 6% per annum. During the years ended December 31, 2000, 2001 and 2002, we accrued dividends in the form of shares of redeemable convertible preferred stock of $315,000 in each year. The shares of preferred stock, together with any accrued but unpaid dividends, are convertible into shares of common stock at the greater of $9.39 per share or the average of the closing sales price for 15 days prior and 15 days subsequent to the conversion and automatically convert on December 31, 2004 at the then conversion rate. The shares were mandatorily redeemable at $10 per share, plus accrued but unpaid dividends, at the later of September 30, 2002 or 60 days subsequent to the date upon which we give notice to the holder of its right to redeem the shares. The shares have a liquidation preference of $10 per share, plus all accrued but unpaid dividends.
In November 1999, Abbott Laboratories, Inc. ("Abbott"), a former collaborative partner, subscribed to 525,000 shares of redeemable convertible preferred stock for consideration of $5,250,000, of which $2,750,000 was received in November 1999 and $2,500,000 was received in January 2000.
In September 2001, we entered into an agreement with Abbott whereby Abbott waived its right to redeem 100,000 shares of its redeemable convertible preferred stock plus the related accrued but unpaid dividends.
In September 2002, Abbott delivered notice of its election to cause the redemption of the 425,000 shares of redeemable convertible preferred stock eligible for redemption. On March 7, 2003, we reached a settlement with Abbott regarding their disputes in connection with the prior termination of the parties' Research & Development and License Agreement and the election of Abbott to have us redeem the shares of preferred stock. Abbott had previously elected to have 425,000 shares of preferred stock redeemed, with 162,500 shares to be redeemed on December 30, 2002 at $10.00 per share, plus accrued dividends, and the remaining shares to be redeemed no later than January 31, 2004. Under the settlement, which included mutual releases, we have agreed to make quarterly cash payments to Abbott during 2003 and 2004 and end of the year lump sum payments in 2005 and 2006 to redeem 425,000 shares of preferred stock and to pay accrued dividends as to such shares. We have paid $400,000 to Abbott through September 30, 2003. Our remaining yearly financial obligations to Abbott under the agreement are approximately $0.3 million, $1.3 million, $1.8 million and $1.9 million during 2003, 2004, 2005 and 2006, respectively. Under the settlement, neither party admitted any liability or wrongdoing.
Dividends are accrued on the non-redeemable preferred stock at a rate of 6% per year and are included in the short-term portion and long-term portion of redeemable preferred stock in the accompanying consolidated balance sheets.
7. DEBT
On July 30, 2003, for the purposes of obtaining short-term financing until permanent financing can be secured, the Company entered into separate promissory note agreements with a group of individuals that aggregated $1.0 million. The notes bear interest at 12% per annum and mature on January 31, 2004. In accordance with the terms of the promissory note agreements, the Company will issue warrants, exercisable at $2.25 per share at any time after January 30, 2004 until July 30, 2007, to the group of individuals for each month the notes are outstanding. As of September 30, 2003, 50,000 warrants have been issued. The Company has recorded approximately $22,000 as interest expense for the estimated fair value of these 50,000 warrants as determined under the Black-Sholes option-pricing model.
8. SALE OF BILICHEK PRODUCT LINE
On March 6, 2003, we sold our BiliChek Non-invasive Bilirubin Analyzer product line and related assets to Respironics. Respironics had previously been our exclusive U.S. licensee and distributor of the product line. The base cash purchase price was $4 million with an additional $1 million to be paid based upon completion of certain product development work, and up to an additional $6.25 million to be paid in royalties and earn out payments over the next five years based upon the achievement of certain operating results by Respironics. The purpose of the sale of the BiliChek products was to enable us to focus on expanding our diabetes and cancer detection businesses. At December 31, 2002, fixed assets of approximately $443,000, which were fully depreciated, and inventory of $643,000 were included in the sale. BiliChek revenue was approximately $2.5 million in 2002, which represented 65% of our total revenue for the year.
In connection with the agreement related to the asset sale, we agreed to provide to Respironics certain transition-related services and some short-term contract manufacturing and technical support. In addition to the product development work noted above, we also agreed to pay Respironics $2.0 million, as a penalty if pursuant to such product development work we are unable to complete the design and related work necessary to replace certain component parts used in the BiliChek device, which beyond current inventory levels are no longer commercially available. $2.0 million of the $4.0 million received has been recorded as deferred gain on the accompanying September 30, 2003 balance sheet.
Supplemental Cash Flow Financial Information
(in thousands)
Sale of BiliChek
| Inventory | $675 | |
| Property | 10 | |
| Accrued liabilities | 243 | |
| Consultant fees | 10 | |
| Deferred gain | 2,000 | |
| Gain on sale | 1,062 | |
| Cash received | $4,000 | |
9. GUARANTEES
As discussed in Note 3, in November 2002, the FASB issued FIN 45. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations do not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. As discussed in Note 2, the adoption of FIN 45 did not have a material impact on our results of operations or financial condition and did not result in any additional liabilities as of September 30, 2003 associated with guarantees covered by this interpretation.
Warranty
We provide for the estimated cost of product warranties at the time revenue is recognized. The estimated warranty obligation is affected by new unit sales and units sold less than 18 months prior to the dates of the financial statements. If actual product repair costs differ from estimates, revisions to the estimated warranty liability would be required. We evaluate our warranty obligations on a product line basis.
Information regarding the changes in our aggregate product warranty liabilities is as follows for the nine month period ended September 30, 2003 (in thousands):
| Balance, December 31, 2002 | $29 |
| Accruals for warranties issued during the period | 7 |
| Settlements made (in cash or in kind) during the period | (8) |
| Balance, September 30, 2003 | $28 |
10. LOSS PER COMMON SHARE
Loss per common share is computed using SFAS No. 128, "Earnings per Share." SFAS No. 128 established standards for the computation, presentation and disclosure of earnings per share. Basic loss per share amounts are computed by dividing the net loss by the weighted average number of common shares outstanding during the periods. Dilutive earnings per share calculations include the potential exercise of outstanding stock options, warrants and convertible securities. The effects of stock options, warrants and convertible securities have not been included in the Company's 2003 and 2002 loss per share computations as their effect would have been anti-dilutive. Potential common shares totaling 1,585,515 and 1,399,860, which consist of outstanding stock options and warrants, are considered to be anti-dilutive at September 30, 2003 and 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements in this report which express "belief", "anticipation" or "expectation" as well as other statements which are not historical facts are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under "Risk Factors" in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in, or incorporated by reference into, this report. Examples of these uncertainties and risks include, but are not limited to:
critical components of our products;
The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this report.
OVERVIEW
We were incorporated on October 27, 1992, and since that date we raised capital through the sale of preferred stock, issuance of debt securities, public and private sales of common stock, funding from collaborative arrangements and sales of assets. Following our initial funding in early 1993, we immediately began research and development activities with the objective of commercializing less invasive diagnostic, screening and monitoring products. As part of our initial business strategy, we established arrangements with leading medical device companies for the development, commercial-ization and introduction of some of our products. We developed collaborative arrangements with Abbott Laboratories, Welch Allyn, Inc. and Respironics, Inc. for our continuous glucose monitoring, cervical cancer detection product and BiliChek products, respectively. Over the past year, we have sold our BiliChek business to our collaborative partner, Respironics, and have agreed to terminate our collaborative relationships with Abbott for our continuous glucose monitoring product and with Welch Allyn for our cervical cancer detection product. In addition, we have a collaborative agreement with Roche Diagnostics BMC related to a diabetes detection product, although there is currently no development or marketing activity with regard to this product, and we expect no revenue from this product in the foreseeable future. We are pursuing a collaborative partner for our glucose monitoring product, and we may seek to establish strategic relationships with other leading companies for the development, commercialization, and introduction of additional products, if it is the best path to commercialization for those products. In addition, we are seeking venture capital funding for our non-invasive cancer technology.
In December 2001, we acquired 100% of the common stock of Sterling Medivations, Inc. (doing business as SimpleChoice), a company formed for the purpose of developing and marketing insulin-delivery products.
We have a limited operating history upon which our prospects can be evaluated. Our prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate. We have experienced operating losses since our inception, and, as of September 30, 2003, we have an accumulated deficit of about $52.4 million. To date, we have engaged primarily in research and development efforts. We first generated revenues from product sales in 1998, but do not have significant experience in manufacturing, marketing or selling our products. Our development efforts may not result in commercially viable products, and we may not be successful in introducing our products. Moreover, required regulatory clearances or approvals may not be obtained in a timely manner, or at all. Our products may not ever gain market acceptance, and we may not ever generate significant revenues or achieve profitability. The development and commercialization of our products will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. We expect our operating losses to continue through at least 2003 as we continue to expend substantial resources to introduce our SimpleChoice® product line, further the development of our products, obtain regulatory clearances or approvals, build our marketing, sales, manufacturing and finance organizations and conduct further research and development.
Our product revenues to date have been limited. For 2002, a substantial majority of our product line revenues came from our BiliChek product line, which we sold in March 2003. We expect that the majority of our revenue in 2004 will be derived from sales of our SimpleChoice insulin delivery products, the first product of which was introduced to the market in December 2002. Our other products for glucose monitoring and cervical cancer detection are still in development.
We currently sell our SimpleChoice products to distributors, which then distribute our products, resulting in revenues from distributor sales. The channels for sales of our future glucose monitoring and cervical cancer detection products are not currently established. The royalties and earn out that we expect to receive from Respironics depend on sales of the applicable BiliChek products. We, or any collaborative partner we secure, may not be able to sell sufficient volumes of our products to generate substantial revenues or profits for us.
CRITICAL ACCOUNTING POLICIES
Our material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition are discussed below. Because we are still early in our enterprise development, the number of these policies requiring explanation is limited. As we begin to generate increased revenue from different sources, we expect that the number of applicable policies and complexity of the judgments required will increase.
Currently our policies that could require critical management judgment are in the areas of revenue recognition, reserves for accounts receivable, accruals of product warranties and inventory evaluation.
Revenue Recognition: We recognize revenue from sales of products or services upon shipment of products or delivery of services. We also recognize milestone revenue from our collaborative partners when a milestone has been accomplished or when we, and our partner, agree that a milestone is due. We recognize royalty revenue on the disposable product in the BiliChek line, the BiliCal™, when received by us.
Reserve for Accounts Receivable: We estimate losses from the inability of our customers to make required payments and periodically review the payment history of each of our customers or subsidiaries, as well as their financial condition, and revise our reserves as a result.
Accruals of Product Warranties: We book a cost for warranty work on each of our products at the time of sale and match actual warranty work against that accrual, as the work is performed. We periodically review the level of warranty accrual and the actual warranty work incurred, and adjust these as needed.
Clinical Accruals: We accrue a contracted per patient cost as patients are seen at each contracted clinical location.
Inventory Valuation: Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories.
QUARTER OVERVIEW
On August 12, we announced that we were seeking venture capital for our cancer detection business and focusing on reaching profitability through sales of our SimpleChoice insulin delivery disposables products, while continuing to develop the continuous glucose monitoring product.
On August 13, our common stock began trading on the OTC Bulletin Board. We no longer met the $2.5 million shareholder's equity, $35 million market capitalization or net income requirements for continued listing on the NASDAQ SmallCap Market.
On October 14, we announced the start of new clinical studies of our interstitial fluid continuous glucose monitoring technology using an advanced glucose sensor. The study is the latest in a series of clinical tests intended to refine the integration of commercially available sensors with our interstitial fluid collection technology. We are evaluating sensor technology and discussing potential strategic partnerships with several qualified companies.
On October 21, we announced that we were granted an important patent for our SimpleChoice patch insulin delivery technology. U.S. patent number 6,629,949 is the first of what is expected to be a series of patents covering the infusion patch and insulin infusion micropump technology. The first patch product is an insulin pump infusion set, and is expected to be available later this year. We believe the annual U.S. insulin pump infusion set market is approximately $270 million.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002.
General. Net loss attributable to common stockholders was $1.9 million during the three months ended September 30, 2003 as compared to a net loss attributable to common stockholders of $1.1 million for the same period in 2002. The increased loss of $800,000 for the quarter ended September 30, 2003 versus the same quarter of 2002 was due to less revenue resulting from sale of our BiliChek product line in March 2003, and $1.0 million less in milestone revenue from our collaborative agreement with Abbott. The $1.6 million reduction of revenues was partially offset by a reduction in operating costs of $800,000.
Revenue. We have historically received a significant portion of our revenue from development milestone payments from one or more of our strategic partners. Product revenue decreased to $209,000 for the quarter ended September 30, 2003 from $598,000 for the same period in 2002. Product revenue is lower for the 2003 quarter than for the comparable period in 2002 due to the sale of the BiliChek product line in March 2003. BiliChek revenue was $534,000 in the three months ending September 30, 2002 and $0 in the comparable quarter of 2003. SimpleChoice and other revenues were $49,000 and $160,000 for the quarter ended September 30, 2003 versus $0 and $64,000 for the comparable quarter of 2002.
Cost of Sales. Cost of sales decreased to $216,000 for the three months ended September 30, 2003 from $356,000 for the same period in 2002. This decrease is due to lower costs as a result of the sale of the BiliChek product line. We expect costs of sales to increase in the future with the ramp up and sales of products associated with our SimpleChoice product line.
Research and Development Expenses. Research and development expenses decreased to approximately $1.1 million for the three months ended September 30, 2003 compared to $1.3 million for the same period in 2002. The decrease in research and development expenses was primarily due to reductions in salary expense of $122,000 and clinical expense of $87,000. We expect research and development expenses to remain at a high level this year as we continue development and expand clinical trials for products in both our cancer technology and our diabetes management business.
Sales and Marketing Expenses. Sales and marketing expenses decreased to $191,000 during the three months ended September 30, 2003 from $414,000 for the same period in 2002. This reduction is the result of no BiliChek marketing expense in the second quarter of 2003, versus $88,000 in the same quarter of 2002, and lower marketing expense of $135,000 related to the SimpleChoice product line. Marketing expenses are expected to increase in the future as we continue to market and sell additional SimpleChoice products.
General and Administrative Expenses. General and administrative expenses decreased slightly to $555,000 during the three months ended September 30, 2003 compared to $569,000 for the same period in 2002. Although there was a $50,000 decrease in salaries and a $30,000 decrease in other outside services for the quarter ended September 30, 2003, there was an increase of $66,000 in costs associated with fund raising activities. General and administrative expenses are expected to increase in the future with increases in SimpleChoice administrative needs.
Net Interest, Other Income and Expense. Net interest and other income and expense decreased to an expense of $29,000 during the quarter as compared to income of $24,000 during the same quarter of 2002. The decrease is due to lower cash balances and interest expense associated with certain scheduled payments relating to our continuous glucose monitoring patents and our $1.0 million bridge loan.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002.
General. Net loss attributable to common stockholders was $4.3 million during the nine months ended September 30, 2003 as compared to a net loss attributable to common stockholders of $6.8 million for the same period in 2002. The $2.5 million improvement was due to lower cost of goods of $465,000, decreased spending of $3.0 million and the sale of our BiliChek product line, which resulted in a gain of $1.1 million, offset by a $1.9 million decrease in revenues.
Revenue. Product revenue decreased to $1.1 million for the nine months ended September 30, 2003 from $1.9 million for the same period in 2002. Because the BiliChek product line was sold in March 2003, BiliChek revenues were down to $684,000 for nine months ended September 30, 2003, versus $1.6 million for the same period of 2002. SimpleChoice sales are $126,000 and other revenues are $326,000 for the nine months ended September 30 2003, versus $0 and $282,000 for the same period of 2002.
Cost of Sales. Cost of sales decreased to $708,000 for the nine months ended September 30, 2003 from $1.2 million for the same period in 2002. This decrease is due primarily to lower BiliChek costs and excess capacity production charges, which were lower for the 2003 period than in the 2002 period.
Research and Development Expenses. Research and development expenses decreased to approximately $3.3 million for the nine months ended September 30, 2003 compared to $4.7 million for the same period in 2002. The decrease in research and development expenses was primarily due to reductions in salary expense of $839,000 along with reduced spending on our continuous glucose monitoring and cancer projects while awaiting additional funding.
Sales and Marketing Expenses. Sales and marketing expenses decreased to $560,000 during the nine months ended September 30, 2003 from $1.5 million for the same period in 2002, due to the elimination of our initial marketing costs relating to the SimpleChoice product line and the reduction of our BiliChek marketing function.
General and Administrative Expenses. General and administrative expenses decreased to $1.6 million during the nine months ended September 30, 2003 compared to $2.4 million for the same period in 2002. The decrease is primarily due to a decrease in costs associated with salaries of $141,000, legal expenses of $156,000, bonus expense of $180,000 and outside services and consulting fees of $198,000.
Net Interest and Other Income. Net interest and other income decreased to an expense of $98,000 for the nine months ended September 30, 2003 as compared to income of $81,000 for the same period in 2002. The primary causes of this decrease are lower cash balances and interest relating to certain scheduled payments on our continuous glucose monitoring patents and our $1.0 million bridge loan.
During the year, we have recognized about $1.1 million in gain on the sale of our BiliChek product line.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through private sales of debt and private and public sales of our equity securities. From October 27, 1992 (inception) through September 30, 2003, we received approximately $54.3 million in proceeds from sales of our debt and equity securities. At September 30, 2003, we had cash of approximately $501,000 and a working capital deficit of approximately $3.4 million, primarily due to the inclusion in current liabilities of the $2.0 million deferred gain recorded on the sale of assets related to the BiliChek business.
In August 2002, Abbott notified us that it intended to redeem the 425,000 shares of redeemable convertible preferred stock eligible to be redeemed. Under a settlement agreement related to the termination of our collaborative arrangement with Abbott, we agreed with Abbott to redeem the 425,000 shares of preferred stock on an extended schedule through 2006 (see Part II, Item 1. - Legal Proceedings).
Our major cash flows in the nine months ended September 30, 2003 consisted of cash outflows of $5.3 million from operations. We also received $4.0 million from the sale of our BiliChek product line to Respironics. We had cash outflows of $163,000 for additions to property and equipment and paid down debt relating to our agreement with Abbott by $400,000. We also received $1.0 million during the quarter on a bridge loan.
We have historically also received funds from milestones and reimbursements from our collaborative partners. About 30% of our funds inflow has come from these sources. We are currently seeking an additional collaborative partner for our glucose monitoring technology. Until we reach an agreement with a new partner, we expect no such milestones or reimbursements. We have been successful in securing grants to support some of our programs, including a $1.4 million grant, to be spent over two years, from the National Cancer Institute for our cervical cancer program.
In March 2003, we sold our BiliChek Non-invasive Bilirubin Analyzer product line and related assets to Respironics. Respironics had previously been our exclusive U.S. licensee and distributor of the product line. The base cash purchase price was $4 million with an additional $1 million to be paid based upon completion of certain product development work, and up to an additional $6.25 million to be paid in royalties and earn out payments over the next five years based upon the achievement of certain operating results by Respironics. Of the initial $4.0 million cash payment, $2.0 million has been recognized and offset against the net assets sold to record a gain recognized on the sale of the $1.1 million in the first quarter. The additional $2.0 million paid has been recorded as deferred gain on our September 30, 2003 Balance Sheet under Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", as there exists a penalty for non-performance of certain requirements under the asset sale agreement. We estimate the probability of this penalty is remote.
On July 30, 2003, we issued notes to five individuals totaling $1.0 million, including two officers of the company under separate promissory note agreements. These notes were issued as a temporary financing with a term of six months from issuance. The notes bear interest at a rate of 12%, paid monthly. The loan agreement includes a provision for the issuance of warrants at the same time interest payments are due. To date, 75,000 warrants have been issued in connection with these notes. The notes may be pre-paid at any time after September 30, 2003.
We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements in addition to those sources. Management is evaluating various funding alternatives and believes funds will be available from obtaining additional financing and from sales and royalty revenue sufficient to support planned operations through December 31, 2003. However, there can be no assurance that we will be able to raise additional funds or achieve planned sales volumes. These conditions raise substantial doubt about our ability to continue as a going concern through at least December 31, 2003. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. We will also need to secure a collaborative partner to move forward with our continuous glucose program and will need funding in addition to that provided by grants to complete our pivotal trials for our cervical cancer product in a timely fashion.
We currently invest our excess cash balances primarily in short-term, investment-grade, interest-bearing obligations or direct or guaranteed obligations of the U.S. government until such funds are utilized in operations. Substantial capital will be required to develop our products, including completing product testing and clinical trials, obtaining all required United States and foreign regulatory approvals and clearances, and commencing and scaling up manufacturing and marketing our products. Any failure of our collaborative partners to fund our development expenditures, or our inability to obtain capital through other sources, would have a material adverse effect on our business, financial condition and results of operations.
RISK FACTORS
The following risk factors should be considered carefully in addition to the other information presented in this report. This report contains forward looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward looking statements. Factors that might cause such differences include, but are not limited to, the following:
IF WE CANNOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED, OR ACHIEVE PROFITABILITY WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
Our independent auditors have included an explanatory paragraph in their 2002 audit report referring to our recurring operating losses and a substantial doubt about our ability to continue as a going concern. Management is evaluating various funding alternatives and believes funds will be available from obtaining additional financing and from sales and royalty revenue sufficient to support planned operations through December 31, 2003. However, there can be no assurance that we will be able to raise additional funds or achieve planned sales volumes. If we do not secure additional funding, we will be unable to conduct all of our product development efforts as planned, and we may need to cease operations or sell assets. In addition, the existence of the explanatory paragraph in the audit report may in and of itself cause our stock price to decline as certain investors may be restricted or precluded from investing in companies that have received this notice in an audit report.
Our management has implemented plans designed to reduce our cash requirements through reductions in operating expenditures and reductions in development activities should collaborative partners or additional funding not be secured. However, there can be no assurance that we will be able to successfully implement these plans or that we will be able to do so without significantly harming our business, financial condition or results of operations.
WE DO NOT HAVE ALONG OPERATING HISTORY, WHICH MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS.
Because limited historical information is available on our revenue trends and operations, it will be difficult for you to evaluate our business. Our prospects must be considered in light of the substantial risks, expenses, uncertainties and difficulties encountered by entrants into the medical device industry, which is characterized by increasing intense competition and a high failure rate.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES TO CONTINUE.
We have never been profitable, and we have had operating losses since our inception. We expect our operating losses to continue as we continue to expend substantial resources to launch the SimpleChoice product line, to complete development of our products, obtain regulatory clearances or approvals, build our marketing, sales, manufacturing and finance organizations, and conduct further research and development. To date, we have engaged primarily in research and development efforts. The further development and commercialization of our products will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. We have only generated limited revenues from product sales. Our accumulated deficit was about $52.4 million at September 30, 2003.
IF WE CANNOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED, WE WILL NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
We will require substantial additional capital to develop our products, including completing product testing and clinical trials, obtaining all required regulatory approvals and clearances, beginning and scaling up manufacturing, and marketing our products. We have historically funded a significant portion of our activities through collaborative partners. We are seeking a collaborative partner for our glucose monitoring technology and are seeking targeted funding for our cervical cancer program. Any failure to find collaborative partners to fund our capital expenditures, or our inability to obtain capital through other sources, would limit our ability to grow and operate as planned. Even if we do enter into an agreement with a collaborative partner, the obligations of a collaborative partner to fund our expenditures will be largely discretionary and will depend on a number of factors, including our ability to meet specified milestones in the development and testing of the relevant product. We may not be able to meet these milestones, or our collaborative partner may not continue to fund our expenditures.
We bear responsibility for all aspects of our SimpleChoice product line and our cervical cancer product, which are not being developed with a collaborative partner. In addition to any funds that may be provided by collaborative partners, we will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements. We believe that our existing capital resources, any funds we expect to raise this year, and the funding from prospective collaborative partners will be sufficient to satisfy our funding requirements through 2003, but may not be sufficient to fund our operations to the point of commercial introduction of our glucose monitoring products, our cervical cancer detection product or our full line of diabetes products. Any failure to agree on a collaborative arrangement or to achieve adequate funding in a timely fashion would delay our development programs and could lead to abandonment of one or more of our development initiatives. Any required additional funding may not be available on terms attractive to us, or at all. To the extent we cannot obtain additional funding, our ability to continue to develop and introduce products to market will be limited. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants that would limit how we conduct our business or finance our operations.
WE ARE NO LONGER LISTED ON A NASDAQ MARKET, WHICH MAY AFFECT OUR ABILITY TO OBTAIN ADDITIONAL FUNDS WHEN NEEDED AND THE LIQUIDITY AND VALUE OF OUR COMMON STOCK.
The Nasdaq National Market and SmallCap Markets have minimum listing requirements. In December 2002, we applied for and moved to the Nasdaq SmallCap Market because we could not continue to meet the National Market listing requirements. A key requirement is the level of stockholders' equity. At June 30, 2003, our stockholders' equity was below the minimum Nasdaq requirements and, as a result, our stock was delisted from the SmallCap Market. Our stock is now listed on the OTC Bulletin Board, which does not have similar listing requirements. As a result, our ability to raise additional capital may be impacted and the liquidity and value of our common stock may be impaired.
OUR SIMPLECHOICE PRODUCT LINE HAS A DIFFERENT FOCUS THAN OUR NON-INVASIVE PRODUCTS, AND WE WILL BE REQUIRED TO DEVELOP NEW CAPABILITIES TO SUCCESSFULLY MANAGE THESE OPERATIONS.
Prior to our acquisition of the SimpleChoice product line, it did not have revenues or significant assets. The SimpleChoice product line is also significantly different from our historical product line, which focuses on non-invasive and minimally invasive products. We shipped small quantities of our first SimpleChoice products to be introduced to the market during 2003. SimpleChoice's future business will depend on our ability to develop more fully various functions that will enable it to operate as planned, including manufacturing, marketing, and distribution capabilities. There can be no assurance that we, or our subsidiary doing business as SimpleChoice, will be able to successfully develop or implement these functions.
OUR ABILITY TO SELL OUR PRODUCTS IS CONTROLLED BY GOVERNMENT REGULATIONS, AND WE MAY NOT BE ABLE TO OBTAIN ANY NECESSARY CLEARANCES OR APPROVALS.
The design, manufacturing, labeling, distribution and marketing of medical device products are subject to extensive and rigorous government regulation, which can be expensive and uncertain and can cause lengthy delays before we can begin selling our products.
IN THE UNITED STATES, THE FOOD AND DRUG ADMINISTRATION'S ACTIONS COULD DELAY OR PREVENT OUR ABILITY TO SELL OUR PRODUCTS, WHICH WOULD ADVERSELY AFFECT OUR GROWTH AND STRATEGY PLANS.
In order for us to market our products in the United States, we must obtain clearance or approval from the Food and Drug Administration, or FDA. We cannot be sure:
The premarket approval process is more rigorous and lengthier than the 510(k) clearance process for premarket notifications; it can take several years from initial filing and require the submission of extensive supporting data and clinical information. For example, Roche, as part of our collaborative agreement, previously filed a premarket notification for our diabetes detection product, which was withdrawn when the FDA indicated that this product should be submitted for premarket approval, including submission of clinical study data. We do not have any premarket notifications or premarket approval applications pending, but our cervical cancer detection product and, we believe, our glucose monitoring products will require submission of applications for premarket approval.
The FDA may impose strict labeling or other requirements as a condition of its clearance or approval, any of which could limit our ability to market our products. Further, if we wish to modify a product after FDA clearance of a premarket notification or approval of a premarket approval application, including changes in indications or other modifications that could affect safety and efficacy, additional clearances or approvals will be required from the FDA. Any request by the FDA for additional data, or any requirement by the FDA that we conduct additional clinical studies or submit to the more rigorous and lengthier premarket approval process, could result in a significant delay in bringing our products to market and substantial additional research and other expenditures. Similarly, any labeling or other conditions or restrictions imposed by the FDA on the marketing of our products could hinder our ability to effectively market our products. Any of the above actions by the FDA could delay or prevent altogether our ability to market and distribute our products. Further, there may be new FDA policies or changes in FDA policies that could be adverse to us.
IN FOREIGN COUNTRIES, INCLUDING EUROPEAN COUNTRIES, WE ARE ALSO SUBJECT TO GOVERNMENT REGULATION, WHICH COULD DELAY OR PREVENT OUR ABILITY TO SELL OUR PRODUCTS IN THOSE JURISDICTIONS.
In order for us to market our products in Europe and some other international jurisdictions, we and our distributors and agents must obtain required regulatory registrations or approvals. We must also comply with extensive regulations regarding safety, efficacy and quality in those jurisdictions. We may not be able to obtain the required regulatory registrations or approvals, or we may be required to incur significant costs in obtaining or maintaining any regulatory registrations or approvals we receive. Delays in obtaining any registrations or approvals required to market our products, failure to receive these registrations or approvals, or future loss of previously obtained registrations or approvals would limit our ability to sell our products internationally. For example, international regulatory bodies have adopted various regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. These regulations vary from country to country. In order to sell our products in Europe, we must maintain ISO 9001 certification and CE mark certification, which is an international symbol of quality and compliance with applicable European medical device directives. Failure to receive or maintain ISO 9001 certification or CE mark certification or other international regulatory approvals would prevent us from selling in Europe.
EVEN IF WE OBTAIN CLEARANCE OR APPROVAL TO SELL OUR PRODUCTS, WE ARE SUBJECT TO ONGOING REQUIREMENTS AND INSPECTIONS THAT COULD LEAD TO THE RESTRICTION, SUSPENSION OR REVOCATION OF OUR CLEARANCE.
We, as well as our collaborative partners, will be required to adhere to applicable FDA regulations regarding good manufacturing practice, which include testing, control, and documentation requirements. We are subject to similar regulations in foreign countries. Ongoing compliance with good manufacturing practice and other applicable regulatory requirements will be strictly enforced in the United States through periodic inspections by state and federal agencies, including the FDA, and in international jurisdictions by comparable agencies. Failure to comply with these regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure to obtain premarket clearance or premarket approval for devices, withdrawal of approvals previously obtained, and criminal prosecution. The restriction, suspension or revocation of regulatory approvals or any other failure to comply with regulatory requirements would limit our ability to operate and could increase our costs.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO OBTAIN AND PROTECT THE PROPRIETARY INFORMATION ON WHICH WE BASE OUR PRODUCTS.
Our success depends in large part upon our ability to establish and maintain the proprietary nature of our technology through the patent process, as well as our ability to license from others patents and patent applications necessary to develop our products. If any of our patents are successfully challenged, invalidated or circumvented, or our right or ability to manufacture our products were to be limited, our ability to continue to manufacture and market our products could be adversely affected. In addition to patents, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, through confidentiality and proprietary information agreements. The other parties to these agreements may breach these provisions, and we may not have adequate remedies for any breach. Additionally, our trade secrets could otherwise become known to or be independently developed by competitors.
We have been issued, or have rights to, 32 U.S. patents (including those under license). In addition, we have filed for, or have rights to, 35 U.S. patents (including those under license) that are still pending. There are additional international patents and pending applications. One or more of the patents we hold directly or license from third parties, including those for the disposable components to be used with our glucose monitoring, infant jaundice and insulin delivery products, may be successfully challenged, invalidated or circumvented, or we may otherwise be unable to rely on these patents. These risks are also present for the process we use or will use for manufacturing our products. In addition, our competitors, many of whom have substantial resources and have made substantial investments in competing technologies, may apply for and obtain patents that prevent, limit or interfere with our ability to make, use and sell our products, either in the United States or in international markets.
The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. In addition, the United States Patent and Trademark Office may institute interference proceedings. The defense and prosecution of intellectual property suits, Patent and Trademark Office proceedings and related legal and administrative proceedings are both costly and time consuming. Moreover, we may need to litigate to enforce our patents, to protect our trade secrets or know-how, or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceedings involving us may require us to incur substantial legal and other fees and expenses and may require some of our employees to devote all or a substantial portion of their time to the proceedings. An adverse determination in the proceedings could subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from selling our products in some or all markets. We may not be able to reach a satisfactory settlement of any dispute by licensing necessary patents or other intellectual property. Even if we reached a settlement, the settlement process may be expensive and time consuming, and the terms of the settlement may require us to pay substantial royalties. An adverse determination in a judicial or administrative proceeding or the failure to obtain a necessary license could prevent us from manufacturing and selling our products.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT SALES REVENUES TO SUSTAIN OUR GROWTH AND STRATEGY PLANS.
We expect that the majority of our revenues in 2004 will come from sales of our new SimpleChoice diabetes product line, which has just been launched and some of which is still in development. We sold our BiliChek product line earlier this year and will not have continuing revenue from that source other than future earn out payments. Our ability to collect earn out payments from the BiliChek product line depends on Respironics' efforts in conducting that business. Our glucose monitoring product in development depends on finding a new partner and the collaborative partner's ability to generate sales of our products which will provide us with revenue. We may not be able to successfully commercialize the products we are developing. Even if we do, we, together with any collaborative partners with respect to products being jointly developed, may not be able to sell sufficient volumes of our products to generate profits for us.
WE ARE DEVELOPING OUR CURRENT PRODUCT LINES INDEPENDENTLY FROM ANY COLLABORATIVE PARTNERS, WHICH MAY REQUIRE US TO ACCESS ADDITIONAL CAPITAL AND TO DEVELOP ADDITIONAL SKILLS TO PRODUCE, MARKET AND DISTRIBUTE THESE PRODUCTS.
We are independently finishing development, building up production capacity, launching, marketing and distributing our SimpleChoice line of products. We are also currently seeking direct funding for and expect to commercialize our cervical cancer detection product independently of any collaborative partner. These activities require additional resources and capital that we will need to secure. There is no assurance that we will be able to raise sufficient capital or attract and retain skilled personnel to enable us to finish development, launch and market these products. Thus, there can be no assurance that we will be able to commercialize all, or any, of these products.
BECAUSE OUR PRODUCTS, WHICH USE DIFFERENT TECHNOLOGY OR APPLY TECHNOLOGY IN MORE INNOVATIVE WAYS THAN OTHER MEDICAL DEVICES, ARE OR WILL BE NEW TO THE MARKET, WE MAY NOT BE SUCCESSFUL IN LAUNCHING OUR PRODUCTS AND OUR OPERATIONS AND GROWTH WOULD BE ADVERSELY AFFECTED.
Our products are based on new methods of glucose monitoring and cervical cancer detection and new methods of delivery for our diabetes products. If our products do not achieve significant market acceptance, our sales will be limited and our financial condition may suffer. Physicians and individuals may not recommend or use our products unless they determine that these products are an attractive alternative to current tests that have a long history of safe and effective use. To date, our products have been used by only a limited number of people, and few independent studies regarding our products have been published. The lack of independent studies limits the ability of doctors or consumers to compare our products to conventional products.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE MEDICAL DEVICE INDUSTRY, OUR FUTURE GROWTH AND OPERATING RESULTS WILL SUFFER.
The medical device industry in general, and the markets in which we expect to offer products in particular, are intensely competitive. Many of our competitors have substantially greater financial, research, technical, manufacturing, marketing and distribution resources than we do and have greater name recognition and lengthier operating histories in the health care industry. We may not be able to effectively compete against these and other competitors. For example, a number of competitors are currently marketing traditional glucose monitors. These monitors are widely accepted in the health care industry and have a long history of accurate and effective use. Further, if our products are not available at competitive prices, health care administrators who are subject to increasing pressures to reduce costs may not elect to purchase them. Also, a number of companies have announced that they are developing products that permit non-invasive and less invasive glucose monitoring. Accordingly, competition in this area is expected to increase.
Furthermore, our competitors may succeed in developing, either before or after the development and commercialization of our products, devices and technologies that permit more efficient, less expensive non-invasive and less invasive glucose monitoring, insulin delivery, diabetes detection, or cancer detection. It is also possible that one or more pharmaceutical or other health care companies will develop therapeutic drugs, treatments or other products that will substantially reduce the prevalence of diabetes or otherwise render our products obsolete.
WE HAVE LITTLE MANUFACTURING EXPERIENCE, WHICH COULD LIMIT OUR GROWTH.
We do not have manufacturing experience that would enable us to make products in the volumes that would be necessary for us to achieve significant commercial sales, and we rely upon our suppliers. In addition, we may not be able to establish and maintain reliable, efficient, full scale manufacturing at commercially reasonable costs, in a timely fashion. Difficulties we encounter in manufacturing scale-up, or our failure to implement and maintain our manufacturing facilities in accordance with good manufacturing practice regulations, international quality standards or other regulatory requirements, could result in a delay or termination of production. To date, our manufacturing activities have included our former BiliChek and BiliCal products, as well as the diabetes detection product on a limited scale. We are having our initial product offerings in the SimpleChoice insulin delivery area manufactured by a third party. We may decide to manufacture these products ourselves in the future or may decide to manufacture products that are currently under development in this market segment. Companies often encounter difficulties in scaling up production, including problems involving production yield, quality control and assurance, and shortages of qualified personnel.
SINCE WE RELY ON SOLE SOURCE SUPPLIERS FOR SEVERAL OF OUR PRODUCTS, ANY FAILURE OF THOSE SUPPLIERS TO PERFORM WOULD HURT OUR OPERATIONS.
Several of the components used in our products are available from only one supplier, and substitutes for these components are infeasible or would require substantial modifications to our products. Any significant problem experienced by one of our sole source suppliers may result in a delay or interruption in the supply of components to us until that supplier cures the problem or an alternative source of the component is located and qualified. Any delay or interruption would likely lead to a delay or interruption in our manufacturing operations. For our products which require premarket approval, the inclusion of substitute components could require us to qualify the new supplier with the appropriate government regulatory authorities. Alternatively, for our products which qualify for premarket notification, the substitute components must meet our product specifications.
Since we are relying on third party manufacturing for our initial product offerings in the SimpleChoice product line, we are dependent upon those parties for product supply. Any delay in initiating production or scaling production to higher volumes could result in delays of product introduction, or create lower availability of product than our expectations. These delays could lead to lower revenue achievement and additional cash requirements for us.
OUR LIMITED MARKETING AND SALES EXPERIENCE MAKES OUR SIMPLECHOICE REVENUE UNCERTAIN.
We are responsible for marketing our SimpleChoice product line. We have relatively limited experience in marketing or selling medical device products and only have a four person marketing and sales staff. In order to successfully continue to market and sell our products, we must either develop a marketing and sales force or expand our arrangements with third parties to market and sell our products. We may not be able to successfully develop an effective marketing and sales force, and we may not be able to enter into and maintain marketing and sales agreements with third parties on acceptable terms. If we develop our own marketing and sales capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations. If we enter into a marketing arrangement with a third party, any revenues we would receive will be dependent on this third party, and we will likely be required to pay a sales commission or similar compensation to this party. The efforts of these third parties for the marketing and sale of our products may not be successful.
BECAUSE WE OPERATE IN AN INDUSTRY WITH SIGNIFICANT PRODUCT LIABILITY RISK, AND WE HAVE NOT SPECIFICALLY INSURED AGAINST THIS RISK, WE MAY BE SUBJECT TO SUBSTANTIAL CLAIMS AGAINST OUR PRODUCTS.
The development, manufacture and sale of medical products entail significant risks of product liability claims. We currently have no product liability insurance coverage beyond that provided by our general liability insurance. Accordingly, we may not be adequately protected from any liabilities, including any adverse judgments or settlements, we might incur in connection with the development, clinical testing, manufacture and sale of our products. A successful product liability claim or series of claims brought against us that results in an adverse judgment against or settlement by us in excess of any insurance coverage could seriously harm our financial condition or reputation. In addition, product liability insurance is expensive and may not be available to us on acceptable terms, if at all.
THE AVAILABILITY OF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS IS UNCERTAIN, WHICH MAY LIMIT CONSUMER USE AND THE MARKET FOR OUR PRODUCTS.
In the United States and elsewhere, sales of medical products are dependent, in part, on the ability of consumers of these products to obtain reimbursement for all or a portion of their cost from third-party payors, such as government and private insurance plans. Any inability of patients, hospitals, physicians and other users of our products to obtain sufficient reimbursement from third-party payors for our products, or adverse changes in relevant governmental policies or the policies of private third-party payors regarding reimbursement for these products, could limit our ability to sell our products on a competitive basis. We are unable to predict what changes will be made in the reimbursement methods used by third-party health care payors. Moreover, third-party payors are increasingly challenging the prices charged for medical products and services, and some health care providers are gradually adopting a managed care system in which the providers contract to provide comprehensive health care services for a fixed cost per person. Patients, hospitals and physicians may not be able to justify the use of our products by the attendant cost savings and clinical benefits that we believe will be derived from the use of our products, and therefore may not be able to obtain third-party reimbursement.
Reimbursement and health care payment systems in international markets vary significantly by country and include both government sponsored health care and private insurance. We may not be able to obtain approvals for reimbursement from these international third-party payors in a timely manner, if at all. Any failure to receive international reimbursement approvals could have an adverse effect on market acceptance of our products in the international markets in which approvals are sought.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN SCIENTIFIC, TECHNICAL, MANAGERIAL AND FINANCE PERSONNEL.
Our ability to operate successfully and manage our future growth depends in significant part upon the continued service of key scientific, technical, managerial and finance personnel, as well as our ability to attract and retain additional highly qualified personnel in these fields. We may not be able to attract and retain key employees when necessary, which would limit our operations and growth. None of our key employees have an employment contract with us, nor are any of these employees, except our chief executive officer, covered by key person or similar insurance. In addition, if we are able to successfully develop and commercialize our products, we will need to hire additional scientific, technical, marketing, managerial and finance personnel. We face intense competition for qualified personnel in these areas, many of whom are often subject to competing employment offers.
WE ARE SIGNIFICANTLY INFLUENCED BY OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATED ENTITIES.
Our directors, executive officers and entities affiliated with them beneficially owned an aggregate of about 25% of our outstanding common stock as of September 30, 2003. These stockholders, acting together, would be able to exert significant influence on substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers and other business combination transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We have not entered into any transactions using derivative financial instruments and believe our exposure to interest rate risk, foreign currency exchange rate risk and other relevant market risks is not material.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. We carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 2003.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In January 2003, we announced that we had given notice that we were initiating actions required to terminate our research, development and license agreement with Abbott to jointly develop a continuous glucose monitor. We further announced that we were withholding payment due in connection with the redemption of the shares of our preferred stock held by Abbott as an offset to claims which have also been made by us under our agreement with Abbott. Under the terms of the preferred stock, 162,500 shares of our preferred stock were required to be redeemed on December 30, 2002 at $10 per share. We also announced that we had asked the U.S. patent office to resolve an inventorship dispute involving issued Abbott patents related to Abbott's glucose monitoring technology. Abbott exercised its right to terminate the agreement on January 7, 2003. We filed a Form 8-K on March 10, 2003, announcing that we had reached a settlement with Abbott Laboratories regarding the disputes in connection with the prior termination of the parties' Research & Development and License Agreement and the election of Abbott to have shares of our preferred stock redeemed, with 162,500 shares to be redeemed on December 30, 2002 at $10 per share, plus accrued dividends, and the remaining shares to be redeemed no later than January 31, 2004. Under the settlement, which included mutual releases, we have agreed to make quarterly payments to Abbott during 2003 and 2004 and end of the year lump sum payments in 2005 and 2006 to redeem 425,000 preferred shares and to pay approximately $0.7 million, $1.3 million, $1.8 million and $1.9 million for 2003, 2004, 2005 and 2006, respectively. Under the settlement, neither party admitted any liability or wrongdoing.
C. On August 25, 2003, we issued 10,000 shares of common stock each to Robert R. Blakley, Jr., Scott R. Griffith and Jesse B. Shelmire, III, in consideration of services provided to SpectRx. SpectRx common shares closed at $ 1.60/share on August 25, 2003. These shares were issued in reliance on the exemption from registration in Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of the disputes and settlement described in "Item 1. - Legal Proceedings," we have not redeemed the shares of redeemable convertible preferred stock subject to redemption paid the accrued dividends of $358,875 or made the scheduled payment of $150,000 on September 30, 2003. Under the settlement with Abbott, we have agreed to make certain payments to Abbott in connection with the redemption of these shares.
On October 24 ,2003, we filed a report on Form 8-K reporting under Item 4 that on October 17, 2003, the Audit Committee of the Board of Directors of SpectRx, Inc. (the "Company") unanimously approved the engagement of the accounting firm of Eisner LLP as its new independent public accountants effective immediately. Also on October 17, 2003, the Company's Audit Committee unanimously agreed to dismiss Ernst & Young LLP.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| Exhibit Number | Exhibit Description |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certifications |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certifications |
| 32.1 | Section 1350 Certifications |
| 32.2 | Section 1350 Certifications |
(b) Reports on Form 8-K
Current report on Form 8-K dated August 12, 2003, under Item 5 that its common stock was to be listed on the OTC Bulletin Board effective August 13, 2003.
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, in Norcross, Georgia.
SPECTRX, INC.
| Date: November 14, 2003 | By: /S/ THOMAS H. MULLER, JR. |
| Thomas H. Muller, Jr. Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) |
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certifications
I, Mark A. Samuels, Chief Executive Officer of SpectRx, Inc., certify that:
I have reviewed this quarterly report on Form 10-Q of SpectRx, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: November 14, 2003 | ./s/ Mark A. Samuels |
| Mark A. Samuels | |
| Chief Executive Officer |
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certifications
I, Thomas H. Muller, Jr., Chief Financial Officer of SpectRx, Inc., certify that:
- I have reviewed this quarterly report on Form 10-Q of SpectRx, Inc.;
- Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
- The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: November 14, 2003 | ./s/ Thomas H. Muller, Jr. |
| Thomas H. Muller, Jr. | |
| Chief Financial Officer |
EXHIBIT INDEX
| Exhibit Number | Exhibit Description |
| 31.1 | (Rule 13a-14(a)/15d-14(a) Certifications |
| 31.2 | (Rule 13a-14(a)/15d-14(a) Certifications |
| 32.1 | Section 1350 Certifications |
| 32.2 | Section 1350 Certifications |
Exhibit 32.1
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of SpectRx, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
| Date: November 14, 2003 | /s/ MARK A. SAMUELS |
| Name: Mark A. Samuels | |
| Title: Chief Executive Officer |
Exhibit 32.2
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of SpectRx, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
| Date: November 14, 2003 | /s/ Thomas H. Muller, Jr. |
| Name: Thomas H. Muller, Jr. | |
| Title: Chief Financial Officer |