1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1997.
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 (I.R.S. employer
incorporation or organization) identification no.)
6025A Unity Drive, Norcross, GA 30071
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 242-8723
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $30.7 million as of February 27, 1998, based
upon the average of the high and low prices of the Registrant's Common Stock
reported for such date by the Nasdaq National Market. Shares of Common Stock
held by each executive officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 27, 1998, the Registrant had outstanding 7,757,112 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE.
Parts of the following documents are incorporated by reference in Part
III of this Form 10-K Report: Proxy Statement for Registrant's 1998 Annual
Meeting of Shareholders -- Items 10, 11, 12 and 13.
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PART I
ITEM 1. BUSINESS
OVERVIEW
SpectRx is engaged in the research, development, manufacturing, and
marketing of products that offer less invasive and painless alternatives to
blood tests currently used for infant jaundice, diabetes screening and glucose
monitoring. The Company's products for infant jaundice, diabetes screening and
glucose monitoring are based on proprietary electro-optical and microporation
technology that can eliminate the pain and inconvenience of a blood sample. The
Company has entered into collaborative arrangements with Respironics, Inc.
("Respironics") through its recently acquired business, Healthdyne Technologies,
Inc., Roche Diagnostics Boehringer Mannheim Corp. ("Roche Diagnostics BMC")
and Abbott Laboratories ("Abbot") to facilitate the development,
commercialization and introduction of its infant jaundice, diabetes screening
and glucose monitoring products, respectively.
SPECTRX'S BUSINESS STRATEGY
The Company's goal is to introduce products that reduce or eliminate
pain, are convenient to use and provide rapid results at the point of care,
thereby improving patient well being and reducing health care costs. To achieve
this objective, the Company is pursuing the following business strategy.
- Focus on Current Product Portfolio. The Company intends to
continue to advance its current products to commercialization by
(i) leveraging the expertise of its collaborative partners, (ii)
seeking 510(k) clearance from the United States Food and Drug
Administration ("FDA") for these products, (iii) expanding its
internal product development capabilities, and (iv) developing
its sales, marketing and manufacturing capabilities. This
includes the manufacturing and marketing of its BiliCheck(TM)
system and the continued development and introduction of the
Company's diabetes screening product.
- Expand the Market for its Glucose Monitoring Product. The Company
believes that the less invasive, easy-to-use glucose monitoring
product could lead to greater patient compliance with recommended
glucose monitoring rates. In addition, the Company believes that
its diabetes screening product could substantially increase the
number of diagnosed diabetics, thus increasing the demand for its
glucose monitoring device and disposable assay cartridge.
- Collaborate with Market Leaders. The Company has selectively
established collaborative arrangements with Abbott, Roche
Diagnostics BMC and Respironics to develop and commercialize its
products. The Company intends to continue selectively
establishing strategic relationships with leading companies, as
appropriate, for the development, commercialization and
introduction of future products.
- Leverage Proprietary Technologies. The Company intends to
leverage its proprietary electro-optical and microporation
technologies by developing future products based on these
technologies that can provide cost effective, less invasive
alternatives to current diagnostic or monitoring products. For
example, the Company believes its interstitial fluid sampling
technology may be applicable for monitoring analytes other than
glucose.
- Address Large Market Opportunities. The Company intends to
selectively develop future products for large markets in which
its products can ideally (i) apply for 510(k) clearance from the
FDA, (ii) incorporate a disposable component and (iii) qualify
for third-party reimbursement.
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INDUSTRY OVERVIEWS
INFANT JAUNDICE
Background
Infant jaundice is a condition that primarily affects newborns within
the first three to 10 days of life. If left untreated infant jaundice may, in
extreme cases, lead to brain damage or death (kernicterus). Jaundice is
characterized by a yellowing of the skin and eyes caused by an excess of
bilirubin in the body. Bilirubin is a normal waste product resulting from the
breakdown of red blood cells and is removed from the body by the liver. Prior to
birth, the bilirubin in an infant is processed by the mother's liver and
excreted. After birth, an infant must eliminate bilirubin without the mother's
help. It may take the infant's system several days to begin eliminating the
bilirubin faster than it is produced. Infants who are born prematurely, who are
underfed, or who belong to certain ethnic groups are at increased risk of
developing jaundice. The initial screening for jaundice is the observation of
yellow skin. This is a subjective determination prone to errors due to differing
skin colors and gestational ages. If a baby is selected for further jaundice
testing, the current procedure requires that a blood sample be obtained from the
infant, usually by lancing the infant's heel, which is a traumatic process for
the infant. Since jaundice normally presents in infants 36 to 72 hours after
birth, infants who are sent home after a short hospital stay pursuant to managed
care guidelines in the United States are at risk because the condition may not
have presented prior to release.
The Infant Jaundice Screening and Monitoring Market
Of the approximately four million newborns each year in the United
States, approximately 50% have recognizable jaundice. Annually, approximately
1.7 million newborns receive at least one blood test for bilirubin. Of those
newborns tested, approximately 700,000 have elevated bilirubin levels, and a
portion of these newborns will receive additional tests. The cost to the patient
for a bilirubin test ranges from $22.25 to $37.75; the laboratory processing
cost usually ranges from $10.00-$12.00. Many of those infants in the United
States diagnosed with jaundice will undergo phototherapy, a treatment that
converts bilirubin into a water soluble form that can be processed and
eliminated from the infant's system. The Company believes that the average
newborn under active phototherapy treatment receives three to four bilirubin
monitoring tests.
The SpectRx Non-Invasive Infant Jaundice Product
The Company's infant jaundice product, named the "BiliCheck(TM)"
Non-Invasive Bilirubin Analyzer (the "BiliCheck(TM)") is based upon reflection
spectroscopy that measures bilirubin regardless of skin color or gestational
age. The product is designed to provide rapid, point of care bilirubin
measurements and to serve as an initial screening and ongoing monitoring device.
The Company believes that the BiliCheck(TM) has the potential to replace the
painful heel stick procedure currently utilized.
The design of the BiliCheck(TM) consists of a hand held,
battery-operated instrument, which sits in a compact recharger base. This
instrument incorporates a microspectrometer to collect spectroscopic information
from the skin and a proprietary, disposable calibration element, BiliCal(TM).
After calibration, the instrument is applied to the skin of the infant for five
applications, which generally takes less than a minute, during which time the
bilirubin level is measured by collecting spectroscopic information from the
skin and analyzing it using a proprietary algorithm that adjusts for testing
difficulties due to skin color, gestational age and other factors.
Using an early stage prototype, the Company tested 361 infants in a
pilot study conducted at Northside Hospital and found a correlation coefficient
of 0.92 between total serum bilirubin measured using conventional blood tests
and that measured using the Company's prototype. In addition, the Company has
ongoing clinical study programs at Northside Hospital and Pennsylvania Hospital.
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The Company is currently conducting developmental clinical trials at two sites
using beta prototypes of its BiliCheck(TM). The Company expects Respironics to
continue clinical testing and file for 510(k) clearance from the FDA in 1998.
Respironics has stated that it plans to commence marketing of the BiliCheck(TM)
in the United States and Canada, subject to obtaining FDA clearance and
necessary Canadian regulatory approvals. Subject to obtaining necessary
regulatory approvals, the Company expects to commence sales of the BiliCheck(TM)
in certain international countries in the first half of 1998. Unexpected
problems, however, may arise in the development and regulatory approval
processes. In addition, Respironics retains a significant degree of discretion
regarding the timing of these activities and the amount and quality of
financial, personnel and other resources that they devote to these activities.
Accordingly, there can be no assurance that the regulatory filing or marketing
schedules will be met, if at all.
The Company's BiliCheck(TM) is being developed pursuant to a
collaborative arrangement with Respironics. Under the terms of the arrangement,
SpectRx will develop and manufacture the product and Respironics will pay
certain costs associated with the FDA approval process and conducting of
clinical trials. In addition, Respironics will pay for a portion of the product
development. Respironics has been granted a license to market and sell the
product in the United States and Canada, while SpectRx retains the rights to
sell the product in all other world markets.
The company has made considerable progress toward commercialization in
1997. SpectRx introduced BiliCheck(TM) and its disposable component BiliCal(TM)
to potential distributors and medical device marketers at the Medica '97
tradeshow in Dusseldorf, Germany in November 1997. The Company has entered into
distribution agreements with qualified neonatal distributors that cover
territories comprising approximately 75% of the potential market for the
BiliCheck(TM) in Europe, as well as in Argentina, Australia and New Zealand.
Discussions have begun with potential distributors in the Asia/Pacific area,
South America, India, South Africa and the Middle East, among other countries.
The Company also announced in January 1998, that it had received ISO 9001
certification for its manufacturing facility and subject to completion of its
technical file and other review, was granted its CE mark for European
certification. SpectRx has been establishing locations for marketing clinicals
in Europe prior to revenue generating shipments.
DIABETES
Background
Diabetes is a major health care problem which, according to the World
Health Organization, is estimated to affect 100 million people worldwide by the
year 2000. If undiagnosed and untreated, diabetes can lead to severe medical
complications over time, including blindness, loss of kidney function, nerve
degeneration, and cardiovascular disease. Diabetes is the sixth leading cause of
death by disease in the United States and is estimated to cost the American
economy over $110 billion annually, including indirect costs such as lost
productivity.
Diabetes occurs when the body does not produce sufficient levels of, or
effectively utilize, insulin, a hormone that regulates the metabolism
(breakdown) of glucose. Glucose levels in the blood must be within a specific
concentration range to ensure proper cellular function and health. Insulin
deficiency results in an abnormally high blood glucose concentration, which
causes protein glycation throughout the body, impairs the ability of cells to
intake glucose and has other adverse effects. In Type I (insulin-dependent
juvenile-onset) diabetes, which affects from 5% to 10% of all people with
diagnosed diabetes, the cells that make insulin have been destroyed. Type I
diabetes is treated with daily insulin injections. In the more prevalent form of
diabetes, Type II (non-insulin-dependent adult-onset) diabetes, the insulin
producing cells are unable to produce enough insulin to compensate for the
patient's poor sensitivity to the hormone in glucose using tissues such as
skeletal muscle (a condition called insulin resistance). Type II diabetes is
initially managed with proper diet, exercise and oral medication. Based on
statistics published by the National Institutes of Health, however, the Company
estimates that approximately 50% of Type II diabetics will eventually require
insulin therapy.
The Diabetes Screening Market
The American Diabetes Association (the "ADA") estimates that over 16
million people in the United States have diabetes, only half of whom have been
diagnosed with the disease. The long term health care costs of a diabetic
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patient can be substantially reduced if the patient can be diagnosed in the
early stages of the disease. Early diagnosis allows glucose levels to be
monitored and properly controlled, thereby reducing complications that result
from long term exposure to elevated glucose levels. These complications include
diabetic retinopathy, kidney disease, nerve degeneration, and cardiovascular
disease. Currently, approximately 625,000 new cases of diabetes are diagnosed
each year in the United States, and many of those diagnosed have complications
that generally appear eight to ten years after onset of the disease. The Company
believes that the low rate of diabetes diagnosis and the failure in many cases
to diagnose the disease prior to the onset of complications is due primarily to
the lack of a convenient and accurate diabetes screening test. The Company
believes that the current market in the United States for diabetes screening
tests is approximately $300 million per year. In June 1997, the ADA altered its
recommendation for diabetes screening to increase the recommended level of
screening for all adults over 45 years old to every three years, which the
Company believes will increase market spending.
There are several existing diabetes screening tests in use today. The
diabetes screening procedure recommended by the ADA is the blood-based fasting
plasma glucose test. This test is difficult and inconvenient to administer
because it requires the patient to fast for eight hours prior to the drawing of
blood, and because the blood sample is usually sent to a laboratory for
analysis, which delays the receipt by the patient of the test results. Current
methods for diabetes screening that utilize random finger stick blood glucose
tests are no longer recommended by the ADA because the random nature of the
tests results in an unacceptably low level of sensitivity (i.e., the ability to
correctly determine that a particular person has diabetes) and specificity
(i.e., the ability to correctly determine that a particular person does not have
diabetes). Glucose urine test products, which are available over-the-counter,
have an even lower test sensitivity and specificity and are not recommended for
screening by the ADA. The low levels of sensitivity and specificity in both the
random finger stick blood glucose test and the glucose urine test result in
cases of both undetected diabetes, which can prevent early treatment of the
disease in such cases, and false indications of diabetes, which can cause
patients to incur the expense of, and devote the time for, needless additional
testing.
The SpectRx Non-Invasive Diabetes Screening Product
The SpectRx diabetes screening product is designed to detect and
measure fluorescence in the lens of the eye and evaluate that measurement using
the Company's proprietary algorithm. An abnormally high level of florescence in
the lens of the eye may be indicative of prolonged exposure to high levels of
glucose due to diabetes. A measurement indicating a patient is likely to have
diabetes could be confirmed by subsequent testing using conventional blood-based
diagnostics. The performance of the Company's diabetes screening product has
been shown to be comparable to that of the blood-based screening test. Unlike
the blood based tests, however, the SpectRx diabetes screening product is
painless, would provide the patient with test results in less than a minute, and
would not require the patient to fast for eight hours prior to administration of
the test.
The Company's diabetes screening product is designed to be simple and
painless to use and to produce accurate point of care results in a very short
period of time. The Company believes that such a method of diabetes screening is
likely to become as prevalent as glaucoma testing, which is regularly performed
during eye exams. Thus, the Company believes that the product may result in
increased diagnoses of the approximately 50 million undiagnosed diabetics
worldwide, including the approximately eight million in the United States. For
this reason, the Company believes that its diabetes screening product presents a
substantial opportunity to identify new patients who can benefit from proper
treatment thereby reducing incidence of complications and their associated cost.
The Company's diabetes screening product is designed as a compact
instrument that will meet the space requirements of optometrists' and
physicians' offices and will also be suitable for retail establishments such as
pharmacies. To use the device, the individual looks into the instrument while
placing his head against a rest. The individual is instructed to look at a fixed
light as the instrument locates the eye and automatically tracks the pupil
opening. The device measures fluorescence in the lens of the eye using a
low-intensity blue light. The results of the analysis will indicate either that
the patient should undergo further diagnostic testing or that there is no
indication of diabetes. In a pilot study of more than 1,300 subjects (both
diabetics and non-diabetics) conducted by Roche Diagnostics BMC, an early stage
prototype of the Company's diabetes screening product demonstrated an ability to
detect diabetes.
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The Company is in the process of final design of the production
prototype. The Company expects Roche Diagnostics BMC to commence clinical
testing and file for 510(k) clearance from the FDA in 1998. Unexpected problems,
however, may arise in the development and regulatory approval processes. In
addition, Roche Diagnostics BMC retains a significant degree of discretion
regarding the timing of these activities and the amount and quality of
financial, personnel and other resources that it devotes to these activities.
Accordingly, there can be no assurance that the development or regulatory filing
will occur within this time frame, or at all.
The Company has entered into a collaboration agreement with Roche
Diagnostics BMC, pursuant to which the Company has granted Roche Diagnostics BMC
an exclusive worldwide license to sell and market the Company's diabetes
screening product. The Company receives development milestone payments and
expects to receive a manufacturing profit on products sold to Roche Diagnostics
BMC. Roche Diagnostics BMC is responsible for conducting clinical testing,
obtaining regulatory approvals for, and the marketing, distribution and sales
of, the Company's diabetes screening product.
The Glucose Monitoring Market
Many people with diabetes have difficulty achieving optimal glucose
control. For proper glucose control, each insulin injection should be adjusted
to reflect the person's current blood glucose concentration, carbohydrate
consumption, exercise pattern, stress or other illness. Accordingly, personal
glucose monitoring products have become critical in managing diabetes by
allowing diabetics to measure their glucose levels in order to adjust their
diet, exercise and use of oral medication or insulin to maintain proper blood
glucose levels.
In June 1993, the National Institutes of Health announced the results
of the Diabetes Control and Complications Trial ("DCCT"). This long term study
of approximately 1,400 people with Type I diabetes confirmed the importance of
glucose control as a determinant of long term risk of degenerative
complications. The data from the DCCT demonstrated that the risk of degenerative
complications is significantly reduced if blood glucose concentrations in people
with Type I diabetes can be brought closer to the concentrations measured in
non-diabetic individuals. For example, the DCCT study demonstrated that the risk
of complications of diabetic retinopathy, the leading cause of blindness in the
United States, could be reduced by 76% through proper glucose control. The DCCT
panel recommended that Type I diabetics measure their blood glucose four times
per day in order to maintain proper control over their glucose levels. Although
the DCCT study involved people with Type I diabetes only, a similar Japanese
study on Type II diabetics supports the conclusion of the DCCT study that
maintaining low average glucose levels reduces the risks of complications
associated with diabetes.
Because glucose monitoring is an important part of the every day life
of the world's diagnosed diabetics, the personal glucose monitoring market is
substantial. The Company believes that the worldwide market for glucose
monitoring products at manufacturers' price levels is approximately $2.0 billion
annually and is growing at approximately 17% per year. The North American market
for such products was approximately $1.0 billion in 1996. The Company believes
that the market for personal glucose monitoring products is driven by four main
factors: 1) an aging population; 2) the realization that tight glucose control
dramatically reduces the risk of complications; 3) the availability of
third-party reimbursement in developed nations; and 4) the promotion and
increased availability of glucose monitoring products. It is estimated that
diabetics currently monitor their glucose on average less than twice a day
instead of the DCCT recommendation of four times per day. The Company believes
that the pain and inconvenience associated with conventional finger stick blood
glucose monitoring systems is the primary reason that most people with diabetes
fail to comply with the recommendations of the DCCT panel. The Company believes
that greater awareness of the benefit of frequent self-monitoring and less
painful, more convenient monitoring products could significantly increase the
global market. Currently, no non-invasive glucose monitoring systems are
commercially available.
Glucose monitoring products have evolved rapidly over time. Various
factors have allowed new entrants to establish market share in the glucose
monitoring product market, including technological advances, broader product
distribution and increased patient awareness of product innovations. These
factors have also expanded the overall size of the market for glucose monitoring
products.
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Current commercially available glucose monitoring systems are painful
and inconvenient. These systems require that a blood sample be obtained from a
patient, applied to a disposable test strip and then measured for glucose
concentrations using a battery-powered, hand held monitor. Under these systems,
the blood sample is usually obtained from a patient's fingertip because of the
high concentration of capillaries at this site and because the blood produced at
the fingertip can most easily be applied directly to test strips used in such
devices. These systems typically require the patient to complete the following
steps: insert the disposable test strip into the meter, lance the finger, apply
the drop of blood to the test strip and wait for the meter to display the
results. Because nerve endings are concentrated in the fingertips, this sampling
process can be painful. The level of patient discomfort is compounded by the
fact that the fingertips offer a limited surface area from which to obtain a
blood sample. Thus, the patient can be required to repeatedly sample from the
same site, eventually resulting in callouses. In addition, applying the drop of
blood to the test strip is difficult for those diabetics who have lost dexterity
in their extremities due to nerve degeneration.
The SpectRx Glucose Monitoring Product
The Company is developing a glucose monitoring product in collaboration
with Abbott that utilizes the Company's proprietary interstitial fluid sampling
technology to allow people with diabetes to easily and accurately measure their
glucose levels. Interstitial fluid is an extracellular fluid that is prevalent
throughout the body just beneath the skin. Interstitial fluid is the means by
which proteins and chemicals, including glucose, pass between capillaries and
cells. Studies based on the Company's and independent research have indicated
that interstitial fluid glucose levels correlate closely with blood glucose
levels. The Company believes that using interstitial fluid to assay glucose
levels is more efficient than using blood because it is free of interferences
such as red blood cells, which must often be separated from the plasma prior to
measurement. SpectRx's glucose monitoring product uses the Company's
microporation technology to collect a sample of interstitial fluid. The product
is intended to measure the glucose concentration of the fluid using disposable
assay technology supplied and being designed by Abbott specifically for use with
the Company's product. Because the Company's glucose monitoring product is
designed to obtain a sample of interstitial fluid from the outermost layers of
the skin and does not require a blood sample, its use does not stimulate pain
sensors and capillaries found in the deeper layers of skin and is thus free of
the pain and blood involved in conventional finger stick assaying techniques. In
addition, the Company believes that the entire process will take no longer than
current blood glucose monitoring tests.
The Company's glucose monitoring product is expected to be comprised of
a small, hand held battery-powered, monitoring device and a proprietary,
disposable assay cartridge. The monitoring device will be placed on the skin,
and a laser or other suitable energy source mounted in the housing will be
directed onto the skin. When activated, several micropores will be painlessly
created in the outermost layer of skin, the stratum corneum. The Company
believes the creation of micropores will not damage adjacent tissue or penetrate
deeply enough to reach the capillary bed or nerve layer below the stratum
corneum. The Company anticipates that the device will have a proprietary
mechanism that will force the interstitial fluid out of a micropore and into the
disposable cartridge. When the assay cartridge is full and the interstitial
fluid has been analyzed, the results will appear on a display.
In January 1996, the Company undertook a pilot study of 10 subjects
(six diabetics and four nondiabetics) under a protocol reviewed and approved by
the Georgia Baptist Medical Center. The study was designed to evaluate the
correlation between results obtained using early stage prototypes of the
Company's glucose monitoring product and a leading conventional personal blood
glucose monitoring system. The study compared the glucose levels in interstitial
fluid and blood of the 10 subjects who were each administered 75 grams of
glucose. The study, which yielded a total of 876 glucose measurements (438
contemporaneous measurements of interstitial fluid and blood), produced a
correlation coefficient of 0.96 between glucose levels in interstitial fluid and
blood.
In October 1996, the Company entered into a collaborative arrangement
with Abbott for the development and commercialization of the Company's glucose
monitoring product. Pursuant to the arrangement, the Company granted Abbott an
exclusive worldwide license for the Company's glucose monitoring product and
other related glucose monitoring devices in all countries except Singapore and
the Netherlands, where the license is non-exclusive. Pursuant to the terms of
the collaborative arrangement, Abbott has agreed to pay all costs associated
with a joint research and development program, to make certain milestone
payments to the Company and to pay the Company a royalty based on net sales.
Abbott will also be responsible for conducting clinical trials, obtaining
regulatory approval for and
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manufacturing, marketing, distributing, and selling the products covered by the
arrangement. In addition, Abbott made a $3 million equity investment in the
Company in 1996 whereby it purchased 500,000 shares of Series C Preferred Stock
which converted into 357,143 shares of Common Stock upon the Company's initial
public offering.
The Company is currently engaged in a joint development research
program that is focused on the collection of interstitial fluid. Once the
research and development related to the collection of interstitial fluid is
completed, it will be followed by the integration of the Company's microporation
technology and Abbott's disposable assay technology into a prototype device. The
Company expects prototype development to be followed by clinical trials and a
regulatory submission. Unexpected problems, however, may arise during the
development and regulatory approval processes. In addition, Abbott retains a
significant degree of discretion regarding the timing of these activities and
the amount and quality of financial, personnel and other resources that it
devotes to these activities. Accordingly, there can be no assurance that these
events will occur.
COLLABORATIVE ARRANGEMENTS
The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing, and commercialization of its products
depends upon the Company's ability to selectively enter into and maintain
collaborative arrangements with leading medical device companies. The Company
has been successful in its history in developing such strategic relationships.
The Company currently has collaborative arrangements with Abbott, Roche
Diagnostics BMC and Respironics. The Company is, to varying degrees, dependent
upon its collaborative partners for the development, clinical testing,
regulatory approval, manufacturing, and commercialization of its products.
Respironics (Healthdyne Technologies, Inc.)
In June 1996, SpectRx entered into a Purchasing and Licensing Agreement
with Healthdyne Technologies, Inc., which was later acquired by Respironics (the
"Respironics Agreement"). Pursuant to the Respironics Agreement, Respironics is
responsible for clinical trials, the regulatory approval process and sale of the
BiliCheck(TM) in the United States and Canada. The Company retains manufacturing
rights and is responsible for the regulatory approval process and sale of the
infant jaundice product outside of the United States and Canada. Under the
Respironics Agreement, the Company receives from Respironics licensing fees and
a manufacturing profit on products sold to Respironics and shares any profit
from the sales of disposables by Respironics. Respironics receives an exclusive
license for the United States and Canada (i) to use and sell instruments for
non-invasive bilirubin measurement ("Instruments"), (ii) to use and sell
disposable probes, tips or other devices which, when used with Instruments,
measure bilirubin levels ("Disposables") and items accessory to and not
necessary for the operation of Instruments or Disposables ("Accessories"), and
(iii) to make Instruments, Disposables and/or Accessories (collectively,
"Licensed Products"). Unless SpectRx is unable to supply Licensed Products,
Respironics must purchase its requirements for Licensed Products from SpectRx.
Respironics has agreed to pay SpectRx's cost for manufacturing each Licensed
Product. Respironics and SpectRx then share equally the margin earned on the
sale of Licensed Products. In order to maintain license exclusivity, Respironics
has agreed to purchase from SpectRx certain minimum amounts of Licensed Products
or pay a royalty to SpectRx for an equivalent number of Licensed Products. In
the event that SpectRx is unable to supply Licensed products, Respironics
receives a license to manufacture the Licensed Products and pays a royalty to
SpectRx on sales of Licensed Products.
SpectRx has granted to Respironics the exclusive option to acquire an
exclusive license for the United States and Canada, on terms substantially
similar to those contained in the Respironics Agreement, with respect to any new
intellectual property that comes into existence after the effective date of the
Respironics Agreement, which covers devices that would compete, directly or
indirectly, with the Licensed Products and for which SpectRx has the right and
authority to grant licenses. In such event, Respironics has agreed to reimburse
SpectRx for one-half of SpectRx's cost to develop and commercialize such
product, in lieu of paying any license fees. If Respironics fails to exercise
such option, SpectRx may license such intellectual property to any third party
on terms no more favorable than those offered to Respironics.
The Respironics Agreement remains in effect for the longer of fifteen
years or until the expiration date of the last licensed patent to expire. Upon
expiration of the Respironics Agreement, Respironics has the option to renew the
Respironics Agreement for additional fifteen year terms indefinitely.
Respironics also has the right to terminate the
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Respironics Agreement without cause upon not less than 30 days' written notice
to the Company. In the event that certain milestones are not achieved before
certain specified dates, Respironics has the right to assume the
commercialization efforts with respect to the Licensed Products, in which case:
(i) all further development funding payable to SpectRx under the Respironics
Agreement ceases, (ii) Respironics must pay SpectRx a royalty, and (iii) SpectRx
must compensate Respironics for commercialization costs through a royalty
offset.
On February 11, 1998, Healthdyne Technologies, Inc. merged with
Respironics, with Respironics as the surviving entity. There can be no assurance
that the change in control of Healthdyne Technologies, Inc. will not affect the
Company's collaborative arrangement with Healthdyne Technologies, Inc.
Roche Diagnostics Boehringer Mannheim
In December 1994, SpectRx entered into a Development and License
Agreement (the "Development Agreement") with Boehringer Mannheim Corp. (which
has since merged with Roche Diagnostics) with respect to a non-invasive
instrument that measures changes in the lens of the human eye for the purpose of
detecting diabetes. Pursuant to the Development Agreement, SpectRx has granted
to Roche Diagnostics BMC an exclusive, worldwide license to sell and market the
Company's diabetes screening product. SpectRx receives development milestone
payments from Roche Diagnostics BMC pursuant to the Development Agreement. The
Development Agreement remains exclusive for so long as Roche Diagnostics BMC
meets certain minimum volume purchase requirements set forth in the Supply
Agreement with Roche Diagnostics BMC (discussed below). The Development
Agreement may be terminated at any time by Roche Diagnostics BMC upon written
notice to SpectRx.
In January 1996, Roche Diagnostics BMC and SpectRx entered into a
Supply Agreement for the supply by SpectRx to Roche Diagnostics BMC of the
Company's diabetes screening product (the "Supply Agreement"). Roche Diagnostics
BMC's purchase price for the Company's diabetes screening product is calculated
pursuant to a formula based on a gross margin. Roche Diagnostics BMC is required
to meet minimum annual purchase requirements for the diabetes screening product
each year or Roche Diagnostics BMC forfeits its exclusivity under the marketing
license granted in the Development Agreement. The term of the Supply Agreement
is coincident with the term of the Development Agreement. Roche Diagnostics BMC
may terminate the Supply Agreement for material breach (including a failure to
supply adequate requirements) of the agreement by the Company, which breach
remains unremedied for 30 days after notice to the Company and in which case
Roche Diagnostics BMC is deemed to have acquired a manufacturing license under
the Development Agreement. If Roche Diagnostics BMC acquires this manufacturing
license, it must pay royalties to SpectRx on Roche Diagnostics BMC sales of the
diabetes screening product. During the term of the Supply Agreement, SpectRx can
not enter into any agreement to develop or manufacture a non-invasive diabetes
detection instrument using the same or similar technology as used in the
Company's diabetes screening product other than with Roche Diagnostics BMC
affiliates. Roche Diagnostics BMC is not restricted from pursuing the
development of a diabetes screening instrument with another party.
On March 5, 1998, Roche Holding, Ltd. acquired Corange, Ltd., which is
the parent company of Boehringer Mannheim, GmbH., the parent company of
Boehringer Mannheim Corp. There can be no assurance that the change in control
of Boehringer Mannheim will not adversely affect the Company's collaborative
arrangement with Boehringer Mannheim.
Abbott Laboratories
In October 1996, SpectRx entered into a Research & Development and
License Agreement (the "Abbott Agreement") with Abbott for the development and
commercialization of the Company's glucose monitoring technology in the field of
extracting interstitial fluid samples for glucose monitoring (the "Field").
Pursuant to the Agreement, SpectRx has granted to Abbott a worldwide license
under its patents, patent applications and know how (the "Technology") useful in
the Field, including improvements, to manufacture and sell products in the
Field. The license is exclusive in all countries except Singapore and the
Netherlands where the license is non-exclusive. Abbott also has certain rights
of first negotiation with the Company regarding any rights the Company may have
to license the Technology for the development and commercialization of other
products relating to the measurement of analytes in interstitial fluid and the
delivery of therapeutic agents based on such measurements. Under the Abbott
Agreement,
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SpectRx receives from Abbott development funding, payments on achievement of
milestones and a royalty on Abbott product sales. In addition, Abbott made a $3
million equity investment in SpectRx in 1996 whereby it purchased 500,000 shares
of Series C Preferred Stock which converted into 357,143 shares of Common Stock
upon the Company's initial public offering. Abbott subsequently purchased
SpectRx Common Stock on the open market and currently owns 6.6% of the
outstanding Stock of the Company.
Under the Abbott Agreement, the parties have agreed to jointly conduct
a research program designed to demonstrate that the Company's glucose monitoring
product can extract an adequate sample of interstitial fluid in a targeted time
period. During the joint development program, which began in the fourth quarter
of 1996, Abbott will pay mutually agreed development costs. SpectRx is
responsible for the completion of a prototype and human clinical testing.
Thereafter, if Abbott wishes to commercialize the product, it is responsible for
further product development and obtaining all required regulatory approvals.
After obtaining these regulatory approvals, Abbott is required to diligently
pursue the sales of the products but is not prohibited from marketing competing
products. If Abbott elects not to commercialize the product, the agreement may
be terminated by either party. Abbott has a fixed period from the date of notice
to the Company of its intention to commercialize the product in which to
complete commercialization and begin shipment of products. If such
commercialization has not been completed within the permitted time, SpectRx may
terminate the agreement.
Under the Abbott Agreement, all technology invented solely by SpectRx
during the joint development program is owned solely by SpectRx. All technology
invented solely by Abbott and all clinical data, regulatory filings and
government marketing approvals developed solely by Abbott are the property of
Abbott. On certain early termination events, SpectRx has a right to obtain a
license to certain of the relevant Abbott technology. Technology jointly
invented during the joint development program will be jointly owned pursuant to
a royalty sharing arrangement.
The Abbott Agreement remains in effect until the expiration of the last
licensed patent to expire. Abbott has the right to terminate the Abbott
Agreement without cause upon not less than 60 days' prior notice to the Company
at any time prior to the first shipment of products and upon not less than 120
days' prior notice to the Company thereafter. If Abbott terminates without cause
after completion of the joint development program but before the first product
is shipped, Abbott must pay to the Company a one time development program
milestone payment. Abbott may terminate the Abbott Agreement upon not less than
30 days' prior notice to the Company for certain product development failures or
failure to obtain key patent protection. In the fourth quarter of 1997, Abbott
made a payment of $500,000 to SpectRx, in recognition of the progress made in
the extraction of interstitial fluid.
LICENSING ARRANGEMENTS
Georgia Tech Research Corporation
The Company has a license agreement with Georgia Tech Research
Corporation ("GTRC") pursuant to which GTRC has granted the Company an
exclusive, worldwide license (including the right to grant sublicenses) to make,
use and sell products that incorporate GTRC's know how related to a method of
using non-invasive instrumentation to quantitatively measure molecular changes
in living human lenses for the purposes of diagnosing diabetes and
precataractous conditions (the "GTRC Agreement"). Under the license, the Company
must pay a royalty to GTRC on net sales of any such products manufactured and
sold by the Company. The term of the GTRC Agreement is until the expiration date
of the last expiring patent covering any of the technology licensed or, if no
patent issues, for 15 years from the date of execution of the GTRC Agreement.
Altea Technologies, Inc
In March 1996, SpectRx entered into a License and Joint Development
Agreement (the "Altea/Nimco Agreement") among the Company, Altea ("Altea") and
Non-Invasive Monitoring Company, Inc. ("Nimco") pursuant to which certain rights
in respect of jointly developed technology are allocated between the Company and
Altea. Both Altea and Nimco are jointly controlled by Jonathan Eppstein, a Vice
President of the Company, and his sister. The Altea/Nimco Agreement also covers
one granted patent and know how related to the glucose monitoring product, the
joint application of the Company and Altea for a U.S. patent and an
international patent related to the glucose
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monitoring product, and provides for continued joint development efforts between
SpectRx and Altea as mutually agreed. The Altea/Nimco Agreement further provides
for the joint ownership by SpectRx and Altea of certain patents and technology
relating to the transdermal/intradermal movement of substances utilizing various
methods. Under the Altea/Nimco Agreement, SpectRx receives worldwide, exclusive
rights to any technology for monitoring applications covered by the Nimco
patents and related joint technology and Altea receives exclusive, worldwide
rights to any technology for delivery applications covered by the joint
technology. Future inventions made by each of SpectRx and Altea based on newly
developed technology are included within the Altea/Nimco Agreement.
SpectRx is obligated to pay royalties to Nimco for products using its
technology and to Altea for products using its technology, in each case based on
net sales of products and net revenues from sublicensees. Royalties on products
using both Nimco and Altea technology will be allocated as mutually agreed.
Minimum annual royalties are payable by SpectRx to Altea. See Note 9 of Notes to
Consolidated Financial Statements. If actual accrued royalties are less than the
minimum royalty amount, SpectRx may pay Altea the difference or the license will
become non-exclusive. Thereafter, SpectRx must offer a right of first refusal to
acquire exclusive rights to the monitoring technology to Altea.
The term of the Altea/Nimco Agreement is for the life of the patents
covered by the agreement. The agreement may be terminated by any party in the
event of a default by any other party that is not cured within 90 days of notice
to the defaulting party. The agreement may be terminated globally by Altea if
SpectRx fails to commercialize any product, use or application utilizing the
monitoring technology in any major country by the date of the first commercial
shipment date under the Abbott Agreement and may be terminated by Altea with
respect to certain regions if SpectRx fails to commercialize any product, use or
application in those regions by this date. SpectRx may terminate the agreement
upon not less than three months prior notice to Altea and Nimco if given before
it has commercialized the technology and upon not less than six months prior
notice to each party if given after commercialization has commenced. Except in
the case of termination of the agreement by SpectRx for breach, upon termination
all technology and joint technology shall become the exclusive property of
Altea, except the Nimco patents. If the agreement is terminated by SpectRx for
breach, all rights to the monitoring technology in the countries in which
SpectRx has retained its exclusive rights shall become the exclusive property of
SpectRx, each party shall retain non-exclusive rights to the monitoring
technology in other countries, and Altea shall retain all rights to the delivery
technology. If SpectRx loses its rights to the monitoring technology for failure
to commercialize (but not due to breach), Altea and Nimco, after their
reacquisition of rights from SpectRx, will pay an amount of money by way of a
royalty to SpectRx according to a formula to reflect each party's relative
investment.
The University of Texas M.D. Anderson Cancer Center
In March 1996, SpectRx, entered into a Patent License Agreement with
the Board of Regents (the "Board") of the University of Texas System and M.D.
Anderson pursuant to which the Board granted SpectRx an exclusive license under
certain of its patents to manufacture, have manufactured, use and sell products
within the United States for use within the licensed field of optical
measurement of bilirubin in human tissue (the "MDA Patent License Agreement").
SpectRx has the right to assign this license to affiliates and the right to
sublicense the foregoing rights. In connection with the MDA Patent License
Agreement, SpectRx has agreed to pay all expenses incurred in prosecuting and
maintaining the patents licensed and a royalty on net sales of products that
incorporate the licensed patents, subject to annual minimum royalty payments.
See Note 9 of Notes to Consolidated Financial Statements. The term of the MDA
Patent License Agreement is until the expiration date of the last expiring
patent licensed. The Board has the right at any time after one year from the
effective date of the MDA Patent License Agreement to terminate the license if
SpectRx, within 90 days after written notice from the Board, fails to provide
written evidence satisfactory to the Board that SpectRx has commercialized or is
actively and effectively attempting to commercialize an invention licensed under
the MDA Patent License Agreement.
Joseph Lakowicz, Ph.D.
The Company has a license agreement with Joseph Lakowicz, Ph.D. whereby
Dr. Lakowicz has granted the Company an exclusive, worldwide license (including
the right to grant sublicenses) to make, use, and sell medical products that
incorporate Dr. Lakowicz's intellectual property related to lifetime
fluorescence technology (the "Lakowicz Agreement"). The intellectual property
consists of a portfolio of granted patents, patent applications and foreign
filings
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in the area of lifetime fluorescence technology. The Company has agreed to pay a
royalty to Dr. Lakowicz on net sales of such products manufactured and sold.
Additionally, the Company is committed to fund certain research programs under
the direction of Dr. Lakowicz. See Note 9 of Notes to Consolidated Financial
Statements, which includes these funding commitments. The Company has
sublicensed some parts of this intellectual property related to invasive blood
tests to its majority owned subsidiary, FluorRx, Inc. The term of the Lakowicz
Agreement is until the expiration date of the last expiring patent covering any
of the technology licensed.
RESEARCH, DEVELOPMENT AND ENGINEERING
To date, the Company has been engaged primarily in the research,
development and testing of the Company's glucose monitoring, diabetes screening
and infant jaundice products, including research for and development of its core
electro-optical and microporation technologies. Since inception to December 31,
1997, the Company incurred approximately $7.9 million in research and
development expenses, net of approximately $2.3 million which was reimbursed
through collaborative arrangements. Three distinct groups within the Company
conduct research, development and engineering. One group consists of 26
engineers and support personnel who design optics, electronics, mechanical
components and software for the infant jaundice and diabetes screening products.
A second group consists of 16 scientists and engineers who devote their time to
the development of microporation technology for the monitoring of glucose and
other analytes. The third group consists of five engineers and scientists
focused on investigating new applications for the Company's core electro-optical
and microporation technologies.
The Company believes that the interstitial fluid sampling technology
under development at SpectRx and Abbott for use in connection with the Company's
glucose monitoring product may also be used to develop alternatives for certain
blood tests where the analyte being tested is also present in comparable volumes
in interstitial fluid. Abbott has a right of first negotiation with the Company
regarding the use of interstitial fluid sampling technology for these
applications.
In 1996, SpectRx executed a licensing agreement with Dr. Lakowicz of
the University of Maryland pursuant to which the Company licenses a portfolio of
intellectual property related to lifetime fluorescence technology, a technology
used to determine the spectroscopic fingerprint of a substance. The Company
believes lifetime fluorescence technology may have applications including in
vitro blood chemistry, molecular diagnostics, flow cytometry, combinatorial
chemistry for pharmaceutical discovery research and noninvasive optical
diagnostics.
To date, the Company has only tested prototypes of its glucose
monitoring and diabetes screening products and pre-release production versions
of its infant jaundice product. Because the Company's research and clinical
development programs are at an early stage, substantial additional research and
development and clinical trials will be necessary before commercial prototypes
of the Company's glucose monitoring and diabetes screening products are
produced.
MANUFACTURING
One element of the Company's business strategy is to manufacture
certain of its products and to outsource the production of other, high volume
products and associated disposables. To date, the Company's manufacturing
activities have consisted of building certain prototype devices, developing
production infrastructure and building pre-release production versions of its
BiliCheck(TM) and BiliCal(TM) products. If the Company successfully develops its
diabetes screening product and infant jaundice product and, together with Roche
Diagnostics BMC and Respironics, obtains FDA clearance and other regulatory
approvals to market these products, the Company will undertake to manufacture
these products in commercial quantities. The Company has no experience
manufacturing such products in the volumes that would be necessary for the
Company to achieve significant commercial sales. Currently 12 individuals are
employed by the Company to accomplish the pre-production planning, quality
system development, facility development, and production scaling that will be
needed to bring production to commercial levels. The Company announced in early
1998 that it had received ISO 9001 and CE mark Certification subject to final
completion of its technical file and other review. These approvals enable the
Company to commence production of its BiliCheck(TM) and BiliCal(TM) products
and, if completed successfully, will permit shipment of these products into
markets for which it has received regulatory clearance.
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SALES, MARKETING AND DISTRIBUTION
The Company has elected to focus the sales and distribution of its
current products through its collaborative partners. The Company believes that
by aligning with larger, more established partners, in specific market segments,
it can utilize its partners' already developed strengths and more effectively
and quickly penetrate the market place. The Company's primary efforts to date
have been to build the skill and information base to identify and quantify
market segments to which the Company's technologies can be economically
developed and marketed.
The Company has developed the BiliCheck(TM) and BiliCal(TM) marketing
and distribution program to an introductory stage. SpectRx has developed
packaging, advertising, display materials, and training, and has, in addition,
signed distribution agreements or is in negotiation with companies it believes
to be highly experienced in the neonatal markets that SpectRx is targeting in
Europe, Asia and South America. The Company has also added or engaged marketing
personnel to develop and execute the programs necessary to launch the
BiliCheck(TM) system and to manage sales of these products. Nevertheless,
commercial volumes of these products have not yet been shipped and the efficacy
of the marketing programs or the distributors has not yet been tested with
SpectRx's products.
Respironics has the exclusive right to market and sell the Company's
infant jaundice product in the United States and Canada. Abbott has the
exclusive right to market and sell the Company's glucose monitoring product in
all countries except Singapore and the Netherlands, where the license is
non-exclusive. Roche Diagnostics BMC has the exclusive worldwide right to market
and sell the Company's diabetes screening product.
PATENTS
The Company has pursued a strategy of developing and acquiring patents
and patent rights and licensing technology. SpectRx's success depends in large
part upon its ability to establish and maintain the proprietary nature of its
technology through the patent process and to license from others patents and
patent applications necessary to develop its products. The Company has licensed
from Nimco one granted patent and know how related to its glucose monitoring
product, jointly applied with Altea for a U.S. patent and an international
patent related to this device and has licensed this granted patent and these
patent applications to Abbott pursuant to the parties' collaborative
arrangements. SpectRx has license agreements with GTRC that give the Company the
right to use two patents related to its diabetes screening product, and the
Company has licensed this proprietary technology to Roche Diagnostics BMC
pursuant to the Company's collaborative arrangement with Boehringer Mannheim.
The Company has license agreements with M.D. Anderson that give SpectRx access
to one patent related to the Company's infant jaundice product, and the Company
has applied for two patents related to this product. SpectRx has licensed the
one patent and two patent applications to Respironics pursuant to its
collaborative arrangement with that company. In addition, SpectRx has licensed
from Dr. Joseph Lakowicz of the University of Maryland several granted patents
and patent applications related to fluorescence spectroscopy that it intends to
use in its research and development efforts.
There can be no assurance that one or more of the patents held directly
by the Company or licensed by the Company from third parties, including the
disposable components to be used in connection with its glucose monitoring and
infant jaundice products, or processes used in the manufacture of the Company's
products, will not be successfully challenged, invalidated or circumvented or
that the Company will otherwise be able to rely on such patents for any reason.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that prevent, limit
or interfere with the Company's ability to make, use and sell its products
either in the United States or in foreign markets. If any of the Company's
patents are successfully challenged, invalidated or circumvented or the
Company's right or ability to manufacture its products were to be proscribed or
limited, the Company's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon the Company's business, financial condition and results of
operations.
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COMPETITION
The medical device industry in general, and the markets for glucose
monitoring and diabetes screening devices and processes in particular, are
intensely competitive. If successful in its product development, the Company
will compete with other providers of personal glucose monitors, diabetes
screening tests and infant jaundice products. A number of competitors, including
Johnson & Johnson, Inc. (which owns Lifescan, Inc.), Roche Diagnostics BMC,
Bayer AG (which owns Miles Laboratories, Inc.) and Abbott (which owns MediSense,
Inc.) 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. Furthermore, 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.
There is also competition in the diabetes screening and infant jaundice
markets. The existing blood test providers, companies that produce blood tests
and other technologies that could replace blood testing will compete for a share
of these markets.
GOVERNMENT REGULATION
All of the Company's products are regulated as medical devices. Medical
device products are subject to rigorous FDA and other governmental agency
regulations in the United States and may be subject to regulations of relevant
foreign agencies. The FDA regulates the clinical testing, manufacture, labeling,
packaging, marketing, distribution and record keeping for such products in order
to ensure that medical products distributed in the United States are safe and
effective for their intended uses. Noncompliance with applicable requirements
can result in import detentions, fines, civil penalties, injunctions,
suspensions or losses of regulatory approvals or clearances, recall or seizure
of products, operating restrictions, refusal of the government to approve
product export applications or allow the Company to enter into supply contracts,
and criminal prosecution. Failure to obtain regulatory approvals, the
restriction, suspension or revocation of regulatory approvals or clearances, if
obtained, or any other failure to comply with regulatory requirements would a
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Clinical Chemistry Branch of the FDA's Division of Clinical
Laboratory Devices (the "Branch") has traditionally been the reviewing branch
for blood-based personal glucose monitoring products. The Clinical Chemistry and
Clinical Toxicology Devices Panel (the "Panel") is an external advisory panel
that provides advice to the Branch regarding devices that are reviewed by the
Branch. The panel meets from time to time and provides comments on testing
guidelines. There can be no assurance that the Panel's comments will not result
in a FDA policy or change in FDA policy that is materially adverse to the
Company's regulatory position.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to GMP), and Class II devices are
subject to general and special controls (for example, performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
Class III devices are those which must receive premarket approval from the FDA
to ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed Class I or II devices).
A medical device manufacturer may seek clearance to market a medical
device by filing a 510(k) premarket notification with the FDA if a medical
device manufacturer establishes that a newly developed device is "substantially
equivalent" to either a device that was legally marketed prior to May 28, 1976,
the date upon which the Medical Device Amendments of 1976 were enacted, or to a
device that is currently legally marketed and has received 510(k) premarket
clearance from the FDA. The 510(k) premarket notification must be supported by
appropriate information, including, where appropriate, data from clinical
trials, establishing the claim of substantial equivalence to the satisfaction of
the FDA. Commercial distribution of a device for which a 510(k) premarket
notification is required can begin only after the FDA issues an order finding
the device to be "substantially equivalent" to a predicate device. The FDA has
recently been requiring a more rigorous demonstration of substantial equivalence
than in the past. It generally takes from four to 12 months from the date of
submission to obtain clearance of a 510(k) submission, but it may take
substantially longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device, or that
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additional information is needed before a substantial equivalence determination
can be made. The Company believes that its products will qualify for 510(k)
premarket notification.
A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products that
fall into this category and could have a material adverse effect on the
Company's business, financial condition and results of operations. For any of
the Company's products that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
efficacy of the device or that constitute a major change to the intended use of
the device will require new 510(k) submissions or approval of a PMA application.
Any modified device for which a new 510(k) premarket notification is required
cannot be distributed until 510(k) clearance is obtained for the modified
device. There can be no assurance that the Company will obtain 510(k) clearance
in a timely manner, if at all, for any devices or modifications to devices for
which it may submit a 510(k) notification.
A PMA application must be submitted if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or
for a Class III device for which FDA has called for PMAs. The PMA application
must contain valid scientific evidence to support the safety and effectiveness
of the device which includes the results of clinical trials, all relevant bench
tests, and laboratory and animal studies. The PMA application must also contain
a complete description of the device and its components, and a detailed
description of the methods, facilities and controls used for manufacture,
including, where appropriate, the method of sterilization and its assurance. In
addition, the submission must include proposed labeling, advertising literature
and training methods (if required). If human clinical trials of a device are
required in connection with a PMA application, and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing, and a description of how the device will be
manufactured. If the IDE application is reviewed and approved by the FDA and one
or more appropriate institutional review boards ("IRBs"), human clinical trials
may begin at a specific number of investigational sites with a specific number
of patients, as approved by the FDA. If the device presents a "nonsignificant
risk" to the patient, a sponsor may begin clinical trials after obtaining
approval for the study by one or more appropriate IRBs, but FDA approval for the
commencement of the study is not required. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study provided
such compensation does not exceed recovery of costs of manufacture, research,
development and handling. An IDE supplement must be submitted to and approved by
FDA before a sponsor or an investigator may make a significant change to the
investigational plan that may affect the plan's scientific soundness or the
rights, safety or welfare of human subjects.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will accept the
application for filing. An incomplete application will be returned to the
sponsor and must be resubmitted and accepted for filing before the application
will be substantively reviewed. Once the submission is accepted for filing, the
FDA begins an in-depth review of the PMA application. An FDA review of a PMA
application generally takes one to two years from the date the PMA application
is accepted for filing, but may take significantly longer. The review time is
often significantly extended by the FDA asking for more information or
clarification of information already provided in the submission. During the PMA
application review period, the submission may be sent to an FDA-selected
scientific advisory panel composed of physicians and scientists with expertise
in the particular field. The FDA scientific advisory panel issues a
recommendation to the FDA that may include conditions for approval. The FDA is
not bound by the recommendations of the advisory panel. Toward the end of the
PMA application review process, the FDA will conduct an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance with
applicable GMP requirements.
If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will issue an approvable letter,
which usually contains a number of conditions which must be met in order to
secure final approval of the PMA application. When those conditions have been
fulfilled to the satisfaction of the FDA, the agency will issue a PMA
application approval letter authorizing commercial marketing of the device for
certain indications and intended uses. The PMA application review process can be
expensive, uncertain and lengthy. A number of devices for which a PMA has been
sought have never been approved for marketing. The FDA may also determine that
additional
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clinical trials are necessary, in which case the PMA may be significantly
delayed while such trials are conducted and data is submitted in an amendment to
the PMA application. Modifications to the design, labeling or manufacturing
process of a device that is the subject of an approved PMA application, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMA applications. Supplements to a PMA often require the
submission of the same type of information required for an initial PMA, except
that the supplement is generally limited to that information needed to support
the proposed change from the product covered by the original PMA. The FDA
generally does not call for an advisory panel review for PMA supplements. There
can be no assurance that, if required, the Company will be able to meet the
FDA's PMA requirements or that any necessary approvals will be received. Failure
to comply with regulatory requirements would have a material adverse effect on
the Company's business, financial condition and results of operations.
Regulatory approvals and clearances, if granted, may include
significant labeling limitations and limitations on the indicated uses for which
the product may be marketed. In addition, to obtain such approvals and
clearances, the FDA and certain foreign regulatory authorities impose numerous
other requirements with which medical device manufacturers must comply. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. Any products manufactured or distributed by the Company
pursuant to FDA clearances or approvals are subject to pervasive and continuing
regulation by the FDA. The FDA also requires the Company to provide it with
information on death and serious injuries alleged to have been associated with
the use of the Company's products, as well as any malfunctions that would likely
cause or contribute to death or serious injury. Failure to comply with
applicable regulatory requirements can result in, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal by the government to grant
premarket clearance or premarket approval for devices, withdrawals of approvals
and criminal prosecutions.
The Company is required to register with the FDA as a device
manufacturer and list its products with the Agency. The Company also is subject
to biannual inspections, for compliance with GMP, by the FDA and state agencies
acting under contract with the FDA. The GMP regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner with
respect to manufacturing, testing, quality assurance and quality control
activities. The FDA also has promulgated final regulatory changes to the GMP
regulations that require, among other things, design controls and maintenance of
service records, and which will increase the cost of complying with GMP
requirements.
Labeling and promotional activities are subject to scrutiny by the FDA
and in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved users. The
Company and its products are also subject to a variety of state and local laws
and regulations in those states and localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers are
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business.
International sales of the Company's products are subject to the
regulatory requirements of each target country. The regulatory review process
varies from country to country. The ISO 9000 series of standards for quality
operations have been developed to ensure that companies know the standards of
quality to which they must adhere to receive certification. The European Union
has promulgated rules which require that medical products received by mid-1998
the right to affix the CE mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device
directives. The ISO 9001 certification will be one of the CE mark certification
requirements required by mid-1998. Failure to receive and maintain the right to
affix the CE mark will prohibit the Company from selling its products in member
countries of the European Union.
The Company will rely upon its corporate partners to obtain certain
United States and foreign regulatory approvals and if such approvals are
obtained the Company will rely upon its corporate partners to remain in
compliance with ongoing United States and foreign regulatory restrictions. The
inability or failure of such third parties to comply
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with the varying regulations or the imposition of new regulations would
materially adversely effect the Company's business, financial condition and
results of operations.
EMPLOYEES AND CONSULTANTS
As of December 31, 1997, the Company had 62 employees and consulting or
other contract arrangements with 23 additional persons to provide services to
the Company on a full- or part-time basis. Of the 85 people so employed or
engaged by the Company, 51 are engaged in research and development activities,
11 are engaged in sales and marketing activities, 5 are engaged in regulatory
affairs and quality assurance, 10 are engaged in manufacturing and development,
and 8 are engaged in administration and accounting. No employees are covered by
collective bargaining agreements, and the Company believes it maintains good
relations with its employees.
The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of certain
key scientific, technical, managerial and finance personnel, and its ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel. None of these key employees has an employment contract
with the Company nor are any of these employees covered by key person or similar
insurance. In addition, if the Company, together with its collaborative
partners, is able to successfully develop and commercialize the Company's
products, the Company will need to hire additional scientific, technical,
marketing, managerial and finance personnel. The Company faces intense
competition for qualified personnel in these areas, many of whom are often
subject to competing employment offers, and there can be no assurance that the
Company will be able to attract and retain such personnel. The loss of key
personnel or inability to hire and retain additional qualified personnel in the
future could have a material adverse effect on the Company's 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. The Company's 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 risk factors.
Early Stage of Development; No Assurance of Successful Product Development
To date, the Company has only tested prototypes and pre-release
production versions of its products. Because the Company's research and clinical
development programs are at an early stage, substantial additional research and
development and clinical trials will be necessary before commercial prototypes
of the Company's products are produced. The Company could encounter unforeseen
problems in the development of its products such as delays in conducting
clinical trials, delays in the supply of key components or delays in overcoming
technical hurdles. There can be no assurance that the Company will be able to
successfully address the problems that may arise during the development and
commercialization process. In addition, there can be no assurance that any of
the Company's products will be successfully developed, proven safe and
efficacious in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable costs, be eligible for
third-party reimbursement from governmental or private insurers, be successfully
marketed or achieve market acceptance. If any of the Company's development
programs are not successfully completed, required regulatory approvals or
clearances are not obtained, or products for which approvals or clearances are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected.
The Company's business is subject to the risks inherent in the
development of new products using new technologies and approaches. There can be
no assurance that unforeseen problems will not develop with these technologies
or applications, that the Company will be able to successfully address
technological challenges it encounters in its research and development programs
or that commercially feasible products will ultimately be developed by the
Company.
Dependence on Collaborative Arrangements
The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing and commercialization of its products depends
upon the Company's ability to selectively enter into and maintain collaborative
arrangements with leading medical device companies. The Company has entered into
collaborative arrangements with, (i) Respironics under which Respironics is
primarily responsible for undertaking or funding the
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development, clinical testing, regulatory approval process and sale of the
Company's infant jaundice product in the United States and Canada, (ii) Roche
Diagnostics BMC under which Roche Diagnostics BMC is primarily responsible for
undertaking or funding the development, clinical testing, regulatory approval
process and sale of the Company's diabetes screening product, and (iii) Abbott
under which Abbott is primarily responsible for undertaking or funding the
development, clinical testing, regulatory approval process, manufacture and sale
of the Company's glucose monitoring product. The agreements evidencing these
collaborative arrangements grant a substantial amount of discretion to each of
Abbott, Roche Diagnostics BMC and Respironics. For example, each of these
collaborative partners may terminate their respective collaborative arrangements
with the Company effective upon the expiration of certain notice periods. In
addition, the obligation of each of the Company's collaborative partners to fund
or undertake the development, clinical testing, regulatory approval process,
marketing, distribution and/or sale of the products covered by their respective
collaborative arrangements with the Company is, to a large extent, dependent
upon the satisfaction of certain goals or "milestones" by certain specified
dates, some of which are outside the Company's control. To the extent that the
obligations of the Company's collaborative partners to fund or undertake all or
certain of the foregoing activities are not contingent upon the satisfaction of
certain goals or milestones, the collaborative partners nevertheless retain a
significant degree of discretion regarding the timing of these activities and
the amount and quality of financial, personnel and other resources that they
devote to these activities. Furthermore, there can be no assurance that disputes
will not arise between the Company and one or more of its collaborative partners
regarding their respective rights and obligations under the collaborative
arrangements. Finally, there can be no assurance that one or more of the
Company's collaborative partners will not be unable, due to financial,
regulatory or other reasons, to satisfy its obligations under its collaborative
arrangement with the Company or will not intentionally or unintentionally breach
its obligations under the arrangement.
There can be no assurance that one or more of the Company's
collaborative partners will not, for competitive reasons, support, directly or
indirectly, a company or product that competes with the Company's product that
is the subject of its collaborative arrangement with the Company. Furthermore,
any dispute between the Company and one of its collaborative partners might
require the Company to initiate or defend expensive litigation or arbitration
proceedings.
Any termination of any collaborative arrangement by one of the
Company's collaborative partners, any inability of a collaborative partner to
fund or otherwise satisfy its obligations under its collaborative arrangements
with the Company and any significant dispute with, or breach of a contractual
commitment by, a collaborative partner, would likely require the Company to seek
and reach agreement with another collaborative partner or to assume, to the
extent possible and at its own expense, all the responsibilities being
undertaken by this collaborative partner. There can be no assurance that the
Company would be able to reach agreement with a replacement collaborative
partner. If the Company were not able to find a replacement collaborative
partner, there can be no assurance that the Company would be able to perform or
fund the activities for which such collaborative partner is currently
responsible. Even if the Company were able to perform and fund these activities,
the Company's capital requirements would increase substantially. In addition,
the further development and the clinical testing, regulatory approval process,
marketing, distribution and sale of the product covered by such collaborative
arrangement would be significantly delayed.
On February 11, 1998, Healthdyne merged with Respironics, with
Respironics as the surviving entity. There can be no assurance that the change
in control of Healthdyne will not adversely affect the Company's collaborative
arrangement with Healthdyne. On March 5, 1998, Roche Holding, Ltd. acquired
Corange, Ltd., which is the parent company of Boehringer Mannheim, GmbH., the
parent company of Boehringer Mannheim. There can be no assurance that the change
in control of Boehringer Mannheim will not adversely affect the Company's
collaborative arrangement with Boehringer Mannheim.
Any of the foregoing circumstances could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Limited Operating History; History of Losses and Expectations of Future Losses
The Company has a limited operating history upon which its prospects
can be evaluated. Such prospects must be considered in light of the substantial
risks, expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate.
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The Company has experienced operating losses since its inception, and, as of
December 31, 1997, the Company had an accumulated deficit of approximately $12.1
million. To date, the Company has engaged primarily in research and development
efforts, and a number of the Company's key management and technical personnel
have only recently joined the Company. The Company has never generated revenues
from product sales and does not have experience in manufacturing, marketing or
selling its products. There can be no assurance that the Company's development
efforts will result in commercially viable products, that the Company will be
successful in introducing its products, or that required regulatory clearances
or approvals will be obtained in a timely manner, or at all. There can be no
assurance that the Company's products will ever gain market acceptance or that
the Company will ever generate revenues or achieve profitability. The
development and commercialization of its products will require substantial
development, regulatory, sales and marketing, manufacturing and other
expenditures. The Company expects its operating losses to continue through 1999
as it continues to expend substantial resources to complete development of its
products, obtain regulatory clearances or approvals, build its marketing, sales,
manufacturing and finance organizations and conduct further research and
development.
Government Regulations; No Assurance of Regulatory Approvals
The design, manufacturing, labeling, distribution and marketing of the
Company's products will be subject to extensive and rigorous government
regulation in the United States and certain other countries where the process of
obtaining and maintaining required regulatory clearance or approvals is lengthy,
expensive and uncertain. In order for the Company to market its products in the
United States, the Company must obtain clearance or approval from the FDA. The
Company intends to seek clearance to market each of its products through a
510(k) premarket notification supported by clinical data. Although no 510(k)
premarket notification has been filed with the FDA for clearance to market any
of the Company's products, the Company expects 510(k) premarket notifications
for clearance to market its infant jaundice product and its diabetes screening
product in 1998. A 510k for the glucose monitoring product is expected after the
completion of development. There can be no assurance that any such notifications
will be filed in accordance with this schedule, that the FDA will act favorably
or quickly on such 510(k) submissions, or that significant difficulties and
costs will not be encountered during efforts to obtain FDA clearance or
approval. Specifically, the FDA may request additional data or require
additional clinical studies be conducted to obtain 510(k) clearance for one or
more of the Company's products. In addition, there can be no assurance that the
FDA will not require the submission of a premarket approval ("PMA") application
to obtain FDA approval to market one or more of the Company's products. The PMA
process is more rigorous and lengthier than the 510(k) clearance process and can
take several years from initial filing and require the submission of extensive
supporting data and clinical information. In addition, there can be no assurance
that the FDA will not impose strict labeling or other requirements as a
condition of its 510(k) clearance or PMA, any of which could limit the Company's
ability to market its products. Further, if the Company wishes to modify a
product after FDA clearance of a 510(k) premarket notification or approval of a
PMA 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 the Company conduct additional clinical studies or
submit to the more rigorous and lengthier PMA process could result in a
significant delay in bringing the Company's products to market and substantial
additional research and other expenditures by the Company. Similarly, any
labeling or other conditions or restrictions imposed by the FDA on the marketing
of the Company's products could hinder the Company's ability to effectively
market its products. Any of the foregoing actions by the FDA could delay or
prevent altogether the Company's ability to market and distribute its products
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
In order for the Company to market its products under development in
Europe and certain other foreign jurisdictions, the Company and its distributors
and agents must obtain required regulatory registrations or approvals and
otherwise comply with extensive regulations regarding safety, efficacy and
quality in those jurisdictions. Specifically, certain foreign 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 commence sales in Europe, the Company will be required to obtain ISO
9001 certifications and after mid-1998, the Company will be prohibited from
selling its products in Europe until such time as the Company receives CE mark
certification, which is an international symbol of quality and compliance with
applicable European medical device directives. While the Company has received
ISO 9001 and CE mark
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certification, it must still comply with certain completion requirements
including submission of its technical file, and it must maintain its
certifications in future periods. Failure to receive or maintain ISO 9001 or CE
mark certification or other foreign regulatory approvals could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will obtain any other
required regulatory registrations or approvals in such countries or that it will
not be required to incur significant costs in obtaining or maintaining such
regulatory registrations or approvals. Delays in obtaining any registrations or
approvals required to market the Company's products, failure to receive these
registrations or approvals, or future loss of previously obtained registrations
or approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company and its collaborative partners will be required to adhere
to applicable FDA regulations regarding Good Manufacturing Practice ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP 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
foreign jurisdictions by comparable agencies. Failure to comply with applicable
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, refusal of the government to grant 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 have a material adverse effect on the Company's business, financial
condition and results of operations.
The Clinical Chemistry Branch of the FDA's Division of Clinical
Laboratory Devices (the "Branch") has traditionally been the reviewing branch
for blood-based personal glucose monitoring products. The Clinical Chemistry and
Clinical Toxicology Devices Panel (the "Panel") is an external advisory panel
that provides advice to the Branch regarding devices that are reviewed by the
Branch. The panel meets from time to time and provides comments to the Branch
regarding guidelines. There can be no assurance that the Panel's comments will
not result in a FDA policy or change in FDA policy that is materially adverse to
the Company's regulatory position.
The Company will rely upon Abbott, Roche Diagnostics BMC and
Respironics to obtain United States and foreign regulatory approvals and
clearances for its glucose monitoring, diabetes screening and infant jaundice
products, respectively, and if such approvals or clearances are obtained the
Company will rely upon these collaborative partners to maintain them in full
force and effect and to otherwise remain in compliance with all applicable
United States and foreign regulatory restrictions. The inability or failure of
such third parties to comply with the varying regulations or the imposition of
new regulations would materially adversely effect the Company's business,
financial condition and results of operations.
Dependence on Licensed Patent Applications and Proprietary Technology
SpectRx's success depends in large part upon its ability to establish
and maintain the proprietary nature of its technology through the patent process
and to license from others patents and patent applications necessary to develop
its products. The Company has licensed from Non-Invasive Monitoring Company,
Inc. ("Nimco") one granted patent and know-how related to its glucose monitoring
product, jointly applied with Altea Technologies, Inc. ("Altea") for a U.S.
patent and an international patent related to this device and has licensed this
granted patent and these patent applications to Abbott pursuant to the parties'
collaborative arrangements. SpectRx has license agreements with Georgia Tech
Research Corporation ("GTRC") that give the Company the right to use two patents
related to its diabetes screening product, and the Company has licensed this
proprietary technology to Roche Diagnostics BMC pursuant to the Company's
collaborative arrangement with Boehringer Mannheim. The Company has license
agreements with the University of Texas M.D. Anderson Cancer Center ("M.D.
Anderson") that give SpectRx access to one patent related to the Company's
infant jaundice product, and the Company has applied for two patents related to
this product. SpectRx has licensed the one patent and two patent applications to
Respironics pursuant to its collaborative arrangement with that company. In
addition, SpectRx has licensed from Joseph Lakowicz, Ph.D. of the University of
Maryland several granted patents and patent applications related to fluorescence
spectroscopy that it intends to use in its research and development efforts.
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There can be no assurance that one or more of the patents held directly
by the Company or licensed by the Company from third parties, including the
disposable components to be used in connection with its glucose monitoring and
infant jaundice products, or processes used in the manufacture of the Company's
products, will not be successfully challenged, invalidated or circumvented or
that the Company will otherwise be able to rely on such patents for any reason.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that prevent, limit
or interfere with the Company's ability to make, use and sell its products
either in the United States or in foreign markets. If any of the Company's
patents are successfully challenged, invalidated or circumvented or the
Company's right or ability to manufacture its products were to be proscribed or
limited, the Company's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Certain
companies in the medical device industry have instituted intellectual property
litigation, including patent infringement actions, for legitimate and, in
certain cases, competitive reasons. In addition, the United States Patent and
Trademark Office ("USPTO") may institute litigation or interference proceedings.
There can be no assurance that the Company will not become subject to patent
infringement claims or litigation or interference proceedings instituted by the
USPTO to determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming. Litigation
may be necessary to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceedings brought against, initiated by or otherwise involving
the Company may require the Company to incur substantial legal and other fees
and expenses and may require some of the Company's employees to devote all or a
substantial portion of their time to the prosecution or defense of such
litigation or proceedings. An adverse determination in litigation or
interference proceedings to which the Company may become a party, including any
litigation that may arise against the Company, could subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties or prevent the Company from selling its products in certain
markets, or at all. Although patent and intellectual property disputes regarding
medical devices are often settled through licensing or similar arrangements,
there can be no assurance that the Company would be able to reach a satisfactory
settlement of such a dispute that would allow it to license necessary patents or
other intellectual property. Even if such a settlement were reached, the
settlement process may be expensive and time consuming and the terms of the
settlement may require the Company to pay substantial royalties. An adverse
determination in a judicial or administrative proceeding or the failure to
obtain a necessary license could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements. There can be no
assurance that such confidentiality or proprietary information agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known to or be
independently developed by competitors.
Fixed Royalty Rates and Manufacturing Profits
Substantially all of the Company's revenues and profits are expected to
be derived from royalties and manufacturing profits that the Company will
receive from Abbott, Roche Diagnostics BMC and Respironics resulting from sales
of its glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing profits for the
Company. In addition, the Company's profit margins are not likely to increase
over time because the Company's royalty rates and manufacturing profit rates are
predetermined.
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In addition, it is common practice in the glucose monitoring device
industry for manufacturers to sell their glucose monitoring devices at
substantial discounts to their list prices or to offer customers rebates on
sales of their products. Manufacturers offer such discounts or rebates to expand
the use of their products and thus increase the market for the disposable assay
strips they sell for use with their products. Because Abbott may, pursuant to
its collaborative arrangement with the Company, determine the prices at which it
sells the Company's glucose monitoring devices, it may choose to adopt this
marketing strategy. If Abbott adopts this marketing strategy and discounts the
prices at which it sells the Company's glucose monitoring devices, the royalties
earned by the Company in respect of such sales will decline. There can be no
assurance that, if this strategy is adopted, royalties earned by the Company on
sales of the disposable cartridges to be used in connection with its glucose
monitoring device will be equal to or greater than the royalties the Company
would have earned had its glucose monitoring devices not been sold at a
discount. This possible reduction in royalties on sales of the Company's glucose
monitoring devices could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Uncertainty of Market Acceptance
The Company's products are based upon new methods of glucose
monitoring, diabetes screening and infant jaundice monitoring and screening, and
there can be no assurance that any of these products will gain market
acceptance. Physicians and individuals will not recommend or use the Company's
products unless they determine, based on experience, clinical data, relative
cost, and other factors, that these products are an attractive alternative to
current blood-based tests that have a long history of safe and effective use. To
date, the Company's products have been utilized by only a limited number of
subjects, and no independent studies regarding the Company's products have been
published. The lack of any such independent studies may have an adverse effect
on the Company's ability to successfully market its products. In addition,
purchase decisions for products like the Company's diabetes screening and infant
jaundice products are greatly influenced by health care administrators who are
subject to increasing pressures to reduce costs. Failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
Intense Competition
The medical device industry in general, and the markets for glucose
monitoring and diabetes screening devices and processes in particular, are
intensely competitive. If successful in its product development, the Company
will compete with other providers of personal glucose monitors, diabetes
screening tests and infant jaundice products. A number of competitors, including
Johnson & Johnson, Inc. (which owns Lifescan, Inc.), Roche Diagnostics BMC,
Bayer AG (which owns Miles Laboratories, Inc.) and Abbott (which owns MediSense
Inc.), 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. Furthermore, 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.
Many of the Company's competitors have substantially greater financial,
research, technical, manufacturing, marketing and distribution resources than
the Company and have greater name recognition and lengthier operating histories
in the health care industry. There can be no assurance that the Company will be
able to effectively compete against these and other competitors. In addition,
there can be no assurance that the Company's glucose monitoring, diabetes
screening or infant jaundice products will replace any currently used devices or
systems, which have long histories of safe and effective use. Furthermore, there
can be no assurance that the Company's competitors will not succeed in
developing, either before or after the development and commercialization of the
Company's products, devices and technologies that permit more efficient, less
expensive non-invasive and less invasive glucose monitoring, diabetes screening
and infant jaundice monitoring. 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 infant jaundice or otherwise render the Company's products obsolete.
Such competition could have a material adverse effect on the Company's business,
financial condition and results of operation.
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In addition, there can be no assurance that one or more of the
Company's collaborative partners will not, for competitive reasons, reduce its
support of its collaborative arrangement with the Company or support, directly
or indirectly, a company or product that competes with the Company's product
that is the subject of the collaborative arrangement.
Little Manufacturing Experience; Dependence on Sole Sources of Supply
To date, the Company's manufacturing activities have consisted only of
building certain prototype devices and pre-release versions of its BiliCheck(TM)
and BiliCal(TM) products. If the Company successfully develops its diabetes
screening and infant jaundice products and, together with Roche Diagnostics BMC
and Respironics, obtains FDA clearance and other regulatory approvals to market
these products, the Company will undertake to manufacture these products in
significant volumes. The Company has no experience manufacturing such products
in the volumes that would be necessary for the Company to achieve significant
commercial sales. There can be no assurance that the Company will be able to
establish and maintain reliable, full scale manufacturing of these products at
commercially reasonable costs. Although the Company has leased space that it
plans to use to manufacture its products, it may encounter various problems in
establishing and maintaining its manufacturing operations, resulting in
inefficiencies and delays. Specifically, companies often encounter difficulties
in scaling up production, including problems involving production yield, quality
control and assurance, and shortages of qualified personnel. In addition, the
Company's manufacturing facilities will be subject to GMP regulations, including
possible preapproval inspection, international quality standards and other
regulatory requirements. Difficulties encountered by the Company in
manufacturing scale-up or failure by the Company to implement and maintain its
manufacturing facilities in accordance with GMP regulations, international
quality standards or other regulatory requirements could result in a delay or
termination of production, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The microspectrometer and disposable calibration element, components of
the Company's infant jaundice product, and the blue light module and calibration
element, components of the Company's diabetes screening product, are each
available from only one supplier and these products would require a major
redesign in order to incorporate a substitute component. Certain other
components of the infant jaundice and diabetes screening products are currently
obtained from only one supplier, but have readily available substitute
components that can be incorporated in the applicable product with minimal
design modifications. If the Company's products require a PMA, the inclusion of
substitute components could require the Company to qualify the new supplier with
the appropriate government regulatory authorities. Alternatively, if the
Company's products qualify for a 510(k) premarket notification, the substitute
components need only meet the Company's product specifications. Any significant
problem experienced by one of the Company's sole source suppliers may result in
a delay or interruption in the supply of components to the Company until such
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 the Company's manufacturing operations, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
No Marketing and Sales Experience
If the Company, together with Respironics, successfully develops the
Company's infant jaundice product and obtains, in countries other than the
United States and Canada, necessary regulatory approvals and clearances to
market this product, the Company will be responsible for marketing this product
in these countries. The Company has no experience in marketing or selling
medical device products and only has a six person marketing and sales staff. In
order to successfully market and sell its infant jaundice product outside the
United States and Canada, the Company must either develop a marketing and sales
force or enter into arrangements with third parties to market and sell this
product. While the Company has signed distributor agreements for its
BiliCheck(TM) and BiliCal(TM) products, there can be no assurance that the
Company will be able to successfully fully develop a marketing and sales force
or that it will be able to enter into and maintain marketing and sales
agreements with third parties on acceptable terms. If the Company develops its
own marketing and sales capabilities, it will compete with other companies that
have experienced and well-funded marketing and sales operations. If the Company
enters into a marketing arrangement with a third party for the marketing and
sale of its infant jaundice product outside the United States and Canada, any
revenues to be received
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by the Company from this product will be dependent on this third party, and the
Company will likely be required to pay a sales commission or similar amount to
this party. Furthermore, the Company is currently dependent on the efforts of
Abbott and Roche Diagnostics BMC for any revenues to be received from its
glucose monitoring and diabetes screening products, respectively. There can be
no assurance that the efforts of these third parties for the marketing and sale
of the Company's products will be successful.
Product Liability Risk; Limited Insurance Coverage
The development, manufacture and sale of medical products entail
significant risks of product liability claims. The Company currently has no
product liability insurance coverage beyond that provided by its general
liability insurance. Accordingly, there can be no assurance that the Company is
adequately protected from any liabilities, including any adverse judgments or
settlements, it might incur in connection with the development, clinical
testing, manufacture and sale of its products. In addition, product liability
insurance is expensive and may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company that results in an adverse judgment against or
settlement by the Company in excess of any insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Need for Additional Capital; Uncertainty of Access to Capital
Substantial capital will be required to develop the Company's products,
including completing product testing and clinical trials, obtaining all required
United States and foreign regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing its products. Pursuant to the Company's
collaborative arrangements with Abbott, Roche Diagnostics BMC and Respironics,
these collaborative partners will either directly undertake these activities or
will fund a substantial portion of these expenditures. The obligations of the
Company's collaborative partners to fund the Company's capital expenditures is
largely discretionary and depends on a number of factors, including the
Company's ability to meet certain milestones in the development and testing of
its products. There can be no assurance that the Company will meet such
milestones or that the Company's collaborative partners will continue to fund
the Company's capital expenditures. Any failure of the Company's collaborative
partners to fund its capital expenditures would have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional collaborative relationships or
other arrangements. The Company believes that its existing capital resources
will be sufficient to satisfy its funding requirements for at least the next 18
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of its glucose monitoring product. There can be no
assurance that any required additional funding, if needed, will be available on
terms attractive to the Company, or at all, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants.
Uncertainty of Third-Party Reimbursement
In the United States, patients, hospitals and physicians who purchase
medical devices such as the Company's products, generally rely on third-party
payors, principally federal Medicare, state Medicaid and private health
insurance plans, to reimburse them for all or a portion of the cost of the
medical device. Reimbursement for devices that have received FDA approval has
generally been available in the United States. In addition, certain health care
providers are gradually adopting a managed care system in which such providers
contract to provide comprehensive health care services for a fixed cost per
person. The Company is unable to predict what changes will be made in the
reimbursement methods utilized by third-party health care payors. Although the
Company anticipates that patients, hospitals and physicians will justify the use
of the Company's products by the attendant cost savings and clinical benefits
that the Company believes will be derived from the use of its products, there
can be no assurance that this will be the case. Furthermore, the Company could
be adversely affected by changes in reimbursement policies of governmental or
private health care payors. Any inability of patients, hospitals, physicians and
other users of the Company's products to obtain
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25
sufficient reimbursement from health care payors for the Company's products or
adverse changes in relevant governmental policies or the policies of private
third-party payors regarding reimbursement for such products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
If the Company obtains the necessary foreign regulatory approvals,
market acceptance of the Company's products in international markets will be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country and include both government
sponsored health care and private insurance. Although the Company intends to
seek international reimbursement approvals, there can be no assurance that such
approvals will be obtained in a timely manner, if at all. Any failure to receive
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought.
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. Third-party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing one or more products to market, there can be no assurance
that these products will be considered cost effective and that reimbursement to
the consumer will be available or sufficient to allow the Company to sell its
products on a competitive basis.
Need to Attract and Retain Key Employees
The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of certain
key scientific, technical, managerial and finance personnel, and its ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel. The officers listed in the Executive Officers and
Directors table comprise the Company's key personnel. None of these key
employees has an employment contract with the Company nor are any of these
employees covered by key person or similar insurance. In addition, if the
Company, together with its collaborative partners, is able to successfully
develop and commercialize the Company's products, the Company will need to hire
additional scientific, technical, marketing, managerial and finance personnel.
The Company faces intense competition for qualified personnel in these areas,
many of whom are often subject to competing employment offers, and there can be
no assurance that the Company will be able to attract and retain such personnel.
The loss of key personnel or inability to hire and retain additional qualified
personnel in the future could have a material adverse effect on the Company's
business, financial condition and results of operations.
Control by Directors, Executive Officers and Affiliated Entities
The Company's directors, executive officers and entities affiliated
with them, in the aggregate, beneficially own approximately 46% of the Company's
outstanding Common Stock. These stockholders, acting together, would be able to
control substantially all matters requiring approval by the stockholders of the
Company, including the election of directors and the approval of mergers and
other business combination transactions.
Potential Volatility of Stock Price
The stock markets have experienced extreme price and volume
fluctuations that have substantially affected small capitalization medical
technology companies, resulting in changes in the market prices of the stocks of
many such companies that may not have been directly related to their operating
performance. Such broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In addition, the market price of the Common
Stock may be highly volatile. Factors such as variations in the Company's
financial results, changes in the Company's collaborative arrangements, comments
by security analysts, announcements of technological innovations or new products
by the Company or its competitors, changing government regulations and
developments with respect to FDA submissions, patents and proprietary rights, or
litigation may have a material adverse effect on the market price of the Common
Stock.
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26
Anti-Takeover Effect of Certain Charter and Bylaw Provisions on Price of Common
Stock
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting and specify procedures
for director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings. Certain provisions of Delaware law
applicable to the Company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholders for a period of three years unless certain conditions are met,
could also delay or make more difficult a merger, tender offer or proxy contest
involving the Company. The possible issuance of Preferred Stock, the procedures
required for director nominations and stockholder proposals and Delaware law
could have the effect of delaying, deferring or preventing a change in control
of the Company, including without limitation, discouraging a proxy contest or
making more difficult the acquisition of a substantial block of the Company's
Common Stock. These provisions could also limit the price that investors might
be willing to pay in the future for shares of the Company's Common Stock.
Lack of Dividends
The Company has not paid any dividends and does not anticipate paying
any dividends in the foreseeable future.
ITEM 2. PROPERTIES
The Company leases approximately 38,000 square feet in Norcross,
Georgia, which comprise the Company's administrative, research and development,
marketing and production facilities and the Company's planned manufacturing
facility. The Company's lease for the portion of this facility housing the
finance department and certain planned manufacturing operations extends through
1999, the portions housing certain research and development operations expire in
June 2000 and March 2003 and the portion housing administration, sales and
marketing, engineering and certain other planned manufacturing operations
expires in March 2001.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
(ticker symbol SPRX). The number of record holders of the Company's Common Stock
at February 28, 1998 was 93.
The Company completed an initial public offering of 2,361,699 shares of
Common Stock in July 1997. Prior to the initial public offering, the Company's
Common Stock was not publicly traded.
The high and low last sales prices for the third and fourth quarters of
1997 as reported by the Nasdaq National Market are as follows:
1997
---------------------
HIGH LOW
---------- --------
Third Quarter $ 7.75 $ 6.50
Fourth Quarter $ 9.875 $ 6.50
The Company has not paid any dividends since its inception and does not
intend to pay any dividends in the foreseeable future.
On July 1, 1997, the Company commenced and completed its initial public
offering (the "IPO") of 2,361,699 shares (including 201,699 shares sold by
selling stockholders and including the exercise of the underwriters'
over-allotment option consisting of 160,000 shares) of its Common Stock, $0.001
par value per share, at a public offering price of $7.00 per share pursuant to a
registration statement on Form S-1 (file no. 333-80453) filed with the
Securities and Exchange Commission. All of the shares registered were sold.
Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC were the managing
underwriters of the IPO. Aggregate gross proceeds to the Company from the IPO
(prior to deduction of underwriting discounts and commissions and expenses of
the offering) were $15,120,000.
The Company paid underwriting discounts and commissions of $1,058,400
and other expenses of approximately $896,000 in connection with the IPO. The
total expenses paid by the Company in the IPO were $1,954,400, and the net
proceeds to the Company in the IPO were $13,165,600.
From June 30, 1997, the effective date of the Registration Statement, to
December 31, 1997 (the Company's fiscal year end), the approximate amount of net
proceeds used were $1.5 million for the funding of the development of the
Company's infant jaundice and diabetes screening products, $1.1 million for
developing production capacity and increasing inventory, and $0.6 million to
develop sales, marketing and distribution capability. None of such payments
consisted of direct or indirect payments to directors, officers, 10%
stockholders or affiliates of the Company.
-27-
28
ITEM 6. SELECTED FINANCIAL DATA
SPECTRX
(IN THOUSANDS EXCEPT FOR PER SHARE FIGURES)
PERIOD FROM INCEPTION
(OCT. 27, 1992)
YEAR ENDED DECEMBER 31, THROUGH THROUGH
1997 1996 1995 1994 1993 1997
STATEMENTS OF OPERATIONS DATA:
REVENUES $ 901 $ 452 $ 1,179 $ 122 $ 0 $ 2,654
COST AND EXPENSES:
RESEARCH & DEVELOPMENT 3,428 1,815 1,189 869 638 7,939
MARKETING 835 221 146 126 196 1,524
GENERAL & ADMINISTRATIVE 2,558 1,526 637 350 403 5,474
-------- -------- -------- -------- -------- --------
LOSS FROM OPERATIONS (5,920) (3,110) (793) (1,223) (1,237) (12,283)
NET INTEREST AND OTHER INCOME (EXPENSE) 194 (68) 113 (124) 20 135
-------- -------- -------- -------- -------- --------
NET LOSS $ (5,726) $ (3,178) $ (680) $ (1,347) $ (1,217) $(12,148)
======== ======== ======== ======== ======== ========
NET LOSS PER SHARE
BASIC $ (1.26) $ (2.13) $ (0.48) $ (0.96) $ (1.03)
DILUTED $ (1.26) $ (2.13) $ (0.48) $ (0.96) $ (1.03)
SHARES USED TO COMPUTE NET LOSS PER SHARE
BASIC 4,528 1,494 1,410 1,410 1,179
DILUTED 4,528 1,494 1,410 1,410 1,179
CONSOLIDATED BALANCE SHEET DATA
TOTAL ASSETS 14,999 5,946 751 1,327 756
TOTAL LONG TERM OBLIGATIONS 752 250 0 475 0
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ITEM 7. 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 fact 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 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 such
uncertainties and risks include, but are not limited to, whether the
Company's products in development will prove safe and effective;
whether and when the Company or its strategic partners will obtain approval
from the United States Food And Drug Administration ("FDA") and corresponding
foreign agencies; the Company's need to achieve manufacturing scale-up in a
timely manner, and its need to provide for the efficient manufacturing of
sufficient quantities of its products; the lack of immediate alternate sources
of supply for some critical components of its products; the Company's patent
and intellectual property position; the Company's need to fully develop the
marketing, distribution, customer service and technical support and other
functions critical to the success of the Company's potential product lines; the
effectiveness and ultimate market acceptance of the Company's products; and the
dependence of the Company on its strategic partners for funding, development
assistance, clinical trials, distribution and marketing of products developed
by the company. The following discussion should be read in conjunction with
the Company's Financial Statements and Notes thereto included elsewhere in
this report.
OVERVIEW
SpectRx was incorporated on October 27, 1992, and since that date has
raised capital through the sale of preferred stock, issuance of debt
securities, the public sale of common stock and funding from collaborative
arrangements. Following its initial funding in early 1993, the Company
immediately began research and development activities with the objective of
commercializing less invasive diagnostic, screening and monitoring products.
As part of its business strategy, the Company has selectively established
arrangements with leading medical device companies for the development,
commercialization and introduction of its products. Since
inception, the company has entered into collaborative arrangements with Abbott,
Roche Diagnostics BMC and Respironics, (a successor to Healthdyne Technologies,
Inc.) for its glucose monitoring, diabetes screening and infant jaundice
products, respectively. In December 1996, the Company sublicensed certain
technology to and acquired a 64.8% interest in FluorRx, Inc., a Delaware
corporation formed for the purpose of developing and commercializing technology
related to fluorescence spectroscopy. At December 31, 1997, as a result of a
subsequent financing, SpectRx's interest in FluorRx was 57%.
The Company has a limited operating history upon which its prospects
can be evaluated. Such prospects must be considered in light of the substantial
risks, expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. The Company has experienced
operating losses since its inception, and, as of December 31, 1997, the Company
had accumulated deficit of approximately $12.1 million. To date, the Company has
engaged primarily in research and development efforts. The Company has never
generated revenues from product sales and does not have experience in
manufacturing, marketing or selling its products. There can be no assurance that
the Company's development efforts will result in commercially viable products,
that the Company will be successful in introducing its products, or that
required regulatory clearances or approvals will be obtained in a timely manner,
or at all. There can be no assurance that the Company's products will ever gain
market acceptance or that the Company will ever generate revenues or achieve
profitability. The development and commercialization of its products will
require substantial development, regulatory, sales and marketing, manufacturing
and other expenditures. The Company expects its operating losses to continue
through 1999 as it continues to expend substantial resources to complete
development of its products, obtain regulatory clearances or approvals, build
its marketing, sales, manufacturing and finance organizations and conduct
further research and development.
Substantially all of the Company's revenues and profits are expected to
be derived from royalties and manufacturing profits that the Company will
receive from Abbott, Roche Diagnostics BMC and Respironics resulting from sales
of its glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing profits for the
Company. In addition, The Company's profit margins are not likely to increase
over time because the Company's royalty rates and manufacturing profit rates are
predetermined.
In addition, it is common practice in the glucose monitoring device
industry for manufacturers to sell their glucose monitoring devices at
substantial discounts to their list prices or to offer customers rebates on
sales of their
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products. Manufacturers offer such discounts or rebates to expand the use of
their products and thus increase the market for the disposable assay strips they
sell for use with their products. Because Abbott may, pursuant to its
collaborative arrangement with the Company, determine the prices at which it
sells the Company's glucose monitoring devices, it may choose to adopt this
marketing strategy. If Abbott adopts this marketing strategy and discounts the
prices at which it sells the Company's glucose monitoring devices, the royalties
earned by the Company in respect of such sales will decline. There can be no
assurance that if this strategy is adopted, royalties earned by the Company on
sales of the disposable cartridges to be used in connection with its glucose
monitoring device will be equal to or greater than the royalties the Company
would have earned had its glucose monitoring devices not been sold at a
discount. This possible reduction in royalties on sales of the Company's glucose
monitoring devices could have a material adverse effect upon the Company's
business, financial condition and results of operations.
The Company has entered into collaborative arrangements with Abbott,
Roche Diagnostics BMC and Respironics. The agreements evidencing these
collaborative arrangements grant a substantial amount of discretion to each
collaborative partner. If one or more of the Company's collaborative partners
were to terminate its arrangement with the Company, the Company would either
need to reach agreement with a replacement collaborative partner or undertake at
its own expense the activities handled by its collaborative partner prior to
such termination, which would require the Company to develop expertise it does
not currently posses, would significantly increase the Company's capital
requirements and would limit the programs the Company could pursue. The Company
would likely encounter significant delays in introducing its products and the
development, manufacture and sales of its products would be adversely affected
by the absence of such collaborative arrangements. The termination of any of the
Company's collaborative arrangements would have a material adverse effect on the
Company's business, financial condition and results of operations.
RESULTS OF OPERATIONS
Comparison Of 1997 and 1996
General. Net losses increased to approximately $5.7 million, or ($1.26)
per share, for the year ended December 31, 1997 from approximately $3.2 million,
or ($2.13) per share, in 1996 due to increases in research and development
expenses, marketing expenses and general and administrative expenses. The
Company expects net losses to continue. If the Company is unable to attain
certain milestones under a collaboration agreement, its collaborative partner
may not make milestone payments under, or may terminate altogether, such
agreement. If this were to happen, future net losses would escalate rapidly
because of spending increases necessary to complete research, development and
clinical trials of the Company's products, commence sales and marketing efforts
and establish a manufacturing capability.
Research and development expenses. Research and development expenses
increased to approximately $3.4 million for the year ended December 31, 1997
from approximately $1.8 million in 1996. The increase in research and
development expenses was primarily due to increases in compensation costs,
prototype materials and contract research costs, and to a lesser extent,
increases in consulting expenses and outside services. The Company expects
research and development expenses to increase in the future as it begins
clinical trials for its products.
Sales and marketing expenses. Sales and marketing expenses increased to
$835,000 for the year ended December 31, 1997 from $221,000 in 1996. The
increase was due primarily to compensation and recruiting costs, product design
costs, advertising expenses and other marketing expenses related to introduction
of the Company's infant jaundice product. Sales and marketing expenses are
expected to increase in the future as the Company begins to market this product.
General and administrative expenses. General and administrative
expenses increased to approximately $2.6 million for the year ended December 31,
1997 from approximately $1.5 million in 1996. The increase in general and
administrative expense was due to increases in compensation, facility costs,
production development costs and legal fees. General and administrative expenses
are expected to increase in the future as a result of overhead costs associated
with research and development activities and, to a lesser extent, expenses
associated with being a public company.
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31
Net interest expense and other expense. Net interest and other income
increased to $194,000 for the year ended December 31, 1997 from an expense of
$68,000 in 1996. This increase results from the redemption of convertible notes
which were outstanding during 1996, and from an increase in interest received on
cash balances received from the initial public offering, offset by other expense
items.
Comparison of 1996 and 1995
General. Net losses increased to approximately $3.2 million for the
year ended December 31, 1996 from approximately $680,000 in 1995 due to an
increase in research and development expenses and general and administrative
expenses.
Research and development expenses. Research and development expenses
increased to approximately $1.8 million for the year ended December 31, 1996
from approximately $1.2 million in 1995. The increase in research and
development expenses was primarily due to increases in compensation, benefit and
employee recruiting costs and, to a lesser extent, increases in consulting
expenses, patent legal fees and the cost of prototype materials purchased.
Sales and marketing expenses. Sales and marketing expenses increased to
$221,000 for the year ended December 31, 1996 from $146,000 in 1995. The
increase was due primarily to compensation and recruiting costs, product design
costs and expenses related to building a marketing organization for the
Company's infant jaundice product.
General and administrative expenses. General and administrative
expenses increased to approximately $1.5 million for the year ended December 31,
1996 from approximately $637,000 in 1995. The increase in general and
administrative expenses was due to increases in compensation and facility costs.
Net interest and other expense. Net interest and other expense
increased to $68,000 for the year ended December 31, 1996 from an income of
$113,000 in 1995. This increase resulted from interest incurred in conjunction
with the issuance of convertible notes, which have since been redeemed.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through private sales of its debt and equity securities. From October 27, 1992
(inception) through December 31, 1997, the Company received approximately $25.5
million in net proceeds from sales of its debt and equity securities. At
December 31, 1997, the Company had cash of approximately $12.4 million and
working capital of approximately $12.1 million. The Company completed an initial
public offering of its common stock on July 7, 1997 which resulted in net
proceeds received by the Company, of approximately $13.2 million. The Company
currently invests its excess cash balances primarily in short-term,
investment-grade, interest-bearing obligations until such funds are utilized in
operations. Substantial capital will be required to develop the Company's
products, including completing product testing and clinical trials, obtaining
all required United States and foreign regulatory approvals and clearances,
commencing and scaling up manufacturing and marketing its products. Any failure
of the Company's collaborative partners to fund its development expenditures
would have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, addition collaborative relationships or
other arrangements. The company believes that its existing capital resources
will be sufficient to satisfy its funding requirements for at least the next 18
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of its glucose monitoring product.
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OTHER MATTERS
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem).
The Company has conducted a review of its business systems, including
its computer systems, and is querying its customers, vendors and resellers as to
their progress in identifying and addressing problems that their computer
systems may face in correctly interrelating and processing date information as
the year 2000 approaches and is reached. However, there can be no assurance that
the Company will identify all such Year 2000 problems in its computer systems or
those of its customers, vendors or resellers in advance of their occurrence or
that the Company will be able to successfully remedy any problems that are
discovered. The expenses of the Company's efforts to identify and address such
problems, or the expenses or liabilities to which the Company may become subject
as a result of such problems, could have a material adverse effect on the
Company's business, financial condition and results of operations. The revenue
stream and financial stability of existing customers may be adversely impacted
by Year 2000 problems, which could cause fluctuations in the Company's revenues.
In addition, failure of the Company to identify and remedy Year 2000 problems
could put the Company at a competitive disadvantage relative to companies that
have corrected such problems.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPECTRX, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997
- --------------------------------------------------------------------- -------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,721 $ 12,449
Accounts receivable, net of allowance for doubtful accounts of $29 1 554
in 1996 and 1997
Other current assets 90 335
-------- --------
Total current assets 4,812 13,338
-------- --------
PROPERTY AND EQUIPMENT, NET 596 930
-------- --------
OTHER ASSETS:
Other assets, net 126 289
Due from related parties 412 442
-------- --------
Total other assets 538 731
-------- --------
$ 5,946 $ 14,999
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
- --------------------------------------------------------------------- -------- --------
CURRENT LIABILITIES:
Accounts payable $ 557 $ 515
Accrued liabilities 385 758
-------- --------
Total current liabilities 942 1,273
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
CONVERTIBLE SUBORDINATED PROMISSORY NOTES 250 250
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 0 502
-------- --------
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.001 par value; 3,560 3 0
shares authorized, 3,104 and 0 shares issued and outstanding in
1996 and 1997, respectively
Series B convertible preferred stock, $.001 par value; 1,375 1 0
shares authorized, 1,272 and 0 shares issued and outstanding in
1966 and 1997, respectively
Series C convertible preferred stock, $.001 par value; 5,000 1 0
shares authorized, 500 and 0 shares issued and outstanding in
1996 and 1997, respectively
Preferred stock, $.001 par value; 5,000 shares authorized in 1997, 0 0
0 shares issued
Common stock, $.001 par value; 50,000 shares authorized, 1,532 and 2 8
7,748 shares issued and outstanding in 1996 and 1997,
respectively
Additional paid-in capital 11,503 25,372
Deferred compensation (286) (210)
Notes receivable from officers (48) (48)
Deficit accumulated during development stage (6,422) (12,148)
-------- --------
Total stockholders' equity 4,754 12,974
======== ========
$ 5,946 $ 14,999
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
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SPECTRX, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM
YEAR ENDED DECEMBER 31 INCEPTION
-------------------------------------- (OCTOBER 27, 1992)
1995 1996 1997 TO DECEMBER 31, 1997
-------- -------- -------- --------------------
REVENUES $ 1,179 $ 452 $ 901 $ 2,654
-------- -------- -------- --------------------
EXPENSES:
Research and development 1,189 1,815 3,428 7,939
Sales and marketing 146 221 835 1,524
General and administrative 637 1,526 2,558 5,474
-------- -------- -------- --------------------
1,972 3,562 6,821 14,937
-------- -------- -------- --------------------
Operating loss (793) (3,110) (5,920) (12,283)
INTEREST EXPENSE (INCOME), NET 5 132 (430) 518
OTHER (INCOME) EXPENSE (118) (64) 236 (653)
-------- -------- -------- --------------------
NET LOSS $ (680) $ (3,178) $ (5,726) $(12,148)
======== ======== ======== ====================
NET LOSS PER SHARE:
Basic $ (0.48) $ (2.13) $ (1.26)
======== ======== ========
Diluted $ (0.48) $ (2.13) $ (1.26)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,410 1,494 4,528
======== ======== ========
Diluted 1,410 1,494 4,528
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
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Spectrx, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------------------------------------------------------------------------
SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT
------------------------------------------------------------------------------------------
BALANCE, OCTOBER 27, 1992 0 $ 0 0 $ 0 0 $ 0 0 $ 0
(INCEPTION)
Initial stockholders' 0 0 0 0 0 0 1,179 1
contribution at $.001 per
share
Issuance of Series A 1,850 2 0 0 0 0 0 0
preferred stock at $1 per
share, net of issuance
costs of $12
Issuance of common stock at 0 0 0 0 0 0 231 0
$.21 per share
Conversion of subordinated 1,254 1 0 0 0 0 0 0
notes at $1 per share
Series A preferred stock 0 0 0 0 0 0 0 0
warrants issued in
connection with
convertible subordinated
promissory notes
Net loss 0 0 0 0 0 0 0 0
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 3,104 3 0 0 0 0 1,410 1
Common stock warrants 0 0 0 0 0 0 0 0
issued in connection with
convertible subordinated
promissory notes
Net loss 0 0 0 0 0 0 0 0
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,1995 3,104 3 0 0 0 0 1,410 1
Common stock warrants 0 0 0 0 0 0 0 0
issued in connection with
convertible subordinated
promissory notes
Conversion of subordinated 0 0 390 0 0 0 0 0
notes
Issuance of Series B 0 0 882 1 0 0 0 0
preferred stock at $4 per
share, net of issuance
costs of $23
Issuance of Series C 0 0 0 0 500 1 0 0
preferred stock at $6 per
share, net of issuance
costs of $24 and royalty
payments of $223
Issuance of common stock in 0 0 0 0 0 0 29 0
settlement of a dispute
valued at $.49 per share
Issuance of common stock 0 0 0 0 0 0 71 1
for purchased technology
valued at $.49 per share
Exercise of warrant at 0 0 0 0 0 0 22 0
$1.12 per share
Issuance of stock options 0 0 0 0 0 0 0 0
at $.70 and $2.45 per
share, valued at $1.05
and $5.50 per share,
respectively
Amortization of deferred 0 0 0 0 0 0 0 0
compensation
Net loss 0 0 0 0 0 0 0 0
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 3,104 3 1,272 1 500 1 1,532 2
Issuance of common stock 0 0 0 0 0 0 2,160 1
at $7 per share, net of
issuance costs of
$ 909,000
Conversion of convertible (3,104) (3) (1,272) (1) (500) (1) 3,483 4
preferred stocks
Exercise of warrants at a 0 0 0 0 0 0 560 1
weighted average price
per share of $1.24
Exercise of stock options 0 0 0 0 0 0 10 0
at a weighted average
price per share of $.26
Employee stock purchase 0 0 0 0 0 0 3 0
plan at a weighted
average price per share
of $5.95
Amortization of deferred 0 0 0 0 0 0 0 0
compensation
Net loss 0 0 0 0 0 0 0 0
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 0 $ 0 0 $ 0 0 $ 0 7,748 $ 8
===========================================================================================
DEFICIT
NOTES ACCUMULATED TOTAL
ADDITIONAL RECEIVABLE DURING STOCKHOLDERS'
PAID-IN DEFERRED FROM DEVELOPMENT EQUITY
CAPITAL COMPENSATION OFFICERS STAGE (DEFICIT)
---------------------------------------------------------------
BALANCE, OCTOBER 27, 1992 $ 0 $ 0 $ 0 $ 0 $ 0
(INCEPTION)
Initial stockholders' 1 0 0 0 2
contribution at $.001 per
share
Issuance of Series A 1,836 0 0 0 1,838
preferred stock at $1 per
share, net of issuance
costs of $12
Issuance of common stock at 48 0 (48) 0 0
$.21 per share
Conversion of subordinated 1,253 0 0 0 1,254
notes at $1 per share
Series A preferred stock 79 0 0 0 79
warrants issued in
connection with
convertible subordinated
promissory notes
Net loss 0 0 0 (2,564) (2,564)
--------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 3,217 0 (48) (2,564) 609
Common stock warrants 35 0 0 0 35
issued in connection with
convertible subordinated
promissory notes
Net loss 0 0 0 (680) (680)
--------------------------------------------------------------
BALANCE, DECEMBER 31,1995 3,252 0 (48) (3,244) (36)
Common stock warrants 59 0 0 0 59
issued in connection with
convertible subordinated
promissory notes
Conversion of subordinated 1,560 0 0 0 1,560
notes
Issuance of Series B 3,504 0 0 0 3,505
preferred stock at $4 per
share, net of issuance
costs of $23
Issuance of Series C 2,752 0 0 0 2,753
preferred stock at $6 per
share, net of issuance
costs of $24 and royalty
payments of $223
Issuance of common stock in 14 0 0 0 14
settlement of a dispute
valued at $.49 per share
Issuance of common stock 34 0 0 0 35
for purchased technology
valued at $.49 per share
Exercise of warrant at 24 0 0 0 24
$1.12 per share
Issuance of stock options 304 (304) 0 0 0
at $.70 and $2.45 per
share, valued at $1.05
and $5.50 per share,
respectively
Amortization of deferred 0 18 0 0 18
compensation
Net loss 0 0 0 (3,178) (3,178)
--------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 11,503 (286) (48) (6,422) 4,754
Issuance of common stock 13,152 0 0 0 13,153
at $7 per share, net of
issuance costs of
$ 909,000
Conversion of convertible 1 0 0 0 0
preferred stocks
Exercise of warrants at a 693 0 0 0 694
weighted average price
per share of $1.24
Exercise of stock options 3 0 0 0 3
at a weighted average
price per share of $.26
Employee stock purchase 20 0 0 0 20
plan at a weighted
average price per share
of $5.95
Amortization of deferred 0 76 0 0 76
compensation
Net loss 0 0 0 (5,726) (5,726)
--------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $25,372 $ (210) $ (48) $(12,148) $12,974
=============================================================
The accompanying notes are an integral part of these consolidated statements.
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36
SPECTRX, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, (OCTOBER 27, 1992)
------------------------------------ TO DECEMBER 31,
1995 1996 1997 1997
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (680) $ (3,178) $ (5,726) $(12,148)
-------- -------- -------- --------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 111 182 281 677
Amortization of debt discount 5 66 0 138
Issuance of stock in settlement of 0 14 0 14
dispute
Amortization of deferred compensation 0 18 76 94
Changes in operating assets and liabilities:
Accounts receivable (200) 215 (553) (554)
Other assets 14 (60) (456) (554)
Due from related parties 0 (412) (30) (442)
Accounts payable 158 391 (42) 515
Accrued liabilities 0 317 354 871
Deferred revenue (534) 0 0 0
-------- -------- -------- --------
Total adjustments (446) 731 (370) 759
-------- -------- -------- --------
Net cash used in operating activities (1,126) (2,447) (6,096) (11,389)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (177) (422) (567) (1,437)
Additions to purchased technology (32) (49) 0 (205)
-------- -------- -------- --------
Net cash used in investing activities (209) (471) (567) (1,642)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 0 24 13,870 13,896
Issuance of Series A preferred stock, net 0 0 0 1,838
Issuance of Series B preferred stock, net 0 3,505 0 3,505
Issuance of Series C preferred stock, net 0 2,753 0 2,753
Issuance of redeemable convertible preferred 0 0 521 521
stock, net
Issuance of warrants 5 18 0 35
Issuance of convertible subordinated promissory notes 500 1,232 0 2,932
-------- -------- -------- --------
Net cash provided by financing 505 7,532 14,391 25,480
-------- -------- -------- --------
activities
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (830) 4,614 7,728 12,449
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 937 107 4,721 0
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 107 $ 4,721 $ 12,449 $ 12,449
======== ======== ======== ========
CASH PAID FOR:
Interest $ 0 $ 0 $ 10 $ 10
======== ======== ======== ========
Income taxes $ 0 $ 0 $ 0 $ 0
======== ======== ======== ========
-36-
37
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, (OCTOBER 27, 1992)
------------------------------------ TO DECEMBER 31,
1995 1996 1997 1997
-------- -------- -------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of preferred stock to common $ 0 $ 0 $ 5 $ 5
======== ======== ======== ========
Conversion of subordinated promissory notes
to preferred stock $ 0 $ 1,560 $ 0 $ 2,814
======== ======== ======== ========
Stock issued for subscription receivable $ 0 $ 0 $ 0 $ 48
======== ======== ======== ========
Warrants issued in connection with
convertible subordinated notes and
redeemable convertible preferred stock $ 30 $ 41 $ 19 $ 157
======== ======== ======== ========
Issuance of common stock for purchased technology $ 0 $ 35 $ 0 $ 35
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
-37-
38
SPECTRX, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BACKGROUND
SpectRx, Inc. and subsidiary (the "Company") is engaged in the research and
development of products that offer less invasive and painless alternatives
to blood tests currently used for glucose monitoring, diabetes screening,
and infant jaundice. The Company's goal is to introduce products that
reduce or eliminate pain, are convenient to use, and provide rapid results
at the point of care, thereby improving patient well-being and reducing
healthcare costs. The Company's glucose monitoring, diabetes screening, and
infant jaundice products are based on proprietary electro-optical and
microporation technology that can eliminate the pain and inconvenience of a
blood sample. The Company has entered into collaborative arrangements with
Abbott Laboratories ("Abbott"), Boehringer Mannheim Corporation
("Boehringer Mannheim") and Healthdyne Technologies, Inc. ("Healthdyne") to
facilitate the development, commercialization, and introduction of its
glucose monitoring, diabetes screening, and infant jaundice products,
respectively.
The developmental nature of the Company's activities is such that inherent
risks exist in its operations. The Company is subject to a number of risks,
including successful product development, dependence on licensed patent
applications and proprietary technology, completion of regulatory
approvals, a market for its products, competition from well-established
larger companies and potential competition from other noninvasive products,
the potential need for additional financing, a lack of sales experience,
product liability, and dependence on key personnel. While management
believes that the Company will be successful, there are no assurances of
successful future operations.
In July 1997, the Company completed an initial public offering (the
"Offering") of its common stock (Note 5). In connection with the Offering,
the board of directors approved a reverse stock split of 1-for-1.4 for the
Company's common stock effective February 19, 1997. Accordingly, all share,
per share, weighted average share, stock option, and common stock warrant
information have been restated to reflect the split. The reverse stock
split had no effect upon the number of shares of preferred stock issued and
outstanding, just the number of shares of common stock into which the
preferred stock converted.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
SpectRx, Inc. ("SpectRx") and, since December 5, 1996, its majority owned
subsidiary FluorRx, Inc. ("FluorRx") (Note 3). All significant intercompany
amounts have been eliminated.
PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
-38-
39
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash or cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of five to seven
years. Expenditures for repairs and maintenance are expensed as incurred.
Property and equipment are summarized as follows at December 31, 1996 and
1997 (in thousands):
1996 1997
------ ------
Equipment $ 689 $1,181
Furniture and fixtures 181 256
------ ------
870 1,437
Less accumulated depreciation 274 507
------ ------
Property and equipment, net $ 596 $ 930
====== ======
OTHER ASSETS
Other assets include net purchased technology of $118,000 and $70,000 at
December 31, 1996 and 1997, respectively, which is being amortized using
the straight-line method over its estimated useful life of five years.
PATENT COSTS
Costs incurred in filing, prosecuting, and maintaining patents are expensed
as incurred. Such costs aggregated approximately $71,000, $165,000, and
$286,000 in 1995, 1996, and 1997, respectively.
REVENUE RECOGNITION
Revenue from collaborative research and development agreements is recorded
when earned. Periodic license fee payments under collaborative agreements
related to future performance are deferred and recognized as income when
earned.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of expenditures for research
conducted by the Company and payments made under contracts with consultants
or other outside parties. All research and development costs are expensed
as incurred.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share," effective for fiscal years ending after December 15,
1997. The Company adopted the new guidelines for the calculation and
presentation of earnings per share and all prior periods have been
restated. Basic earnings per share is based upon the weighted average
number of shares outstanding. Diluted earnings per share is based upon the
weighted average number of shares outstanding and the dilutive effect of
common stock equivalent shares ("CSEs") issuable upon the conversion of
convertible preferred stock (using the if-converted method) and stock
options and warrants (using the treasury stock method).
-39-
40
Pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") No. 83, common stock, and CSEs issued at prices below the
public offering price during the 12-month period prior to the Offering were
included in the calculation as if they were outstanding for all periods
presented, regardless of whether they are dilutive. In February 1998, SEC
staff released SAB No. 98 on computations of earnings per share. SAB No. 98
replaces SAB No. 83 in its entirety and requires, among other items, that
only "nominal issuances" of common stock be reflected in the calculation as
if they were outstanding for all periods presented and that the calculation
be made in accordance with Statement No. 128 for periods subsequent to the
Offering. Accordingly, for all periods presented, common stock equivalents
have been excluded from diluted weighted average shares outstanding as
their impact was antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts payable,
and other financial instruments approximate their fair values principally
because of the short-term maturities of these instruments. The fair value
of the Company's long-term debt is estimated based on the current rates
offered to the Company for debt of similar terms and maturities. Under this
method, the fair value of the Company's long-term debt was not
significantly different than the stated value at December 31, 1997.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and purchased technology, to determine
whether any impairments are other than temporary. Management believes that
the long-lived assets in the accompanying balance sheets are appropriately
valued.
3. INVESTMENT IN FLUORRX, INC.
In December 1996, the Company sublicensed certain technology to and
acquired a 65% interest in FluorRx, a newly organized Delaware corporation
formed for the purpose of developing and commercializing technology related
to fluorescence spectroscopy. The Company's interest is represented by two
seats on FluorRx's board of directors and 129,000 shares of FluorRx's
Series A convertible preferred stock purchased for $250,000. As discussed
below in December 1997, FluorRx issued 23,000 shares of mandatory
redeemable convertible preferred stock, which if converted to common stock,
would reduce the Company's ownership percentage in FluorRx to 57%.
FluorRx has authorized 1,000,000 shares of preferred stock with a par value
of $.01 per share, of which 300,000 shares were authorized as Series A
preferred stock ("Series A Preferred") and 300,000 as Series B preferred
stock ("Series B Preferred"). All outstanding Series A Preferred is owned
by SpectRx and has been eliminated in consolidation. FluorRx's Series A and
B Preferred is convertible at a ratio one to one (subject to adjustment)
into FluorRx's common stock. The Series B Preferred may be converted at the
option of the holder at any time after issuance and is automatically
converted into common stock upon the occurrence of certain defined events.
The holders of the Series B Preferred are entitled to annual cumulative
dividends, payable when declared, at a rate of 8% per share. In addition,
the holders of Series B Preferred have liquidation preference of $25.94 per
share, plus accrued but unpaid dividends. The Series B Preferred is
redeemable at the shareholders option after December 2002, at a price of
$25.94, plus accrued but unpaid dividends or, fair market value, as
defined, as of the date of the request for redemption.
In December 1997, FluorRx sold 23,000 shares of Series B Preferred at a
price of $25.94 per share for an aggregate purchase price of $597,000 with
net cash proceeds to FluorRx of $521,000. In connection with the issuance
of the Series B Preferred, FluorRx issued the selling agent a warrant to
purchase 2,300 shares of FluorRx common stock. The warrant was valued at
$19,000 and was accounted for as additional issuance costs.
For the years ended December 31, 1996 and 1997, FluorRx incurred operating
losses of $58,000 and $632,000. Due to the Company's effective control of
FluorRx, the Company has fully consolidated these losses.
-40-
41
4. CONVERTIBLE SUBORDINATED PROMISSORY NOTES
In November 1995 and April 1996, the Company issued 10% convertible
subordinated promissory notes for $500,000 and $982,000, respectively.
Pursuant to the terms of these notes, all outstanding principal and accrued
interest were converted in August 1996 into 389,951 shares of Series B
convertible preferred stock. Warrants to purchase 107,143 and 210,470
shares of common stock were issued with the promissory notes in
consideration for additional proceeds of $5,000 and $18,000, respectively,
in November 1995 and April 1996, respectively (Note 6). The value of the
warrants issued in November 1995 and April 1996 was determined to be
$35,000 and $59,000, respectively, based on the difference between the
stated interest rate and the Company's estimated effective borrowing rate
for the terms of the notes. The noncash allocation to the warrants of
$30,000 and $41,000 in November 1995 and April 1996, respectively, was
accounted for as a debt discount. The unamortized debt discount was
expensed as additional interest expense upon the conversion of the notes in
August 1996.
In June 1996, the Company issued an 8% convertible subordinated promissory
note for $250,000. Principal and interest are payable June 1998. The holder
of the note may convert outstanding principal and interest into common
stock at a conversion rate of $3.50 per share.
5. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In July 1997, the Company successfully completed its initial public
offering of common stock. The Company sold 2,160,000 shares of common
stock, including an underwriters over-allotment of 160,000 shares, at an
initial public offering price of $7. The total proceeds of the initial
public offering, net of underwriting discounts and offering expenses, were
approximately $13.2 million. In connection with the offering, all
outstanding shares of Series A, B, and C preferred stock converted into
3,482,762 shares of common stock. Additionally, warrants to purchase
559,986 shares of common stock were exercised for proceeds of $694,000.
PREFERRED STOCK
In January 1997, the Company 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.
STOCK OPTIONS
In May 1995, the Company adopted the 1995 Stock Option Plan (as amended,
the "Plan"), under which 1,428,572 shares of common stock are authorized
and reserved for use in the Plan. The Plan allows the issuance of incentive
stock options, nonqualified stock options, and stock purchase rights. The
exercise price of options is determined by the Company's board of
directors, but incentive stock options must be granted at an exercise price
equal to the fair market value of the Company's common stock as of the
grant date. Options generally become exercisable over four years and expire
ten years from the date of grant. At December 31, 1997, options to purchase
352,464 shares of common stock were available for future grant under the
Plan.
-41-
42
Stock option activity for each of the three years ended December 31, 1997
is as follows:
NUMBER OF WEIGHTED AVERAGE
OPTIONS PRICE PER SHARE
--------- ---------------
Plan inception, May 1995 0 $ 0.00
Granted 329,834 0.21
Canceled (3,983) 0.21
---------
Outstanding, December 31, 1995 325,851 0.21
Granted 338,940 1.05
Exercised (403) 0.21
Canceled (1,026) 0.21
---------
Outstanding, December 31, 1996 663,362 0.64
Granted 418,000 7.50
Exercised (10,065) 0.26
Cancelled (5,656) 0.46
---------
Outstanding, December 31, 1997 1,065,641 3.34
=========
Exercisable, December 31, 1997 365,073 0.47
=========
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE
EXERCISE PRICES OF SHARES PRICE LIFE OF SHARES PRICE
------------------------ --------- -------- ---------- ----------- -------
$.21-$.70 578,353 $0.44 8.0 years 346,069 $0.36
$2.45 69,288 2.45 8.9 years 18,767 2.45
$7.00-$7.50 418,000 7.50 9.9 years 237 7.00
--------- -------
Total 1,065,641 3.34 8.8 years 365,073 0.47
========= =======
In June 1996, November 1996, and December 1996, the Company granted options
to purchase 269,652, 8,573, and 60,715, respectively, shares of common
stock at exercise prices of $.70, $2.45, and $2.45 per share, respectively.
In connection with the issuance of these options, the Company recognized
$304,000 as deferred compensation for the excess of the deemed value for
accounting purposes of the common stock issuable upon exercise of such
options over the aggregate exercise price of such options. This deferred
compensation is amortized ratably over the vesting period of the options.
The Company has elected to account for its stock-based compensation plan
under APB No. 25, "Accounting for Stock Issued to Employees;" however, the
Company has computed for pro forma disclosure purposes the value of all
options granted in each of the three years ended December 31, 1997 using
the Black-Scholes option pricing model as prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," and using the following weighted
average assumptions used for grants in 1995, 1996, and 1997:
1995 1996 1997
---- ---- ----
Risk-free interest rate 6.0% 6.6% 5.86%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives 4 years 4 years 4 YEARS
Expected volatility 90.0% 90.0% 58.0%
The total values of the options granted during the years ended December 31,
1995, 1996, and 1997 were computed as approximately $46,000, $511,000, and
$1,587,000, respectively, which would be amortized over the vesting period
of the options. If the Company had accounted for these plans in accordance
with SFAS No. 123, the
-42-
43
Company's reported net loss and net loss per share for each of the three
years ended December 31, 1997 would have increased by the following pro
forma amounts:
1995 1996 1997
---- ---- ----
Net loss:
As reported $ (680) $ (3,178) $ (5,726)
Pro forma (694) (3,226) (5,890)
Net loss per share:
Basic
As reported $ (0.48) $ (2.13) $ (1.26)
Pro forma (0.49) (2.16) (1.30)
Diluted
As reported (0.48) (2.13) (1.26)
Pro forma (0.49) (2.16) (1.30)
WARRANTS
In connection with the November 1995 and April 1996 note sales (Note 4),
the Company issued warrants to purchase 317,613 shares of common stock at
an exercise price per share of 20% of the price per share paid in the next
equity financing of $5,000,000 or more, inclusive of the notes and warrants
subject to conversion. In August 1996, the exercise price was set at $1.12
per share.
Upon the close of the Offering, all outstanding warrants to purchase
559,986 shares of common stock were exercised providing proceeds of
approximately $694,000.
Under the terms of a certain license and technology agreement (Note 9), the
Company issued a right to Altea Technologies, Inc. ("Altea") to obtain a
warrant for the purchase of up to 588,572 shares of common stock at $.21
per share. Upon a liquidity event (for which the Offering qualified), as
defined, Altea had the option to sell all rights to the licensed technology
in exchange for a warrant to purchase up to 588,572 shares of common stock,
depending on the achievement of certain milestones with respect to the
licensed technology. Altea did not elect to exercise its right to obtain
the warrant, and the Company will continue with the existing license and
technology agreement.
EMPLOYEE STOCK PURCHASE PLAN
In connection with the Offering, the Company adopted an employee stock
purchase plan under which the Company may issue up 214,286 shares of common
stock. Eligible employees may use up to 10% of their compensation to
purchase, through payroll deductions, the Company's common stock at the end
of each plan period for 85% of the lower of the beginning or ending stock
price in the plan period. During 1997, the Company issued 3,387 shares of
common stock at a price of $5.95 per share.
6. INCOME TAXES
The Company has incurred net operating losses since inception. As of
December 31, 1997, the Company had net operating loss ("NOL") carryforwards
of approximately $11,660,000 available to offset its future income tax
liability. The NOL carryforwards begin to expire in the year 2007. The
Company has recorded a valuation allowance for all NOL carryforwards.
Utilization of existing NOL carryforwards may be limited in future years,
if significant ownership changes have occurred.
-43-
44
Components of deferred tax assets are as follows at December 31, 1996 and
1997:
1996 1997
----------- -----------
NOL carryforwards $ 2,394,000 $ 4,431,000
Valuation allowance (2,394,000) (4,431,000)
----------- -----------
Deferred tax assets $ 0 $ 0
=========== ===========
7. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments at December 31, 1997 under noncancellable
operating leases for office space and equipment are as follows:
1998 $201,000
1999 206,000
2000 136,000
2001 24,000
Rental expense was $49,000, $92,000, and $215,000 in 1995, 1996, and 1997,
respectively.
In the past, the Company has been subject to certain asserted and
unasserted claims against certain intellectual property rights owned and
licensed by the Company. A successful claim against intellectual property
rights owned or licensed by the Company could subject the Company to
significant liabilities to third parties, require the Company to seek
licenses from third parties, or prevent the Company from selling its
products in certain markets or at all. In the opinion of management, there
are no known claims against the Company's owned or licensed intellectual
property rights that will have a material adverse impact on the Company's
financial position or results of operations.
8. RELATED-PARTY TRANSACTIONS
In connection with a June 1994 sale of restricted stock, the Company loaned
two officers of the Company $48,525. These loans were secured by common
stock of the Company held by the officers, bear interest at 6% per annum,
and become payable on June 30, 1999.
In March 1996, the Company issued 28,572 shares of common stock to Laser
Atlanta Optics, Inc. ("LAO") in settlement of a dispute. The Company and
LAO are related through a common group of shareholders. The shares were
valued at $14,000, which was expensed upon issuance. In September 1996, the
Company loaned LAO $30,000, which was repaid in December 1996.
In March 1996, the Company entered into a license and joint development
agreement with Altea, a company equally owned by Jonathan Eppstein, an
officer and principal stockholder of the Company, and his sister (Note 9).
On March 8, 1996, pursuant to the terms of the agreement, the Company
received certain rights to technology useful in glucose monitoring, issued
71,429 shares of common stock, which were valued at $35,000, and made cash
payments totaling $25,000 for the rights to the technology. The Company
paid royalties to Altea totaling $273,000 and $100,000 during 1996 and
1997, respectively.
In October 1996, the Company loaned two officers a total of $400,000. The
loans are secured by common stock of the Company and common stock of LAO
held by the officers. The loans bear interest at 6.72% per annum and are
due and payable in cash in October 2001.
In October 1996, the Company entered into a research and development and
license agreement (the "Abbott Agreement") with Abbott for the development
and commercialization of the Company's glucose monitoring product (Note
10). Under the Abbott Agreement, the Company receives payments on
achievement of milestones
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and a royalty on Abbott product sales for which the Company recorded
revenues of $500,000 during 1997. The Abbott Agreement also requires Abbott
to reimburse certain direct expenses incurred by the Company in connection
with the development of the glucose monitoring products. Reimbursed
expenses of $0, $490,000, and $1,788,000 for the years ended December 31,
1995, 1996, and 1997, respectively, have been netted with research and
development expenses in the accompanying statements of operations. In
connection with the Abbott Agreement, Abbott purchased $3 million of Series
C preferred stock.
A portion of the proceeds from the Company's sale of convertible
subordinated promissory notes and Series A and B preferred stock were
received from officers, directors, or other parties related to the Company
as a result of previous equity transactions. The sales were conducted
concurrently with and on the same terms as those entered into with
unrelated parties.
9. LICENSE AND TECHNOLOGY AGREEMENTS
As part of the Company's efforts to conduct research and development
activities and to commercialize potential products, the Company, from time
to time, enters into agreements with certain organizations and individuals
that further those efforts but also obligate the Company to make future
minimum payments or to remit royalties ranging from 1% to 3% of revenue
from sale of commercial products developed from the research.
The Company generally has the option not to make required minimum royalty
payments, in which case the Company loses the exclusive license to develop
applicable technology. Minimum required payments to maintain exclusive
rights to licensed technology are as follows at December 31, 1997:
1998 $ 410,000
1999 510,000
2000 760,000
2001 1,110,000
2002 1,360,000
No royalty payments were made during 1995. During 1996, the Company paid
$273,000 in royalties in connection with the sale of the Series C preferred
stock, of which $50,000 was expensed as required minimum payments and
$223,000 was netted with the proceeds of the related stock sale.
During 1997, the Company paid $110,000 for royalty payments.
Additionally, the Company is obligated to obtain and maintain certain
patents, as defined by the agreements.
10. REVENUES FROM COLLABORATIVE AGREEMENTS
The Company has entered into collaborative research and development
agreements (the "Agreements") with collaborative partners for the joint
development, regulatory approval, manufacturing, marketing, distribution,
and sales of products. The Agreements generally provide for nonrefundable
payments upon contract signing and additional payments upon reaching
certain milestones with respect to technology. The Abbott Agreement
requires Abbott to remit royalties to the Company based on net product
sales and to reimburse certain direct expenses incurred by the Company. In
connection with Healthdyne and Boehringer Mannheim Agreements, the partners
are required to purchase products manufactured by the Company at a
predetermined profit margin subject to renegotiation between the parties in
certain instances.
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Major customers who contributed 10% or more of the Company's total revenues
from collaborative agreements were as follows for each of the three years
ended December 31, 1995, 1996, and 1997:
1995 1996 1997
---- ---- ----
Abbott 0% 0% 55%
Boehringer Mannheim 69 0 0
Healthdyne 11 100 28
Teijin 20 0 0
LJL Biosystems, Inc. 0 0 17
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SpectRx, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of SPECTRX, INC. (a
Delaware corporation in the development stage) AND SUBSIDIARY as of December 31,
1996 and 1997 and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1997 and for the period from inception (October
27, 1992) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SpectRx, Inc. and
subsidiary as of December 31, 1996 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 and for the period from inception (October 27, 1992) to December 31,
1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 13, 1998
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file a definitive proxy statement within 120
days after the end of the fiscal year covered by this Report pursuant to
Regulation 14A relating to the Registrant's 1998 Annual Meeting of Stockholders
(the "Proxy Statement") to be held on May 27, 1998, and certain information
included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and nominees for directors of the
Company is incorporated by reference to the Company's Proxy Statement.
The executive officers of the Company, who are elected by and serve at
the discretion of the Board of Directors, and their ages at February 27, 1998,
are as follows:
NAME AGE POSITION
Mark A. Samuels 40 President, Chief Executive Officer and Director
Keith D. Ignotz 50 Executive Vice President, Chief Operating Officer and
Director
Thomas H. Muller, Jr. 56 Executive Vice President, Chief Financial Officer and
Secretary
Robert G. Rothfritz 48 Vice President, Operations
Jonathan A. Eppstein 45 Vice President, Transdermal Systems
Richard L. Fowler 41 Vice President, Engineering
Except as set forth below, all of the executive officers have been
associated with the Company in their present or other capacities for more than
the past five years. Officers are elected annually by the Board of Directors and
serve at the discretion of the Board. There are no family relationships among
executive officers of the Company.
Mark A. Samuels has served as a member of the Company's Board of
Directors, President and Chief Executive Officer since co-founding the Company
in 1992. Prior to that time, Mr. Samuels was a founder of Laser Atlanta Optics,
Inc., an optical sensor company, where he held the position of President and
Chief Executive Officer until 1992, and was a director until October 1996. While
at Laser Atlanta Optics, Mr. Samuels focused on the development of commercial
and medical applications of electro-optics. Mr. Samuels earned a B.S. in Physics
and an M.S. (Electrical Engineering) from Georgia Institute of Technology.
Keith D. Ignotz has served as a member of the Company's Board of
Directors and Chief Operating Officer since co-founding the Company in 1992.
Formerly, Mr. Ignotz was President of Humphrey Instruments SmithKline Beckman
(Japan), President of Humphrey Instruments GmbH (Germany), and Senior Vice
President of Allergan Humphrey Inc., a $100 million per year ophthalmic
diagnostic company. Mr. Ignotz is a member of the board of directors of Vismed,
Inc. (Dicon), an ophthalmic diagnostic products company, and Pennsylvania
College of Optometry. Mr. Ignotz earned a B.A. in Sociology from San Jose State
University and an M.B.A. from Pepperdine University.
Thomas H. Muller, Jr. has served as the Company's Chief Financial
Officer since joining the Company in December 1996. Prior to that time, Mr.
Muller was President of Muller & Associates, an operational and financial
management services company and Chief Financial Officer of Nurse On Call, Inc.
From 1984 to 1992, Mr. Muller was Chief Financial Officer of HBO & Company, a
provider of information systems and services to the health care industry. Mr.
Muller earned a B.I.E. in Industrial Engineering from Georgia Institute of
Technology and an M.B.A. from Harvard Business School.
Robert G. Rothfritz, has served as the Company's Vice President of
Operations since joining the Company in July 1996. From 1994 to 1996, Mr.
Rothfritz was Director of Manufacturing for Atlantic Envelope Company, a
National Service Industries, Inc. division, and from 1993 to 1994, he was a
Senior Manager, Manufacturing Systems Leader for Ethicon EndoSurgery, a Johnson
& Johnson division. From 1988 to 1992, Mr. Rothfritz was Vice President,
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Operations for the Oral Care Division of Bausch & Lomb, Inc. Mr. Rothfritz
earned a B.S. in Mechanical Engineering from Georgia Institute of Technology.
Jonathan A. Eppstein has served as the Company's Vice President of
Transdermal Systems since December 1996, and was Vice President of Research and
Development since co-founding the Company in 1992. Prior to that time, Mr.
Eppstein was Systems Engineering Manager and Director of Medical Programs for
Laser Atlanta Optics, Inc. Mr. Eppstein earned a B.S. in Electrical Engineering
and a M.S. in Mathematics from Western Michigan University. Mr. Eppstein,
together with his sister, controls Altea and Nimco.
Richard L. Fowler has served as the Company's Vice President of
Engineering since joining the Company in February 1996. Prior to that time, Mr.
Fowler worked for Laser Atlanta Optics, Inc., where he held the positions of
President and Chief Executive Officer from August 1994 to February 1996. As Vice
President of Engineering for Laser Atlanta Optics from 1992 to 1994, Mr. Fowler
managed the development of three laser sensor products. Mr. Fowler earned a B.S.
in Electrical Engineering from University of Texas.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULE.
Schedules are not included in this Annual Report on Form 10-K, as
they are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or
Notes thereto.
3. EXHIBITS
Refer to (c) below.
(b) REPORTS ON FORM 8-K
The Company was not required to and did not file any Current
Reports on Form 8-K during the quarter ended December 31, 1997.
(c) EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are
filed as part hereof, or incorporated by reference into, this
Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Norcross, State of Georgia, on the 26th day of March 1998.
SPECTRX, INC.
By: /s/ MARK A. SAMUELS
-----------------------------
Mark A. Samuels
President and Chief Executive Officer
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Mark A. Samuels and Thomas H.
Muller, Jr., jointly and severally, his or her attorneys-in-fact, and each with
the power of substitution, for him or her in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------- -------------------------------------- -----------------
/s/ MARK A. SAMUELS President, Chief Executive Officer and March 26, 1998
- -------------------------------- Director (Principal Executive Officer)
Mark A. Samuels
/s/ THOMAS H. MULLER, JR. Executive Vice President and Chief March 26, 1998
- -------------------------------- Financial Officer (Principal Financial
Thomas H. Muller, Jr. and Accounting Officer)
/s/ KEITH D. IGNOTZ Executive Vice President, Chief March 26, 1998
- -------------------------------- Operating Officer and Director
Keith D. Ignotz
/s/ CHARLES G. HADLEY Director March 26, 1998
- --------------------------------
Charles G. Hadley
\
/s/ JACK R. KELLY, JR. Director March 26, 1998
- --------------------------------
Jack R. Kelly, Jr.
53
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
3.1 (2) Certificate of Incorporation of the Company, as amended, as currently in effect.
3.2 (1) Bylaws of the Company.
4.1 (1) Specimen Common Stock Certificate.
10.1 (1) 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.2 (1) 1995 Stock Plan, as amended, and form of Stock Option Agreement thereunder.
10.3 (1) Stock Purchase Agreement, dated June 30, 1994, between Mark A. Samuels and the
Company.
10.4 (1) Stock Purchase Agreement, dated June 30, 1994, between Keith D. Ignotz and the
Company.
10.5 (1) Assignment and Bill of Sale, dated February 29, 1996, between Laser Atlanta Optics,
Inc. and the Company.
10.6 (1) Security Agreement, dated October 31, 1996, between Mark A. Samuels and the Company.
10.7 (1) Security Agreement, dated October 31, 1996, between Keith D. Ignotz and the Company.
10.11A (1)* License Agreement, dated May 7, 1991, between Georgia Tech
Research Corporation and Laser Atlanta Optics, Inc.
10.11B (1) Agreement for Purchase and Sale of Technology, Sale, dated January 16, 1993,
between Laser Atlanta Optics, Inc. and the Company.
10.11C (1) First Amendment to License Agreement, dated October 19, 1993,
between Georgia Tech Research Corporation and the Company.
10.12 (1) Clinical Research Study Agreement, dated July 22, 1993, between Emory University
and the Company.
10.13A (1)* Development and License Agreement, dated December 2, 1994,
between Boehringer Mannheim Corporation and the Company.
10.13B (1)* Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and the Company.
10.14 (1) Sponsored Research Agreement, No. SR95-006, dated May 3, 1995, between University
of Texas, M.D. Anderson Cancer Center and the Company.
10.15 (1) Sole Commercial Patent License Agreement, dated May 4, 1995, between Martin
Marietta Energy Systems, Inc. and the Company.
10.16A (1) License Agreement, dated November 22, 1995, between Joseph R. Lakowicz, Ph.D. and
the Company.
10.16B (1) Amendment of License Agreement, dated November 28, 1995, between Joseph R.
Lakowicz, Ph.D. and the Company.
10.16C (1) Second Amendment to License Agreement, dated March 26, 1997, between Joseph R.
Lakowicz, Ph.D. and the Company.
10.17 (1) License and Joint Development Agreement, dated March 1, 1996, between
NonInvasive-Monitoring Company, Inc., Altea Technologies, Inc. and the Company.
10.18 (1)* Patent License Agreement, dated March 12, 1996, between the Board of Regents of the
University of Texas System, M.D. Anderson and the Company.
10.19 (1)* Purchasing and Licensing Agreement, dated June 19, 1996, between Respironics and
the Company.
10.20 (1) Research Services Agreement, dated September 3, 1996, between Sisters of Providence
in Oregon doing business as the Oregon Medical Laser Center, Providence St. Vincent
Medical Center and the Company.
10.21A (1)* Research and Development and License Agreement, dated October 10, 1996, between
Abbott Laboratories and the Company.
10.21B ** Letter Agreement, dated December 22, 1997, between Abbott Laboratories and the
Company.
10.22 (1) Lease, dated September 21, 1993, between National Life
Insurance Company d/b/a Plaza 85 Business Park and the Company,
together with amendments 1, 2 and 3 thereto and Tenant Estoppel
Certificate, dated September 20, 1994.
21.1 Subsidiaries of the Registrant.
54
EXHIBIT
NO. DESCRIPTION
- ---------- -----------------------------------------------------------------
23.1 Consent of independent accountants.
24.1 Power of Attorney (included at signature page.)
27.1 Financial Data Schedule.
- --------
* Confidential treatment granted for portions of these agreements.
** Confidential treatment requested for portions of this agreement.
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 333-22429) filed February 27, 1997,
and amended on April 24, 1997, June 11, 1997, and June 30, 1997, which
Registration Statement became effective June 30, 1997.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 filed
August 12, 1997.