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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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 October 31, 2001, was 10,566,038.
SPECTRX, INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION............................................................................ 3
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
BALANCE SHEETS -
DECEMBER 31, 2000 AND SEPTEMBER 30, 2001.......................................... 3
STATEMENTS OF OPERATIONS -
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001..................... 4
STATEMENTS OF CASH FLOWS -
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001..................................... 5
NOTES TO FINANCIAL STATEMENTS............................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................ 8
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 19
PART II. OTHER INFORMATION................................................................................ 20
ITEM 1. LEGAL PROCEEDINGS....................................................................... 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................................ 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 21
SIGNATURES................................................................................................ 22
EXHIBIT INDEX............................................................................................. 22
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECTRX, INC.
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
2000 2001
UNAUDITED UNAUDITED
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,609 $ 9,519
Accounts receivable 1,259 845
Inventory 481 625
Other current assets 377 496
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Total current assets 5,726 11,485
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PROPERTY & EQUIPMENT, Net 894 681
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OTHER ASSETS 528 550
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TOTAL ASSETS $ 7,148 $ 12,716
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LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,020 $ 701
Accrued liabilities 1,262 1,089
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Total current liabilities 2,282 1,790
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COLLABORATIVE PARTNER ADVANCE 381 381
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REDEEMABLE CONVERTIBLE PREFERRED STOCK 5,579 5,815
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 9 10
Additional paid-in-capital 30,927 42,216
Treasury stock, at cost 0 (33)
Accumulated deficit (31,999) (37,432)
Notes receivable from officers (31) (33)
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Total stockholders' equity (deficit) (1,094) 4,730
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TOTAL LIABILITIES & EQUITY $ 7,148 $ 12,716
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The accompanying notes are an integral part of the financial statements.
SPECTRX, INC.
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2000 2001 2000 2001
------- -------- ------- -------
REVENUE
Product sales $ 529 $ 570 $ 1,642 $ 1,726
Collaborative agreements 0 0 749 100
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TOTAL 529 570 2,391 1,826
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EXPENSES
Cost of sales 499 410 1,439 1,417
Research & development 1,374 781 4,608 2,989
Sales & marketing 239 337 700 711
General & administrative 900 675 2,143 2,090
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Total 3,012 2,203 8,890 7,207
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Operating loss (2,483) (1,633) (6,499) (5,381)
OTHER INCOME 0 0 21 2
INTEREST INCOME 138 106 308 182
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NET LOSS (2,345) (1,527) (6,170) (5,197)
PREFERRED STOCK DIVIDENDS (78) (78) (236) (236)
------- -------- ------- -------
Loss available to common shareholders ($2,423) ($ 1,605) ($6,406) ($5,433)
======= ======== ======= =======
NET (LOSS) PER SHARE
BASIC ($ 0.29) ($ 0.15) ($ 0.76) ($ 0.58)
======= ======== ======= =======
DILUTED ($ 0.29) ($ 0.15) ($ 0.76) ($ 0.58)
======= ======== ======= =======
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING
BASIC 8,484 10,428 8,406 9,336
======= ======== ======= =======
DILUTED 8,484 10,428 8,406 9,336
======= ======== ======= =======
The accompanying notes are an integral part of the financial statements.
SPECTRX, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
ENDED
SEPTEMBER 30,
2000 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,170) $ (5,197)
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Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 304 274
Amortization of deferred compensation 57 0
Changes in assets and liabilities:
Accounts receivable 435 414
Inventory 101 (144)
Due from related parties (22) (22)
Other current assets (324) (119)
Accounts payable (17) (319)
Accrued liabilities 187 (173)
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Total adjustments 721 (89)
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Net cash used in operating activities (5,449) (5,286)
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CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment (434) (61)
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Net cash used in investing activities (434) (61)
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CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock (net of issuance costs) 4,941 11,290
Issuance of redeemable convertible preferred stock 2,500 0
Purchase of treasury stock, at cost 0 (33)
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Net cash provided by financing activities 7,441 11,257
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NET INCREASE IN CASH AND CASH EQUIVALENTS 1,558 5,910
CASH AND CASH EQUIVALENTS, beginning of period 2,143 3,609
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CASH AND CASH EQUIVALENTS, end of period $ 3,701 $ 9,519
========= =========
The accompanying notes are an integral part of the financial statements
SPECTRX, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited interim financial statements included herein have
been prepared by SpectRx. These statements reflect all adjustments, all of which
are of a normal, recurring nature, which are, in the opinion of management,
necessary to present fairly the financial position as of September 30, 2001, the
results of operations for the three months and nine months ended September 30,
2000 and 2001, and the cash flows for the nine months ended September 30, 2000
and 2001. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. Preparing
financial statements requires that our management make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. Our accounting policies
continue unchanged from December 31, 2000. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
our Annual Report on Form 10-K for the year ended December 31, 2000 and our
Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30,
2001.
The results of operations for the three and nine months ended September
30, 2000 and 2001 are not necessarily indicative of the results for a full
fiscal year.
2. FLUORRX
In December 1996, we sublicensed certain technology to and acquired a
64.8% interest in FluorRx, Inc., a corporation organized for the purpose of
developing and commercializing technology related to fluorescence spectroscopy.
Our 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, August 1998, and April 1999, FluorRx sold additional
convertible preferred stock for net cash proceeds of $521,000, $429,000,
$511,000 and $300,000, respectively. The issuance of additional preferred stock
reduced our ownership (on an as converted basis) to 43%. Effective with the
August 1998 funding, we began accounting for our investment in FluorRx under the
equity method of accounting. In connection therewith, we began suspending the
equity losses from our investment in FluorRx. The accompanying statement of
operations for the three months and nine months ended September 30, 2001
excludes $21,465 and $40,975 in losses, respectively, which represents our 43%
equity in the losses of FluorRx. Cumulative suspended equity losses as of
September 30, 2001 amounted to $1,541,371.
3. COMPREHENSIVE INCOME
We currently have no other comprehensive income items as defined by
Statement of Financial Accounting Standards ("SFAS") No. 130.
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," in June 1998,
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," in June 1999 and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133," in June 2000. SFAS No. 133
establishes accounting and reporting standards for derivatives and hedges. It
requires that all derivatives be recognized as other assets or liabilities at
fair value and established specific criteria for the use of hedge accounting.
SFAS No. 137 defers the effective date of SFAS No. 133 by one year to fiscal
years beginning after June 15, 2000. SFAS No. 138 amends accounting and
reporting standards for SFAS No. 133 for certain derivative instruments and
certain hedging activities. We adopted these statements with no material impact
to our results of operations or financial position as we do not have any
material derivative instruments.
The FASB issued SFAS No. 141, "Accounting for Business Combinations,"
on June 30, 2001. It requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of accounting.
The FASB issued SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets," on June 30, 2001. It provides that goodwill and certain
intangible assets will no longer be subject to amortization, but instead will be
subject to a periodic impairment assessment by applying a fair-value based test.
Our required adoption date is January 1, 2002. Adoption of SFAS No. 142 will not
have a material impact on our results of operations or financial position.
5. LITIGATION
We are involved in certain litigation arising in the ordinary course of
business. In management's opinion, the ultimate resolution of these matters will
not have a material adverse effect on our financial position or results of
operations. See Part II, Item 1, "Legal Proceedings," for disclosure of
significant litigation matters.
6. STOCKHOLDERS' EQUITY
In June 2001, we announced that we had completed two private
placements. On June 4, 2001, we entered into an agreement with affiliates of
SAFECO Corporation, which invested about $9.5 million in SpectRx before
transaction expenses. On June 13, 2001, we entered into an agreement with
affiliates of Special Situations Fund, which invested about $2.5 million in
SpectRx before transaction expenses. The financings consisted, in total, of
sales of about 1.9 million shares of common stock and warrants to purchase
379,127 shares of common stock. Under the terms of the agreements, each share of
common stock was sold at a price of $6.319 per share, which represented a
discount from the market price of our common stock on the dates these
transactions closed. The first transaction, funded on June 4, 2001, involved the
private placement of 1.5 million shares of common stock. The second transaction,
funded on June 13, 2001, involved the private placement of 395,633 shares of
common stock. The combination of these two transactions resulted in proceeds to
SpectRx of about $12 million before transaction expenses. The 1,895,633 shares
issued in these transactions constituted 22.2% of our common stock outstanding
prior to the first private placement transaction. In addition, the purchasers of
common stock also received warrants to purchase an aggregate of 379,127 shares
of common stock for $9.8874 per share. These warrants expire on the fifth
anniversary of their issuance date. The warrants are valued at $1.7 million and
are included in additional paid-in capital in the accompanying balance sheet. On
August 30, 2001, the common stockholders of SpectRx, excluding the shares held
by SAFECO and Special Situations Fund, approved these transactions.
In October 2001, Abbott invested an additional $1 million in SpectRx
common stock, acquiring 126,199 shares at $7.92 per share, which is subject to
SpectRx maintaining certain rights to sublicense technology to Abbott. The
purchase was associated with a milestone under a program to commercialize our
continuous glucose monitoring technology for people with diabetes. The purchase
raises Abbott's common stock ownership in SpectRx to approximately 5.9%.
On September 19, 2001, we announced that our Board of Directors had
approved a stock repurchase program for up to $1 million of our common stock. As
of September 30, 2001, we had purchased 5,800 shares of common stock at an
average price of $5.59 per share.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
We issued $5.25 million of redeemable convertible preferred stock in
November 1999 in conjunction with the execution of an amendment to our agreement
with Abbott. Dividends are accrued on the preferred stock at a rate of 6% per
year and total $78,750 for the third quarter of 2001, $236,000 for the nine
months ended September 30, 2001 and $565,000 since issuance. The related
dividends are included in redeemable convertible preferred stock in the
accompanying balance sheets.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report which express "belief", "anticipation" or
"expectation" as well as other statements which are not historical facts are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or
anticipated results, including those set forth under "Risk Factors" in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in or incorporated by reference into this report.
Examples of these uncertainties and risks include, but are not limited to:
- whether our products in development will prove safe and
effective;
- whether and when we or our strategic partners will obtain
approval from the Food and Drug Administration, or FDA, and
corresponding foreign agencies;
- our need to achieve manufacturing scale-up in a timely manner,
and our need to provide for the efficient manufacturing of
sufficient quantities of our products;
- the lack of immediate alternate sources of supply for some
critical components of our products;
- our patent and intellectual property position;
- the need to fully develop the marketing, distribution,
customer service and technical support and other functions
critical to the success of our potential product lines;
- the effectiveness and ultimate market acceptance of our
products;
- access to sufficient debt or equity capital to meet our
operating and financial needs;
- the dependence on our strategic partners for funding,
development assistance, clinical trials, distribution and
marketing of products developed by us; and
- other risks and uncertainties described from time to time in
our reports filed with the Securities and Exchange Commission,
including those contained in our Annual Report on Form 10-K
for the year ended December 31, 2000, and our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2001 and
June 30, 2001.
The following discussion should be read in conjunction with our
financial statements and notes thereto included elsewhere in this report.
OVERVIEW
We were incorporated on October 27, 1992, and since that date we have
raised capital through the sale of preferred stock, issuance of debt securities,
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 diagnostic, screening and monitoring products. As part of our business
strategy, we have established arrangements with leading medical device companies
for the development, commercialization and introduction of our products. We have
entered into collaborative arrangements with Respironics, Inc. for our infant
jaundice product, with Welch Allyn, Inc. for our cancer detection product, with
Abbott Laboratories for our glucose monitoring products, and with Roche
Diagnostics for our diabetes detection product. In December 1996, we sublicensed
specified 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, 2001, as a
result of subsequent financings, our interest in FluorRx was 43%.
We have a limited operating history upon which our prospects can be
evaluated. Our prospects must be considered in light of the substantial risks,
expenses and difficulties encountered by entrants into the medical device
industry. This industry is characterized by an increasing number of
participants, intense competition and a high failure rate. We have experienced
operating losses since our inception, and, as of September 30, 2001, we had an
accumulated deficit of about $37.4 million. To date, we have engaged primarily
in research and development efforts. We first generated revenues from product
sales in 1998, but do not have significant experience in manufacturing,
marketing or selling our products. Our development efforts may not result in
commercially viable products, and we may not be successful in introducing our
products. Moreover, required regulatory clearances or approvals may not be
obtained in a timely manner, or at all. Our products may not ever gain market
acceptance, and we may not ever generate significant revenues or achieve
profitability. The development and commercialization of our products will
require substantial development, regulatory, sales and marketing, manufacturing
and other expenditures. We expect our operating losses to continue through 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.
Although we have historically received the majority of our revenues
from development milestone payments, the majority of our revenues and profits in
the future are expected to be derived from royalties and manufacturing profits
that we will receive from Abbott, Roche and Respironics resulting from sales of
the products for which we have collaborative arrangements with each of these
companies. The royalties and manufacturing profits that we expect to receive
from each of our collaborative partners depend on sales of these products. We
and our collaborative partners may not be able to sell sufficient volumes of our
products to generate substantial royalties and manufacturing profits for us.
We have entered into collaborative arrangements with Respironics, Welch
Allyn, Abbott and Roche. The agreements evidencing these collaborative
arrangements grant a substantial amount of discretion to each collaborative
partner. If one or more of our collaborative partners were to terminate their
arrangement with us, we would either need to reach agreement with a replacement
collaborative partner or undertake, at our own expense, the activities
previously handled by our collaborative partner. 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 would be adversely affected
by the absence of collaborative arrangements.
QUARTER OVERVIEW
In August 2001, our stockholders approved previously announced private
placements of common stock with institutional investors. The private placements
resulted in gross proceeds to the company of approximately $12 million.
Approximately 66% of eligible shares were represented at the special
stockholders meeting, of which 99% of eligible shares voted for the transaction.
The purchasers of the common stock were entities affiliated with SAFECO
Asset Management and Special Situations Fund III, L.P. The proceeds of the sales
will be used for research, development, clinical trials, regulatory efforts,
sales and marketing activities, working capital and other general corporate
purposes.
In September 2001, we announced that Abbott Laboratories had given
Development Program Notice to proceed with commercialization of our continuous
glucose monitoring product. As part of that notice, Abbott was to purchase an
additional $2 million in SpectRx common stock in satisfaction of its milestone
payment to us. We agreed to a postponement of $1 million due for this milestone.
We expect this payment before the end of 2002 upon the occurrence of certain
events. The $1 million common stock purchase increased Abbott's common stock
ownership in SpectRx to approximately 5.9%. The transaction was completed in
October 2001. Both the second $1 million payment and a portion of the first
payment are subject to our ability to maintain our rights to sublicense to
Abbott certain technology that was licensed by Altea to us. We and Altea are
currently in arbitration regarding various issues related to this license
agreement.
As part of the agreement to move forward with commercialization, Abbott
granted rights to SpectRx to independently develop a single-use application of
the glucose monitoring technology. Also, we and Abbott modified the terms
related to the shares of convertible redeemable preferred stock held by Abbott
to reduce the amount eligible for redemption by $1 million of the original $5.25
million.
In September 2001, our Board of Directors approved a stock repurchase
program for up to $1 million of our common stock. These purchases may be
commenced or suspended at any time without prior notice depending on business or
market conditions and other factors. As of October 31, 2001, we had
approximately 10.5 million shares outstanding. As of September 30, 2001 we had
purchased 5,800 shares on the open market at an average price of $5.64 per
share.
In October 2001, we announced that we had received a grant of $338,000
from the U.S. Centers for Disease Control and Prevention, or CDC, to expand
research on our continuous glucose monitor. The grant raises the total amount of
CDC funding for the project to just under $1 million. The grant is used to adapt
our technology to monitor glucose levels of children and aging populations with
diabetes.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000.
General. Net loss available to common stockholders decreased to $1.6
million during the three months ended September 30, 2001 as compared to $2.4
million during the same period in 2000 due to a decrease in expenses, primarily
as a result of Abbott funding our continuous glucose monitoring product research
during the third quarter in 2001 and a decrease in legal fees. We expect net
losses to continue.
Revenue. We have historically received the majority of our revenue from
development milestone payments from one or more of our strategic partners. We
began shipping our infant jaundice product, the BiliChek(TM) to distributors
outside of the United States and Canada during the quarter ended June 30, 1998,
and were able to ship in the United States after FDA approval was received at
the end of the first quarter of 1999. In March 2000, we shipped the first
Accu-Check(TM) D-Tector(TM) units, which have been used in clinical trials.
Product revenue increased to $570,000 for the quarter ended September 30, 2001
from $529,000 for the same period in 2000. Product revenue is higher for the
2001 quarter than for the comparable period in 2000, due to the increase in
revenues from our BiliChek products. We did achieve a milestone in September,
2001 in our continuous glucose monitoring program from our collaborative
partner, Abbott. Abbott had the right, as part of an agreement, to pay this
milestone by purchasing common stock, which it elected to do, so there was not
revenue recognition due to this milestone.
Cost of Sales. Cost of sales decreased to $410,000 for the three months
ended September 30, 2001 from $499,000 during the same period in 2000. This
decrease is due to excess capacity production charges, which were lower for this
period than in 2000, and less excess capacity, partially offset by cost of sales
increases directly related to increased product revenue.
Research and Development Expenses. Research and development expenses
decreased to $781,000 for the three months ended September 30, 2001 compared to
$1.4 million for the same period in 2000. The decrease in research and
development expenses was primarily due to Abbott's reimbursement of expenses
associated with our continuous glucose monitoring product. 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.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$337,000 during the three months ended September 30, 2001 from $239,000 during
the same period in 2000, due mainly to increased marketing research on current
and potential products. Marketing expenses are expected to increase in the
future as BiliChek sales expand geographically.
General and Administrative Expenses. General and administrative
expenses decreased to $675,000 during the three months ended September 30, 2001
compared to the $900,000 incurred during the same period in 2000. The decrease
is primarily due to decreased legal fees. General and administrative expenses
are expected to increase in the future.
Net Interest and Other Income. Net interest and other income decreased
to $106,000 during the three months ended September 30, 2001 from $138,000
during the same period in 2000. This decrease is due to much lower interest
rates on higher cash balances for the 2001 quarter versus the 2000 quarter.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000.
General. Net loss available to common stockholders decreased to $5.4
million during the nine months ended September 30, 2001 as compared to $6.4
million during the same period in 2000 primarily due to Abbott's reimbursement
of expenses associated with our continuous glucose monitoring technology.
Revenue. We have historically received the majority of our revenue from
development milestone payments from one or more of our strategic partners. We
began shipping the BiliChek to distributors outside of the United States and
Canada during the quarter ended June 30, 1998, and were able to ship in the
United States after FDA approval was received at the end of the first quarter of
1999. In March 2000, we shipped the first Accu-Check D-Tector units, which have
been used in clinical trials. Product revenue increased to $1.7 million for the
nine months ended September 30, 2001 from $1.6 million for the same period in
2000. Product revenue increased for the nine months of 2001 from the comparable
period of 2000 even though we did not have any 2001 revenues from our Accu-Check
D-Tector units which were used in clinical trials and totaled $225,000 in 2000.
There were increases in BiliChek sales, transdermal sales and licensing revenue.
Collaborative agreements revenue, which is event-based rather than sales-based,
decreased to $100,000 during the nine months ended September 30, 2001 from
$749,000 during the same period in 2000. The milestones accomplished in the
first nine months of 2000 were on our continuous glucose monitoring device, a
smaller milestone received on our Bilirubin device, and a milestone received on
our Accu-Check D-Tector device.
Cost of Sales. Cost of sales remained relatively constant at $1.4
million for the nine months ended September 30, 2001 and for the same period in
2000. While the cost of sales increased in direct relationship to the increase
in the BiliCheck product line sales, it was offset by the decrease in cost of
goods related to sales of Accu-Check D-Tector units to Roche in 2000.
Research and Development Expenses. Research and development expenses
decreased to $3.0 million for the nine months ended September 30, 2001 compared
to $4.6 million for the same period in 2000. The research and development
expenses primarily relate to research in glucose monitoring and cancer
detection, including costs to conduct clinical trials, salaries, consulting and
contracted research for our developmental products. Expenditures decreased
mainly due to the reimbursement from Abbott for expenditures relating to our
continuous glucose monitoring product.
Sales and Marketing Expenses. Sales and marketing expenses remained
relatively constant at $700,000 during the nine months ended September 30, 2001
compared to the same period in 2000.
General and Administrative Expenses. General and administrative
expenses remained relatively constant at $2.1 million during the nine months
ended September 30, 2001 and the same period in 2000.
Net Interest and Other Income. Net interest and other income decreased
to $184,000 during the nine months ended September 30, 2001 from $329,000 during
the same period in 2000. This decrease is due to much lower interest rates on
higher balances for the 2001 period versus the 2000 period.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through
private sales of debt and private and public sales of our equity securities.
From October 27, 1992 (inception) through September 30, 2001, we received
approximately $48.0 million in proceeds from sales of our debt and equity
securities. At September 30, 2001, we had cash of approximately $9.5 million and
working capital of approximately $9.7 million. We completed an initial public
offering of our common stock on July 7, 1997, which resulted in net proceeds
received by us, before expenses related to the transaction, of approximately
$14.0 million. We issued $5.25 million of redeemable convertible preferred stock
in November 1999 in conjunction with the execution of amendment to our agreement
with Abbott. We issued common stock in a private placement in February 2000,
which resulted in gross proceeds of $5.0 million. We issued common stock and
warrants in two private placements in June 2001, which resulted in net proceeds
of approximately $11.2 million. We issued common stock to Abbott in September
2001 in a private placement, which resulted in gross proceeds of $1 million, as
discussed above. See "Quarter Overview."
Our major cash flows in the nine months ended September 30, 2001
consisted of cash out-flow of $5.3 million from operations and $61,000 in
additions to property and equipment, and cash inflow of $11.3 million from sales
of our common stock.
In addition to funds that we expect to be provided by our collaborative
partners and the funds we recently raised, we may be required to raise
additional funds through public or private financing, additional collaborative
relationships or other arrangements. We believe our existing and available
capital resources plus anticipated milestone payments will be sufficient to
satisfy our funding requirements through 2002.
We currently invest our excess cash balances primarily in short-term,
investment-grade, interest-bearing obligations or direct or guaranteed
obligations of the U.S. government until such funds are utilized in operations.
Substantial capital will be required to develop our products, including
completing product testing and clinical trials, obtaining all required United
States and foreign regulatory approvals and clearances, and commencing and
scaling up manufacturing and marketing our products. Any failure of our
collaborative partners to fund our development expenditures would have a
material adverse effect on our business, financial condition and results of
operations.
RISK FACTORS
The following risk factors should be considered carefully in addition
to the other information presented in this report. This report contains forward
looking statements that involve risks and uncertainties. Our actual results may
differ significantly from the results discussed in the forward looking
statements. Factors that might cause such differences include, but are not
limited to, the following risk factors:
WE HAVE A SHORT OPERATING HISTORY, WHICH MAKES IT DIFFICULT FOR YOU TO EVALUATE
OUR BUSINESS.
Because limited historical information is available on our operations,
it will be difficult for you to evaluate our business. Our prospects must be
considered in light of the substantial risks, expenses, uncertainties and
difficulties encountered by entrants into the medical device industry, which is
characterized by increasing intense competition and a high failure rate.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES TO CONTINUE FOR SEVERAL YEARS.
We have never been profitable, and we have had operating losses since
our inception. We expect our operating losses to continue as we continue to
expend substantial resources to complete development of our products, obtain
regulatory clearances or approvals, build our marketing, sales, manufacturing
and finance organizations, and conduct further research and development. To
date, we have engaged primarily in research and development efforts. The further
development and commercialization of our products will require substantial
development, regulatory, sales and marketing, manufacturing and other
expenditures. We have only generated limited revenues from product sales. Our
accumulated deficit was about $37.4 million at September 30, 2001.
OUR ABILITY TO SELL OUR PRODUCTS IS CONTROLLED BY GOVERNMENT REGULATIONS, AND WE
MAY NOT BE ABLE TO OBTAIN ANY NECESSARY CLEARANCES OR APPROVALS.
The design, manufacturing, labeling, distribution and marketing of our
products are and will be subject to extensive and rigorous government
regulation, which can be expensive and uncertain and can cause lengthy delays
before we can begin selling our products.
IN THE UNITED STATES, THE FOOD AND DRUG ADMINISTRATION'S ACTIONS COULD
DELAY OR PREVENT OUR ABILITY TO SELL OUR PRODUCTS, WHICH WOULD
ADVERSELY AFFECT OUR GROWTH AND STRATEGY PLANS.
In order for us to market our products in the United States, we must
obtain clearance or approval from the Food and Drug Administration, or FDA. We
cannot be sure:
- that we or our collaborative partners will make timely filings
with the FDA;
- that the FDA will act favorably or quickly on these
submissions;
- that we will not be required to submit additional information
or perform additional clinical studies;
- that we would not be required to submit an application for
premarket approval, rather than a premarket notification
submission as described below; or
- that other significant difficulties and costs will not be
encountered to obtain FDA clearance or approval.
The premarket approval process is more rigorous and lengthier than
the clearance process for premarket notifications; it can take several years
from initial filing and require the submission of extensive supporting data and
clinical information. For example, Roche previously filed a premarket
notification for our diabetes detection product, which was withdrawn when the
FDA indicated that this product should be submitted for premarket approval,
including submission of clinical study data. We do not have any other premarket
notifications or premarket approval applications pending, but we currently
believe our other cancer detection product and our glucose monitoring products
will require submission of applications for premarket approval.
The FDA may impose strict labeling or other requirements as a condition
of its clearance or approval, any of which could limit our ability to market our
products. Further, if we wish to modify a product after FDA clearance of a
premarket notification or approval of a premarket approval application,
including changes in indications or other modifications that could affect safety
and efficacy, additional clearances or approvals will be required from the FDA.
Any request by the FDA for additional data, or any requirement by the FDA that
we conduct additional clinical studies or submit to the more rigorous and
lengthier premarket approval process, could result in a significant delay in
bringing our products to market and substantial additional research and other
expenditures. Similarly, any labeling or other conditions or restrictions
imposed by the FDA on the marketing of our products could hinder our ability to
effectively market our products. Any of the above actions by the FDA could delay
or prevent altogether our ability to market and distribute our products.
Further, there may be new FDA policies or changes in FDA policies that could be
adverse to us.
IN FOREIGN COUNTRIES, INCLUDING EUROPEAN COUNTRIES, WE ARE ALSO SUBJECT
TO GOVERNMENT REGULATION, WHICH COULD DELAY OR PREVENT OUR ABILITY TO
SELL OUR PRODUCTS IN THOSE JURISDICTIONS.
In order for us to market our products in Europe and some other
international jurisdictions, we and our distributors and agents must obtain
required regulatory registrations or approvals. We must also comply with
extensive regulations regarding safety, efficacy and quality in those
jurisdictions. We may not be able to obtain any required regulatory
registrations or approvals, or we may be required to incur significant costs in
obtaining or maintaining such regulatory registrations or approvals we receive.
Delays in obtaining any registrations or approvals required to market our
products, failure to receive these registrations or approvals, or future loss of
previously obtained registrations or approvals would limit our ability to sell
our products internationally. For example, international regulatory bodies have
adopted various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. These regulations vary from country to country. In order to sell
our products in Europe, we must maintain ISO 9001 certification and CE mark
certification, which is an international symbol of quality and compliance with
applicable European medical device directives. Failure to receive or maintain
ISO 9001 certification of meeting standards of quality or CE mark certification
or other international regulatory approvals would prevent us from selling in
Europe.
EVEN IF WE OBTAIN CLEARANCE OR APPROVAL TO SELL OUR PRODUCTS, WE ARE
SUBJECT TO ONGOING REQUIREMENTS AND INSPECTIONS THAT COULD LEAD TO THE
RESTRICTION, SUSPENSION OR REVOCATION OF OUR CLEARANCE.
We and our collaborative partners will be required to adhere to
applicable FDA regulations regarding good manufacturing practice, which include
testing, control, and documentation requirements. We are subject to similar
regulations in foreign countries. Ongoing compliance with good manufacturing
practice and other applicable regulatory requirements will be strictly enforced
in the United States through periodic inspections by state and federal agencies,
including the FDA, and in international jurisdictions by comparable agencies.
Failure to comply with these regulatory requirements could result in, among
other things, warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure to
obtain premarket clearance or premarket approval for devices, withdrawal of
approvals previously obtained, and criminal prosecution. The restriction,
suspension or revocation of regulatory approvals or any other failure to comply
with regulatory requirements would limit our ability to operate and could
increase our costs.
SINCE WE WILL RELY PRINCIPALLY ON OUR COLLABORATIVE PARTNERS TO OBTAIN AND
MAINTAIN OUR REGULATORY APPROVALS, ANY FAILURE OF OUR COLLABORATIVE PARTNERS TO
PERFORM COULD HURT OUR OPERATIONS.
Because they have primary responsibility for regulatory compliance, the
inability or failure of our collaborative partners to comply with the varying
regulations, or the imposition of new regulations, would limit our ability to
produce and sell our products. We will solely rely upon Abbott, Roche and
Respironics to obtain United States and international regulatory approvals and
clearances for our glucose monitoring, diabetes detection and infant jaundice
products. We and Welch Allyn will jointly seek regulatory approvals for our
cervical cancer detection product, but we do not have control over the timing or
amount of resources Welch Allyn devotes to these activities.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO OBTAIN AND PROTECT THE PROPRIETARY
INFORMATION ON WHICH WE BASE OUR PRODUCTS.
Our success depends in large part upon our ability to establish and
maintain the proprietary nature of our technology through the patent process, as
well as our ability to license from others patents and patent applications
necessary to develop our products. If any of our patents are successfully
challenged, invalidated or circumvented, or our right or ability to manufacture
our products were to be proscribed or limited, our ability to continue to
manufacture and market our products could be adversely affected. In addition to
patents, we rely on trade secrets and proprietary know-how, which we seek to
protect, in part, through confidentiality and proprietary information
agreements. The other parties to these agreements may breach these provisions,
and we may not have adequate remedies for any breach. Additionally, our trade
secrets could otherwise become known to or be independently developed by
competitors.
We have been issued, or have rights to, 36 U.S. patents (including
these under license). In addition, we have filed for, or have rights to, 35 U.S.
patents (including those under license) that are still pending. One or more of
the patents we hold directly or licensed from third parties, including those for
the disposable components to be used with our glucose monitoring and infant
jaundice products, may be successfully challenged, invalidated or circumvented,
or we may otherwise be unable to rely on these patents. These risks are also
present for the process we use or will use for manufacturing our products. In
addition, our competitors, many of whom have substantial resources and have made
substantial investments in competing technologies, may apply for and obtain
patents that prevent, limit or interfere with our ability to make, use and sell
our products, either in the United States or in international markets.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. In
addition, the United States Patent and Trademark Office may institute litigation
or interference proceedings. The defense and prosecution of intellectual
property suits, Patent and Trademark Office proceedings and related legal and
administrative proceedings are both costly and time consuming. Moreover, we may
need to litigate to enforce our patents, to protect our trade secrets or
know-how, or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation or interference proceedings
involving us may require us to incur substantial legal and other fees and
expenses and may require some of our employees to devote all or a substantial
portion of their time to the proceedings. An adverse determination in the
proceedings could subject us to significant liabilities to third parties,
require us to seek licenses from third parties or prevent us from selling our
products in some or all markets. We may not be able to reach a satisfactory
settlement of any dispute by licensing necessary patents or other intellectual
property. Even if we reached a settlement, the settlement process may be
expensive and time consuming, and the terms of the settlement may require us to
pay substantial royalties. An adverse determination in a judicial or
administrative proceeding or the failure to obtain a necessary license could
prevent us from manufacturing and selling our products.
OUR REVENUES WILL BE PRIMARILY DERIVED FROM SALES OF OUR PRODUCTS BY THIRD
PARTIES OVER WHOM WE HAVE LIMITED INFLUENCE, AND THEY MAY NOT BE ABLE TO
GENERATE SUFFICIENT SALES REVENUES TO SUSTAIN OUR GROWTH AND STRATEGY PLANS.
Although we have historically received the majority of our revenue from
development milestone payments, the revenues that we expect to receive from each
of our collaborative partners in the future depend primarily on sales of our
products, most of which are still in development. We may not be able to
successfully commercialize the products we are developing. Even if we do, we,
together with our collaborative partners, may not 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. The majority of our revenues and profits are expected to be
derived from royalties and manufacturing profits that we will receive from
Abbott, Roche and Respironics resulting from sales of the products we are
developing with each of these companies. Another significant portion of our
revenues and profits are expected to be derived from the sale of cervical cancer
detection products and we would share with Welch Allyn in the revenues generated
from sales of these products to distributors and end users.
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 these discounts or rebates to
expand the use of their products, which increases the market for the disposable
strips they sell for use with their products. Because Abbott has discretion to
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 we earn for these sales will be less. In this case,
royalties we earn on sales of our disposable cartridges may be less than the
amounts we would have earned had our glucose monitoring devices not been sold at
a discount.
BECAUSE OUR PRODUCTS, WHICH USE DIFFERENT TECHNOLOGY THAN OTHER MEDICAL DEVICES,
ARE OR WILL BE NEW TO THE MARKET, WE MAY NOT BE SUCCESSFUL IN LAUNCHING OUR
PRODUCTS AND OUR OPERATIONS AND GROWTH WOULD BE ADVERSELY AFFECTED.
Our products are based on new methods of glucose monitoring, diabetes
detection, infant jaundice and cervical cancer detection. If they do not achieve
significant market acceptance, our sales will be limited and our financial
condition may suffer. Physicians and individuals may not recommend or use our
products unless they determine that these products are an attractive alternative
to current blood-based or other tests that have a long history of safe and
effective use. To date, our products have been used by only a limited number of
people, and few independent studies regarding our products have been published.
The lack of independent studies limits the ability of doctors or consumers to
compare our products to conventional products.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE MEDICAL DEVICE
INDUSTRY, OUR FUTURE GROWTH AND OPERATING RESULTS WILL SUFFER.
The medical device industry in general, and the markets in which we
expect to offer products in particular, are intensely competitive. Many of our
competitors have substantially greater financial, research, technical,
manufacturing, marketing and distribution resources than we do and have greater
name recognition and lengthier operating histories in the health care industry.
We may not be able to effectively compete against these and other competitors.
For example, a number of competitors are currently marketing traditional glucose
monitors. These monitors are widely accepted in the health care industry and
have a long history of accurate and effective use. Further, if our products are
not available at competitive prices, health care administrators who are subject
to increasing pressures to reduce costs may not elect to purchase them. Also, a
number of companies have announced that they are developing products that permit
non-invasive and less invasive glucose monitoring. Accordingly, competition in
this area is expected to increase.
Furthermore, our competitors may succeed in developing, either before
or after the development and commercialization of our products, devices and
technologies that permit more efficient, less expensive non-invasive and less
invasive glucose monitoring, diabetes detection, infant jaundice or cancer
detection. It is also possible that one or more pharmaceutical or other health
care companies will develop therapeutic drugs, treatments or other products that
will substantially reduce the prevalence of diabetes or infant jaundice or
otherwise render our products obsolete.
In addition, one or more of our collaborative partners may, 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 products. This would limit our ability to compete with others.
WE HAVE LITTLE MANUFACTURING EXPERIENCE, WHICH COULD LIMIT OUR GROWTH.
We do not have manufacturing experience that would enable us to make
products in the volumes that would be necessary for us to achieve significant
commercial sales. In addition, we may not be able to establish and maintain
reliable, efficient, full scale manufacturing at commercially reasonable costs,
in a timely fashion. Difficulties we encounter in manufacturing scale-up, or our
failure to implement and maintain our manufacturing facilities in accordance
with good manufacturing practice regulations, international quality standards or
other regulatory requirements, could result in a delay or termination of
production. To date, our manufacturing activities have only included our
BiliChek and BiliCal products, as well as the Accu-Chek D-Tector diabetes
detection product on a limited scale. If we obtain the necessary regulatory
approvals to market the diabetes detection product, we will undertake to
manufacture this product in significant volumes. Companies often encounter
difficulties in scaling up production, including problems involving production
yield, quality control and assurance, and shortages of qualified personnel.
SINCE WE RELY ON SOLE-SOURCE SUPPLIERS FOR SEVERAL OF OUR PRODUCTS, ANY FAILURE
OF THOSE SUPPLIERS TO PERFORM WOULD HURT OUR OPERATIONS.
Several of the components used in our products are available from only
one supplier, and substitutes for these components are infeasible or would
require substantial modifications to our products. Any significant problem
experienced by one of our sole source suppliers may result in a delay or
interruption in the supply of components to us until that supplier cures the
problem or an alternative source of the component is located and qualified. Any
delay or interruption would likely lead to a delay or interruption in our
manufacturing operations. 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. For our products which require premarket
approval, the inclusion of substitute components could require us to qualify the
new supplier with the appropriate government regulatory authorities.
Alternatively, for our products which qualify for premarket notification, the
substitute components must meet our product specifications.
OUR LIMITED MARKETING AND SALES EXPERIENCE MAKES OUR INTERNATIONAL REVENUE
UNCERTAIN.
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 five
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. We may not be able to
successfully develop an effective marketing and sales force, and we may not be
able to enter into and maintain marketing and sales agreements with third
parties on acceptable terms. If we develop our own marketing and sales
capabilities, we will compete with other companies that have experienced and
well-funded marketing and sales operations. If we enter into a marketing
arrangement with a third party for the marketing and sale of our infant jaundice
product outside the United States and Canada, any revenues we would receive 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 for
any revenues to be received from our glucose monitoring and diabetes detection
products. The efforts of these third parties for the marketing and sale of our
products may not be successful.
BECAUSE WE OPERATE IN AN INDUSTRY WITH SIGNIFICANT PRODUCT LIABILITY RISK, AND
WE HAVE NOT SPECIFICALLY INSURED AGAINST THIS RISK, WE MAY BE SUBJECT TO
SUBSTANTIAL CLAIMS AGAINST OUR PRODUCTS.
The development, manufacture and sale of medical products entail
significant risks of product liability claims. We currently have no product
liability insurance coverage beyond that provided by our general liability
insurance. Accordingly, we may not be adequately protected from any liabilities,
including any adverse judgments or settlements, we might incur in connection
with the development, clinical testing, manufacture and sale of our products. A
successful product liability claim or series of claims brought against us that
results in an adverse judgment against or settlement by us in excess of any
insurance coverage could seriously harm our financial condition or reputation.
In addition, product liability insurance is expensive and may not be available
to us on acceptable terms, if at all.
IF WE CANNOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED, WE WILL NOT BE ABLE TO
IMPLEMENT OUR BUSINESS PLAN.
We will require substantial additional capital to develop our products,
including completing product testing and clinical trials, obtaining all required
regulatory approvals and clearances, beginning and scaling up manufacturing, and
marketing our products. Any failure of our collaborative partners to fund our
capital expenditures, or our inability to obtain capital through other sources,
would limit our ability to grow and operate as planned. Under our collaborative
arrangements with Abbott, Roche, Respironics and Welch Allyn, these
collaborative partners will either directly undertake the activities to develop
our products or will fund a substantial portion of these expenditures. The
obligations of our collaborative partners to fund our expenditures is largely
discretionary and depends on a number of factors, including our ability to meet
specified milestones in the development and testing of our products. We may not
be able to meet these milestones, or our collaborative partners may not continue
to fund our expenditures.
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
through 2002, but may not be sufficient to fund our operations to the point of
commercial introduction of either of our glucose monitoring products or our
cervical cancer product. Any required additional funding may not be available on
terms attractive to us, or at all. To the extent we cannot obtain additional
funding, our ability to continue to develop and introduce products to market
will be limited. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants that would limit how we conduct our business or finance our
operations.
THE AVAILABILITY OF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS IS UNCERTAIN,
WHICH MAY LIMIT CONSUMER USE AND THE MARKET FOR OUR PRODUCTS.
In the United States and elsewhere, sales of medical products are
dependent, in part, on the ability of consumers of these products to obtain
reimbursement for all or a portion of their cost from third-party payors, such
as government and private insurance plans. Any inability of patients, hospitals,
physicians and other users of our products to obtain sufficient reimbursement
from third-party payors for our products, or adverse changes in relevant
governmental policies or the policies of private third-party payors regarding
reimbursement for these products, could limit our ability to sell our products
on a competitive basis. We are unable to predict what changes will be made in
the reimbursement methods used by third-party health care payors. Moreover,
third-party payors are increasingly challenging the prices charged for medical
products and services, and some health care providers are gradually adopting a
managed care system in which the providers contract to provide comprehensive
health care services for a fixed cost per person. Patients, hospitals and
physicians may not be able to justify the use of our products by the attendant
cost savings and clinical benefits that we believe will be derived from the use
of our products, and therefore may not be able to obtain third-party
reimbursement.
Reimbursement and health care payment systems in international markets
vary significantly by country and include both government sponsored health care
and private insurance. We may not be able to obtain approvals for reimbursement
from these international third-party payors in a timely manner, if at all. Any
failure to receive international reimbursement approvals could have an adverse
effect on market acceptance of our products in the international markets in
which approvals are sought.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN SCIENTIFIC, TECHNICAL,
MANAGERIAL AND FINANCE PERSONNEL.
Our ability to operate successfully and manage our future growth
depends in significant part upon the continued service of key scientific,
technical, managerial and finance personnel, as well as our ability to attract
and retain additional highly qualified personnel in these fields. We may not be
able to attract and retain key employees when necessary, which would limit our
operations and growth. None of our key employees have an employment contract
with us, nor are any of these employees, except our chief executive officer,
covered by key person or similar insurance. In addition, if we are able to
successfully develop and commercialize our products, we will need to hire
additional scientific, technical, marketing, managerial and finance personnel.
We face intense competition for qualified personnel in these areas, many of whom
are often subject to competing employment offers.
WE ARE CONTROLLED BY OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATED
ENTITIES.
Our directors, executive officers and entities affiliated with them
beneficially owned an aggregate of about 23% of our outstanding common stock as
of September 30, 2001. 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.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 9, 2000, we filed a Demand for Arbitration of disputes arising
under our license agreement with Altea Technologies, Inc., Non-Invasive
Monitoring Company and our former vice president, Jonathan Eppstein, who is also
a principal in Altea and Non-Invasive Monitoring. We sought an interpretation of
portions of the license agreement relating to our obligation to assign future
intellectual property rights and relief and damages for these and other issues.
Altea had sent two letters to us purporting to give notice of our material
breach of the license agreement for failure to assign specified intellectual
property rights to Altea or Non-Invasive Monitoring and to participate in a
joint development program and other items. Final arguments were held October 23,
2000 and a decision was entered on November 7, 2000 when the arbitration panel
denied the claims for damages by both parties. They also denied the claims by
Altea and Non-Invasive Monitoring that we were in breach due to our failure to
continue a program of joint development and that we had 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 and Non-Invasive
Monitoring 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.
On December 11, 2000, Altea and Non-Invasive Monitoring filed a new
Demand for Arbitration of certain disputes arising under the licensing agreement
with us. Altea and Non-Invasive Monitoring sought to require us to engage in
future agreements with Altea for joint development, to obtain assignment of
additional patents, to have us held liable for specified actions by a
subcontractor and to receive a finding that commercialization has not occurred.
Subsequently, we filed a Motion to Dismiss or Limit Issues for Arbitration. On
March 13, 2001, the panel issued an order dismissing the issue regarding
commercialization as premature because the alleged deadline for
commercialization had not yet occurred. Almost four months later, on August 2,
2001, the Panel issued an order setting the date for the arbitration hearing in
early 2002. The Panel further stated that as of December 31, 2002, the Panel
will consider the commercialization issue, although additional discovery may be
required in early 2002. We believe that Altea's claims are without merit but
intend to abide by the decision of this second arbitration panel as to the
proper scope of our duty to assign future intellectual property rights under the
license agreement and to participate in a joint development program.
On August 16, 2000, we filed a complaint for Declaratory Judgment
against Ampersand Medical Corp. seeking a declaration that we have not
misappropriated or improperly disclosed any alleged confidential information or
alleged trade secrets disclosed to us by Ampersand. Ampersand subsequently filed
a counter-suit in Illinois against us, alleging that we had misappropriated
trade secrets belonging to Ampersand. The parties agreed to mediation earlier
this year, and the counter-suit filed in Illinois by Ampersand was withdrawn but
could be refiled in Gwinnett County, Georgia if mediation was unsuccessful. In
July 2001, Ampersand terminated mediation discussions and the parties are now
moving to trial, expected to be held in February 2002. We believe Ampersand's
claims are without merit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 3, 2001, we sold 126,199 shares of our common stock to
Abbott Laboratories for gross proceeds of $1 million. These sales were made in
reliance upon the exemption contained in Section 4(2) from the registration
provisions of the Securities Act of 1933 in reliance upon the representations of
the purchaser.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 30, 2001, we held a special meeting of stockholders to
approve the sale of securities to entities associated with SAFECO Corporation
and Special Situations Fund, which in total exceeded 20% of the common stock
outstanding prior to the transaction.
The results of the votes were to approve the transaction; 99.8% of the
votes cast eligible to vote on the transaction, voting for the approval. The
total shares voted was 6,879,762, which was 66% of the shares outstanding. Of
those shares voted, 4,984,129 were eligible to vote on the transactions. These
eligible shares were voted as follows:
Voting for 4,974,837
Voting against 9,292
Abstained 0
---------
4,984,129
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.3* Amendment dated September 4, 2001 to the Research &
Development License Agreement between Abbott Laboratories and
SpectRx (dated October 10, 1996)
</Table>
- ----------------
* Confidential treatment requested for portions of this agreement.
(b) Reports on Form 8-K
The registrant filed a Form 8-K on September 7, 2001 announcing under
Item 5 the amendment of the collaborative agreement between SpectRx and Abbott
Laboratories, as well as the results of a special stockholders meeting.
The registrant also filed a Form 8-K on September 20, 2001 announcing
under Item 5 that its Board of Directors had approved a stock repurchase program
for up to $1.0 million of our common stock.
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, 2001 By: /S/ THOMAS H. MULLER, JR.
----------------------------------------------------
Thomas H. Muller, Jr.
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
EXHIBIT INDEX
The exhibits listed below are filed herewith.
EXHIBIT
NO. DESCRIPTION
- -------- -----------
10.3* Amendment dated September 4, 2001 to the Research &
Development License Agreement between Abbott Laboratories and
SpectRx (dated October 10, 1996)
- --------
* Confidential treatment requested for portions of this agreement.