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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, 1998
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, 1998, was 8,005,645.
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SPECTRX, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION...............................................................3
ITEM 1. FINANCIAL STATEMENTS.........................................................
CONSOLIDATED BALANCE SHEETS -
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998.............................3
CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998..............4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998........................5
NOTES TO CONSOLIDATED 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 N/A
PART II. OTHER INFORMATION..................................................................26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ..............................26
ITEM 5. OTHER INFORMATION..........................................................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................26
SIGNATURES..................................................................................26
EXHIBIT INDEX...............................................................................28
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECTRX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SPECTRX
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
DECEMBER 31, 1998
1997 (unaudited)
------------ -------------
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 12,449 $ 6,531
Accounts Receivable 554 361
Inventory 218 362
Other Current Assets 117 147
------------ ------------
Total Current Assets 13,338 7,401
PROPERTY & EQUIPMENT, (net of accumulated depreciation of $507 930 848
and $720 in 1997 and 1998 respectively)
------------ ------------
OTHER ASSETS, NET
Other Assets 289 279
Due from related parties 442 463
------------ ------------
Total Other Assets 731 742
------------ ------------
TOTAL ASSETS $ 14,999 $ 8,991
============ ============
LIABILITIES & STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable $ 515 $ 155
Accrued Liabilities 758 545
------------ ------------
Total Current Liabilities 1,273 700
CONVERTIBLE NOTE $ 250 $ 0
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock 8 8
Additional paid-in-capital 25,372 25,739
Deferred comp (210) (147)
Accumulated deficit (12,148) (17,278)
Notes Rec. from officers (48) (31)
------------ ------------
Total Stkhldrs' equity 12,974 8,291
------------ ------------
TOTAL LIABILITIES & EQUITY $ 14,999 $ 8,991
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SPECTRX, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1998 1997 1998
-------- -------- -------- --------
REVENUE
Product Sales $ 0 $ 194 $ 0 $ 483
Collaborative agreements 125 183 401 333
COST OF SALES 0 382 0 1,093
-------- -------- -------- --------
GROSS MARGIN 125 (5) 401 (277)
EXPENSES
Research & development 519 1,063 1,807 3,038
Sales & marketing 191 232 479 804
General & administrative 845 564 2,087 1,715
-------- -------- -------- --------
Total 1,555 1,859 4,373 5,557
-------- -------- -------- --------
Operating loss (1,430) (1,864) (3,972) (5,834)
OTHER EXPENSE (INCOME) 31 (633) 38 (325)
INTEREST EXPENSE (INCOME) (189) (96) (277) (379)
-------- -------- -------- --------
NET LOSS $ (1,272) $ (1,135) $ (3,733) $ (5,130
======== ======== ======== ========
NET LOSS PER SHARE
BASIC $ (0.17) $ (0.14) $ (0.82) $ (0.65)
DILUTED $ (0.17) $ (0.14) $ (0.82) $ (0.65)
WEIGHTED COMMON EQUIVALENT SHARES
OUTSTANDING
BASIC 7,388 8,001 4,544 7,897
DILUTED 7,388 8,001 4,544 7,897
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SPECTRX, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
---------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ....................................................................... $ (3,733) $ (5,130)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 192 277
Gain on Investment - FluorRx ........................................ 0 (329)
Amortization of deferred compensation ................................. 57 63
Changes in assets and liabilities:
Accounts receivable ................................................ (51) 193
Inventory .......................................................... 0 (144)
Other assets ....................................................... (251) (98)
Due from related parties ........................................... (22) (22)
Accounts payable ................................................... 68 (360)
Accrued liabilities ................................................ 350 142
---------- -----------------
Total adjustments .............................................. 343 (278)
Net cash used in operating activities .......................... (3,390) (5,408)
---------- -----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment ............................... (472) (280)
Additions to purchased technology ......................................... (36)
---------- -----------------
Net cash used in investing activities .......................... (508) (280)
---------- -----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock (net of issuance costs) .......................... 13,153 95
Exercise of stock warrants ................................................ 694 0
---------- -----------------
Net cash provided by financing activities ...................... 13,847 95
---------- -----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................................................... 9,949 (5,593)
CASH AND CASH EQUIVALENTS, beginning of period ................................. 4,721 12,124
---------- -----------------
---------- -----------------
CASH AND CASH EQUIVALENTS, end of period ....................................... $ 14,670 $ 6,531
========== =================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING & FINANCING ACTIVITIES:
Conversion of Promissory note to common stock .................................. $ 0 $ 289
========== =================
Conversion of preferred stock to common stock .................................. $ 5 $ 0
==========
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SPECTRX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by the company without audit. 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 consolidated financial position as
of September 30, 1998, the consolidated results of operations for the three
months and for the nine months ended September 30, 1997 and 1998, and the
consolidated cash flows for the nine months ended September 30, 1997 and 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accounting policies of the Company continue
unchanged from December 31, 1997. The Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these financial statements be read in conjunction with the December 31, 1997
financial statements and notes thereto included in the Company's Annual Report
on Form 10K.
The results of operations for the three months and nine months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full fiscal year.
2. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" effective for fiscal years ending after December 15,
1997. The Company adopted the new guidelines for the calculation and
presentation of earnings per share and all prior periods have been restated.
Basic earnings per share is based upon the weighted average number of shares
outstanding. Diluted earnings per share is based upon the weighted average
number of shares outstanding and the dilutive effect of common stock equivalent
shares ("CSEs") issuable upon the conversion of convertible preferred stock
(using the if-converted method) and stock options and warrants (using the
treasury stock method).
Pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin ("SAB") No. 83, common stock, and CSEs issued at prices
below the public offering price during the 12-month period prior to the Offering
were included in the calculation as if they were outstanding for all periods
presented, regardless of whether they are dilutive. In February 1998, SEC staff
released SAB No. 98 on computations of earnings per share. SAB No. 98 replaces
SAB No. 83 in its entirety and requires, among other items, that only "nominal
issuances" of common stock be reflected in the calculation as if they were
outstanding for all periods presented and that the calculation be made in
accordance with Statement No. 128 for periods subsequent to the Offering.
Accordingly, for all periods presented, common stock equivalents have been
excluded from diluted weighted average shares outstanding as their impact was
antidilutive.
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3. FLUORRX
In December 1996, SpectRx (the "Company") sublicensed certain
technology to and acquired a 65% interest in FluorRx, a corporation organized
for the purpose of developing and commercializing technology related to
fluorescence spectroscopy. The Company'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. The issuance of additional
preferred stock reduced the Company's ownership (on an as converted basis) to
47%. Through December 1997, the Company fully consolidated the losses of
FluorRx, which on a cumulative basis amounted to $690,000. The losses were fully
consolidated as the Company represented FluorRx's sole source of financial
support and substantially all the capital at risk related to investments and
advances from the Company. Due to the additional funding in December 1997 and
March 1998, the Company recognized 53% of the loss during the six months ended
June 30, 1998. Due to the subsequent funding in August 1998, the Company's
ownership decreased to 47%. Effective with the decrease in ownership, the
Company began accounting for its investment in FluorRx under the equity method
of accounting. In connection with the change in accounting from consolidation to
the equity method, the Company adjusted its investment in FluorRx to $0 which
resulted in other income of $635,000.
4. COMPREHENSIVE INCOME
The Company currently has no other Comprehensive Income items as
defined by SFAS No. 130.
5. DEVELOPMENT STAGE ENTERPRISE
In prior periods, the Company was considered a development stage
company, as defined by SFAS No.7. During the three months ended September 30,
1998, the Company exited the development stage due to the manufacture and sale
of its infant jaundice product in the second and third quarters of 1998.
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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 fact are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or
anticipated results, including those set forth 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 the Company's Financial
Statements and Notes thereto included elsewhere in this report.
OVERVIEW
SpectRx was incorporated on October 27, 1992, and since that date has
raised capital through the sale of preferred stock, issuance of debt securities,
the public sales of common stock and funding from collaborative arrangements.
Following its initial funding in early 1993, the Company immediately began
research and development activities with the objective of commercializing less
invasive diagnostic screening and monitoring products. As part of its business
strategy, the Company has selectively established arrangements with leading
medical device companies for the development, commercialization and introduction
of its products. Since inception, the Company has entered into collaborative
arrangements with Abbott Laboratories ("Abbott"), Roche Diagnostics BMC
("Roche")and Respironics, Inc. ("Respironics") for its glucose monitoring,
diabetes screening and infant jaundice products, respectively. In December 1996,
the Company sublicensed certain technology to and acquired a 65 % interest in
FluorRx, Inc., a Delaware corporation formed for the purpose of developing and
commercializing technology related to fluorescence spectroscopy. At September
30, 1998, as a result of subsequent financing, SpectRx's interest in FluorRx was
47%.
The Company has a limited operating history upon which its prospects
can be evaluated. Such prospects must be considered in light of the substantial
risks, expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. The Company has experienced
operating losses since its inception, and, as of September 30, 1998, the Company
had an accumulated deficit of approximately $17.3 million. To date, the Company
has engaged primarily in research and development efforts. Although the Company
generated revenues from product sales for the first time in the three months
ended June 30, 1998 and continued to generate revenues in the three months ended
September 30, 1998 the Company does not have extended experience in
manufacturing, marketing or selling its products. During the first quarter of
1998 the Company began manufacturing its infant jaundice product in anticipation
of product shipment the second quarter of 1998.There can be no assurance that
the Company's development efforts will result in commercially viable products,
that the Company will be successful in introducing its products, or that
required regulatory clearances or approvals will be obtained in a timely manner,
or at all. There can be no assurance that the Company's products will ever gain
market acceptance or that the Company will ever generate revenues or achieve
profitability. The development and commercialization of its products will
require substantial development, regulatory, sales and marketing, manufacturing
and other
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expenditures. The Company expects its operating losses to continue through 1999
as it continues to expend substantial resources to complete development of its
products, obtain regulatory clearances or approvals, build its marketing, sales,
manufacturing and finance organizations and conduct further research and
development.
Substantially all of the Company's revenues and profits are expected to be
derived from royalties and manufacturing profits that the Company will receive
from Abbott, Roche Diagnostics and Respironics resulting from sales of its
glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing profits for the
Company. In addition, the Company's profit margins are not likely to increase
over time because the Company's royalty rates and manufacturing profit rates are
predetermined.
The Company has entered into collaborative arrangements with Abbott, Roche
Diagnostics BMC and Respironics. The agreements evidencing these collaborative
arrangements grant a substantial amount of discretion to each collaborative
partner. If one or more of the Company's collaborative partners were to
terminate its arrangement with the Company, the Company would either need to
reach agreement with a replacement collaborative partner or undertake at its own
expense the activities handled by its collaborative partner prior to such
termination, which would require the Company to develop expertise it does not
currently possess, would significantly increase the Company's capital
requirements and would limit the programs the Company could pursue. The Company
would likely encounter significant delays in introducing its products and the
development, manufacture and sale of its products would be adversely affected by
the absence of such collaborative arrangements. The termination of any of the
Company's collaborative arrangements would have a material adverse effect on the
Company's business, financial condition and results of operations.
QUARTER OVERVIEW
In addition to the results from operations discussed below, SpectRx announced
several items during the quarter ended September 30, 1998. The Company announced
that its strategic partner, Respironics, had filed with the FDA a 510k
application for the company's infant jaundice product (August 19, 1998). The
Company also announced during the quarter that it had entered into a
distribution agreement with Atom Medical Corporation for distribution of the
Company's infant jaundice product in Japan, pending regulatory approval from
Japan's Ministry of Health and Welfare. Also received during the quarter was
regulatory approval to market the BiliCheck(TM) Non-Invasive Bilirubin Analyzer
in Canada and shipments to Respironics for sale in Canada commenced in this
quarter.
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RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.
General. Net losses decreased to approximately $1.1 million during the
three months ended September 30, 1998 from approximately $1.3 million during the
same period in 1997 primarily due to increased revenue and a one time gain from
the investment in FluorRx offset by an increase in research and development
expenses and cost of sales. The Company expects similar net losses to continue.
Revenue. The Company has historically only received revenue from
achieving development milestones with one or more of its strategic partners. The
Company began shipping its infant jaundice product to distributors outside of
the United States and Canada during the quarter ended June 30, 1998. The Company
began shipping its infant jaundice product to its distributor in Canada during
the quarter ended September 30, 1998. The increase in revenue to $377,000 in the
three months ended September 30, 1998 versus $125,000 in the same period in 1997
is a result of having realized product revenue of approximately $194,000 versus
none in 1997, and having reached larger development milestones on the Company's
infant jaundice product in the third quarter of 1998.
Cost of Sales. Cost of sales were $382,000 for the three months ended
September 30, 1998 versus $0 during the same period of 1997. While a portion of
the cost of sales increase is directly related to product revenue, the majority
of the increase represents excess capacity production charges. The Company
expects excess capacity to exist for at least the remainder of this year.
Research and development expenses. Research and development expenses
increased to approximately $1,063,000 during the three months ended September
30, 1998 from approximately $519,000 during the same period in 1997. The
increase in research and development expenses was primarily due to increases in
compensation, benefit and employee recruiting costs and, to a lesser extent,
increases in consulting expenses, patent legal fees and the cost of prototype
materials purchased. The Company expects research and development expenses to
increase in the future as it continues development and expands clinical trials
for its products.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $232,000 during the three months ended September 30,1998 from
approximately $191,000 during the same period in 1997. The increase was due
primarily to an increase in size of its marketing organization for the Company's
infant jaundice product and to support the product rollout in the quarter. Sales
and marketing expenses are expected to increase in the future as the Company
markets this product in more countries.
General and administrative expenses. General and administrative expenses
decreased to approximately $564,000 during the three months ended September 30,
1998 compared to the approximately $845,000 incurred during the same period in
1997. The decrease is primarily due to the recognition of production development
activities in 1997 as G&A expense ($185,000) versus cost of goods expense during
the same period in 1998. General and administrative expenses are expected to
increase in the future as a result of overhead costs associated with research
and development activities and, to a lesser extent, expenses associated with
being a public company.
Net interest and other income. Net interest and other income increased
to $729,000 during the three months ended September 30, 1998 from $158,000
during the same period in 1997. This increase results from an increase in other
income (+$635,000) realized from deconsolidating its subsidiary, FluorRx, as a
result of a reduction in ownership to 47%, offset by a decrease (-$93,000) in
interest received on cash balances received from the initial public offering.
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COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.
General. Net losses increased to approximately $5.1 million during the
nine months ended September 30, 1998 from approximately $3.7 million during the
same period in 1997 primarily due to an increase in research and development
expenses and cost of sales,offset by an increase in revenue.
Revenue. The Company began shipping its infant jaundice product to
distributors outside of the United States and Canada during the quarter ended
June 30, 1998. The Company began shipping its infant jaundice product to its
distributor in Canada during the quarter ended September 30, 1998. The increase
in revenue to $816,000 in the nine months ended September 30, 1998 versus
$401,000 in the same period in 1997 is a result of having realized product
revenue of approximately $483,000 versus none in 1997, and having reached larger
development milestones on the Company's infant jaundice product and glucose
monitoring product.
Cost of Sales. Cost of sales were $1,093,000 for the nine months ended
September 30, 1998 versus $0 during the same period of 1997. While a portion of
the cost of sales increase is directly related to product revenue, the majority
of the increase represents excess capacity production charges. The Company
expects excess capacity to exist for at least the remainder of this year.
Research and development expenses. Research and development expenses
increased to approximately $3.0 million during the nine months ended September
30, 1998 from approximately $1.8 million during the same period in 1997. The
increase in research and development expenses was primarily due to increases in
compensation, benefit and employee recruiting costs and, to a lesser extent,
increases in consulting expenses, patent legal fees and the cost of prototype
materials purchased. Approximately 43% of the increase was due to research on
new development activities beyond the company's three initial products, and
approximately 20% was due to an increase in patent costs. The Company expects
research and development expenses to increase in the future as it continues
development and expands clinical trials for its products.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $804,000 during the nine months ended September 30, 1998 from
approximately $479,000 during the same period in 1997. The increase was due
primarily to increase in size of its marketing organization for the Company's
infant jaundice product and to support the product rollout. Sales and marketing
expenses are expected to increase in the future as the Company begins to expand
its marketing for this product.
General and administrative expenses. General and administrative expenses
decreased to approximately $1.7 million during the nine months ended at
September 30, 1998 compared to the approximately $2.1 million incurred during
the same period in 1997. The decrease is primarily due to the fact that FluorRx
G&A expense is not reflected in the nine months ended September 30, 1998,
whereas these expenses are reflected in the same period during 1997. In
addition, in 1997 production development activities were included in G & A
expense; in 1998 all production expense is included in cost of goods. General
and administrative expenses are expected to increase in the future as a result
of overhead costs associated with research and development activities and, to a
lesser extent, expenses associated with being a public company.
Net interest and other income. Net interest and other income increased to
$704,000 during the nine months ended September 30, 1998 from an income of
$239,000 during the same period in 1997. This increase results from
an increase in interest received on cash balances received from the initial
public offering as well as the increase in other income ($635,000) from the
deconsolidation of SpectRx's subsidiary, FluorRx, as a result of a reduction in
ownership to 47%.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through private sales of its debt and private and public sales of its equity
securities. From October 27, 1992 (inception) through September 30, 1998, the
Company received approximately $25.7 million in net proceeds from sales of its
debt and equity securities. At September 30, 1998, the Company had cash of
approximately $6.5 million and working capital of approximately 6.7 million. The
Company completed an initial public offering of its common stock on July 7, 1997
which resulted in net proceeds received by the Company, before expenses related
to the transaction, of approximately $14.0 million. The Company currently
invests its excess cash balances primarily in short-term, investment-grade,
interest-bearing obligations until such funds are utilized in operations.
Substantial capital will be required to develop the Company's products,
including completing product testing and clinical trials, obtaining all required
United States and foreign regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing its products. Any failure of the
Company's collaborative partners to fund its development expenditures would have
a material adverse effect on the Company's business, financial condition and
results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional collaborative relationships or
other arrangements. The Company believes that its existing capital resources
will be sufficient to satisfy its funding requirements for at least the next 12
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of its glucose monitoring product.
YEAR 2000 ASSESSMENT
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem).
The Company has conducted a review of its business systems, including its
computer systems, and is querying its customers, vendors and resellers as to
their progress in identifying and addressing problems that their computer
systems may face in correctly interrelating and processing date information as
the year 2000 approaches and is reached. The Company has completed its review
and testing of its internal business systems and computer systems and has
determined that the cost of corrective activities for these areas is not
material. The company is still in the process of reviewing the risks and
compliance of its customers, vendors and resellers. The Company feels that its
assurance and testing program will be completed by the end of the second quarter
of 1999. However, there can be no assurance that the Company will identify all
such Year 2000 problems in its computer systems or those of its customers,
vendors or resellers in advance of their occurrence or that the Company will be
able to successfully remedy any problems that are discovered. The expenses of
the Company's efforts to identify and address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company's business,
financial condition and results of operations. The revenue stream and financial
stability of existing customers may be adversely impacted by Year 2000 problems,
which could cause fluctuations in the Company's revenues. In addition, failure
of the Company to identify and remedy Year 2000 problems could put the Company
at a competitive disadvantage relative to companies that have corrected such
problems.
RISK FACTORS
The following risk factors should be considered carefully in addition
to the other information presented in this report. This report contains forward
looking statements that involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the forward
looking statements. Factors that might cause such differences include, but are
not limited to, the following risk factors.
Early Stage of Development; No Assurance of Successful Product Development
To date, the Company has only begun shipping its first product and has
only tested prototypes of its other products. Because the Company's research and
clinical development programs are at an early stage, substantial additional
research and development and clinical trials will be necessary before commercial
prototypes of the Company's products are produced. The Company could encounter
unforeseen problems in the development of its products such as delays in
conducting clinical trials, delays in the supply of key components or delays in
overcoming technical hurdles. There can be no assurance that the Company will be
able to successfully address the problems that may arise during the development
and commercialization process. In addition, there can be no assurance that any
of the Company's products will be successfully developed, proven safe and
efficacious in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable costs, be eligible for
third-party reimbursement from governmental or private insurers, be successfully
marketed or achieve market acceptance. If any of the Company's development
programs are not successfully completed, required regulatory approvals or
clearances are not obtained, or products for which approvals or clearances are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected.
The Company's business is subject to the risks inherent in the
development of new products using new technologies and approaches. There can be
no assurance that unforeseen problems will not develop with these technologies
or applications, that the Company will be able to successfully address
technological challenges it encounters in its research and development programs
or that commercially feasible products will ultimately be developed by the
Company.
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Dependence on Collaborative Arrangements
The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing and commercialization of its products depends
upon the Company's ability to selectively enter into and maintain collaborative
arrangements with leading medical device companies. The Company has entered into
collaborative arrangements with (i) Abbott under which Abbott is primarily
responsible for undertaking or funding the development, clinical testing,
regulatory approval process, manufacture and sale of the Company's glucose
monitoring product, (ii) Roche Diagnostics BMC under which Roche is primarily
responsible for undertaking or funding the development, clinical testing,
regulatory approval process and sale of the Company's diabetes screening
product, and (iii) Respironics under which Respironics is primarily responsible
for undertaking or funding the development, clinical testing, regulatory
approval process and sale of the Company's infant jaundice product in the United
States and Canada. The agreements evidencing these collaborative arrangements
grant a substantial amount of discretion to each of Abbott, Roche and
Respironics. For example, each of these collaborative partners may terminate
their respective collaborative arrangements with the Company effective upon the
expiration of certain notice periods. In addition, the obligation of each of the
Company's collaborative partners to fund or undertake the development, clinical
testing, regulatory approval process, marketing, distribution and/or sale of the
products covered by their respective collaborative arrangements with the Company
is, to a large extent, dependent upon the satisfaction of certain goals or
"milestones" by certain specified dates, some of which are outside the Company's
control. To the extent that the obligations of the Company's collaborative
partners to fund or undertake all or certain of the foregoing activities are not
contingent upon the satisfaction of certain goals or milestones, the
collaborative partners nevertheless retain a significant degree of discretion
regarding the timing of these activities and the amount and quality of
financial, personnel and other resources that they devote to these activities.
Furthermore, there can be no assurance that disputes will not arise between the
Company and one or more of its collaborative partners regarding their respective
rights and obligations under the collaborative arrangements. Finally, there can
be no assurance that one or more of the Company's collaborative partners will be
able, due to financial, regulatory or other reasons, to satisfy its obligations
under its collaborative arrangement with the Company or will not intentionally
or unintentionally breach its obligations under the arrangement. There can be no
assurance that one or more of the Company's collaborative partners will not, for
competitive reasons, support, directly or indirectly, a company or product that
competes with the company's product that is the subject of its collaborative
arrangement with the Company. Furthermore, any dispute between the Company and
one of its collaborative partners might require the Company to initiate or
defend expensive litigation or arbitration proceedings.
Any termination of any collaborative arrangement by one of the
Company's collaborative partners, any inability of a collaborative partner to
fund or otherwise satisfy its obligations under its collaborative arrangements
with the Company and any significant dispute with, or breach of a contractual
commitment by, a collaborative partner, would likely require the Company to seek
and reach agreement with another collaborative partner or to assume, to the
extent possible and at its own expense, all the responsibilities being
undertaken by this collaborative partner. There can be no assurance that the
Company would be able to reach agreement with a replacement collaborative
partner. If the Company were not able to find a replacement collaborative
partner, there can be no assurance that the Company would be able to perform or
fund the activities for which such collaborative partner is currently
responsible. Even if the Company were able to perform and fund these activities,
the Company's capital requirements would increase substantially. In addition,
the further development and the clinical testing, regulatory approval process,
marketing, distribution and sale of the product covered by such collaborative
arrangement would be significantly delayed.
On February 11, 1998, Healthdyne merged with Respironics, with
Respironics as the surviving entity. There can be no assurance that the change
in control of Healthdyne will not adversely affect the Company's collaborative
arrangement with Healthdyne. On March 5, 1998, Roche Holding, Ltd. acquired
Corange, Ltd., which is the parent company of Boehringer Mannheim, GmbH., the
parent company of Boehringer Mannheim. There can be no assurance that the change
in control of Boehringer Mannheim will not adversely affect the Company's
collaborative arrangement with Boehringer Mannheim.
Any of the foregoing circumstances could have a material adverse effect
upon the Company's business, financial condition and results of operations.
-13-
14
Limited Operating History; History of Losses and Expectations of Future Losses
The Company has a limited operating history upon which its prospects
can be evaluated. Such prospects must be considered in light of the substantial
risks, expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. The Company has experienced
operating losses since its inception, and, as of September 30, 1998, the Company
had an accumulated deficit of approximately $17.3 million. To date, the Company
has engaged primarily in research and development efforts. The Company began
shipping initial orders of the BiliCheck product in the second quarter of 1998.
Prior to that the Company had never generated revenues from product sales and
did not have experience in manufacturing, marketing or selling its products.
There can be no assurance that the Company's development efforts will result in
commercially viable products, that the Company will be successful in introducing
its products, or that required regulatory clearances or approvals will be
obtained in a timely manner, or at all. There can be no assurance that the
Company's products will ever gain market acceptance or that the Company will
ever generate significant revenues or achieve profitability. The development and
commercialization of its products will require substantial development,
regulatory, sales and marketing, manufacturing and other expenditures. The
Company expects its operating losses to continue through 1999 as it continues to
expend substantial resources to complete development of its products, obtain
regulatory clearances or approvals, build its marketing, sales, manufacturing
and finance organizations and conduct further research and development.
-14-
15
Government Regulations; No Assurance of Regulatory Approvals
The design, manufacturing, labeling, distribution and marketing of the
Company's products will be subject to extensive and rigorous government
regulation in the United States and certain other countries where the process of
obtaining and maintaining required regulatory clearance or approvals is lengthy,
expensive and uncertain. In order for the Company to market its products in the
United States, the Company must obtain clearance or approval from the United
States Food and Drug Administration ("FDA"). The Company intends to seek
clearance to market each of its products through a 510(k) premarket notification
supported by clinical data. Although a 510(k) premarket notification has been
filed for the Company's infant jaundice product, clearance has not yet been
received and no other 510(k) premarket notification has been filed with the FDA
for clearance to market any of the Company's products. The Company expects
510(k) premarket notifications for clearance to market its diabetes screening
product to be filed in 1998. A 510(k) for the glucose monitoring product is
expected to be filed after the completion of development. There can be no
assurance that any such notifications will be filed in accordance with this
schedule, that the FDA will act favorably or quickly on such 510(k) submissions,
or that significant difficulties and costs will not be encountered during
efforts to obtain FDA clearance or approval. Specifically, the FDA may request
additional data or require additional clinical studies be conducted to obtain
510(k) clearance for one or more of the Company's products. In addition, there
can be no assurance that the FDA will not require the submission of a premarket
approval ("PMA") application to obtain FDA approval to market one or more of the
Company's products. The PMA process is more rigorous and lengthier than the
510(k) clearance process and can take several years from initial filing and
require the submission of extensive supporting data and clinical information. In
addition, there can be no assurance that the FDA will not impose strict labeling
or other requirements as a condition of its 510(k) clearance or PMA, any of
which could limit the Company's ability to market its products. Further, if the
Company wishes to modify a product after FDA clearance of a 510(k) premarket
notification or approval of a PMA application, including changes in indications
or other modifications that could affect safety and efficacy, additional
clearances or approvals will be required from the FDA. Any request by the FDA
for additional data or any requirement by the FDA that the Company conduct
additional clinical studies or submit to the more rigorous and lengthier PMA
process could result in a significant delay in bringing the Company's products
to market and substantial additional research and other expenditures by the
Company. Similarly, any labeling or other conditions or restrictions imposed by
the FDA on the marketing of the Company's products could hinder the Company's
ability to effectively market its products. Any of the foregoing actions by the
FDA could delay or prevent altogether the Company's ability to market and
distribute its products and could have a material adverse effect on the
Company's business, financial condition and results of operations.
-15-
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In order for the Company to market its products under development in
Europe and certain other foreign jurisdictions, the Company and its distributors
and agents must obtain required regulatory registrations or approvals and
otherwise comply with extensive regulations regarding safety, efficacy and
quality in those jurisdictions. Specifically, certain foreign regulatory bodies
have adopted various regulations governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. These regulations vary from country to country. In
order to commence sales in Europe, the Company has obtained ISO 9001
certifications and CE mark certification, which is an international symbol of
quality and compliance with applicable European medical device directives.
Failure to obtain other foreign regulatory approvals could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to maintain
its ISO 9001 certification or CE mark certification, or will be able to obtain
any other required regulatory registrations or approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining such regulatory registrations or approvals. Delays in obtaining any
registrations or approvals required to market the Company's products, failure to
receive these registrations or approvals, or future loss of previously obtained
registrations or approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company and its collaborative partners will be required to adhere
to applicable FDA regulations regarding Good Manufacturing Practice ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be strictly enforced in the United States through
periodic inspections by state and federal agencies, including the FDA, and in
foreign jurisdictions by comparable agencies. Failure to comply with applicable
regulatory requirements could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals previously
obtained and criminal prosecution. The restriction, suspension or revocation of
regulatory approvals or any other failure to comply with regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company will rely upon Abbott, Roche Diagnostics BMC and
Respironics to obtain United States and foreign regulatory approvals and
clearances for its glucose monitoring, diabetes screening and infant jaundice
products, respectively, and if such approvals or clearances are obtained the
Company will rely upon these collaborative partners to maintain them in full
force and effect and to otherwise remain in compliance with all applicable
United States and foreign regulatory restrictions. The inability or failure of
such third parties to comply with the varying regulations or the imposition of
new regulations would materially adversely affect the Company's business,
financial condition and results of operations.
-16-
17
Dependence on Licensed Patent Applications and Proprietary Technology
SpectRx's success depends in large part upon its ability to establish
and maintain the proprietary nature of its technology through the patent process
and to license from others patents and patent applications necessary to develop
its products. The Company has licensed from Non-Invasive Monitoring Company,
Inc. ("Nimco") one granted patent and know-how related to its glucose monitoring
product, jointly applied with Altea Technologies, Inc. ("Altea") for a U.S.
patent and an international patent related to this device and has licensed this
granted patent and these patent applications to Abbott pursuant to the parties'
collaborative arrangements. SpectRx has license agreements with Georgia Tech
Research Corporation ("GTRC") that give the Company the right to use two patents
related to its diabetes screening product, and the Company has licensed this
proprietary technology to Roche Boehringer Mannheim pursuant to the Company's
collaborative arrangement with Roche Boehringer Mannheim. The Company has
license agreements with the University of Texas M.D. Anderson Cancer Center
("M.D. Anderson") that give SpectRx access to one patent related to the
Company's infant jaundice product, and the Company has applied for two patents
related to this product. SpectRx has licensed the one patent and two patent
applications to Respironics pursuant to its collaborative arrangement with that
company. In addition, SpectRx has licensed from Joseph Lakowicz, Ph.D. of the
University of Maryland several granted patents and patent applications related
to fluorescence spectroscopy that it intends to use in its research and
development efforts.
There can be no assurance that one or more of the patents held directly
by the Company or licensed by the Company from third parties, including the
disposable components to be used in connection with its glucose monitoring and
infant jaundice products, or processes used in the manufacture of the Company's
products, will not be successfully challenged, invalidated or circumvented or
that the Company will otherwise be able to rely on such patents for any reason.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that prevent, limit
or interfere with the Company's ability to make, use and sell its products
either in the United States or in foreign markets. If any of the Company's
patents are successfully challenged, invalidated or circumvented or the
Company's right or ability to manufacture its products were to be proscribed or
limited, the Company's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon the Company's business, financial condition and results of
operations.
-17-
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The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Certain companies in
the medical device industry have instituted intellectual property litigation,
including patent infringement actions, for legitimate and, in certain cases,
competitive reasons. In addition, the United States Patent and Trademark Office
("USPTO") may institute litigation or interference proceedings. There can be no
assurance that the Company will not become subject to patent infringement claims
or litigation or interference proceedings instituted by the USPTO to determine
the priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. Any litigation or interference proceedings
brought against, initiated by or otherwise involving the Company may require the
Company to incur substantial legal and other fees and expenses and may require
some of the Company's employees to devote all or a substantial portion of their
time to the prosecution or defense of such litigation or proceedings. An adverse
determination in litigation or interference proceedings to which the Company may
become a party, including any litigation that may arise against the Company,
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties or prevent the Company from
selling its products in certain markets, or at all. Although patent and
intellectual property disputes regarding medical devices are often settled
through licensing or similar arrangements, there can be no assurance that the
Company would be able to reach a satisfactory settlement of such a dispute that
would allow it to license necessary patents or other intellectual property. Even
if such a settlement were reached, the settlement process may be expensive and
time consuming and the terms of the settlement may require the Company to pay
substantial royalties. An adverse determination in a judicial or administrative
proceeding or the failure to obtain a necessary license could prevent the
Company from manufacturing and selling its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements. There can be no
assurance that such confidentiality or proprietary information agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known to or be
independently developed by competitors.
Fixed Royalty Rates and Manufacturing Profits
Substantially all of the Company's revenues and profits are expected to
be derived from royalties and manufacturing profits that the Company will
receive from Abbott, Roche Diagnostics BMC and Respironics resulting from sales
of its glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing profits for the
Company. In addition, the Company's profit margins are not likely to increase
over time because the Company's royalty rates and manufacturing profit rates are
predetermined.
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Uncertainty of Market Acceptance
The Company's products are based upon new methods of glucose
monitoring, diabetes screening and infant jaundice monitoring and screening, and
there can be no assurance that any of these products will gain market
acceptance. Physicians and individuals will not recommend or use the Company's
products unless they determine, based on experience, clinical data, relative
cost, and other factors, that these products are an attractive alternative to
current blood-based tests that have a long history of safe and effective use. To
date, the Company's products have been utilized by only a limited number of
subjects, and no independent studies regarding the Company's products have been
published. The lack of any such independent studies may have an adverse effect
on the Company's ability to successfully market its products. In addition,
purchase decisions for products like the Company's diabetes screening and infant
jaundice products are greatly influenced by health care administrators who are
subject to increasing pressures to reduce costs. Failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
Intense Competition
The medical device industry in general, and the markets for glucose
monitoring and diabetes screening devices and processes in particular, are
intensely competitive. If successful in its product development, the Company
will compete with other providers of personal glucose monitors, diabetes
screening tests and infant jaundice products. A number of competitors, including
Johnson & Johnson, Inc. (which owns Lifescan, Inc.), Roche Boehringer Mannheim,
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.
-19-
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Many of the Company's competitors have substantially greater financial,
research, technical, manufacturing, marketing and distribution resources than
the Company and have greater name recognition and lengthier operating histories
in the health care industry. There can be no assurance that the Company will be
able to effectively compete against these and other competitors. In addition,
there can be no assurance that the Company's glucose monitoring, diabetes
screening or infant jaundice products will replace any currently used devices or
systems, which have long histories of safe and effective use. Furthermore, there
can be no assurance that the Company's competitors will not succeed in
developing, either before or after the development and commercialization of the
Company's products, devices and technologies that permit more efficient, less
expensive non-invasive and less invasive glucose monitoring, diabetes screening
and infant jaundice monitoring. It is also possible that one or more
pharmaceutical or other health care companies will develop therapeutic drugs,
treatments or other products that will substantially reduce the prevalence of
diabetes or infant jaundice or otherwise render the Company's products obsolete.
Such competition could have a material adverse effect on the Company's business,
financial condition and results of operation.
In addition, there can be no assurance that one or more of the
Company's collaborative partners will not, for competitive reasons, reduce its
support of its collaborative arrangement with the Company or support, directly
or indirectly, a company or product that competes with the Company's product
that is the subject of the collaborative arrangement.
Little Manufacturing Experience; Dependence on Sole Sources of Supply
To date, the Company's manufacturing activities have consisted only of
building certain prototype devices and the initial production of its
BiliCheck(TM) and BiliCal(TM) products. If the Company successfully develops its
diabetes screening product and successfully markets its infant jaundice product
and, together with Roche Diagnostics BMC and Respironics, obtains FDA clearance
and other regulatory approvals to market these products, the Company will
undertake to manufacture these products in significant volumes. The Company has
no experience manufacturing such products in the volumes that would be necessary
for the Company to achieve significant commercial sales. There can be no
assurance that the Company will be able to establish and maintain reliable, full
scale manufacturing of these products at commercially reasonable costs. Although
the Company has leased space that it plans to use to manufacture its products,
it may encounter various problems in establishing and maintaining its
manufacturing operations, resulting in inefficiencies and delays. Specifically,
companies often encounter difficulties in scaling up production, including
problems involving production yield, quality control and assurance, and
shortages of qualified personnel. In addition, the Company's manufacturing
facilities will be subject to GMP regulations, including possible preapproval
inspection, international quality standards and other regulatory requirements.
Difficulties encountered by the Company in manufacturing scale-up or failure by
the Company to implement and maintain its manufacturing facilities in accordance
with GMP regulations, international quality standards or other regulatory
requirements could result in a delay or termination of production, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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21
The microspectrometer and disposable calibration element, components of
the Company's infant jaundice product, and the blue light module and calibration
element, components of the Company's diabetes screening product, are each
available from only one supplier and these products would require a major
redesign in order to incorporate a substitute component. Certain other
components of the infant jaundice and diabetes screening products are currently
obtained from only one supplier, but have readily available substitute
components that can be incorporated in the applicable product with minimal
design modifications. If the Company's products require a PMA, the inclusion of
substitute components could require the Company to qualify the new supplier with
the appropriate government regulatory authorities. Alternatively, if the
Company's products qualify for a 510(k) premarket notification, the substitute
components need only meet the Company's product specifications. Any significant
problem experienced by one of the Company's sole source suppliers may result in
a delay or interruption in the supply of components to the Company until such
supplier cures the problem or an alternative source of the component is located
and qualified. Any delay or interruption would likely lead to a delay or
interruption in the Company's manufacturing operations, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Little Marketing and Sales Experience
The Company is responsible for marketing the infant jaundice product in
countries other than the United States and Canada. The Company has little
experience in marketing or selling medical device products and only has a nine
person marketing and sales staff. In order to successfully market and sell its
infant jaundice product outside the United States and Canada, the Company must
either develop a marketing and sales force or enter into arrangements with third
parties to market and sell this product. While the Company has signed
distributor agreements for its BiliCheck(TM) and BiliCal(TM) products there can
be no assurance that the Company will be able to successfully develop a
marketing and sales force or that it will be able to enter into marketing and
sales agreements with third parties on acceptable terms, if at all. If the
Company develops its own marketing and sales capabilities, it will compete with
other companies that have experienced and well-funded marketing and sales
operations. If the Company enters into a marketing arrangement with a third
party for the marketing and sale of its infant jaundice product outside the
United States and Canada, any revenues to be received by the Company from this
product will be dependent on this third party, and the Company will likely be
required to pay a sales commission or similar amount to this party. Furthermore,
the Company is currently dependent on the efforts of Abbott and Roche
Diagnostics BMC for any revenues to be received from its glucose monitoring and
diabetes screening products, respectively. There can be no assurance that the
efforts of these third parties for the marketing and sale of the Company's
products will be successful.
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22
Product Liability Risk; Limited Insurance Coverage
The development, manufacture and sale of medical products entail
significant risks of product liability claims. The Company currently has no
product liability insurance coverage beyond that provided by its general
liability insurance. Accordingly, there can be no assurance that the Company is
adequately protected from any liabilities, including any adverse judgments or
settlements, it might incur in connection with the development, clinical
testing, manufacture and sale of its products. In addition, product liability
insurance is expensive and may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company that results in an adverse judgment against or
settlement by the Company in excess of any insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Need for Additional Capital; Uncertainty of Access to Capital
Substantial capital will be required to develop the Company's products,
including completing product testing and clinical trials, obtaining all required
United States and foreign regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing its products. Pursuant to the Company's
collaborative arrangements with Abbott, Roche Diagnostics BMC and Respironics,
these collaborative partners will either directly undertake these activities or
will fund a substantial portion of these expenditures. The obligations of the
Company's collaborative partners to fund the Company's capital expenditures is
largely discretionary and depends on a number of factors, including the
Company's ability to meet certain milestones in the development and testing of
its products. There can be no assurance that the Company will meet such
milestones or that the Company's collaborative partners will continue to fund
the Company's capital expenditures. Any failure of the Company's collaborative
partners to fund its capital expenditures would have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional collaborative relationships or
other arrangements. The Company believes that its existing capital resources
will be sufficient to satisfy its funding requirements for at least the next 12
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of its glucose monitoring product. There can be no
assurance that any required additional funding, if needed, will be available on
terms attractive to the Company, or at all, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants.
Uncertainty of Third-Party Reimbursement
In the United States and elsewhere, sales of medical products are
dependent, in part, on the ability of consumers of these products to obtain
reimbursement for all or a portion of their cost from third-party payors, such
as government and private insurance plans. Third-party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing one or more products to market, there can be no assurance
that these products will be considered cost effective and that reimbursement to
the consumer will be available or sufficient to allow the Company to sell its
products on a competitive basis.
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Need to Attract and Retain Key Employees
The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of certain
key scientific, technical, managerial and finance personnel, and its ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel. None of the Company's key employees has an employment
contract with the Company nor are any of these employees covered by key person
or similar insurance. In addition, if the Company, together with its
collaborative partners, is able to successfully develop and commercialize the
Company's products, the Company will need to hire additional scientific,
technical, managerial and finance personnel. The Company faces intense
competition for qualified personnel in these areas, many of whom are often
subject to competing employment offers, and there can be no assurance that the
Company will be able to attract and retain such personnel. The loss of key
personnel or inability to hire and retain additional qualified personnel in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations.
Significant Influence of Directors, Executive Officers and Affiliated Entities
The Company's directors, executive officers and entities affiliated
with them in the aggregate, beneficially own approximately 46% of the Company's
outstanding Common Stock. These stockholders, acting together, would have
significant influence over all matters requiring approval by the stockholders of
the Company, including the election of directors and the approval of mergers and
other business combination transactions.
Potential Volatility of Stock Price
The stock markets have experienced extreme price and volume
fluctuations that have substantially affected small capitalization medical
technology companies, resulting in changes in the market prices of the stocks of
many such companies that may not have been directly related to their operating
performance. Such broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In addition, the market price of the Common
Stock may be highly volatile. Factors such as variations in the Company's
financial results, changes in the Company's collaborative arrangements, comments
by security analysts, announcements of technological innovations or new products
by the Company or its competitors, changing government regulations and
developments with respect to FDA submissions, patents and proprietary rights, or
litigation may have a material adverse effect on the market price of the Common
Stock.
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24
Anti-Takeover Effect of Certain Charter and Bylaw Provisions on Price of Common
Stock
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting and specify procedures
for director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings. Certain provisions of Delaware law
applicable to the Company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholders for a period of three years unless certain conditions are met,
could also delay or make more difficult a merger, tender offer or proxy contest
involving the Company. The possible issuance of Preferred Stock, the procedures
required for director nominations and stockholder proposals and Delaware law
could have the effect of delaying, deferring or preventing a change in control
of the Company, including without limitation, discouraging a proxy contest or
making more difficult the acquisition of a substantial block of the Company's
Common Stock. These provisions could also limit the price that investors might
be willing to pay in the future for shares of the Company's Common Stock.
Lack of Dividends
The Company has not paid any dividends and does not anticipate paying any
dividends in the foreseeable future.
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PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
On July 1, 1997, the Company commenced and completed its initial public
offering (the "IPO") of 2,361,699 shares (including 201,699 shares sold by
selling stockholders and including the exercise of the underwriters'
over-allotment option consisting of 160,000 shares) of its Common Stock, $0.001
par value per share at a public offering price of $7.00 per share pursuant to a
registration statement on Form S-1 (file no. 333-80453) filed with the
Securities and Exchange Commission. All of the shares registered were sold.
Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC were the managing
underwriters of the IPO. Aggregate gross proceeds to the Company from the IPO
(prior to deduction of underwriting discounts and commissions and expenses of
the offering) were $15,120,000.
The Company paid underwriting discounts and commissions of $1,058,400
and other expenses of approximately $896,000 in connection with the IPO. The
total expenses paid by the Company in the IPO were $1,954,400, and the net
proceeds to the Company in the IPO were $13,165,600.
From June 30, 1997, the effective date of the Registration Statement to
September 30, 1998, the approximate amount of net proceeds used were $3.5
million for the funding of the development of the Company's infant jaundice and
diabetes screening products, $2.5 million for developing production capacity and
increasing inventory, $1.4 million to develop sales, marketing and distribution
capability and 1.0 million for other internal Research and Development. None of
such payments consisted of direct or indirect payments to directors, officers,
10% stockholders or affiliates of the Company.
Item 5: Other Information
Stockholders are entitled to present proposals for action at a
forthcoming meeting if they comply with the requirements of the proxy rules
promulgated by the SEC. Proposals of stockholders of the Company that are
intended to be presented by such stockholders at the Company's 1999 Annual
Meeting must be received by the Company no later then December 25, 1998, in
order that they may be considered for inclusion in the proxy statement and form
of proxy relating to that meeting.
With respect to stockholder proposals not included in the Company's
proxy statement for the 1999 Annual Meeting of Stockholders, the persons named
in management's proxy for the 1999 Annual Meeting of Stockholders will be
entitled to exercise the discretionary voting power conferred by such proxy
under the circumstances specified in Rule 14a-4(c) of the Securities Exchange
Act of 1934, as amended, including with respect to proposals received by the
company not later than forty-five (45) days prior to the first anniversary of
the date of mailing of the proxy statement for the prior year's Annual Meeting
of Stockholders. Proposals of stockholders of the Company that are intended to
be presented by such stockholders at the Company's 1999 Annual Meeting must be
received by the Company no later than March 10, 1999. If such shareholder fails
to comply with the foregoing notice provision, the proxy holders will be allowed
to use their discretionary voting authority when the proposal is raised at the
1999 Annual Meeting.
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, 1998.
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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 13, 1998 By: /s/ THOMAS H. MULLER, JR.
-------------------------------
Thomas H. Muller, Jr.
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1(2) Certificate of Incorporation of the Company, as amended, as currently in
effect.
3.2(1) Bylaws of the Company.
4.1(1) Specimen Common Stock Certificate.
10.1(1) 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.2(1) 1995 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.3(1) Stock Purchase Agreement, dated June 30, 1994, between Mark A.
Samuels and the Company.
10.4(1) Stock Purchase Agreement, dated June 30, 1994, between Keith D.
Ignotz and the Company.
10.5(1) Assignment and Bill of Sale, dated February 29, 1996, between
LAO and the Company.
10.6(1) Security Agreement, dated October 31, 1996, between Mark A.
Samuels and the Company.
10.7(1) Security Agreement, dated October 31, 1996, between Keith D.
Ignotz and the Company.
10.8A(1)+ License Agreement, dated May 7, 1991, between Georgia Tech
Research Corporation and Laser Atlanta Optics, Inc..
10.8B(1) Agreement for Purchase and Sale of Technology, Sale, dated January 16,
1993, between Laser Atlanta Optics, Inc. and the Company.
10.8C(1) First Amendment to License Agreement, dated October 19, 1993,
between Georgia Tech Research Corporation and the Company.
10.9(1) Clinical Research Study Agreement, dated July 22, 1993, between Emory
University and the Company.
10.10A(1)+ Development and License Agreement, dated December 2, 1994,
between Boehringer Mannheim Corporation and the Company.
10.10B(1)+ Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and the Company.
10.11(1) Sponsored Research Agreement, No. SR95-006, dated May 3, 1995,
between University of Texas, M.D. Anderson Cancer Center and the
Company.
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10.12(1) Sole Commercial Patent License Agreement, dated May 4, 1995, between
Martin Marietta Energy Systems, Inc. and the Company.
10.13A(1) License Agreement, dated November 22, 1995, between Joseph R.
Lakowicz, Ph.D. and the Company.
10.13B(1) Amendment of License Agreement, dated November 28, 1995, between
Joseph R. Lakowicz, Ph.D. and the Company.
10.13C(1) Second Amendment to License Agreement, dated March 26, 1997, between
Joseph R. Lakowicz, Ph.D. and the Company.
10.14(1) License and Joint Development Agreement, dated March 1, 1996, between
NonInvasive-Monitoring Company, Inc., Altea Technologies, Inc. and the
Company.
10.15(1)+ Patent License Agreement, dated March 12, 1996, between the
Board of Regents of the University of Texas System, M.D.
Anderson and the Company.
10.16(1)+ Purchasing and Licensing Agreement, dated June 19, 1996, between
Healthdyne and the Company.
10.17(1) Research Services Agreement, dated September 3, 1996, between
Sisters of Providence in Oregon doing business as the Oregon
Medical Laser Center, Providence St. Vincent Medical Center and
the Company.
10.18A(1)+ Research and Development and License Agreement, dated October
10, 1996, between Abbott Laboratories and the Company.
10.18B(3)++ Letter Agreement, dated December 22, 1997, between Abbott Laboratories and
the Company.
10.19(1) Lease, dated September 21, 1993, between National Life Insurance
Company d/b/a Plaza 85 Business Park and the Company, together
with amendments 1, 2 and 3 thereto and Tenant Estoppel
Certificate, dated September 20, 1994.
11.1 Calculation of earnings per share.
27.1 Financial Data Schedule (For SEC use only).
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(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 quarterly period 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
27,1998.
+ Confidential treatment granted for portions of these agreements.
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