<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
Commission File Number 0-21537
PACIFIC BIOMETRICS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer specified in its charter)
Delaware 93-1211114
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
25651 Atlantic Ocean Drive, Suite A-1, Lake Forest, CA 92630
- --------------------------------------------------------------------------------
(Address of principal executive offices)
949-455-9724
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes ( X ) No ( )
As of November 12, 1998, shares of common stock outstanding of the issuer were
3,709,671.
Transitional Small Business Disclosure Format (check one) Yes ( ) No ( X )
1
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PACIFIC BIOMETRICS, INC.
INDEX TO FORM 10-QSB
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheet.................................................. 3
Consolidated Statements of Operations....................................... 4
Condensed Consolidated Statements of Cash Flows............................. 5
Notes to Consolidated Financial Statements.................................. 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.........................................................10
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS..................................................16
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS..........................16
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES....................................16
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...................................................16
ITEM 5 - OTHER INFORMATION..................................................16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K...................................16
</TABLE>
2
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PACIFIC BIOMETRICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 942,696
Accounts receivable, net of allowance for doubtful
accounts of $90,137 258,536
Inventory 171,315
Prepaid expenses and other 170,990
------------
Total current assets 1,543,537
Property and equipment, net 655,008
Other assets:
Technology license, net 2,426,191
Prepaid financing costs 53,906
Restricted cash 100,000
Deposit and other 2,750
------------
Total assets $ 4,781,392
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties $ 253,664
Accounts payable 202,735
Accrued liabilities 349,591
Deferred compensation 81,916
Advances from customers 3,376
Technology licenses payable 2,221,369
Capital lease obligations 262,396
------------
Total current liabilities 3,375,047
------------
Capital lease obligations - long term portion 293,042
------------
Total long term liabilities 293,042
------------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 1,550,000 shares issued and outstanding 15,500
Common stock, $0.01 par value, 30,000,000 shares
authorized, 3,709,671 shares issued and outstanding 37,097
Additional paid-in capital Common Stock 13,700,868
Additional paid-in capital Preferred Stock 5,062,654
Deficit accumulated during the development stage (17,702,816)
------------
Total stockholders' equity 1,113,303
------------
Total liabilities and stockholders' equity $ 4,781,392
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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PACIFIC BIOMETRICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Month Period For the Period
Ended September 30, from Inception
---------------------------- (December 1992) to
1998 1997 September 30, 1998
------------- ------------- ------------------
<S> <C> <C> <C>
Revenues $ 306,954 $ 638,347 $ 7,841,197
------------- ------------- ------------------
Operating expenses:
Laboratory expense and cost of goods sold 316,948 394,680 5,990,308
Research and product development 509,841 462,234 5,148,506
Selling, general and administrative 579,389 439,785 6,721,939
Purchased in-process research and development 0 0 6,373,884
Amortization of intangible assets 200,452 15,625 1,223,474
------------- ------------- ------------------
Total operating expenses 1,606,630 1,312,324 25,458,111
------------- ------------- ------------------
Operating loss (1,299,676) (673,977) (17,616,914)
------------- ------------- ------------------
Other income (expense):
Interest expense (69,859) (13,474) (463,640)
Interest income 12,201 63,406 303,665
Grant and other income 965 164 74,073
------------- ------------- ------------------
(56,693) 50,096 (85,902)
------------- ------------- ------------------
Net loss $ (1,356,369) $ (623,881) $ (17,702,816)
============= ============= ==================
Basic and diluted loss per share $ (0.38) $ (0.17) $ (11.25)
============= ============= ==================
Number of shares used in per-share calculation 3,709,671 3,705,522 1,757,380
============= ============= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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PACIFIC BIOMETRICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Month Period For the Period
Ended September 30, from Inception
------------------------------ (December 1992) to
1998 1997 September 30, 1998
-------------- ------------- ------------------
<S> <C> <C> <C>
Cash used by operations $ (1,117,976) $ (404,099) $ (8,634,864)
Cash used by investing activities (35,493) (819,779) (261,055)
Cash (used ) provided by financing activities (147,891) (79,035) 9,838,615
-------------- ------------- ----------------
(Decrease) Increase in cash and cash equivalents (1,301,360) (1,302,913) 942,696
Cash and cash equivalents:
Beginning of period 2,244,056 2,916,695 0
-------------- ------------- ----------------
End of period $ 942,696 $ 1,613,782 $ 942,696
============== ============= ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PACIFIC BIOMETRICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Pacific Biometrics, Inc. (the "Company" or "PBI") was incorporated in Delaware
in May 1996 in connection with the June 1996 acquisitions of BioQuant, Inc.
("BioQuant"), a Michigan corporation, and Pacific Biometrics, Inc. ("PBI-WA"), a
Washington corporation, whereby both became wholly-owned subsidiaries of the
Company in separate stock-for-stock exchange transactions.
The unaudited financial statements of the Company presented herein, have been
prepared pursuant to the rules of the Securities and Exchange Commission for
quarterly reports on Form 10-QSB and do not include all of the information and
footnote disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the financial statements and notes
thereto for the year ended June 30, 1998 included in the Company's Annual Report
on Form 10-KSB.
In the opinion of management, the financial statements include all adjustments
(consisting solely of normal, recurring adjustments) necessary for a fair
presentation of results for these interim periods.
Revenues are primarily from the laboratory business. The Company's potential
products are currently in research and development, and no significant revenues
have been generated from these potential products to date. Consequently, the
Company is a development stage enterprise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TECHNOLOGY
The Company has an exclusive worldwide license for the use of a transdermal
sweat collection device from Sudormed, Inc. ("Sudormed") for all medical
diagnostic applications of such skin patch technology. In addition, the license
allows for the development of all other potential applications of such
technology, except for those relating to alcohol and drugs of abuse. In exchange
for such license rights, the Company agreed to pay Sudormed approximately $3
million over a twenty-month period, of which approximately $900,000 has been
paid through September 30, 1998. Such payments include a lump-sum payment of
$1.6 million due on December 31, 1998. During the quarter ended September 30,
1998 the Company renegotiated the Sudormed License to defer $225,000 in monthly
payments until January 1, 1999. These deferred payments when combined with the
$1.6 million obligation
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and other scheduled payments will total approximately $1.9 million due related
to the maintenance of the license.
The Company also owns a fully paid license to the assay technology used with the
Osteopatch(TM) product. The SalivaSac-Registered Trademark- is a proprietary
patented product of the Company.
RISKS AND UNCERTAINTIES
The Company's products require approvals from the U.S. Food and Drug
Administration (FDA) and international regulatory agencies prior to
commercialization. There can be no assurance that the Company's products will
receive any of the required approvals. If the Company is denied such approvals
or if such approvals are delayed beyond current expectations, such actions would
have a material adverse effect on the Company.
The Company's financial position also creates risks and uncertainties as
discussed below in Note 3 and puts the Company at risk of defaulting under the
Sudormed license discussed above.
3. GOING CONCERN
The Company has experienced recurring losses from operations and cash flow
shortages, and has deficiencies in working capital and stockholders' equity.
Also, the Company has significant amounts of debt maturing on December 31, 1998
and on January 1, 1999. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described below. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements on a
continuing basis.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are necessary to provide the Company with the
ability to continue in existence. These steps include significant reductions in
expenses and staffing, delay of research and development projects, renegotiation
of certain contractual commitments and engagement of an investment-banking firm
to raise capital.
The Company does not anticipate that the Company's current cash and cash
equivalents and short-term investments, together with projected revenues from
operations and financing arrangements will be sufficient to satisfy its
operating expense requirements beyond December 1998. The Company is actively
working to raise additional funds through equity,
7
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debt arrangements and product licensing agreements to cover current year
liquidity requirements. Failure to do so will have a material adverse effect on
the Company and its ability to continue to operate as currently contemplated.
4. EARNINGS PER SHARE
As the Company had a net loss from continuing operations for the period ended
September 30, 1998, and 1997 and for the period from inception to September 30,
1998, basic and diluted net loss per share are the same.
Net loss applicable to common stockholders includes $62,000 in cumulative
dividends on the convertible preferred stock for the period ended September 30,
1998. The imputed dividends are a non-cash, one-time charge based on the
immediate conversion feature.
Basic and diluted net loss per common share for the period ended September 30,
1998, and 1997 and for the period from inception to September 30, 1998 were
calculated as follows:
<TABLE>
<CAPTION>
Three Month Three Month For the Period
Period Ended Period Ended from Inception
9/30/1998 9/30/1997 to 9/30/1998
--------------- -------------- ---------------
<S> <C> <C> <C>
Net Loss $ (1,356,369) $ (623,881) $ (17,702,816)
Preferred Stock cumulative dividend ( 62,000) 0 ( 132,093)
Imputed dividend on Preferred
Stock issued 0 0 ( 1,937,500)
-------------- -------------- ---------------
Net Loss available to Common
stockholders $ (1,418,369) $ (623,881) $ (19,772,409)
============== ============== ===============
Basic and diluted net loss per share $ (0.38) $ (0.17) $ (11.25)
============== ============== ===============
Weighted average shares
outstanding 3,709,671 3,705,522 1,757,380
============== ============== ===============
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
TECHNOLOGY AND MANUFACTURING AGREEMENTS
The Company has also entered into a supply agreement with Sudormed (Note 2) that
requires certain minimum purchases to retain the exclusive use of the licensed
technology. As of September 30, 1998, all minimum purchase requirements had been
met. The Company is obligated to purchase 400,000 additional units by June 30,
1999 and each year thereafter. Failure to make the necessary purchases by the
Company could result in the technology license becoming non-exclusive.
8
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EMPLOYMENT AND NONCOMPETITION AGREEMENTS
In October 1996, the Company had entered into employment and noncompetition
agreements with four executives. These agreements specify that the executives
may not engage in any competitive activity for periods ranging from 9 months to
2 years following termination. Certain of the agreements also provide for
compensation of nine months salary and benefits in the event of termination
under certain circumstances. As of September 30, 1998, the Company recorded a
severance liability of approximately $102,000 in connection with an executive
officer who resigned in July 1998.
LEGAL PROCEEDINGS
On September 24, 1997, the Company received from the former manufacturer of
SPINPRO-Registered Trademark- a demand for arbitration in connection with
alleged breaches of the contract relating to the manufacture of SPINPRO
- -Registered Trademark-. The former manufacturer is seeking damages of
approximately $515,000. The Company does not believe that the claims have any
merit and believes that the ultimate outcome of this proceeding will not have a
material impact on the Company. The Company is vigorously contesting such claims
and has filed counterclaims against the former manufacturer. The Company has
also filed for arbitration against a former vendor relating to SPINPRO
- -Registered Trademark-, seeking damages for alleged breach of contract with
respect to the manufacture of molds for SPINPRO-Registered Trademark-parts.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the preceding consolidated financial statements and notes in this Form
10-QSB and in conjunction with the financial statements and notes thereto for
the year ended June 30, 1998 included in the Company's Annual Report on Form
10-KSB.
OVERVIEW
PBI was incorporated in Delaware in May 1996 in connection with the acquisition
of BioQuant and PBI-WA. On June 28, 1996, the Company completed the mergers
whereby BioQuant and PBI-WA became wholly owned subsidiaries of the Company in
separate stock-for-stock exchange transactions.
The mission of PBI is to develop and commercialize non-invasive technologies for
use in medical diagnostics and laboratory services to improve the detection and
management of chronic diseases. The Company has developed two patented platform
technologies that permit the use of sweat and saliva as diagnostic fluids. Such
platform technologies are based on fifteen issued U.S. patents and two pending
U.S. patents with respect to the Company's SweatPatch-TM- and SalivaSac
- -Registered Trademark-.
Expenses consist, and are expected to continue to consist, primarily of
operating expenses necessary to continue the commercial laboratory operation
(the Company's only significant current source of revenue), research and
development costs for products under development, administration expenses and
payment of license and royalty fees to maintain the Company's intellectual
property rights.
As of September 30, 1998, the Company had an accumulated deficit since inception
of $17,702,816 which included a one-time charge of $6,373,884 for the value of
purchased research and development expenses relating to the Company's merger
with BioQuant and a one-time charge of $428,368 relating to a prior merger
involving PBI-WA in 1995.
10
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RESULTS OF OPERATIONS:
Comparison of the three month periods ending September 30, 1998 and 1997:
<TABLE>
<CAPTION>
- ------------------------------------------
Rounded to Nearest Three
Thousand Dollars Months
- ------------------------------------------
<S> <C> <C>
Revenues:
- ------------------------------------------
Ending 9/30/98 $ 307 Revenues for both quarters are almost entirely comprised of
- ------------------------------------------ laboratory service revenue. Revenues were higher for the
Ending 9/30/97 $ 638 quarter ended 9/30/97 due to work performed on a large contract
- ------------------------------------------ that was not replaced.
Dollar variance $(331)
- ------------------------------------------
Percent variance (52)%
- ------------------------------------------
Laboratory expenses and cost
of goods sold:
- ------------------------------------------
Ending 9/30/98 $ 317 The decrease is related directly to the lower level of
- ------------------------------------------ laboratory service revenues.
Ending 9/30/97 $ 395
- ------------------------------------------
Dollar variance $(78)
- ------------------------------------------
Percent variance (20)%
- ------------------------------------------
Research and product
development:
- ------------------------------------------
Ending 9/30/98 $ 510 The increase is related to the Company's funding of continuing
- ------------------------------------------ research related to development of technology license
Ending 9/30/97 $ 462 opportunities and support of product introduction in Europe.
- ------------------------------------------
Dollar variance $ 48
- ------------------------------------------
Percent variance 10%
- ------------------------------------------
Selling, general and
administration expenses:
- ------------------------------------------
Ending 9/30/98 $ 579 The increase is primarily due to increased legal and accounting
- ------------------------------------------ fees and increased severance costs as a result of reductions
Ending 9/30/97 $ 440 in staff during this period.
- ------------------------------------------
Dollar variance $ 139
- ------------------------------------------
Percent variance 32%
- ------------------------------------------
Amortization of intangible
assets:
- ------------------------------------------
Ending 9/30/98 $ 200 The increase is due to the inclusion of non-cash amortization of
- ------------------------------------------ the Sudormed license.
Ending 9/30/97 $ 16
- ------------------------------------------
Dollar variance $ 184
- ------------------------------------------
Percent variance 1150%
- ------------------------------------------
Total other income (expense):
- ------------------------------------------
Ending 9/30/98 $ (57) The additional net expense is due to both the inclusion of
- ------------------------------------------ imputed interest on the Sudormed license obligation and on a
Ending 9/30/97 $ 50 decline in interest income.
- ------------------------------------------
Dollar variance $(107)
- ------------------------------------------
Percent variance (214)%
- ------------------------------------------
Net income (loss):
- ------------------------------------------
Ending 9/30/98 $ (1,356) The increased net loss is due to lower sales, inclusion of
- ------------------------------------------ imputed interest, lower interest income, higher research and
Ending 9/30/97 $(624) development and selling, general and administrative costs,
- ------------------------------------------ partially offset by reductions in staff.
Dollar variance $(732)
- ------------------------------------------
Percent variance (117)%
- ------------------------------------------
</TABLE>
11
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LIQUIDITY AND CAPITAL RESOURCES:
FINANCING ACTIVITIES
The Registration Statement pertaining to the initial public offering ("IPO") of
the Company's securities was declared effective by the Securities and Exchange
Commission on October 29, 1996. Gross proceeds from the public offering were
approximately $8.1 million. The Company has used the net proceeds from the
offering (approximately $6.3 million) for product development activities
relating to the Osteopatch-TM-, for funding the growth of its central reference
laboratory operations, for research on SalivaSac-Registered Trademark- potential
products, working capital, and approximately $1.2 million to repay debt.
On February 20, 1998, the Company consummated the sale of 925,000 shares of
Series A Convertible Preferred Stock (the "Preferred Stock") with an
institutional investor for an aggregate purchase price of $1,850,000. In
addition, the Company granted such institutional investor an option (the
"Option") to purchase up to 625,000 shares of Preferred Stock until May 20, 1998
for an exercise price of $1,250,000. The Option was exercised in full during May
1998.
OPERATIONS
As of September 30, 1998 the Company had cash and cash equivalents of $942,696.
In addition, the Company's current liabilities exceeded its current assets.
During the quarter ended September 30, 1998, the Company's cash and cash
equivalents declined by approximately $1.3 million from the prior quarter.
The Company has implemented cost reduction programs that will permit existing
cash reserves to meet operating expense requirements through December 31, 1998.
These programs include: reducing staffing from 50 employees in May 1998 to 27
employees as of October 1998, deferral of approximately $82,000 in compensation,
and suspension of current research and development activities. In addition, the
Company has renegotiated the Sudormed license agreement to defer certain monthly
payments of approximately $225,000 until January 1, 1999. However, under the
license agreement, the Company is required to pay approximately $1.6 million on
December 31, 1998. Based on existing resources, the Company will be unable to
make such payments (see "Future Operations" below).
On July 22, 1998 the Company announced that Russ Warnick, the Company's Chief
Scientific Officer, had resigned from the Company to pursue other outside
interests. Mr. Warnick's areas of responsibility have been reassigned to Dr.
Elizabeth Leary, Vice President of Laboratory Services, Dr. Michael Murphy,
Laboratory Director, and Dr. Allan Pronovost, Vice President of Research and
Development. Dr. Pronovost, who joined the Company last January, has had a
distinguished career in medical diagnostic product development, having
directed the development of over 35 products through FDA approval
12
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and market introduction. As a result of the depth of experience and expertise of
the Company's technical staff, the Company does not expect Mr. Warnick's
departure to have a material adverse impact on the Company.
PRODUCTS AND SERVICES
On September 8, 1998 the Company announced it is seeking development partners
for new applications and marketing partners for existing products and products
under development utilizing its proprietary non-invasive collection
technologies, the SweatPatch-TM- and the SalivaSac-Registered Trademark-. Such
technologies involve the collection and analysis of various analytes in sweat
and saliva, respectively, for screening, diagnosis and monitoring of diseases
and medical conditions. Many of the analytes measured in urine and serum can
also be found in sweat and saliva. The Company has made significant progress in
the development of these platform technologies and the Company believes that
both of these technologies can be used to develop accurate, affordable and easy
to use non-invasive tests in a variety of markets. In particular, the Company
is focused on developing partnering agreements related to using the SalivaSac
- -Registered Trademark- technology for drugs of abuse detection and for
non-invasive saliva glucose screening.
On September 8, 1998 the Company also announced that Segix Italia S. p. A.
("Segix") exercised its option to enter into an exclusive ten year license,
supply and distribution agreement with the Company for the distribution of the
Osteopatch-TM- system in Italy. This agreement was finalized after the
successful market and technical evaluation of the Osteopatch-TM- system in Italy
during the past year. This agreement will permit Segix to launch the
Osteopatch-TM- system in Italy. If the Company were to lose its rights under the
Sudormed license agreement (see "Future Operations" below), Sudormed would have
the option, if Segix's agrees, to continue to license Segix directly. However,
Segix (or Sudormed as licensor) in order to use the Osteopatch-TM- would still
require the Company's Pyridinoline Assay Kit, which is covered by a fully paid
exclusive license with Metra Biosystems, Inc. Development of a separate assay
would take considerable time and expense.
On September 14, 1998 the Company announced that BSI, Inc., the North American
Division of BSI, the world's leading registrar of quality management systems,
awarded the Osteopatch-TM- an Annex 5 CE marking certificate under the European
Medical Device Directive. The CE marking of the Osteopatch-TM- product allows
the Company to commercially distribute the Osteopatch-TM- system throughout the
European common market.
In February 1998 the Company completed the initial clinical trials for the
Osteopatch-TM-, for the collection and analysis of bone resorption, an indicator
of fracture risk and filed a 510(k) premarket notification with the U.S. Food
and Drug Administration (FDA). While the Company was encouraged by the
results of the clinical trials, the FDA will require additional information
before this product can be approved as a collection and analytical
13
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device for bone resorption markers. The Company has been and expects to continue
to work with the FDA to determine which additional studies and information will
be required to support the approval process. Given the novelty of sweat as a
diagnostic fluid today, the Company believes this product application is
establishing a precedent for future applications of the SweatPatch-TM-
technology and therefore will require a more detailed review on the part of
the FDA than originally anticipated.
The additional studies required for resubmission to the FDA will not begin until
after appropriate funding has been raised by the Company and the clinical trial
design has been reviewed with the FDA. The Company estimates that completion of
such studies and resubmission will cost approximately $2 million. Once the
Company commences these trials, it is expected it will take at least six to nine
months before the Company can resubmit its application to the FDA. Based on
current capital requirements, without an immediate infusion of capital, the
Company will not be able to commence such trials. Further, even if commenced,
there can be no assurance that the Company will have sufficient resources to
complete such trials or that the FDA will not require further studies so as to
delay the Company's application, or that the FDA will ultimately approve the
Company's product.
FUTURE OPERATIONS
If the Company is unable to renegotiate the scheduled December 31, 1998 payment
of $1.6 million or raise equity funding adequate to pay or finance the
obligation, it is at risk of losing the Sudormed license rights to the patch
technology (SweatPatch-TM-). Loss of such license would result in the
abandonment of the Osteopatch-TM- product and all research and development
efforts relating to the SweatPatch-TM- technology.
The Company is working to raise approximately $5 million in debt or equity. This
would permit the Company to maintain the Sudormed license and continue with the
Company's plans to develop non-invasive diagnostic products using both the
SweatPatch-TM- and SalivaSac-Registered Trademark- technologies and build the
laboratory service business. If the Company is unsuccessful in these efforts,
the Company will likely lose the SweatPatch-TM- license and will focus its
efforts on the laboratory service business and SalivaSac-Registered Trademark-
licensing opportunities to create future value.
If the Company loses the Sudormed license and is absolved of its related payment
obligations, current assets would exceed current liabilities. However,
laboratory service revenues would have to be increased and/or expenses would
have to be reduced in order to achieve self-sufficiency without additional
funding. Therefore, without additional outside funding the Company may not be
able to meet its operating expense requirements beyond December 1998.
The Company is actively working to raise the funds mentioned above and
additional funds to cover longer term requirements for product research and
development and laboratory
14
<PAGE>
operations. The Company has also reduced its net cash used in operating
activities, which has averaged over $1 million per quarter for the past twelve
months, in order to conserve existing cash resources. In August 1998, the
Company announced that it had retained R&R Capital Group to assist in raising
capital. However there can be no assurance that such external sources of funding
will be available or be available on terms acceptable to the Company, in which
event, the Company will be required to delay, scale back or eliminate its
research and development programs, including but not limited to the development
of the Osteopatch-TM- and other products involving the SweatPatch-TM- and the
SalivaSac-Registered Trademark- technologies. Alternatively, the Company may
obtain funds through entering into arrangements with collaborative partners
or others that may require the Company to relinquish rights, which may be
substantial, to certain of its technologies or potential products that the
Company would not otherwise relinquish. Outside funding, if available, will
probably involve substantial dilution to existing stockholders or changes in
stockholder rights in order to raise the necessary additional funds.
The Company has advised Nasdaq that for the period ended September 30, 1998, the
Company has fallen below the $2,000,000 in net tangible assets (total assets
minus total liabilities and goodwill) maintenance criteria for continued listing
of the Company's securities on the Nasdaq SmallCap Market. The Company also
received notice from Nasdaq that it is not in compliance with the $1.00 minimum
bid requirement with respect to its common stock. The Company is reviewing its
current efforts to obtain additional equity investments with Nasdaq and has
requested a delay in any delisting proceedings awaiting the outcome of the
Company's current efforts.
In the event of Nasdaq SmallCap Market delisting the Company's securities,
trading, if any, in the Company's securities may then continue to be conducted
on the OTC Electronic Bulletin Board or in the non-Nasdaq over-the-counter
market. As a result, an investor may find it more difficult to purchase, sell,
or to obtain accurate quotations as to the market value of the Company's
securities and it could become more difficult for the Company to raise capital.
15
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. However, on
September 24, 1997 the Company received from the former manufacturer of
SPINPRO-Registered Trademark- a demand for arbitration in connection with
alleged breaches of the contract relating to the manufacture of SPINPRO
- -Registered Trademark-. The former manufacturer is seeking damages of
approximately $515,000. The Company does not believe that the claims have any
merit and believes that the ultimate outcome of this proceeding will not have a
material impact on the Company. The Company is vigorously contesting such
claims and has filed counterclaims against the former manufacturer. The Company
has also filed for arbitration against a former vendor relating to SPINPRO
- -Registered Trademark-, seeking damages for alleged breach of contract with
respect to the manufacture of molds for SPINPRO-Registered Trademark- parts.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable.
ITEM 5 - OTHER INFORMATION - Not Applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(10.30) License, Supply and Distribution Agreement, dated July 17, 1998 by
and between Segix Italia S.p.A. and the Company.
(27.1) Financial Data Schedule.
(b) The following current reports on Form 8-K were filed during
the quarter ended September 30, 1998:
(i) July 29, 1998 with respect to the engagement of Grant Thornton LLP
s the Company's independent auditors.
16
<PAGE>
SIGNATURES
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.
DATED: November 19, 1998
\s\ Paul G. Kanan President and Chief Executive
- ----------------------------- Officer
Paul G. Kanan
\s\ Peter B. Ludlum Vice President and Chief Financial
- ---------------------------- Officer (Principal Financial and
Peter B. Ludlum Accounting Officer)
17
<PAGE>
PORTIONS OF THIS DOCUMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT
LICENSE, SUPPLY AND DISTRIBUTION AGREEMENT
THIS LICENSE, SUPPLY AND DISTRIBUTION AGREEMENT ("Agreement"), effective as of
17th July, 1998, is made by and between Pacific Biometrics, Inc., a company duly
organized and existing under the laws of Delaware, having its principal place of
business at 1370 Reynolds Avenue, Irvine, CA 92614 ("PBI") and Segix Italia
S.p.A., a company duly organized and existing under the laws of Italy, having
its principal place of business at Via del Mare, 36-00040, Pomezia (Roma),
Italia ("Segix").
WHEREAS:
PBI and Segix are Parties to that certain Evaluation Agreement dated August 6th,
1997, which provided that Segix conduct a market and technical evaluation of
PBI's Osteopatch* (the "Product", as hereinafter defined);
Segix exercised its option pursuant to the Evaluation Agreement to be the
exclusive distributor and licensee of the Product in the Territory, as
hereinafter defined; and
Segix has or is willing to establish appropriate facilities, know-how and
ability to market and sell the Product in the Territory.
NOW, THEREFORE, the Parties agree as follows:
1. DEFINITIONS
As used herein the following capitalized terms shall have the following
respective meaning:
1.1 "COMMERCIAL INTRODUCTION" shall mean January 1, 1999, or the date
on which all necessary approvals have been obtained from the
Italian Authorities for the marketing and sale of the Product in
the Territory, whichever is the later.
1.2 "EFFECTIVE DATE" shall mean 17th July, 1998.
1.3 "INITIAL TERM" shall mean the period from the Effective Date until
the date corresponding to the tenth anniversary of Commercial
Introduction.
1.4 "KNOW-HOW" shall mean any and all information in the possession or
otherwise under the control of PBI required for (i) marketing the
Product including, but not limited to, promotional and advertising
materials and technical specifications; (ii) analyzing the patches
using PBI's
<PAGE>
Assays including, but not limited to, laboratory
instructions, practices and procedures, and quality control
specifications as set forth in Exhibit C.
1.5 "OSTEOPATCH-TM-" shall mean PBI's patented skin patch sweat
collection device. A list of relevant patents and patent
applications, together with dates of application and grant and
territorial application, is set forth in Exhibit E.
1.6 "PARTIES" shall mean PBI and Segix.
1.7 "PBI'S ASSAYS" shall mean PBI's proprietary immunoassay systems
useful for analyzing Osteopatch-TM- for the presence of at least
one biochemical bone marker.
1.8 "PRODUCT" shall mean Osteopatch-TM- and PBI's Assays, as well as
all improvements thereto and replacements thereof now or hereafter
developed or sold by or on behalf of PBI during the term of this
Agreement, provided that PBI is not legally prohibited from
passing on such improvements and replacements to Segix.
1.9 "PROFICIENCY TESTING PROGRAM" shall mean a series of tests,
inspections and analyses established by PBI, the objective of
which is to verify that laboratory work performed in connection
with the use and evaluation of the Product meets quality control
specifications set by PBI.
1.10 "RENEWAL TERM" shall have the meaning set out in Section 16.1.2.
1.11 "TERMINATION DATE" means the later of: (i) the last day of the
Initial Term, or (ii) the last day of any Renewal Term.
1.12 "TERRITORY" shall mean Italy, San Marino and the Vatican.
1.13 "CONTRACT EXCHANGE RATE" shall mean US$1.00=ITL1,750 or its Euro
equivalent when the bilateral conversion rate is fixed relative to
Italy's participation in the European Monetary Union.
2. PAYMENT
As consideration for the rights granted by PBI to Segix under this
Agreement, on the Effective Date Segix shall pay to PBI US$[ * ].
From such sum payable, Segix shall deduct a credit from PBI to Segix of
US$[ * ], provided that Segix already has paid to PBI the sum of
US$[ * ] for
* Omitted pursuant to a request for confidential treatment
2
<PAGE>
exclusivity pursuant to the Evaluation Agreement and the further sum of
$[ * ] to cover PBI's costs for patch supply and processing pursuant
to the Evaluation Agreement.
3. DISTRIBUTION OF THE PRODUCT
3.1 EXCLUSIVE RIGHTS. On the terms set out in this Agreement, Segix
shall be the exclusive distributor and licensee of the Product in
the Territory. Segix agrees to market, sell, and use the Product
only for those biochemical markers approved in advance, in
writing, by PBI. Any orders for Product received by PBI for sale
in the Territory shall be immediately referred to Segix and PBI
shall not knowingly supply Product to third parties destined for
sale or use in the Territory.
3.2 TERRITORIAL LIMITATION. With respect to the Product, Segix shall,
during the term of this Agreement, refrain from seeking customers,
establishing any branch or maintaining any distribution depot
outside the Territory, unless otherwise consented to in writing by
PBI. Segix agrees to use its reasonable efforts to control
distribution of the Product in the Territory so that it is not
available outside of the Territory.
3.3 INDEPENDENT CONTRACTOR. The relationship of Segix and PBI with
respect to this Agreement and transactions concerning the Product
shall be that of independent contractors, and nothing contained in
this Agreement shall be construed to: (i) give either Party the
power to direct or control the day-to-day activities, expressly
including marketing activities, of the other, (ii) constitute the
Parties as partners, joint venturers, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) allow
either party to create or assume any obligation on behalf of the
other for any purpose whatsoever.
3.4 SKILLED SALESPERSONS AND MARKETING. Segix shall employ and train
for the marketing and sale of the Product persons of adequate and
suitable skill and experience in the field of marketing products
related to osteoporosis. Segix agrees to maintain at all times a
sufficient sales force and an adequate sales organization to meet
the demand for the Product in the Territory.
* Omitted pursuant to a request for confidential treatment
3
<PAGE>
3.5 USE OF PBI TRADEMARK AND PATENTS. PBI hereby grants to Segix a
license to use, in the Territory, the "Osteopatch-TM-" trademark,
PBI's patented skin patch sweat collection device and all other
PBI's patented and proprietary information and Know-How relative
to the Product, in accordance with and in performance of the terms
of this Agreement.
3.6 LABELLING OF PRODUCT. The Product labelling shall be in
accordance with the Italian language text which, together with
English translation, is set forth in Exhibit D. Such text shall be
amended from time to time by agreement between the Parties or as
required by the Italian Health Authorities or the United States
Food and Drug Agency (FDA). However, if compliance with a
requirement of the FDA for the exportation of the Product would
cause a breach of the requirements of the Italian Health
Authorities, then the Parties shall meet and attempt in good faith
to find a solution. Such text shall appear on all packaging of the
Product, including on the boxes, the accompanying leaflets and on
each sachet containing the patch, and shall describe Segix as
exclusive licensee for the Territory.
4. SUPPLY
4.1 PRODUCT. Except as expressly provided herein, and subject to the
terms and conditions of this Agreement, Segix shall purchase from
PBI, and PBI shall supply to Segix, all Segix's requirements of
Product.
4.2 PRICE AND PAYMENT. (a) Subject to Section 4.2(b), PBI shall sell
Product to Segix at a price set by PBI as set forth in
Exhibit "A." All prices for Product charged by PBI will be ex-PBI's
facilities in the United States, at which point title and risk of
loss shall pass from PBI to Segix. All non-U.S. taxes, fees,
duties and other charges with respect to the sale by PBI to Segix
of the Products shall be paid by Segix. PBI shall provide reasonable
assistance to Segix in arranging for the shipping of Product to
Segix pursuant to Segix' instructions, All payments due PBI
pursuant to this Agreement shall be paid within [ * ] days from the
date of shipment to Segix. If Segix fails to make any payment to
PBI when due, PBI may, without affecting its rights under this
Agreement, delay any future shipments of the Products to Segix
until such sums have been paid. All payments to PBI pursuant to
this Agreement shall be made in United States currency, by check or
by wire transfer of funds; provided, however, that if PBI elects to
manufacture the Products in
* Omitted pursuant to a request for confidential treatment
4
<PAGE>
the Territory it may notify Segix of its election to receive payment
in the currency of the Territory, and the prices for the Products
shall thereupon be calculated based upon the conversion rate for
such currency as published in the WALL STREET JOURNAL on the date
hereof (the "Contract Exchange Rate"). PBI reserves the right to
change prices up to a maximum annual increase of [ * ]
by giving Segix [ * ] days notice in writing of such changes,
provided that such increases are due to documented increases in the
cost of primary materials to and/or labor costs of PBI or its
suppliers; provided, however, that PBI shall have the right to
request good faith re-negotiation of the Product price if its gross
profit margin on Products sold in the Territory drops below
[ * ]. If the Parties are unable to reach
agreement as a result of such renegotiations, PBI shall have the
right to suspend or terminate this Agreement as provided in
Section 4.2(b).
(b) Should the US Dollar/Italian lira exchange rate fluctuate by
in excess of [ * ] above or below the Contract Exchange
Rate ("Exchange Rate Fluctuation"), then the economic viability
of this Agreement may need to be reconsidered. In such event,
either Party may call upon the other, by written notice, to enter
into a Product price review, whereupon the Parties, in good
faith, shall consider a new price for the Product. Failing
agreement within thirty (30) days of the date of the written
notice requesting the price review, and providing that the
Exchange Rate Fluctuation persists, either Party may suspend the
operation of this Agreement for up to one hundred eighty (180)
consecutive days and no more than a total of one hundred eighty
(180) days in the aggregate over the life of this Agreement.
Should the Exchange Rate Fluctuation still prevail at the
expiration of this period, either Party may terminate this
Agreement by written notice to the other.
4.3 FORECASTS, ORDERS AND ACCEPTANCE.
4.3.1 FORECASTS AND QUARTERLY PURCHASES ORDERS. During the term of
this Agreement, Segix shall provide to PBI: (i) at least [*]
days prior to the beginning of each calendar quarter, a
written forecast of Segix's anticipated requirements for the
Product during the next four calendar quarters, such written
forecast to be advisory in nature only, and (ii) at least [*]
days prior to the beginning of each calendar quarter, a
written purchase order for the Product for such calendar
quarter (the "Quarterly Purchase Order"). Each and every
* Omitted pursuant to a request for confidential treatment
5
<PAGE>
Quarterly Purchase Order shall be within [* ]
of the most recent forecast for that calendar quarter, and
will include without limitation the shipment destination and
a requested delivery date or, in the event that Segix desires
that the Product corresponding to such Quarterly Purchase
Order be shipped in more than one shipment, a shipment
destination and a requested delivery date for each such
shipment. The requested delivery date(s) shall fall any time
within the applicable calendar quarter. Within [ * ]
days after receipt of each and every Quarterly Purchase
Order, PBI shall confirm to Segix in writing without
qualification its acceptance of such Quarterly Purchase
Order, also enclosing a copy of the letter of confirmation,
if any, from PBI's supplier; provided, however, that Segix
delivers such Quarterly Purchase Order to PBI in accordance
with the above.
4.3.2 SUPPLEMENTAL PURCHASE ORDER. In addition to its Quarterly
Purchase Orders, Segix may provide to PBI at any time a
supplemental purchase order for Products ("Supplemental
Purchase Order"), each of which will include without
limitation the shipment destination and a requested delivery
date. Within [ * ] days after receipt of any Supplemental
Purchase Order, PBI shall advise Segix in writing without
qualification of its acceptance or not of such Supplemental
Purchase Order; provided however, that such Supplemental
Purchase Order has been provided to PBI at least [ * ] days
prior to the requested delivery date. PBI's acceptance
shall include without limitation an estimated shipment date
corresponding to each requested delivery date in Segix's
Supplemental Purchase Order.
4.3.3 OBLIGATION TO SUPPLY. PBI shall use its best efforts to
supply the Product to Segix, it being understood that PBI's
ability to meet Segix's requirement for Product depends in
part, on PBI's ability to obtain ordered Product from its
suppliers. Accordingly, PBI's failure to fill Segix's orders
due solely to PBI's inability to obtain sufficient Product
from PBI's suppliers shall not be a breach of this Agreement.
However, any material breach by a PBI supplier of its
* Omitted pursuant to a request for confidential treatment
6
<PAGE>
supply obligations to PBI shall be evaluated by the Parties
in good faith, to decide on the opportunity of taking legal
action against such supplier. In the event that a claim is
made or suit initiated against such a supplier, Segix shall
be entitled to recover its damages resulting from the breach
by such supplier out of any damages recovered or settlement
made with such supplier. [
*
]
4.3.4 DELIVERY. PBI shall use its best efforts to ship the
Product corresponding to Segix's purchase order on PBI's
estimated shipment date, but in no event shall shipment be
made prior to Segix's requested delivery date or later than
[ * ] days after PBI's estimated shipment date. The method
of shipment shall be specified by Segix and Segix will pay
all freight, insurance, and shipping expense.
4.3.5 COMMENCEMENT OF PURCHASE ORDERS. It is foreseen that
the first forecasts and orders shall be placed by Segix on or
before [ * ], 1999, relative to the [ * ] calendar
quarter of 1999, provided that the Parties shall meet during
[ * ] 1999 in order to discuss the proposed forecasts and
orders which Segix shall make. At the same time and
subsequently, in April of each year, the Parties shall review
the specified forecast and order times, with a view to
reducing to a minimum the deadlines contained in Section
4.3.1. The orders for the calendar quarters prior to the
[ * ] quarter 1999 shall be regulated by separate letter
exchanged by the Parties contemporaneously with the signing
of this Agreement.
4.4 ACCEPTANCE. After receipt by Segix of an invoice from PBI, the
invoice will be due and payable as provided in this Agreement
unless the shipment is rejected as non-conforming as provided below
within [ * ] days of its receipt at the address designated by
Segix. Each
* Omitted pursuant to a request for confidential treatment
7
<PAGE>
shipment of a Product from PBI to Segix shall be accompanied by a
quality control certificate. Failure to meet specifications and
other defects referred to in Section 5.1 will be the only basis
upon which a shipment may be rejected by Segix. Unless Segix
advises PBI that a shipment is non-conforming within [ * ] days of
its receipt, such shipment shall be deemed accepted. Each shipment
from PBI will contain numbers identifying the manufacturing lot or
lots for control purposes. Segix will keep accurate records which
will enable it to determine to which customers of Segix the
Products and each manufacturing lot were shipped.
5. WARRANTY FOR THE PRODUCT
5.1 EXPRESS LIMITED WARRANTY. PBI warrants that the Product shall
conform to the specifications set forth in Exhibit B and the label
set forth in Exhibit D and be free from defects in materials and
workmanship and of merchantable quality and fit for the purpose
for the period set by the expiration date(s) indicated on Product
beyond the date of acceptance by Segix pursuant to Section 4.4
(the "Warranty Period"). The warranties set out in this Section
5.1 and in Section 7.1.1 are the exclusive warranties given by PBI
with respect to the Product.
5.2 REMEDY. During the Warranty Period, PBI shall repair or replace,
at PBI's option and expense, any Product that does not perform in
accordance with specifications set forth in Exhibits B and D.
PBI's obligation to repair or replace defective Product pursuant
to this Section 5.2 shall not apply to Product that has not been
handled and stored in accordance with PBI's instructions and
product specifications, or has been subjected to misuse, neglect,
modification or unusual physical or chemical stress after delivery
to Segix. PBI's warranty to repair or replace, and its
performance under the warranty, [
*
] shall be the sole remedies available to Segix
for the delivery of non-conforming or defective Product.
6. CUSTOMER PRICE
Subject to Sections 8.1 and 8.2 hereof, Segix shall have the sole right
to establish and control the price of the Product to its customers.
* Omitted pursuant to a request for confidential treatment
8
<PAGE>
7. REPRESENTATIONS AND WARRANTIES, AND INDEMNIFICATION
7.1 REPRESENTATIONS AND WARRANTIES.
7.1.1 REPRESENTATIONS AND WARRANTIES OF PBI. PBI represents and
warrants that: (i) the Product will conform to the
specifications set forth in Exhibit "B"; (ii) the Product will
be manufactured and handled in compliance with all applicable
laws and regulations; (iii) PBI has the full power, right and
authority to carry out its obligations under this Agreement,
and is owner of the Osteopatch trademark and owner of or
Licensee under the patents for the Product relative to the
Territory which to the best of its knowledge and belief, have
not been challenged or contested by any third party as at the
date hereof; and (iv) PBI has not previously granted and will
not grant any rights to sell the Product to any third party
that conflict with the rights granted to Segix herein.
7.1.2 REPRESENTATIONS AND WARRANTIES OF SEGIX. Segix represents and
warrants that: (i) Segix has the full power, right and
authority to enter into and carry out its obligations under
this Agreement, and (ii) the Product will be handled by Segix
in compliance with all applicable laws and regulations of the
Territory.
7.2 INDEMNIFICATION.
7.2.1 INDEMNIFICATION BY PBI. PBI shall defend and indemnify Segix
against, and hold Segix harmless from, any and all claims,
suits, losses, liabilities and expenses (including reasonable
attorneys fees of attorneys) caused by any Product used in
accordance with instructions and specifications or through the
negligence of PBI, or from the breach of any representation or
warranty set forth in Section 7.1.1; provided that: (i) PBI
shall have sole control of such defense, and (ii) Segix shall
provide notice promptly to PBI of any actual or threatened
claim of which Segix becomes aware. In the event of any such
claim, Segix shall provide PBI, at PBI's expense, information
and assistance as PBI may reasonably request for purposes of
defense.
9
<PAGE>
7.2.2 INDEMNIFICATION BY SEGIX. Segix shall defend and indemnify PBI
against, and hold PBI harmless from, any and all losses, costs,
liabilities or expenses (including reasonable attorneys fees of
attorneys) arising out of or in connection with the use or sale
of the Product by Segix, excluding claims covered by Section
7.2.1, or from the breach of any representation or warranty set
forth in Section 7.1.2; provided that (i) Segix shall have sole
control of such defense and (ii) PBI shall provide notice
promptly to Segix of any actual or threatened claim of which
PBI becomes aware. In the event of any such claim, PBI shall
provide Segix, at Segix' expense, information and assistance as
Segix may reasonably request for purposes of defense.
7.2.3 EXCEPTIONS. Notwithstanding the foregoing, with respect to
third party claims or demands or other events covered by
Section 7.2.2 relating to PBI's continuing business
relationships (as determined in the reasonable judgment of PBI)
including, without limitation, such PBI's relationships with
customers, vendors or suppliers, PBI shall have the right to
employ counsel and defend and/or settle such claims or demands
at its own expense; provided that, except with the consent of
Segix, no settlement of any such claim or demand of third-party
claimants and the costs incurred in reaching such settlement
(including without limitation reasonable fees of attorneys and
other professionals) shall be determinative of the liability of
Segix or the amount of liability of Segix to PBI with respect
to any such individual claim or demand not previously consented
to by Segix in writing.
8. PROVISIONS ON COOPERATION BETWEEN THE PARTIES
8.1 PROFICIENCY TESTING. Segix, through independent laboratories used
by Segix, shall participate in the Proficiency Testing Program
throughout the term of this Agreement and agrees to employ
laboratory practices that assure compliance with PBI's quality
control specifications, which, in preliminary form as agreed by
the Parties, are attached hereto as Exhibit "C". Within [*]days of
the Effective Date, PBI shall provide Segix
* Omitted pursuant to a request for confidential treatment
10
<PAGE>
with its finalized proposed quality control specifications and,
within a further period of [*] days, Segix shall communicate to
PBI any difficulties it foresees in implementing such
specifications, whereupon the Parties shall use their best efforts
to agree on the final specifications. PBI shall render assistance
to Segix in providing instructions to the independent laboratories
on the laboratory practices to be adopted. PBI shall have the
right to terminate this Agreement on written notice to Segix
specifying the nature of Segix' non-conformance in reasonable
detail if Segix's laboratory practices do not meet such agreed
quality control specifications within [ * ] days after receipt of
PBI's written notice of non-compliance with such quality control
specifications.
8.2 BEST EFFORTS. Segix, in accordance with prudent application of
business judgment, shall use its best efforts to promote the use,
sale, marketing and distribution of the Product in the Territory
and to safeguard PBI's interest within the Territory.
8.3 FAIR COMPETITION. Segix shall follow the rules of fair
competition in the Territory and otherwise conduct its business
with a view to gain goodwill to the Product, Segix and PBI.
8.4 COOPERATION. The Parties shall in good faith cooperate in the
development of promotional materials with respect to the sale and
marketing of the Product in the Territory and in the training of
Segix's sales force.
8.5 COSTS.
8.5.1 SALES COSTS. Except as set forth in Section 8.3, Segix shall
bear all costs associated with Segix's promotion and sale of
the Product in the Territory.
8.5.2 COSTS FOR CLINICAL STUDIES. Segix shall bear all costs
associated with any clinical tests and studies of the Product
related to the selling of or maintaining of all required
approvals or registrations for the Product in the Territory.
8.6 INSPECTIONS AND REPORTING.
8.6.1 INSPECTION BY SEGIX. PBI shall permit Segix, upon [ *]
business days prior notice, to inspect the facilities and
audit the manufacturing records of PBI and PBI's
subcontractors, if
* Omitted pursuant to a request for confidential treatment
11
<PAGE>
any, at reasonable times and in the presence of a
representative of PBI, to assure compliance with the terms
and conditions of this Agreement.
8.6.2 INSPECTION BY PBI. Segix shall permit PBI, upon [ * ]
business days prior notice, at reasonable times and in
the presence of a Segix representative, to inspect
Segix's facilities, including laboratories,
warehouses, and the storage and traceability of the
Products, to assure compliance with the terms and
conditions of this Agreement.
8.6.3 REPORTING BY SEGIX. Within [ * ] days from the close of
each calendar quarter, Segix shall render to PBI a written
report setting forth the number and type of PBI's assays
performed by Segix during that quarter and the actual
prices charged by Segix for Products and assays during such
quarter, denominated in Italian Lira. Segix shall keep
complete and accurate books and records containing all
information and data which may be necessary to ascertain
and verify the information provided in such reports. Such
books and records shall be open to examination, at PBI's
expense, by any designated agent or employee of PBI. PBI
may exercise its right of audit no more frequently than [ * ]
in any calendar year and may only conduct [ * ]
for a given reporting period. The records for any given
calendar year shall be preserved for a period of [*] years
from the end of that calendar year. All information,
documents, and records of Segix examined by the designated
agent or employee of Segix shall be maintained in strict
confidence.
8.6.4 REPORTING BY PBI: Within [ * ] days from the close of each
calendar quarter, PBI shall render to Segix a written
report setting forth PBI's fully burdened cost for Product
during such calendar quarter. PBI shall keep complete and
accurate books and records containing all information and
data which may be necessary to ascertain and verify the
information provided in such reports. Such books and
records shall be open to examination, at Segix' expense, by
any designated agent or employee of Segix. Segix may
exercise its right of audit no more frequently than once in
any calendar year and
* Omitted pursuant to a request for confidential treatment
12
<PAGE>
8.6.5 may only conduct a single audit for a given reporting period.
The records for any given calendar year shall be preserved
for a period of three years from the end of that calendar
year. All information, documents, and records of PBI
examined by the designated agent or employee of PBI shall be
maintained in strict confidence.
8.7 RIGHT OF FIRST NEGOTIATION. PBI grants to Segix a right of first
negotiation for the Territory with respect to the development and
commercialization by PBI of new devices and methods for the
identification of bone resorption markers used for the management
of osteoporosis. PBI shall provide written notice to Segix of all
such new developments for which it has proprietary rights,
following which Segix shall have a period of three calendar months
to decide whether it is interested in carrying out an evaluation
study for such new devices and methods. Should Segix decide that
it wishes to carry out such an evaluation study, then the Parties
shall enter into good faith negotiations for the purpose of
concluding an evaluation agreement and license and distribution
agreement for the Territory in a form similar to the agreements
for Osteopatch.
9. SUPPORT TO SEGIX
PBI agrees to:
(i) give all reasonable assistance to Segix, at Segix's expense, in
its sales activities with respect to the Product in the Territory;
(ii) supply Segix with Know-How, including such advertising and
promotional material for the Product as is developed by PBI as
well as relevant information as concerns the Product including but
not limited to the handling and use of the Product; all direct
costs for translation of such material to the language of the
Territory (or any language other than the language used in the
material provided by PBI) and the cost of printing the material
shall be paid by Segix; the Parties acknowledge that the Product,
to the extent possible, given local legal and cultural
differences, shall be promoted and marketed consistently
throughout the world;
13
<PAGE>
(iii) review and give opinion on and approve the contents of any of
Segix's printed materials as relates to information with respect
to the Product; it being understood that PBI must approve in
advance any such printed material to be used by Segix; provided,
however, that, in the event that PBI has not provided comments or
approval or consent in writing within [ * ] days after
receipt of such printed material from Segix, approval and consent
for Segix's use of such printed material shall be deemed to have
been given by PBI;
(iv) provide reasonable assistance to Segix, at Segix's expense, in its
use, analysis and evaluation of PBI's assays;
(v) give Segix access to PBI quality assurance, quality control and
production records as can be reasonably required by Segix for the
performance of its obligations or undertaking under this Agreement
or as reasonably necessary for Segix to defend or otherwise pursue
legal action in connection with Segix's rights hereunder.
10. CHANGES IN THE PRODUCT
PBI shall have the right, for clear and objective medical, scientific or
technical reasons, to make changes in the Product or its packaging, upon
[ * ] days prior written notice to Segix. The Parties shall in good
faith consult with respect to any such proposed changes, to assure
conformity with labeling requirements applicable in the Territory. The
Parties acknowledge that changes in the Product may require the further
approval of relevant regulatory agencies and shall give due consideration
to the costs and delays inherent in such changes.
11. COMPETITION
Without the prior written consent of PBI, during the term of this
Agreement Segix will refrain from manufacturing, selling or otherwise
distributing in the Territory products which are competitive with or
otherwise for the same prescriptive purposes as the Product.
* Omitted pursuant to a request for confidential treatment
14
<PAGE>
12. REPORTS OF SIDE EFFECTS OF THE PRODUCT
12.1 The Parties shall immediately upon becoming aware of any side
effects related to the handling or use of the Product give report
thereof to the other Party in such form and manner as the Parties
from time to time may decide. The same shall apply for any
information regarding the safety, efficacy or stability of the
Product.
12.2 The provisions of this Section 12 shall survive the expiration or
termination of this Agreement and continue for so long as any
statute of limitation may run with respect to claims or demands
regarding the safety, efficacy or stability of the Product.
13. SECRECY AND NON-USE
13.1 CONFIDENTIAL INFORMATION. During the term of this Agreement and
thereafter, any technical, commercial or other information of a
confidential nature disclosed by either of the Parties shall be
treated as strictly confidential and use of such information by
Segix shall be solely for the sale of the Product in the Territory
and by PBI shall be solely for the manufacturing and sale of the
Product outside the Territory and neither Party shall, without the
prior written consent of the other Party, pass it on to any person
except to those of either Party's employees for whom such
information shall be required for the proper performance of their
duties and who are themselves bound by obligations of secrecy and
non-use in respect thereof.
13.2 DOCUMENTATION. All printed material, instructions,
specifications, technical data and other documents or information
material of any kind relating to the Product provided to Segix by
PBI shall remain the property of PBI. Upon expiration or
termination of this Agreement for any reason, all such material
and documents as well as all copies thereof shall be returned to
PBI forthwith, provided, however, that Segix may retain one copy
of such material and documents for archival purposes.
13.3 RIGHT TO RESULTS OF CLINICAL TESTS AND STUDIES. Subject to the
terms of this Agreement, each Party shall disclose to the other
the results of any clinical studies involving the Product carried
out by or on behalf of such Party. Both Parties have the right to
use the result of such clinical studies and the documentation
involved in such studies [ * ];provided, however, that
Segix may only use such results and documentation
* Omitted pursuant to a request for confidential treatment
15
<PAGE>
submitted by PBI for the purpose of carrying out its undertakings
under this Agreement, and PBI may, during the term of this
Agreement, only use such results and documentation submitted by
Segix for activities outside the Territory.
14. FORCE MAJEURE
14.1 EXCUSE FROM FULFILLMENT. Except as set forth in Section 14.2, the
Parties shall be excused from fulfillment of any obligation under
this Agreement, except any payment obligation, to the extent that
and for so long as such fulfillment is prevented or delayed in
whole or in part by causes beyond its reasonable control from
fire, flood, war, embargoes, blockades, riots, governmental
interference, acts or omissions of any governmental authority,
compliance with government regulations (including those introduced
during the term hereof), acts of God, delays or shortages in
transportation or inability to obtain necessary materials from
usual sources or from defects or delays in the performance of its
suppliers or sub-contractors if caused by any circumstance
referred to in this Section 14. Upon the occurrence of any such
event the Party affected shall, without delay, inform the other
Party thereof.
14.2 TERMINATION RIGHT. If, by reason of any of the circumstances set
out in Section 14.1, the fulfillment of any obligation under this
Agreement becomes impossible for more than [ * ] consecutive days,
either Party shall be entitled to terminate this Agreement by
written notice to the other.
15. PATENT PROVISIONS
PBI may, in its discretion, seek to secure and maintain any patent or
other proprietary rights which may be available with respect to the
production, manufacture and sale of the Products. PBI may initiate
infringement litigations on patent(s) and proprietary rights owned by PBI
relating to the Products in the sole discretion of PBI. Either Party
shall notify the other Party of any such infringement of the
aforementioned patent(s) and proprietary rights within the Territory and
PBI shall have six months in which to terminate the infringement or
initiate litigation against an alleged infringer. In the event that PBI,
for any reason, does not terminate the infringement or initiate
litigation within the six months, Segix shall be deemed to have the
right, but not the obligation, to bring an action in its own name or, if
required by law to bring such action in the name of the holder
* Omitted pursuant to a request for confidential treatment
16
<PAGE>
of the patent, in the name of PBI. PBI will cooperate with Segix and Segix
shall bear the cost and expenses incurred in relation to the litigation if
Segix brings suit. Whichever Party bears the costs of litigation against
infringers shall receive all damages and other recoveries awarded in such
instance. No settlement, consent judgement or other voluntary disposition
of the litigation which may have an adverse effect on the rights of one
Party may be entered into without the consent of the other Party.
16. TERM AND TERMINATION
16.1 TERM OF THE AGREEMENT.
16.1.1 TERM. Except as expressly provided herein, this Agreement
shall commence upon the Effective Date and shall continue in full
force and effect until the Termination Date.
16.1.2 RENEWAL TERM. This Agreement shall be renewable for
successive periods of three years, upon the terms and conditions
hereof, except that the Parties shall negotiate, in good faith, to
set a revised schedule of minimum purchases of Product by Segix.
Such revised schedule shall reasonably take into account the sales
trends over the preceding term and other relevant market factors.
Segix shall have the right to commence negotiations for Renewal
Term during the last year of the Initial Term.
16.2 TERMINATION AT WILL.
16.2.1 Segix, at any time during the term of this Agreement, for
any reason or for no reason, may terminate this Agreement upon [ * ]
days prior written notice to PBI. The effective date of such
termination shall be as set forth in Segix's written notice to
PBI, provided that such effective date shall be not less than [ * ]
days after the date of such written notice. In the event of
termination under this Section 16.2.1, Segix shall, at PBI's sole
discretion, pay for all Product ordered (but not for that which
has been forecast) by Segix pursuant to Section 4.3.1, including
payment for Product ordered but not yet delivered.
* Omitted pursuant to a request for confidential treatment
17
<PAGE>
16.2.2 Promptly following its notice of termination pursuant to
Section 16.2.1, Segix shall, where permitted, reassign any
registrations of the Product in the Territory to PBI, at Segix's
expense, and such reassignment, where possible, shall have been
registered on the effective date of such termination.
16.2.3 Following termination by Segix pursuant to Section 16.2.1,
Segix shall for [ * ] years refrain from selling any product which
competes with the Product, unless such termination by Segix was by
virtue of breach on the part of PBI.
16.3 TERMINATION FOR CAUSE.
16.3.1 BY EITHER PARTY. Without prejudice to any other rights it
may have hereunder or at law, either Party shall have the right to
terminate this Agreement without prior notice upon the occurrence
of any of the following:
(i) the other Party should materially breach any of the
material provisions or material conditions of this
Agreement, and should fail to cure such breach within [ * ]
days after receipt of notice of such breach in writing from
the non-breaching Party;
(ii) the other Party becomes insolvent, an order for relief is
entered against the other Party under any bankruptcy or
insolvency laws or laws of similar import, or the other
Party fails generally to pay its debts as they become due;
(iii) the other Party makes an assignment for the benefit of its
creditors or a receiver or custodian is appointed for it or
its business is placed under attachment, garnishment or
other process involving a significant portion of its
business.
16.3.2 BY PBI. Exhibit "A" attached hereto sets forth minimum
expenditures which Segix must make during the 12 month period
starting on the Commercial Introduction of Product in the
* Omitted pursuant to a request for confidential treatment
18
<PAGE>
Territory ("Year 1") and during the 12 month period thereafter
("Year 2") in supporting commercialization of the Product in the
Territory (inclusive of the purchase cost of the Product and
testing). Exhibit "A" also sets forth the minimum purchases of
Product which Segix must make during the 12 month period following
Year Two ("Year 3") and each year thereafter during the term of
this Agreement (respectively, "Year 4," "Year 5," etc.). Without
prejudice to any other rights PBI may have hereunder or at law, if
Segix either fails to meet the quality control standards following
PBI's written notice as provided in Section 8.1 hereof or fails to
satisfy (i) its minimum expenditure obligations as to Year One or
Year Two, (ii) its minimum purchase obligations in Year Three,
(iii) at least [ * ] of its minimum purchase obligations in
any "Year" after Year Three, or (iv) at least [ * ] of its
total minimum purchase obligations in any two consecutive "Years"
after Year Three, PBI shall have the right to terminate this
Agreement on notice to Segix.
16.4 RIGHTS AND DUTIES UPON TERMINATION
16.4.1 SURVIVAL. The following sections of this Agreement shall
survive expiration or termination of this Agreement as follows:
(i) upon expiration of this Agreement, Sections 5, 7, 12, 13,
16.4 and 17;
(ii) upon termination of this Agreement by Segix pursuant to
Section 16.3, Sections 5, 7, 12, 13, 16.4 and 17; and
(iii) upon termination of this Agreement by Segix pursuant to
Section 16.2 or by PBI pursuant to Section 16.3, Sections
5, 7, 12, 13, 16.4 and 17.
16.4.2 OUTSTANDING OBLIGATIONS. Expiration or termination of this
Agreement shall not relieve either of the Parties of its then
outstanding and unfulfilled obligations or liabilities with
respect to the other Party.
* Omitted pursuant to a request for confidential treatment
19
<PAGE>
16.4.3 LIMITATION ON LIABILITY. Notwithstanding Section 16.3.1, neither
party shall be liable to the other for consequential or indirect
damages as a result of any breach of this Agreement.
17. MISCELLANEOUS
17.1 ASSIGNMENT. Each Party shall have the right to assign this
Agreement only in the event of merger or acquisition or the sale
of substantially all of the assets to which this Agreement
relates. In all other cases, assignment shall require the
approval of the other Party, which approval may not be
unreasonably withheld.
17.2 NOTICES. Any notice required or permitted to be given hereunder
shall be given in writing by delivery in person, by telefax with
confirmed answer-back, or by registered air mail, postage prepaid,
addressed as first set forth above or to such other address as
either Party may specify on notice to the other Party. Unless
otherwise specifically provided for herein, such notice shall take
effect upon receipt by addressee, provided that such notice shall
be deemed to have arrived upon the expiration of five days from
the date of sending in case of mail and 24 hours from the hour of
sending in case of telefax.
17.3 ENTIRE AGREEMENT.
17.3.1 ENTIRE UNDERSTANDING. This Agreement sets forth the
entire agreement and understanding between PBI and Segix, as
to the subject matter of this Agreement, and merges all prior
discussions between them and neither of the Parties shall be
bound by any conditions, definitions, warranties or
representations with respect to the subject matter of this
Agreement, other than as expressly provided in this Agreement
or duly set forth on or subsequent to the date hereof, in
writing, and signed by a proper and duly authorized
representative of the Party hereto to be bound thereby.
17.3.2 AMENDMENTS. Amendments, modifications and alterations
to this Agreement shall be made in writing signed by both
Parties.
20
<PAGE>
17.3.3 EXHIBITS. All exhibits referred to herein shall form
an integral part of this Agreement.
17.4 WAIVER. If either Party should at any time waive its rights
due to breach or default by the other Party of any of the
provisions of this Agreement, such waiver shall not be
construed as a continuing waiver regarding that breach or
default or other breaches or defaults of the same or other
provisions of this Agreement.
17.5 SEVERABILITY. In the event that any provisions of this
Agreement shall be found in any jurisdiction to be in
violation of public policy or illegal or unenforceable in
law or equity, such finding shall in no event invalidate any
other provision of this Agreement in that jurisdiction, and
this Agreement shall be deemed amended to the minimum extent
required to comply with the law of such jurisdiction.
17.6 TAXES OR SIMILAR CHARGES. Any stamp duty, tax or similar
charge for the registration, if any, of this Agreement or the
like in the Territory shall be paid by Segix.
17.7 INJUNCTION. A violation by either Party of Section 13 shall
be deemed to be a material breach of a material provision of
this Agreement pursuant to the terms of Section 16.3 hereof,
and, in addition to any other rights of the non-breaching
Party, the non-breaching Party shall have the right and
remedy to have the provisions of Section 16 specifically
enforced, it being acknowledged and agreed that any such
violation might cause irreparable injury to the non-breaching
Party and that money damages will not provide an adequate
remedy to the non-breaching Party.
18. CHOICE OF LAW
This Agreement and all purchase orders issued hereunder shall be governed
and interpreted, and all rights and obligations of the Parties shall be
determined, in accordance with the laws of England without regard to its
conflict of laws rules.
21
<PAGE>
19. DISPUTE RESOLUTION
19.1 If a dispute arises out of or in connection with this Agreement,
including any question as to its existence, interpretation,
performance validity or termination, the Parties agree to first
seek amicable settlement by conciliation under the UNCITRAL
Conciliation Rules administered by the London Court of
International Arbitration.
19.2 If such dispute is not resolved within thirty (30) days, or such
further period as the Parties shall agree in writing, after the
appointment of the conciliator, the dispute shall be referred to
and finally resolved by arbitration under the UNCITRAL Arbitration
Rules administered by the London Court of International
Arbitration, which Rules are deemed to be incorporated by
reference into this clause.
(i) The appointing authority shall be the LCIA;
(ii) The number of arbitrators shall be one, unless otherwise a
greed by the Parties;
(iii) The place of arbitration shall be London, England; and
(iv) The language to be used in the arbitral proceedings shall be
English.
IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate, each
Party taking one copy, on the day and year first above written.
PACIFIC BIOMETRICS, INC. SEGIX ITALIA
/s/ Paul G. Kanan /s/ Luigi Baldassarri
- ----------------------- -------------------------
By: Paul G. Kanan By: Luigi Baldassarri
President & CEO CEO
22
<PAGE>
EXHIBIT A
PRICING SCHEDULE/MINIMUM INVESTMENTS AND PURCHASES
Products shipped in any year will be sold at the following prices during Year 1
following Commercial Introduction[ *
]:
<TABLE>
<CAPTION>
Sales Price
(Ex-PBI's Facility In
Item U.S. DOLLARS)
- ---- ---------------------
<S> <C>
Pyridinoline Kit $[ * ]
Osteopatch (bulk packaged) $[ * ] per patch
</TABLE>
In addition to the foregoing, Segix shall pay PBI (i) [ * ] of all
amounts (net of discount and net of any amount pre-paid to Segix and payable by
Segix to the laboratory for the relative test analysis and delivery costs, as
documented) received by Segix in excess of [ * ] and less than or equal
to [ * ], per test, and (ii) [ * ] of all amounts (net of discount
and net of any amount pre-paid to Segix and payable by Segix to the laboratory
for the relative test analysis and delivery costs, as documented) received by
Segix in excess of [ * ] per test.
<TABLE>
<CAPTION>
Minimum Purchases/Investment (per Section 16.3.2) Amount of Investment
(commencing from Commercial Introduction) or Number of Tests
- ------------------------------------------------- --------------------
<S> <C>
Year 1** [ * ]
Year 2 [ * ]
Year 3 [ * ]
Year 4 [ * ]
Year 5 [ * ]
Year 6-10 [ * ]
</TABLE>
As used herein, a "test" shall mean an Osteopatch used for a single diagnostic
test for a single individual.
** Year 1 investment shall also include all Segix investment expended prior to
the Commercial Introduction.
* Omitted pursuant to a request for confidential treatment
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 942,696
<SECURITIES> 0
<RECEIVABLES> 348,673
<ALLOWANCES> (90,137)
<INVENTORY> 171,315
<CURRENT-ASSETS> 1,543,537
<PP&E> 1,008,525
<DEPRECIATION> (353,517)
<TOTAL-ASSETS> 4,781,392
<CURRENT-LIABILITIES> 3,375,047
<BONDS> 0
0
15,500
<COMMON> 37,097
<OTHER-SE> 1,060,706
<TOTAL-LIABILITY-AND-EQUITY> 4,781,392
<SALES> 306,954
<TOTAL-REVENUES> 306,954
<CGS> 316,948
<TOTAL-COSTS> 1,606,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,859
<INCOME-PRETAX> (1,356,369)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,356,369)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,356,369)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
