1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 NUMBER)
6025A UNITY DRIVE
NORCROSS, GEORGIA 30071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(770) 242-8723
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [ ]
The number of issued and outstanding shares of the Registrant's Common
Stock, $0.001 par value, as of September 30, 2000, was 8,484,629.
2
TABLE OF CONTENTS
SPECTRX, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION ................................................. 3
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS -
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 .............................. 3
STATEMENTS OF OPERATIONS -
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 ........ 4
STATEMENTS OF CASH FLOWS -
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 ......................... 5
NOTES TO FINANCIAL STATEMENTS .............................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................... 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ... 21
PART II. OTHER INFORMATION ..................................................... 22
ITEM 1. LEGAL PROCEEDINGS ............................................. 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................. 22
SIGNATURES ..................................................................... 23
EXHIBIT INDEX .................................................................. 24
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECTRX, INC.
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 2,143 $ 3,701
Accounts Receivable, net 952 517
Inventory 541 440
Other Current Assets 204 528
Subscription Receivable 2,500 0
--------- ---------
Total Current Assets 6,340 5,186
PROPERTY & EQUIPMENT, Net of Accumulated Depreciation of $1,124 and
$1,413 in 1999 and 2000, respectively 839 984
OTHER ASSETS
Other Assets 15 0
Due from Related Parties 499 521
--------- ---------
Total Other Assets 514 521
--------- ---------
TOTAL ASSETS $ 7,693 $ 6,691
========= =========
LIABILITIES & STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable $ 534 $ 517
Accrued Liabilities 1,044 1,231
--------- ---------
Total Current Liabilities 1,578 1,748
NOTE PAYABLE 381 381
REDEEMABLE CONVERTIBLE PREFERRED STOCK 5,264 5,500
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' (DEFICIT) EQUITY
Common Stock 8 8
Additional Paid-in-Capital 25,888 30,829
Deferred Comp (58) (1)
Accumulated Deficit (25,337) (31,743)
Notes Receivable from Officers (31) (31)
--------- ---------
Total Stockholders' (Deficit) Equity 470 (938)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 7,693 $ 6,691
========= =========
Accompanying notes are integral to these balance sheets.
4
SPECTRX, INC.
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30,
1999 2000 1999 2000
------- ------- ------- -------
REVENUE
Product Sales $ 380 $ 529 $ 990 $ 1,642
Collaborative Agreements 1,000 0 1,100 749
------- ------- ------- -------
TOTAL REVENUE 1,380 529 2,090 2,391
OPERATING EXPENSE
Cost of Sales 454 499 1,197 1,439
Research & Development 1,212 1,374 3,783 4,608
Sales & Marketing 221 239 666 700
General & Administrative 634 900 1,940 2,143
------- ------- ------- -------
Total 2,521 3,012 7,586 8,890
------- ------- ------- -------
Operating loss (1,141) (2,483) (5,496) (6,499)
OTHER EXPENSE (INCOME) 3 0 14 (21)
INTEREST EXPENSE (INCOME) (23) (138) (111) (308)
------- ------- ------- -------
NET LOSS $(1,121) $(2,345) $(5,399) $(6,170)
======= ======= ======= =======
PREFERRED STOCK DIVIDENDS 0 (78) 0 (236)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $(1,121) $(2,423) $(5,399) $(6,406)
======= ======= ======= =======
NET LOSS PER SHARE
BASIC $ (0.14) $ (0.29) $ (0.67) $ (0.76)
======= ======= ======= =======
DILUTED $ (0.14) $ (0.29) $ (0.67) $ (0.76)
======= ======= ======= =======
WEIGHTED AVERAGE COMMON EQUIVALENT SHARES
OUTSTANDING
BASIC 8,030 8,484 8,024 8,406
======= ======= ======= =======
DILUTED 8,030 8,484 8,024 8,406
======= ======= ======= =======
Accompanying notes are integral to these statements of operations
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SPECTRX, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine months
Ended
September 30,
1999 2000
-------- --------
Net Loss ....................................................................... $(5,399) $(6,170)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ....................................... 275 304
Amortization of deferred compensation ............................... 57 57
Changes in assets and liabilities:
Accounts receivable .......................................... (92) 435
Inventory .................................................... (48) 101
Other assets ................................................. 47 (324)
Due from related parties ..................................... (21) (22)
Accounts payable ............................................. (16) (17)
Accrued liabilities .......................................... 931 187
Subscription Receivable ...................................... 0 2,500
------- -------
Total adjustments ........................................... 1,133 3,221
------- -------
Net cash used in operating activities ....................... (4,266) (2,949)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment ............................... (177) (434)
------- -------
Net cash used in investing activities ..................... (177) (434)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock (net of issuance costs) .......................... 64 4,941
Advance from a collaborative partner ...................................... 381 0
------- -------
Net cash provided by financing activities ................. 445 4,941
------- -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .......................................................... (3,998) 1,558
CASH AND CASH EQUIVALENTS, beginning of period ................................. 4,962 2,143
------- -------
CASH AND CASH EQUIVALENTS, end of period ....................................... $ 964 $ 3,701
======= =======
Accompanying notes are integral
to these statements of cash flows
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SPECTRX, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by
SpectRx without audit. These statements reflect all adjustments, all of which
are of a normal, recurring nature, and in the opinion of management, necessary
to present fairly the consolidated financial position as of September 30, 2000,
the results of operations for the three months and nine months ended September
30, 1999 and 2000, and the cash flows for the nine months ended September 30,
1999 and 2000. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. The accounting
policies of SpectRx are unchanged from December 31, 1999. SpectRx believes that
the disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in SpectRx's Annual Report on Form 10-K,
for the year ended December 31, 1999.
The results of operations for the three months and nine months ended September
30, 1999 and 2000 are not necessarily indicative of the results to be expected
for the full fiscal year.
2. FLUORRX, INC.
In December 1996, SpectRx (the "Company") sublicensed certain
technology to and acquired a 64.8% interest in FluorRx, a corporation organized
for the purpose of developing and commercializing technology related to
fluorescence spectroscopy. SpectRx's interest in FluorRx is represented by two
seats on the board of directors and 129,000 shares of convertible preferred
stock purchased for $250,000. In December 1997, March 1998, and August 1998,
FluorRx sold additional convertible preferred stock for net cash proceeds of
$521,000, $429,000, and $511,000, respectively. In September 2000, FluorRx sold
additional convertible preferred stock for contracted engineering services
provided to FluorRx amounting to $521,080. The issuance of additional preferred
stock reduced SpectRx's ownership (on an as converted basis) to 42.5%. Effective
with the August 1998 funding, SpectRx began accounting for its investment in
FluorRx under the equity method of accounting. In connection therewith, SpectRx
began suspending the equity losses from its investment in FluorRx because
SpectRx's investment has a net book value of zero. The accompanying Statements
of Operations for the three and nine months ended September 30, 2000 excludes
$342,972 and $468,782 in losses, respectively, which represents SpectRx's 42.5%
equity in the loss of FluorRx. Cumulative suspended equity losses as of
September 30, 2000 amounted to $1,601,782.
3. COMPREHENSIVE INCOME
SpectRx currently has no other comprehensive income items as defined by
Statement of Financial Accounting Standards No. 130.
4. COMMITMENTS AND CONTINGENCIES
The company is subject to lawsuits, as described below in "Legal
Proceedings" in "Other Matters" section of Form 10-Q herein, arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these pending legal proceedings will not have a material adverse
effect on the company's business or financial condition and results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We make statements in this report which express our "belief", "anticipation" or
"expectation" as well as other statements which are not historical facts. These
statements 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
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historical results or anticipated results, including those set forth under "Risk
Factors" in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in or incorporated by reference into
this report. The following discussion should be read in conjunction with our
Financial Statements and Notes included in this report.
OVERVIEW
SpectRx was incorporated on October 27, 1992, and since that date has
raised capital through the sale of preferred stock, the issuance of debt
securities, the public and private sales of common stock and funding from
collaborative arrangements. Following our initial funding in early 1993, we
immediately began research and development activities with the objective of
commercializing less invasive medical diagnostic, screening and monitoring
products. As part of our business strategy, we have selectively established
arrangements with leading medical companies for the development,
commercialization and introduction of our products. We have entered into
collaborative arrangements with Abbott Laboratories, Roche Diagnostics,
Respironics and Welch Allyn for our glucose monitoring, diabetes detection,
infant jaundice and cancer detection products, respectively. In December 1996,
we 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 September
30, 2000, as a result of subsequent financings, SpectRx's interest in FluorRx
was 42.5%.
We have a limited operating history upon which our 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. We have experienced operating
losses since our inception, and, as of September 30, 2000, we have an
accumulated deficit of approximately $31.7 million. To date, we have engaged
primarily in research and development efforts. We first generated revenues from
product sales in 1998 and do not have significant experience in manufacturing,
marketing or selling our products. There can be no assurance that our
development efforts will result in commercially viable products, that we will be
successful in introducing our products, or that required regulatory clearances
or approvals will be obtained in a timely manner, or at all. There can be no
assurance that our products will ever gain market acceptance or that we will
ever generate significant revenues or achieve profitability. The development and
commercialization of our products will require substantial development,
regulatory, sales and marketing, manufacturing and other expenditures. We expect
our operating losses to continue through 2001 as we continue to expend
substantial resources to complete development of our products, obtain regulatory
clearances or approvals, build our marketing, sales, manufacturing and finance
organizations and conduct further research and development.
A significant portion of our revenues and profits are expected to be
derived from royalties and manufacturing profits that we will receive from
future sales by Abbott, Roche Diagnostics and Respironics of any glucose
monitoring, diabetes detection and infant jaundice products, respectively, that
we may develop in the future. Another significant portion of our revenues and
profits are expected to be derived from the sale of any cervical cancer
products. Our collaboration with Welch Allyn is more like a joint venture, so
revenues and profits expected to be derived from the sales of cervical cancer
detection products will be sales to distributors and end users. The royalties,
manufacturing profits and distribution profits that we expect to receive from
each of our collaborations depend on both the successful development and sales
of the products. There can be no assurance that we, together with our
collaborative partners, will be able to successfully develop the products, or
sell sufficient volumes of our products to generate substantial revenues and
profits.
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Our collaborative arrangements grant a substantial amount of discretion to each
collaborative partner. If one or more of our collaborative partners were to
terminate its arrangement with us, we would either need to reach agreement with
a replacement collaborative partner or undertake at our own expense the
activities handled by our collaborative partner prior to any such termination.
This would require us to develop expertise we do not currently possess, would
significantly increase our capital requirements and would limit the programs we
could pursue. We would likely encounter significant delays in introducing our
products and the development, manufacture and sales of our products could be
adversely affected by the absence of such collaborative arrangements. The
termination of any of our collaborative arrangements could have a material
adverse effect on our business, financial condition and results of operations.
QUARTER OVERVIEW
In August 2000, we announced that a significant study, involving 490 newborn
babies, confirmed that our BiliChek TM Non-invasive Bilirubin Analyzer is
capable of using light to painlessly measure bilirubin, the cause of infant
jaundice. The study also showed that the BiliChek TM biophotonic device
accurately measures jaundice in babies of many races and may be used as a
replacement for the painful "heel stick" blood test. According to the results of
the study, which was published in the medical journal Pediatrics (Vol. 106,
issue 2), BiliChek TM measurements showed strong correlation with blood samples
tested by the "gold standard" high-performance laboratory analyzer, at the
University of Wisconsin. In September 2000, we announced the appointment to our
Board of Directors of Chris Monahan, 61, a former Divisional Vice President and
General Manager within Abbott Laboratories' Diagnostics Division.
Development and marketing partner Roche Diagnostics reported to us that it has
received expedited review status from the U.S. FDA for a three-module premarket
approval (PMA) filing for the Accu-Chek(TM) D-Tector(TM) non-invasive diabetes
detection device. Roche expects to file its first module of the PMA before
year's end. Clinical studies of the device to support the PMA application are
underway.
Additionally, marketing partner Respironics reported that it has secured a CPT
code that covers the use of the BiliChek(TM) in the U.S. We also expect
Respironics to submit in the near future additional data requested by the FDA
for expanded phototherapy claims for the BiliChek(TM).
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
General. Net losses increased to $2.4 million from $1.1 million during
the three months ended September 30, 2000 as compared to the same period in 1999
due to a decrease in milestone revenue. We expect similar net losses to
continue.
Revenue. Product revenue increased to $529,000 for the quarter ended
September 30, 2000 from $380,000 for the same period of 1999. The majority of
the increase (64%) represents increased BiliChek TM and BiliCal TM sales. In
addition, Accu-Chek TM sales for clinical trials and other revenue comprised
the rest of the increase. Milestone revenue, which is event-based rather than
sales-based, decreased to $0 during the three months ended September 30, 2000
from $1,000,000 during the same period in 1999 because no milestone payments
were received.
Cost of Sales. Cost of sales was $499,000 for the three months ended
September 30, 2000 versus $454,000 during the same period of 1999. While the
cost of sales increase is directly related to product sales, a portion of the
cost of sales represents excess capacity production charges which were lower for
this quarter of 2000 than in this period in 1999. We expect excess capacity to
exist for the remainder of this year and most of 2001.
Research and Development Expenses. Research and development expenses
increased to approximately $1,374,000 during the three months ended September
30, 2000 from approximately $1,212,000 during the same period in 1999. The
increase in research and development expenses was primarily due to expansion of
research in our glucose monitoring and cancer detection programs, including
increases in costs related to clinical trials, salaries, consulting and
contracted research. We expect research and development expenses to remain at a
high level this year as we continue development and expand clinical trials for
our products.
9
Sales and Marketing Expenses. Sales and marketing expenses increased
slightly to $239,000 during the three months ended September 30, 2000 from
approximately $221,000 during the same period in 1999. Marketing expenses are
expected to increase in the future as BiliChek(TM) sales expand internationally.
General and Administrative Expenses. General and administrative
expenses increased to $900,000 during the three months ended September 30, 2000
compared to approximately $634,000 incurred during the same period in 1999. The
increase is primarily due to increased legal expense compared to the third
quarter of 1999. General and administrative expenses, however, are expected to
remain at a high level for the remainder of the year but to decrease in the
future.
Net Interest and Other Income. Net interest and other income increased
to $138,000 during the three months ended September 30, 2000 from $20,000 during
the same period in 1999. This increase is due to a higher amount of interest
being earned on higher cash balances from private financing received in early
2000.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
General. Net losses increased to approximately $6.4 million during the
nine months ended September 30, 2000 from approximately $5.4 million during the
same period in 1999 primarily due to increased research and development expenses
during 2000 and lower milestone revenue in 2000 versus the same period in 1999.
Revenue. The increase in revenue to $2,391,000 in the nine months ended
September 30, 2000 versus $2,090,000 in the same period in 1999 is a result of
having a more established distributor sales system and increasing demand for the
BiliChek TM product. Sales of the Accu-Chek D-Tector TM in 2000 slightly offset
the lower levels of milestone revenue.
Cost of Sales. Cost of sales was $1.43 million for the nine months
ended September 30, 2000 versus $1.2 million during the same period of 1999. The
increase in cost is due to increased unit sales in 2000. Excess capacity charges
in production decreased in 2000 as compared to the same period in 1999.
Research and development expenses. Research and development expenses
increased to approximately $4.6 million during the nine months ended September
30, 2000 from approximately $3.8 million during the same period in 1999. The
increase in research and development expenses was primarily due to expansion of
research in continuous glucose monitoring and cancer detection, including
increases in the cost to build prototypes of our developmental products, and
increases in clinical costs.
Sales and marketing expenses. Sales and marketing expenses increased 5%
to $700,000 during the nine months ended September 30, 2000 from approximately
$666,000 during the same period in 1999.
General and administrative expenses. General and administrative
expenses increased to approximately $2.1 million during the nine months ended
September 30, 2000 compared to approximately $1.9 million for the same period in
1999. The increase is primarily due to an increase in legal fees relating to the
arbitration with Altea/Nimco.
Net interest and other income. Net interest and other income increased
to $329,000 during the nine months ended September 30, 2000 from $97,000 during
the same period in 1999. This increase results from higher interest earned on
higher cash balances associated with the private funding received in the first
quarter of 2000.
FINANCIAL CONDITION
We have financed our operations since inception primarily through
private sales of debt and private and public sales of our equity securities.
10
From October 27, 1992 (inception) through September 30, 2000, we received
approximately $36.3 million in proceeds from sales of our debt and equity
securities. At September 30, 2000, we had cash of approximately $3.7 million and
working capital of approximately $3.4 million. We issued $5.25 million of
redeemable convertible preferred stock in November 1999 in conjunction with the
amendment to our agreement with Abbott. We also issued common stock in a private
placement in February 2000, which resulted in gross proceeds of $5.0 million.
We currently invest our excess cash balances primarily in short-term,
investment-grade, interest-bearing instruments until such funds are utilized in
operations. Substantial capital will be required to develop our products,
including completing product testing and clinical trials, obtaining all required
United States and international regulatory approvals and clearances, commencing
and scaling up manufacturing and marketing our products. Any failure of our
collaborative partners to fund development expenditures would have a material
adverse effect on our business, financial condition and results of operations.
In addition to funds that we expect to be provided by our collaborative
partners, we may be required to raise additional funds through public or private
financing, additional collaborative relationships or other arrangements.
Assuming we meet our milestones under our agreements with our strategic
collaborators, we believe that our existing capital resources will be sufficient
to satisfy our funding requirements for at least the next nine
months, but may not be sufficient to fund our operations to the point of
commercial introduction of our glucose monitoring product or our cervical cancer
product. However, there can be no assurance that we will meet our milestones or
receive payments from our collaborative partners or that we will enter into new
agreements or receive any related payments.
OTHER MATTERS
Legal Proceedings
As disclosed in our Form 10-Q for the quarters ended March 31, 2000 and June 30,
2000, in March 2000, we filed a Demand for Arbitration of certain disputes
arising under our License Agreement with Altea/NIMCO and a former
officer-employee of SpectRx, Jonathan Eppstein, who is also a principal in
Altea/NIMCO. We sought an interpretation of certain portions of the License
Agreement relating to our obligation to assign future intellectual property
rights and seek relief for these and other issues. We also asked for damages
related to these and other issues. Altea had sent two letters to us purporting
to give notice of material breach of the License Agreement for failure to assign
certain intellectual property rights to Altea or NIMCO and to participate in a
joint development program and other items. As part of the arbitration process,
we and Altea had agreed that the cure period for the alleged defaults would be
postponed pending a final resolution of the arbitration proceedings. Final
arguments were held October 23, 2000 and a decision was entered on November
7,2000. The Arbitration panel denied the claims for damages by both parties.
They also denied the claims by Altea/NIMCO that SpectRx is required to continue
a program of Joint Development and all claims that SpectRx has breached the
License and Joint Development Agreement. The Panel interpreted the scope of
Joint Technology under the Agreement as requested by Altea and as a result said
that two patent applications should be jointly assigned to Altea. The Panel also
resolved a dispute over stock options in effect at the time Altea/NIMCO
principal Jonathan Eppstein's employment ended at SpectRx. The Panel also denied
the claims of both sides for attorney's fees and expenses of arbitration.
In August 2000, SpectRx filed a complaint for Declaratory Judgment against
Ampersand Medical Corp. seeking a declaration that SpectRx has not
misappropriated or improperly disclosed any alleged confidential information or
alleged trade secrets disclosed to it by Ampersand. Ampersand subsequently filed
a counter-suit in Illinois against SpectRx alleging that SpectRx had
misappropriated trade secrets belonging to Ampersand. SpectRx believes
Ampersand's claims are without merit.
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SUBSEQUENT EVENTS
In October 2000, we received another grant of $307,000 from the Centers for
Disease Control and Prevention (CDC) to adapt our glucose monitoring technology
to monitor blood sugar levels of children and elderly people with diabetes. The
funding will be used to conduct clinical studies, research ergonomic issues and
to assist in developing a plan for regulatory approval of the technology for
children and the elderly. The grant announcement represents a commitment of more
than $600,000 in funding to date from the CDC.
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RISK FACTORS
The following risk factors should be considered carefully in addition
to the other information presented in this report. This report contains forward
looking statements that involve risks and uncertainties. Our actual results may
differ significantly from the results discussed in the forward looking
statements. Factors that might cause such differences include, but are not
limited to, the following risk factors:
Limited Operating History; History of Losses and Expectations of Future Losses
We have a limited operating history upon which our 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. We have experienced operating
losses since our inception, and, as of September 30, 2000, we have an
accumulated deficit of approximately $31.7 million. To date, we have engaged
primarily in research and development efforts. We have only generated limited
revenues from product sales and do not have significant experience in
manufacturing, marketing or selling our products. There can be no assurance that
our development efforts will result in commercially viable products, that we
will be successful in introducing our products, or that required regulatory
clearances or approvals will be obtained in a timely manner, or at all. There
can be no assurance that our products will ever gain market acceptance or that
we will ever generate significant revenues or achieve profitability. The
development and commercialization of our products will require substantial
development, regulatory, sales and marketing, manufacturing and other
expenditures. We expect our operating losses to continue through 2001 as we
continue to expend substantial resources to complete development of our
products, obtain regulatory clearances or approvals, build our marketing, sales,
manufacturing and finance organizations and conduct further research and
development.
Government Regulations; No Assurance of Regulatory Approvals
The design, manufacturing, labeling, distribution and marketing of our
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 us to market our products in the United States, we must
obtain clearance or approval from the FDA. We intend to seek clearance to market
each of our products, where possible, through a 510(k) premarket notification
supported by clinical data. A 510(k) premarket notification has been filed with
and approved by the FDA, for clearance to market our infant jaundice product. A
510(k) was filed in February 2000 for expanded use during phototherapy treatment
for the BiliChek(TM). The FDA has requested additional information to be
included in the application, which we expect will be supplied during the fourth
quarter of 2000. A 510(k) premarket notification was filed in 1998 with the FDA
for clearance to market the diabetes detection product. The 510(k) was later
withdrawn, and discussions have been held by Roche Diagnostics with the FDA in
preparation for clinical activity and the submission of a modular PMA for this
product to be filed in 2000. Roche has notified us that it has reached an
agreement with the FDA on an approval path forward and on the protocol for
submission clinicals, which could be concluded by year end. We have not filed
any other 510(k) premarket notification or premarket approval ("PMA")
application for clearance with the FDA. 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 our products. In addition, there can be no assurance that the FDA
will not require the submission of a PMA application to obtain FDA approval to
market other of our products. Preliminary expectations regarding our cancer
program and glucose program are that each of those filings would be a PMA. The
PMA process is more rigorous and lengthier than the 510(k) clearance process and
13
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 our ability
to market our products. Further, if we wish 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 we
conduct additional clinical studies or submit to the more rigorous and lengthier
PMA process could result in a significant delay in bringing our products to
market and substantial additional research and other expenditures. Similarly,
any labeling or other conditions or restrictions imposed by the FDA on the
marketing of our products could hinder our ability to effectively market our
products. Any of the foregoing actions by the FDA could delay or prevent
altogether our ability to market and distribute our products and could have a
material adverse effect on our business, financial condition and results of
operations.
In order for us to market our products under development in Europe and
certain other international jurisdictions, we and our 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 international regulatory bodies have
adopted various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. These regulations vary from country to country. In order to
commence sales in Europe, we have obtained ISO 9001 certification and CE mark
certification, which is an international symbol of quality and compliance with
applicable European medical device directives. While we have received ISO 9001
and CE mark certification, we must maintain our certifications in future
periods. Failure to receive or maintain ISO 9001 or CE mark certification or
other international regulatory approvals could have a material adverse effect on
our business, financial condition and results of operations. There can be no
assurance that we 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 our
products, failure to receive these registrations or approvals, or future loss of
previously obtained registrations or approvals could have a material adverse
effect on our business, financial condition and results of operations.
We and our 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
international 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 our 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
14
materially adverse to our regulatory position.
We will rely upon Abbott, Roche Diagnostics and Respironics to obtain
United States and certain international regulatory approvals and clearances for
our glucose monitoring, diabetes detection and infant jaundice products,
respectively, and if such approvals or clearances are obtained we 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
international 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 affect our business, financial condition
and results of operations. We and Welch Allyn will jointly seek such regulatory
approvals for the cervical cancer product.
Dependence on Licensed Patent Applications and Proprietary Technology
Our success depends in large part upon our ability to establish and
maintain the proprietary nature of our technology through the patent process and
to license from others patents and patent applications necessary to develop our
products. We have licensed from Non-Invasive Monitoring Company, Inc. ("Nimco")
one granted patent and know-how related to our glucose monitoring product,
jointly applied with Altea Technologies, Inc. ("Altea") for a U.S. patent and an
international patent related to this device and have licensed this granted
patent and these patent applications to Abbott pursuant to the parties'
collaborative arrangements. We have license agreements with Georgia Tech
Research Corporation ("GTRC") that give us the right to use two patents related
to our diabetes detection product, and we have licensed this proprietary
technology to Roche Diagnostics pursuant to our collaborative arrangement with
them. We have license agreements with the University of Texas M.D. Anderson
Cancer Center ("M.D. Anderson") that give us access to one patent related to our
infant jaundice product, and we have applied for two patents related to this
product. We have licensed the one patent and two patent applications to
Respironics pursuant to our collaborative arrangement with that company. In
addition, we have licensed from Joseph Lakowicz, Ph.D. of the University of
Maryland several granted patents and patent applications related to fluorescence
spectroscopy that we intend to use in our research and development efforts. We
have been issued, in total, 28 U.S. patents. In addition, we have filed for a
total of 37 U.S. patents that are still in prosecution.
There can be no assurance that one or more of the patents held directly
by us or licensed by us from third parties, including the disposable components
to be used in connection with our glucose monitoring and infant jaundice
products, or processes used in the manufacture of our products, will not be
successfully challenged, invalidated or circumvented or that we 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 our
ability to make, use and sell our products either in the United States or in
international markets. If any of our patents are successfully challenged,
invalidated or circumvented or our right or ability to manufacture our products
were to be proscribed or limited, our ability to continue to manufacture and
market our products could be adversely affected, which would likely have a
material adverse effect upon our 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 we 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 us, to
15
protect trade secrets or know-how owned by us 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 us may require us to incur substantial legal and other fees
and expenses and may require some of our employees to devote all or a
substantial portion of their time to the prosecution or defense of such
litigation or proceedings. An adverse determination in litigation or
interference proceedings to which we may become a party, including any
litigation that may arise against us, could subject us to significant
liabilities to third parties, require us to seek licenses from third parties or
prevent us from selling our products in 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 we 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 us to pay substantial
royalties. An adverse determination in a judicial or administrative proceeding
or the failure to obtain a necessary license could prevent us from manufacturing
and selling our products, which would have a material adverse effect on our
business, financial condition and results of operations.
In addition to patents, we rely on trade secrets and proprietary
know-how, which we seek to protect, in part, through confidentiality and
proprietary information agreements. There can be no assurance that such
confidentiality or proprietary information agreements will not be breached, that
we would have adequate remedies for any breach, or that our trade secrets will
not otherwise become known to or be independently developed by competitors.
Royalty Rates and Manufacturing Profits
The majority of our revenues and profits are expected to be derived
from royalties and manufacturing profits that we will receive from Abbott, Roche
Diagnostics and Respironics resulting from sales of our glucose monitoring,
diabetes detection and infant jaundice products, respectively. Another
significant portion of our revenues and profits are expected to be derived from
the sale of cervical cancer products. Our collaboration with Welch Allyn is more
like a joint venture, so revenues and profits expected to be derived from the
sales of cervical cancer detection products will be sales to distributors and
end users. The royalties, manufacturing profits and distribution profits that we
expect to receive from each of our collaborative partners depend on sales of
such products. There can be no assurance that we, together with our
collaborative partners, will be able to sell sufficient volumes of our products
to generate substantial profits for us. In addition, our profit margins on some
of our products are not likely to increase over time because the royalty rates
and manufacturing profit rates on those products 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 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 us, determine the prices at which they sell
our glucose monitoring devices, they may choose to adopt this marketing
strategy. If Abbott adopts this marketing strategy and discounts the prices at
which they sell our glucose monitoring devices, the amounts earned by us in
respect of such sales will be less. There can be no assurance that, if this
strategy is adopted, royalties earned by us on sales of the disposable
cartridges to be used in connection with our glucose monitoring device will be
equal to or greater than the amounts we would have earned had our glucose
monitoring devices not been sold at a discount. This possible reduction in sales
of our glucose monitoring devices could have a material adverse effect upon our
business, financial condition and results of operations.
16
The collaboration with Welch Allyn is a joint development and
commercialization effort. It is anticipated that both we and Welch Allyn would
manufacture portions of the cancer detection device and both would share in the
revenues of products sold to customers. There can be no assurance, however, that
we, together with Welch Allyn, will sell sufficient volumes of these products to
generate substantial revenues.
Uncertainty of Market Acceptance
Our products are based upon new methods of glucose monitoring, diabetes
detection, infant jaundice monitoring and cervical cancer detection. There can
be no assurance that any of these products will gain market acceptance.
Physicians and individuals will not recommend or use our 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 or
other tests that have a long history of safe and effective use. To date, our
products have been utilized by only a limited number of subjects, and no
independent studies regarding our products have been published. The lack of any
such independent studies may have an adverse effect on our ability to
successfully market our products. In addition, purchase decisions for products
like our diabetes detection and infant jaundice products are greatly influenced
by health care administrators who are subject to increasing pressures to reduce
costs. Failure of our products to achieve significant market acceptance would
have a material adverse effect on our business, financial condition and results
of operations.
Intense Competition
The medical device industry in general, and the markets in which we
expect to offer products in particular, are intensely competitive. If successful
in our product development, we will compete with other providers of personal
glucose monitors, diabetes detection tests, infant jaundice and cancer detection
products.
A number of competitors, including Johnson & Johnson, Inc. (which owns
Lifescan, Inc.), Roche Diagnostics, 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 our competitors have substantially greater financial, research,
technical, manufacturing, marketing and distribution resources than we do and
have greater name recognition and lengthier operating histories in the health
care industry. There can be no assurance that we will be able to effectively
compete against these and other competitors. In addition, there can be no
assurance that our glucose monitoring, diabetes detection, infant jaundice or
cancer detection 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 our competitors will not succeed in developing, either before
or after the development and commercialization of our products, devices and
technologies that permit more efficient, less expensive non-invasive and less
invasive glucose monitoring, diabetes detection, infant jaundice monitoring and
cancer detection. It is also possible that one or more pharmaceutical or other
health care companies will develop therapeutic drugs, treatments or other
products that will substantially reduce the prevalence of diabetes or infant
jaundice or otherwise render our products obsolete. Such competition could have
a material adverse effect on our business, financial condition and results of
operation.
17
In addition, there can be no assurance that one or more of our
collaborative partners will not, for competitive reasons, reduce their support
of their collaborative arrangement with us or support, directly or indirectly, a
company or product that competes with our product that is the subject of the
collaborative arrangement.
Little Manufacturing Experience; Dependence on Sole Sources of Supply
To date, our manufacturing activities have only included our
BiliChek(TM) and BiliCal(TM) products and the Accu-Chek(TM) D-Tector(TM)
diabetes detection product on a limited scale. If we, together with Roche
Diagnostics obtain FDA clearance and other regulatory approvals to market the
diabetes detection product, we will undertake to manufacture this product in
significant volumes. We have no experience manufacturing such products in the
volumes that would be necessary for us to achieve significant commercial sales.
There can be no assurance that we will be able to establish and maintain
reliable, full scale manufacturing of these products at commercially reasonable
costs. Although we have leased space that we plan to use to manufacture our
products, we may encounter various problems in establishing and maintaining our
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, our manufacturing facilities will
be subject to GMP regulations, including possible preapproval inspection,
international quality standards and other regulatory requirements. Difficulties
encountered by us in manufacturing scale-up or failure by us to implement and
maintain our 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 our business, financial condition and results of operations.
The microspectrometer and disposable calibration element, components of
our infant jaundice product, and the blue light module and calibration element,
components of our diabetes detection 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 detection 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. For
our products which require a PMA, the inclusion of substitute components could
require us to qualify the new supplier with the appropriate government
regulatory authorities. Alternatively, for our products which qualify for a
510(k) premarket notification, the substitute components need only meet our
product specifications. Any significant problem experienced by one of our sole
source suppliers may result in a delay or interruption in the supply of
components to us until 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 our manufacturing operations, which
could have a material adverse effect upon our business, financial condition and
results of operations.
Little Marketing and Sales Experience
We are responsible for marketing our infant jaundice product in
countries other than the United States and Canada. We have relatively limited
experience in marketing or selling medical device products and only have a six
person marketing and sales staff. In order to successfully continue to market
and sell our infant jaundice product outside the United States and Canada, we
must either develop a marketing and sales force or expand our arrangements with
third parties to market and sell this product. While we have signed distributor
agreements for our BiliChek(TM) and BiliCal(TM) products, there can be no
assurance that we will be able to successfully fully develop a marketing and
sales force or that we will be able to enter into and maintain marketing and
sales agreements with third parties on acceptable terms. If we develop our own
marketing and sales capabilities, we will compete with other companies that have
experienced and well-funded marketing and sales operations. If we enter into a
18
marketing arrangement with a third party for the marketing and sale of our
infant jaundice product outside the United States and Canada, any revenues to be
received by us from this product will be dependent on this third party, and we
will likely be required to pay a sales commission or similar compensation to
this party. Furthermore, we are currently dependent on the efforts of Abbott and
Roche Diagnostics for any revenues to be received from our glucose monitoring
and diabetes detection products, respectively. There can be no assurance that
the efforts of these third parties for the marketing and sale of our 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. We currently have no product
liability insurance coverage beyond that provided by our general liability
insurance. Accordingly, there can be no assurance that we are adequately
protected from any liabilities, including any adverse judgments or settlements,
we might incur in connection with the development, clinical testing, manufacture
and sale of our products. In addition, product liability insurance is expensive
and may not be available to us on acceptable terms, if at all. A successful
product liability claim or series of claims brought against us that results in
an adverse judgment against or settlement by us in excess of any insurance
coverage could have a material adverse effect on our business, financial
condition and results of operations.
Need for Additional Capital; Uncertainty of Access to Capital
Substantial capital will be required to develop our products, including
completing product testing and clinical trials, obtaining all required United
States and international regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing our products. Pursuant to our
collaborative arrangements with Abbott, Roche Diagnostics, Respironics and Welch
Allyn, these collaborative partners will either directly undertake these
activities or will fund a substantial portion of these expenditures. The
obligations of our collaborative partners to fund our capital expenditures is
largely discretionary and depends on a number of factors, including our ability
to meet certain milestones in the development and testing of our products. There
can be no assurance that SpectRx will meet such milestones or that our
collaborative partners will continue to fund our capital expenditures. Any
failure of our collaborative partners to fund our capital expenditures would
have a material adverse effect on our business, financial condition and results
of operations.
In addition to funds that we expect to be provided by our collaborative
partners, we may be required to raise additional funds through public or private
financing, additional collaborative relationships or other arrangements. We
believe that our existing capital resources and the funding from our
collaborative partners will be sufficient to satisfy our funding requirements
for at least the next nine months, but may not be sufficient to fund our
operations to the point of commercial introduction of either of our glucose
monitoring product concepts or our cervical cancer product. There can be no
assurance that any required additional funding, if needed, will be available on
terms attractive to us, or at all, which could have a material adverse effect on
our 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 our 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
19
to provide comprehensive health care services for a fixed cost per person. We
are unable to predict what changes will be made in the reimbursement methods
utilized by third-party health care payors. Although we anticipate that
patients, hospitals and physicians will justify the use of our products by the
attendant cost savings and clinical benefits that we believe will be derived
from the use of our products, there can be no assurance that this will be the
case. Furthermore, we 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 our products to obtain
sufficient reimbursement from health care payors for our 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 our business, financial condition and results of operations.
If we obtain the necessary international regulatory approvals, market
acceptance of our 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 we intend 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 our 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 we succeed
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 us to sell our products on a
competitive basis.
Need to Attract and Retain Key Employees
Our ability to operate successfully and manage our potential future
growth depends in significant part upon the continued service of certain key
scientific, technical, managerial and finance personnel, and our ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel. The officers listed in the Executive Officers and
Directors table included in our 2000 Proxy Statement comprise our key personnel.
None of these key employees have an employment contract with us nor are any of
these employees covered by key person or similar insurance. In addition, if we,
together with our collaborative partners, are able to successfully develop and
commercialize our products, we will need to hire additional scientific,
technical, marketing, managerial and finance personnel. We face intense
competition for qualified personnel in these areas, many of whom are often
subject to competing employment offers, and there can be no assurance that we
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 our business, financial condition and results
of operations.
Control by Directors, Executive Officers and Affiliated Entities
Our directors, executive officers and entities affiliated with them, in
the aggregate, beneficially owned as of September 30, 2000 approximately 30.2%
of our outstanding Common Stock. These stockholders, acting together, would be
able to control substantially all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
and other business combination transactions.
20
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 our Common Stock. In addition, the market price of the Common Stock may
be highly volatile. Factors such as variations in our financial results, changes
in our collaborative arrangements, comments by security analysts, announcements
of technological innovations or new products by us or by our 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.
Anti-Takeover Effect of Certain Charter and Bylaw Provisions on Price of Common
Stock
Certain provisions of our 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 us. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our Common Stock. Certain of these provisions allow
us 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 us, 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 us. 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 us, including without limitation, discouraging
a proxy contest or making more difficult the acquisition of a substantial block
of our Common Stock. These provisions could also limit the price that investors
might be willing to pay in the future for shares of our Common Stock.
Lack of Dividends
We have not paid any dividends on our common stock and do not
anticipate paying any dividends in the foreseeable future.
21
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We have not entered into any transactions using derivative financial instruments
and believe our exposure to interest rate risk, foreign currency exchange rate
risk and other relevant market risks is not material.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information disclosed in Part I, Item 2, under the heading "Other
Matters--Legal Proceedings" is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying Index to Exhibits are filed as
part hereof, or incorporated by reference into, this Report.
(b) Reports on Form 8-K
The Registrant filed no Current Reports on Form 8-K during the quarter
ended September 30, 2000.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Norcross, Georgia.
SPECTRX, INC.
Date: November 14, 2000 By: /S/ THOMAS H. MULLER, JR.
--------------------------------------
Thomas H. Muller, Jr.
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
24
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 (2) Certificate of Incorporation of SpectRx, as amended, as currently in effect.
3.2 (1) Bylaws of SpectRx.
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 SpectRx.
10.4 (1) Stock Purchase Agreement, dated June 30, 1994, between Keith D. Ignotz and SpectRx.
10.5 (1) Assignment and Bill of Sale, dated February 29, 1996, between Laser Atlanta Optics, Inc. and SpectRx.
10.6 (1) Security Agreement, dated October 31, 1996, between Mark A. Samuels and SpectRx.
10.7 (1) Security Agreement, dated October 31, 1996, between Keith D. Ignotz and SpectRx.
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, dated January 16, 1993, between Laser Atlanta Optics, Inc.
and SpectRx.
10.11C (1) First Amendment to License Agreement, dated October 19, 1993, between Georgia Tech Research
Corporation and SpectRx.
10.12 (1) Clinical Research Study Agreement, dated July 22, 1993, between Emory University and SpectRx.
10.13A (1)* Development and License Agreement, dated December 2, 1994, between Boehringer Mannheim
Corporation and SpectRx.
10.13B (1)* Supply Agreement, dated January 5, 1996, between Boehringer Mannheim and SpectRx.
10.14 (1) Sponsored Research Agreement, No. SR95-006, dated May 3, 1995, between University of Texas, M.D. Anderson
Cancer Center and SpectRx.
10.15 (1) Sole Commercial Patent License Agreement, dated May 4, 1995, between Martin Marietta Energy Systems, Inc. and
SpectRx.
10.16A (1) License Agreement, dated November 22, 1995, between Joseph R. Lakowicz, Ph.D. and SpectRx.
10.16B (1) Amendment of License Agreement, dated November 28, 1995, between Joseph R. Lakowicz, Ph.D. and SpectRx.
10.16C (1) Second Amendment to License Agreement, dated March 26, 1997, between Joseph R. Lakowicz, Ph.D. and SpectRx.
10.16D (4) Third Amendment to License Agreement, dated November 20, 1998, between Joseph R. Lakowicz, Ph.D. and SpectRx.
10.16E (4)** Fourth Amendment to License Agreement, dated November 20, 1998, between Joseph R. Lakowicz, Ph.D. and SpectRx.
10.16F Fifth Amendment to License Agreement, dated May 31, 2000, between Joseph R. Lakowicz, Ph.D. and SpectRx.
10.17 (1) License and Joint Development Agreement, dated March 1, 1996, between NonInvasive-Monitoring
Company, Inc., Altea Technologies, Inc. and SpectRx.
25
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 SpectRx.
10.19A (1)* Purchasing and Licensing Agreement, dated June 19, 1996, between Respironics and SpectRx.
10.19B (4)** Amendment to Purchasing and Licensing Agreement, dated October 21, 1998 between Respironics and
SpectRx.
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 SpectRx.
10.21A (1)* Research and Development and License Agreement, dated October 10, 1996, between Abbott Laboratories and
SpectRx.
10.21B(3) * Letter Agreement, dated December 22, 1997, between Abbott and SpectRx.
10.21 C(6)** Third Amendment to Research and Development and License Agreement, dated November 30, 1999 between
Abbott Laboratories and the SpectRx.
10.22A (1) Lease, dated September 21, 1993, between National Life Insurance Company d/b/a Plaza 85 Business Park and
SpectRx, together with amendments 1, 2 and 3 thereto and Tenant
Estoppel Certificate, dated September 20, 1994.
10.24(4)** Development and Commercialization Agreement, dated December 31, 1998, between Welch Allyn, Inc. and
SpectRx.
10.25A**(5) Development and License Agreement, dated July 13, 1999, between Roche Diagnostics Corporation and SpectRx.
10.25B**(5) Supply Agreement, dated July 13, 1999, between Roche Diagnostics Corporation and SpectRx.
26
EXHIBIT
NO. DESCRIPTION
------- -----------
11.1 Calculation of earnings per share.
21.1 (6) Subsidiaries of the Registrant.
27.1 Financial Data Schedule (for SEC use only).
- ---------------
* 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.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, filed
March 26, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998, filed
March 30, 1999.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 filed
August 13, 1999.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999, filed
March 30, 2000.