<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 000-22501
--------------------------------------------------------
SPECTRUMEDIX CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 25-1686354
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2124 Old Gatesburg Road, State College, Pennsylvania 16803
- --------------------------------------------------------------------------------
(Address of principle executive offices)
(Zip Code)
(814) 867-8600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of:
Date June 30, 1998 Shares 3,515,214
-------------------------------------------- -------------------
<PAGE> 2
SPECTRUMEDIX CORPORATION
QUARTERLY REPORT
QUARTER ENDED JUNE 30, 1998
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Balance Sheets - June 30, 1998 and March 31, 1998.................. 1
Condensed Statements of Operations - Three Months Ended June 30, 1998 and
June 30, 1997 ............................................................... 2
Condensed Statements of Cash Flows - Three Months Ended June 30, 1998 and
June 30, 1997................................................................ 3
Notes to Financial Statements................................................ 4-6
Item 2 Management's Discussion and Analysis of Results of Operations and Financial
Condition....................................................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 2. Changes in Securities and Use of Proceeds.......................... 18
Item 3. Defaults Upon Senior Securities.................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................ 18
Item 5. Other Information.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
(a) Exhibits....................................................... 18
(b) Reports on Form 8-K............................................ 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
SPECTRUMEDIX CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998*
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 861,511 $ 1,680,643
Accounts receivable, net 32,750 12,806
Inventories 418,690 381,393
Prepaid expenses 29,624 49,426
------------ ------------
TOTAL CURRENT ASSETS 1,342,575 2,124,268
------------ ------------
PROPERTY AND EQUIPMENT, net 299,799 279,717
------------ ------------
OTHER ASSETS:
Patent fees 253,589 216,947
License and license options, net of accumulated
amortization of $44,920 and $25,669
Security deposit 150,095 159,346
8,479 8,479
------------ ------------
TOTAL OTHER ASSETS 412,163 384,772
------------ ------------
TOTAL ASSETS $ 2,054,537 $ 2,788,757
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,160,233 $ 1,132,580
Current portion of long-term debt 9,338 5,041
Customer deposits -- 5,960
------------ ------------
TOTAL CURRENT LIABILITIES 1,169,571 1,143,581
------------ ------------
LONG-TERM DEBT, net of current portion 34,589 29,217
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.00115 par value, 2,000,000 shares
authorized, none issued or outstanding
Common stock, $.00115 par value, 23,000,000 shares
authorized and 3,515,214 shares issued and outstanding 4,042 4,042
Additional paid-in capital 11,359,673 10,623,823
Accumulated deficit (9,435,148) (8,570,152)
------------ ------------
Total 1,928,567 2,057,713
Less: Deferred compensation (1,078,190) (441,754)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 850,377 1,615,959
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,054,537 $ 2,788,757
============ ============
</TABLE>
* Derived from audited financial statements
1
<PAGE> 4
SPECTRUMEDIX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES $ 66,898 $ 87,084
COST OF REVENUES 130,084 97,299
----------- -----------
GROSS LOSS (63,186) (10,215)
----------- -----------
OPERATING EXPENSES:
Research and development costs, net 451,004 262,439
General and administrative expenses
360,752 255,816
----------- -----------
TOTAL OPERATING EXPENSES 811,756 518,255
----------- -----------
OPERATING LOSS (874,942) (528,470)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 11,130 --
Interest expense (1,184) (68,862)
Amortization of original issue discount and
deferred bridge financing costs
-- (1,280,305)
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 9,946 (1,349,167)
----------- -----------
NET LOSS $ (864,996) $(1,877,637)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
3,515,214 2,173,100
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (.25) $ (.86)
=========== ===========
</TABLE>
2
<PAGE> 5
SPECTRUMEDIX CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (864,996) $(1,877,637)
----------- -----------
Adjustments to reconcile net loss to net cash from operating
activities:
Amortization of original issue discount and deferred bridge
financing costs -- 1,280,305
Depreciation and amortization 27,931 7,699
Non-cash compensation expense 99,414 67,200
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (19,944) 77,000
(Increase) in inventories (37,297) (7,021)
(Increase) in other assets (26,840) (184,688)
Increase in accounts payable and accrued expenses 27,653 596,867
Increase (decrease) in customer deposits (5,960) 40,125
----------- -----------
Total adjustments 64,957 1,877,487
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (800,039) (150)
----------- -----------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchase of equipment (28,762) (27,716)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank overdraft -- 4,918
Initial public offering costs -- (160,744)
Proceeds from notes payable - others 12,375 5,164
Proceeds from officers' notes -- 1,238
Repayment of notes payable - others (2,706) (175,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,669 (324,424)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (819,132) (352,290)
CASH AND CASH EQUIVALENTS - beginning of period 1,680,643 352,290
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 861,511 $ --
=========== ===========
NON-CASH INVESTMENT AND FINANCING ACTIVITIES:
During the three months ended June 30, 1998 and 1997, additional paid-in
capital and deferred compensation increased by $735,850 and $543,485,
respectively from compensation stock options issued to non-employees.
</TABLE>
3
<PAGE> 6
SPECTRUMEDIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE 1 - GENERAL
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly (a) the financial position as
of June 30, 1998, (b) the results of operations for the three months
ended June 30, 1998 and 1997 and (c) changes in cash flows for the three
months ended June 30, 1998 and 1997.
Refer to the audited financial statements for the fiscal year ended
March 31, 1998, which were included in the Company's Form 10-KSB for
details of accounting policies and accounts, none of which have changed
significantly in composition since that date except as noted below.
Financial results for the interim period ended June 30, 1998 and 1997
may not be indicative of the financial results for the fiscal year
ending March 31, 1999.
The Company has available carryforward losses applicable to the
reduction of future Federal income taxes aggregating approximately
$7,200,000 at March 31, 1998 and which expire at various dates through
2013.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- ---------
<S> <C> <C>
Raw materials $335,878 $238,710
Work-in-process 82,812 142,683
-------- --------
$418,690 $381,393
======== ========
</TABLE>
NOTE 3 - STOCK OPTIONS AND WARRANTS
In May 1998, the Company granted options to purchase 68,000 shares of
its common stock to employees under the Company's 1997 Stock Incentive
Plan at an exercise price of $6.25 per share, which was the estimated
fair value of the common stock on the date of grant. The options vest in
annual installments over a four-year period commencing in May 1999 and
are exercisable for a period of ten years from the date of grant.
NOTE 4 - COMMITMENTS
In May and June 1998, the Company entered into several consulting
agreements. Under the terms of the agreements, the consultants were
issued options to purchase of the Company's common stock. The options
will vest in equal annual installments over periods ranging from one to
three years. During the quarter ended June 30, 1998, the Company
recorded $735,850 in deferred compensation expense related to these
options, which is being amortized over the vesting period thereof.
NOTE 5 - ECONOMIC DEPENDENCY
To date, the Company's revenues have been materially dependent on a
limited number of customers. The nature of the Company's business is
such that during any individual accounting period it may sell its
4
<PAGE> 7
products to a limited number of significant customers. The Company's
existing and proposed products require high quality raw materials and
components that the Company purchases from third party suppliers. The
Company believes adequate sources of supply exist for all raw materials
and components it will need, and that such items are available on
commercially reasonable terms.
NOTE 6 - LEGAL PROCEEDINGS
GRYNBERG MATTER
In March 1996, a complaint was filed in the District Court for the City
and County of Denver, Colorado alleging common law fraud and violation
of the Colorado Securities Act in connection with the plaintiff's
purchase of Common Stock of the Company in 1992. Specifically, the
plaintiff alleges that the co-defendant placement agent induced the
plaintiff's purchase of a unit in a private placement by misrepresenting
that the plaintiff was being offered the sole remaining unit in such
private placement and that the Company would undertake a public offering
within six months of completing such private placement. The plaintiff
sought rescissionary damages in the sum of $45,000, punitive damages in
like amount, interest, costs and attorneys' fees. The court by order
dated March 6, 1997 struck the punitive damages claim, and later ruled
that the plaintiff could seek either rescission or restitution. In
February 1988, judgment was entered against the plaintiff and in favor
of the Company with regard to the plaintiff's claim for damages. The
time for the plaintiff to file an appeal of the judgment has expired.
RUBIN MATTER
On April 21, 1997, a compliant was filed in the Supreme Court of the
State of New York alleging breach of contract. Specifically, the
plaintiff alleges that the Company defaulted under a promissory note
issued to plaintiff on May 16, 1996 in the amount of $175,000 (the
"Rubin Note") while such Note was outstanding and therefore that the
Company is liable and indebted to plaintiff in the principal amount of
$175,000, together with interest and expenses. The Company, on May 2,
1997, paid the principal and interest due under the Rubin Note.
The main remaining issue asserted by the plaintiff is whether, pursuant
to an alleged related agreement, the plaintiff is entitled to 152,174
shares (adjusted to reflect stock splits) of Common Stock or,
alternatively, $875,000. Plaintiff alleges that the Company undertook to
enter into a securities purchase agreement pursuant to which he should
have received the aforementioned shares of Common Stock. The Company
contends that such securities purchase agreement was never discussed and
therefore that no agreement was reached with respect to the terms
thereof. Such securities purchase agreement was not signed by either of
the parties to the Rubin Note. The Company believes that it has
meritorious defenses to the above-described claims and it intends to
defend the litigation vigorously. However, due to the nature of
litigation and because the lawsuit is in the initial stages, the Company
cannot determine the total expense or possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result
of a negotiated settlement. While management believes that the
resolution of this matter will not have a material adverse effect on the
Company's business, financial condition and results of operations, the
results of these proceedings are uncertain and there can be no assurance
to that effect. Regardless of the ultimate outcome of the litigation, it
could result in significant diversion of time by the Company's
personnel.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Quarterly Report on Form 10-QSB. Except for the historical information
contained herein, the discussion in this Report contains certain forward-looking
statements, within the meaning of Section 27A of the Securities Act and Section
27E of the Exchange Act, that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions.
Forward-looking statements are based on management's current expectations and
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from expected results. The cautionary statements
made in this Quarterly Report should be read as being applicable to all related
forward-looking statements wherever they appear in this Quarterly Report.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
OVERVIEW
Since June 1992, the Company has devoted substantially all of its resources to
upgrade and improve the Company's existing line of instrumentation (Mass
Spectrometers, Luminoscopes, etc.), electronic components and software and to
initiate the Company's strategy of carving out new and commercially promising
areas of application for its instrumentation and its scientific expertise and
capabilities, as well as finding new technologies that lie within its technical
purview for licensing and commercialization. The result of these efforts is the
present availability for sale of a fully upgraded line of magnetic sector mass
spectrometers, new and improved Luminoscope add-ons, and high-performance
software for a variety of applications in the petrochemical, environmental and
geochemical areas, among others. In addition, the Company has acquired (i)
license for a DNA Sequencer that is in the process of being brought to the
commercial marketplace and (ii) an option for an instrument-intensive diagnostic
technique that the Company believes will have significant consequences for the
prevention and therapy of many diseases. As most of the Company's products are
still under development, limited revenues have been derived from the sale of
these products and the Company does not expect to receive substantial revenues
from the sale of its products until at least 1999, at the earliest.
The Company has financed its operations primarily though the private sale and
issuance of equity securities and proceeds from an initial public offering (the
"Public Offering") of equity securities during September 1997. The Company
expects to enter into collaborative agreements for the financing of its research
and development efforts and for the commercialization of its products. The
Company has been selected for a Phase II award by the Department of Energy's
Small Business Innovations Research Program. The total amount of the award has
not been determined. However, no assurance can be given that the Company will
obtain significant revenues therefrom.
The Company has not been profitable since inception and had an accumulated
deficit of $9,435,148 at June 30, 1998. Successful future operations depend upon
the Company's ability to develop and commercialize its products. The Company
will require additional funds to complete the development of its products and to
fund operating losses that are expected to be incurred in the next several
years.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The Company had total revenues of $66,898 and $87,084 for the three months ended
June 30, 1998 and 1997, respectively. Revenues for both periods reflect sales of
products from old product lines. To date, the Company has received limited
revenues from the sale of products, and it does not expect to receive
significant product revenue for several years, if at all. The decrease in
revenues of $20,186, or approximately 23%, was due primarily to the increased
focus of the Company on its various research and development and
commercialization efforts, which resulted in the shifting of key personnel from
sales and marketing into such activities, and secondarily to the historical lack
of any full time sales and marketing staff.
Of the total revenues discussed above, revenues derived from the sale of the
Company's services totaled $17,386 and $26,329 for the three month ended June
30, 1998 and 1997, respectively. The decrease in service revenue was $8,943, or
approximately 34%. This decrease was due primarily to the increased focus of the
Company on its various research and development and commercialization efforts,
which resulted in the shifting of key personnel
6
<PAGE> 9
from sales and marketing into such activities, and secondarily to the historical
lack of any full time sales and marketing staff.
Research and development expenses increased $188,565 in 1998 to $451,004 from
$262,439 in 1997, due primarily to increased expenditures for the Company's new
licensed technologies. The proceeds of the Public Offering during the first half
of the fiscal year ended March 31, 1998 enabled the Company to increase its
research and development activities, which are dependent primarily on cash
availability. The Company anticipates that research and development expenses
will increase for fiscal year 1999 as a result of expenses relating to its
option and research and development agreements with the University of
California, Berkeley, its license agreement with Ames Laboratory/Iowa State
University and its license and research and development agreements with the
University of Pennsylvania, and the ability to fund such activities from the
proceeds of the Public Offering.
General and administrative expenses were $360,752 and $255,816 during the three
months ended June 30, 1998 and 1997, respectively, an increase of $104,936, or
approximately 41%. Approximately 47% and 73% of general and administrative
expenses for the three months ended June 30, 1998 and 1997, respectively, were
attributable to payroll, payroll taxes, employee benefits and professional and
consulting services. The increase was due primarily to increases in consulting
fees and insurance expense. The Company expects its general and administrative
expenses to increase in the future as a result of further Company expansion.
Interest expense of $1,184 and $68,862 for the three months ended June 30, 1998
and 1997, respectively, resulted from borrowings. Interest expense decreased
primarily as a result of reduced borrowings. The obligations which caused such
interest expense in 1997 were repaid during September 1997 and October 1997.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed the Public Offering. The net proceeds
from the Public Offering were $5,198,055 (gross proceeds of $6,903,450 less
related costs of $1,705,395). The Company believes that the proceeds received
from the Public Offering, together with future revenue and possible future
collaborative agreements and/or government grants, will be sufficient to meet
the Company's operating expenses and capital requirements into the Company's
third fiscal quarter of the fiscal year ending March 31, 1999. The Company will
attempt to raise any required additional funds through equity or debt
financings, collaborative arrangements with corporate partners or from other
sources if and when available. There can be no assurance that any such
additional funding will be available on favorable terms from any of these
sources, if at all.
In July 1997, the Company renegotiated the terms of the Bridge Financing with
its note holders. Under the revised terms, one-half the face amount of the
promissory notes ($805,000) was converted into warrants (the "Warrants") to
purchase Units (each Unit consisting of Common Stock and one Redeemable
Warrant). The Warrants to purchase 322,000 Units (16.1 Units multiplied by
20,000) are exercisable for four years commencing September 16, 1998 at an
exercise price of $5.75 per Unit (the Public Offering price). The outstanding
principal and interest due under the promissory notes was paid in September
1997. Additional obligations of approximately $252,000 were also written off or
otherwise settled during the year ended March 31, 1998. A portion of the
proceeds of the Bridge Financing was used to expedite the commercialization
effort on the DNA Sequencer and to complete the manufacture of the
instrumentation prototypes for the diagnostic kinetics project. In addition to
the purchase of materials for these projects, the Company has hired additional
scientists and lab technicians. In addition to the sales of the Company's new
products, the sales of the Company's current product lines are expected to
stimulate the sales of core product instrumentation.
The Company expects its cash requirements to increase in future periods. The
Company will require additional funds to conduct research and development, pay
various required license and milestone fees, establish third-party
collaborations and market its products. The Company's capital requirements
depend on many factors, including the status of the development of its products,
obtaining manufacturing capabilities to produce its products in volume,
prosecuting and enforcing its intellectual property right, competing
technological and market developments, and the ability of the Company to develop
new collaborative and licensing arrangements.
7
<PAGE> 10
YEAR 2000 COMPLIANCE
The Company is in the process of assessing the impact of year 2000 on its
operations and systems, including those of its suppliers and collaborators and
other third parties. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues, if any. To date,
the Company has evaluated its financial and accounting systems and believes that
these systems are not and will not be materially affected by the year 2000. The
Company does not yet know the extent, if any, of the impact of the year 2000 on
its other systems and equipment or those of third parties with which the Company
does business. There can be no assurance that third parties, such as suppliers,
clinical research organizations and collaborative parties, are using systems
that are year 2000 compliant or will address any year 2000 issues in a timely
fashion, or at all. Any year 2000 compliance problems of either the Company, its
suppliers, its clinical research organizations, or its collaborative partners
could have a material adverse effect on the Company's business, operating
results and financial conditions.
FUTURE OUTLOOK
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that
SpectruMedix is still a relatively young company and has not yet completed a
full cycle of development, regulatory approval and commercialization for any of
its products. The regulatory processes through which some of the Company's
products must proceed are complex, uncertain and costly, and no assurance can be
given regarding the timing of regulatory progress or that the Company will be
successful in commercializing any of its product candidates. These development
processes require substantial amounts of funding, and the Company is dependent
on corporate partners and the equity markets to finance such efforts. Where
access to funding is difficult, the Company's stockholders may face significant
dilution, and the ability of the Company to proceed with its programs and plans
may be significantly and adversely affected. Actions and advances by competitors
may also significantly affect the Company's prospects, as may the existence of
patents held by such competitors or potential competitors.
8
<PAGE> 11
RISK FACTORS
In addition to the other information contained herein, the
discussion in this Quarterly Report on Form 10-QSB contains certain
forward-looking statements, within the meaning of Section 27A of the Securities
Act and Section 27E of the Exchange Act, that involve risks and uncertainties,
such as statements of the Company's plans, objectives, expectations and
intentions. Actual results could differ materially from those discussed in the
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Report. Factors that could cause or contribute
to such differences include those discussed below as well as those cautionary
statements and other factors set forth elsewhere herein.
History of Losses; Uncertainty of Future Profitability; Ability To
Continue as a Going Concern. The Company has incurred operating losses since
its inception in 1992. At June 30, 1998, the Company had an accumulated deficit
of $9,435,148. The Company's current revenues from operations are limited and
are not sufficient to fund its operating expenses. The Company will need to
either substantially expand the sales of its existing products and services or
successfully develop and commercialize its new products to reach profitability.
No assurance can be given that the Company will be able to accomplish either
such objective. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities which, together with
projected general and administrative expenses, are expected to result in
operating losses for at least the next several years. The Company may not
achieve significant revenues or profitable operations. To date the Company's
operations have been characterized by chronic underfunding and limited ability
to maintain inventories of key components, parts and supplies. In addition,
the proceeds of the Company's initial public offering (the "Public Offering")
may not be sufficient to allow the Company to materially alter its reliance on
"just-in-time" manufacturing and the inherent dependence upon sources of
components, parts and supplies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
As a result of the Company's current financial condition, the Company's
independent accountants have included an emphasis of matter disclosure in their
report on the Company's financial statements for the period ended March 31,
1998. The independent accountants report on the Company's financial statements
includes an explanatory paragraph stating that the net losses and accumulated
deficit raise substantial doubt about the Company's ability to continue as a
going concern.
Early Stage of Development. Since the Company's incorporation in April
1992, the Company has been engaged in organizational activities, acquisition of
assets, hiring of personnel and financing activities. Since operations began in
July 1992, the Company has engaged in the following activities: manufacturing,
research and development, limited sales and marketing, capital raising,
exploration of strategic relationships and collaborations, and other general
corporate activities. The Company has generated limited revenues to date. While
the Company is able to finance certain of its current operations from revenues,
it requires substantial additional financing to continue to increase its
marketing capabilities and increase its research and development activities to
expand the applications of its core technology, to acquire additional
technologies, and to develop new products. As the Company is in the development
stage, its operations are subject to all of the risks inherent in the
establishment of a new business enterprise and the commercialization of new
products. The likelihood of the success of the Company must be considered in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with a new business, and, accordingly, is
highly speculative.
Uncertainty Regarding Completion of Licenses to Key Technologies. The
Company's technologies under development in the area of diagnostic kinetics are
the subject of an option held by the Company from the University of California,
Berkeley. Such option specifies maximum royalty rates and milestone payments,
which the Company deems reasonable. Although the option agreement entitles the
Company to exercise its option and acquire an exclusive license to the
underlying patents and technologies, no assurance can be given that the Company
will be successful in securing such license or that the terms thereof will
ultimately be deemed attractive for the commercialization of such equipment. The
Company does not expect to exercise its option with the University of
California, Berkeley until the second half of 1998, at the earliest.
Uncertainty of Protection of Patents and Proprietary Rights. The
Company's success depends on its ability to obtain patents, protect its trade
secrets and operate without infringing upon the proprietary rights of others.
The
9
<PAGE> 12
Company's existing and potential competitors have applied for a substantial
number of patents. There can be no assurance that any of the Company's future
patent applications will be approved, that the Company will develop additional
proprietary products that are patentable, or that any patents issued to the
Company will provide the Company with any significant protection or will not be
successfully challenged by third parties. Furthermore, there can be no assurance
that others will not design around the patented products developed by the
Company. There can be no assurance that the Company's products will not be found
to infringe upon the patents of others. The area of gene sequencing, in
particular, is subject to intense competition and active filing of patent
applications. Any of such patent applications filed by one or more third parties
may conflict with the Company's products under development. If the Company's
products are found to infringe upon the patents or otherwise impermissibly
utilize the intellectual property of others, the Company's development,
manufacture and sale of such products could be severely restricted or
prohibited. Any such infringement could have a material adverse effect on the
Company's prospects, business, results of operations or financial condition. The
Company may be required to obtain licenses from such third parties or otherwise
obtain licenses to utilize patents or proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights could be obtained on terms acceptable to the Company, or at all. If the
Company does not obtain such licenses, the development, manufacture or sale of
products requiring such licenses could be materially adversely affected. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of such products could be foreclosed.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce the Company's or its licensors' patents, to protect trade secrets or
know-how owned by the Company, or to determine the scope and validity of the
proprietary rights of others, and could result in substantial cost to and
diversion of effort by, and may have a material adverse impact on, the Company.
The Company's competitive position is also dependent upon unpatented
trade secrets. Although the Company takes measures to protect its trade secrets,
trade secrets are difficult to protect. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
or techniques or otherwise gain access to the Company's trade secrets. The
Company pursues a policy of having its employees, consultants and advisors
execute confidentiality agreements to maintain the proprietary nature of its
technology. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or other
proprietary information in the event of unauthorized use or disclosure of such
information.
Technological Uncertainty; Uncertainty of Product Development and
Commercialization; Early Stage of Product Development. The science and
technology of the Company's products, particularly the Company's DNA Sequencer,
is rapidly evolving. Many of the Company's products and proposed products will
require significant further research, development, testing and possibly
regulatory clearances and are subject to the risks of failure inherent in the
development of products based on innovative technologies. The Company's
development efforts in the areas of diagnostic kinetics and pulmonary
diagnostics involve new areas of medicine which necessarily involves
unforeseeable risks and uncertainties. These risks include the possibility that
any or all of the products or proposed products are found to be ineffective or
unsafe, or otherwise fail to receive necessary regulatory clearances, if any,
that the proposed products, although effective, are uneconomical to market, that
such products will not satisfy cost and performance criteria, that third parties
hold proprietary rights that preclude the Company from marketing such products,
or that third parties market a superior or equivalent product. Accordingly, the
Company is unable to predict whether its research and development activities
will result in any commercially viable products other than the Company's mass
spectrometers. Further, the Company cannot predict with certainty when or if the
Company will be able to commercialize certain of its proposed products or that
such products will satisfactorily perform all of the functions for which they
have been designed or prove to be sufficiently reliable in long-term
applications.
New Concept and Emerging Markets; Uncertainty of Market Acceptance. The
production of the DNA Sequencer, diagnostic kinetics instruments, pulmonary
diagnostics technology and other proposed products of the Company represents new
manufacturing processes which are untested on a commercial scale. Although the
Company believes that its technologies and products will, if ultimately
commercialized, represent significant technological advances, demand for the
Company's proposed products, all of which are based upon new designs, concepts
and manufacturing processes, is subject to a high degree of uncertainty. Many
potential customers of the Company, including original equipment manufacturers
("OEM") and commercial end users, may be reluctant to utilize or sell the
Company's proposed products until a sufficient number of other OEMs and
commercial end users have already committed to do so. The Company currently has
limited marketing experience and limited financial,
10
<PAGE> 13
personnel and other resources to undertake the extensive marketing activities
that will be necessary to market its proposed products. The Company's ability to
generate revenues from the sale of its proposed products will be dependent upon,
among other things, its ability to build an effective sales organization. In its
limited marketing efforts to date, the Company has relied solely upon the
efforts of its executive officers. If the Company is unable to market and
distribute its products directly, the Company may have to enter into
arrangements with others, such as joint ventures, licensing or similar
arrangements or distribution agreements. Any such contractual arrangements may
result in a lack of control by the Company over any or all of the marketing and
distribution of such products and may increase its marginal costs. There can be
no assurance that the Company will be able to formalize any marketing
arrangements or that its marketing efforts will be successful.
Limited Manufacturing Experience and Capabilities; Risks Associated with
Expansion of Manufacturing Operations; Possible Dependence on Third-Party
Manufacturers. The Company maintains limited manufacturing facilities and will
need to expand such facilities to effectively manufacture its products on a
profitable basis. Although certain members of the Company's management have
manufacturing experience, the expansion of the Company's manufacturing
facilities and capabilities will subject the Company to numerous risks,
including unanticipated technological problems or delays. Such expansion will
also require additional sources of capital, which may not be available on
commercially reasonable terms, if at all. In the event that the Company is
unable to expand its manufacturing facilities and capabilities, the Company
maybe required to enter into arrangements with others for the manufacture and
packaging of its proposed products. There can be no assurance that the Company
will be able to enter into any such arrangements on commercially reasonable
terms, or at all, or that the Company will ever be able to establish the
capability to manufacture its products on a commercial basis, in which case the
Company's business, results of operations and financial condition would be
materially adversely affected.
Assets Encumbered; Potential Litigation. The Company's assets are
encumbered by liens and security interests granted in favor of certain of the
Company's creditors. A majority of the obligations that gave rise to such liens
and security interests have been repaid with the proceeds of the Public Offering
and the liens and security interests resulting therefrom are in the process of
being released. Two parties have filed security interests, which are still
outstanding, for obligations aggregating $130,000. In the event that any party
holding a security interest should execute such security interest, the Company's
assets could be subject to seizure. In such event, the Company would be
materially adversely affected. In the event the Company should become party to
any litigation relating to these obligations, the costs of defending against
such claims could be substantial, and the Company could be materially adversely
affected.
Dependence on Third-Party Suppliers of Raw Materials and Components;
Relationships with Suppliers, Creditors and Customers. The Company's existing
and proposed products require high quality raw materials and components which
the Company currently purchases and will continue to purchase from third-party
suppliers. The Company believes that adequate sources of supply exist for all of
the raw materials and components that it will need and that such items are
available on commercially reasonable terms. Certain raw materials or components
may, however, from time to time, be difficult to obtain and may cause production
delays or require the Company to find alternate means of production. Thus, the
Company's ability to manufacture its products will depend on its ability to
establish and maintain commercial relationships with at least certain of such
suppliers. The Company does not currently maintain supply agreements with any of
its suppliers.
The Company's production will also be dependent upon its suppliers
satisfying the Company's performance and quality specifications and dedicating
sufficient production capacity to meet the Company's scheduled delivery times.
There can be no assurance that the Company will be able to establish any
commercial relationships with suppliers or, if it is able to do so, that such
suppliers will be able to satisfy the Company's scheduled delivery or
performance requirements or have sufficient production capacity to satisfy such
requirements during any period of sustained demand. Failure or delay by the
Company's suppliers in supplying the Company with needed raw materials and
components would materially adversely affect the Company's operating margins and
the Company's ability to manufacture and deliver products on a timely and
competitive basis, which could, in turn, have a material adverse effect on the
Company.
Effect of Chronic Inadequate Capitalization on Relationships with
Suppliers, Creditors and Customers. Since inception, the Company has been
characterized by chronic inadequate capitalization. Accordingly, the Company's
lack of working capital has at times prevented the Company from making timely
payments to suppliers
11
<PAGE> 14
and creditors or from repairing relationships with such entities. Such financial
difficulties have also prevented the Company from providing parts and service to
certain of its customers in a timely manner. As a result, the Company's
relationships with its customers have also been damaged. The deterioration of
these relationships may make the Company's strategy for expansion more difficult
and may adversely affect the development of the Company's business. There can be
no assurance that the Company will be able to reestablish relationships with its
suppliers, creditors and customers or that the Company will successfully
implement its expansion plan.
Customer Concentration. Approximately 63% and 48% of the Company's net
sales for the years ended March 31, 1998 and 1997, respectively, were derived
from sales to the Company's top five customers. During the fiscal year ended
March 31, 1998 the Company's product sales amounted to approximately 15%, 14%,
13% and 12% to four separate customers. During the fiscal year ended March 31,
1997, product sales consisted of approximately 13% to one customer and 11% to
another customer. The loss of, or significant adverse change in, the
relationship between the Company and these customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. The loss of or reduction in orders from any significant customer,
losses arising from customer disputes regarding shipments, fees, merchandise
condition or related matters, or the Company's inability to collect accounts
receivable from any major customer could have a material adverse impact on the
Company's business, financial condition and results of operations.
Competition and Technological Changes. The Company's success depends
upon establishing and maintaining a competitive position in the research,
development and commercialization of products and technologies in its areas of
focus. The medical and industrial instrumentation industry is highly competitive
and requires substantial capital. The Company competes with, and will compete
with, numerous international, national and regional companies, many of which
have significantly larger operations and greater financial, marketing, human and
other resources than the Company. Accordingly, such competitors may have
substantial competitive advantages over the Company, including the ability to
negotiate favorable supply and distribution agreements and the ability to
negotiate more favorable terms with developers of technology, including
universities. In addition, the Company plans to develop additional products and
acquire additional technologies in order to expand the Company's product and
technology portfolio. No assurance can be given that the Company will
successfully compete in any market in which it conducts or may conduct
operations or that developments by such competitors will not render the
Company's current or future products or technologies uncompetitive or obsolete.
The industry in which the Company competes is characterized by rapid
technological change. Although the basic technology of mass spectrometry has not
changed significantly in many years, its applications and enhancements, as well
as competing measurement and analysis technologies, are constantly developing.
There can be no assurance that the Company's products will not be rendered
obsolete as a result of technological developments. The Company is actively
engaged in research and development to improve its products through the
introduction of enhancements and various additional applications, which by its
nature is uncertain. Accordingly, there can be no assurance that the Company
will be able to develop such new products or improvements.
Need for Additional Financing. Based on the Company's operating plan,
the Company believes that the net proceeds of the Public Offering, together with
future operating revenues and possible future collaborative agreements and/or
government grants, will be sufficient to satisfy its capital requirements and
finance its plans into the Company's third fiscal quarter of the fiscal year
ending March 31, 1999. Such belief is based on certain assumptions, and there
can be no assurance that such assumptions are correct. After such time, the
Company anticipates that it will require additional financing in order to meet
its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve bank financing. The Company may also be forced to enter into third-party
licensing, manufacturing or distribution agreements to support its capital
needs. There can be no assurance that the Company will be able to obtain such
additional capital on a timely basis, on favorable terms, or at all. In any of
such events, the Company may be unable to implement its product development and
commercialization strategy and its operations would be severely and adversely
affected.
Dependence Upon Key Employees and Consultants; Recruitment of Additional
Personnel. The Company is dependent upon the efforts and abilities of Dr. Joseph
K. Adlerstein, its Chairman of the Board of Directors, Chief Executive Officer
and President, and Bernard Sonnenschein, its Secretary and Treasurer, and on
other members of its scientific and management staff. Dr. Adlerstein and Mr.
Sonnenschein are the only executive officers of the
12
<PAGE> 15
Company. In addition, the Company is dependent on collaborators at research
institutions and on the Company's scientific advisors and consultants.
Recruiting and retaining qualified personnel, collaborators, advisors and
consultants will be critical to the Company's success. To date, the Company has
been able to attract and retain the personnel necessary for its operations.
However, there can be no assurance that the Company will be able to do so in the
future, particularly in light of the Company's expansion plans. If the Company
is unable to attract and retain personnel with necessary skills when needed, its
business and expansion plans could be materially adversely affected.
Dr. Adlerstein and Mr. Sonnenschein are substantial stockholders of the
Company, holding approximately 19% and 17%, respectively, of the outstanding
shares. The Company has entered into an employment agreement with Dr.
Adlerstein. The loss or unavailability of the services of either Dr. Adlerstein
or Mr. Sonnenschein for any significant period of time could have a material
adverse effect on the Company's business prospects. The Company has obtained,
and is the sole beneficiary of, key-person life insurance in the amount of
$1,000,000 on the life of Dr. Adlerstein.
Product Warranties. The Company generally warranties parts and services
for each of its products for one year from the date of purchase. Although there
have been few requests for extensive servicing and repairs for products that
have already been sold by the Company during the warranty period, a large number
of requests for such servicing could have a material adverse effect on the
Company by requiring additional expenditures for parts as well as the repair
efforts of the Company's personnel.
Environmental and Other Governmental Regulations. A portion of the
Company's future products may be regulated by the United States Food and Drug
Administration (the "FDA"). Such regulations extend to manufacturing practices,
the conduct of clinical investigations, pre-market approval, record keeping and
reporting requirements and labeling, among other matters. To date the Company
has not yet obtained clearance from the FDA for commercial marketing of its
primary products. In addition, other products that the Company might develop may
also be subject to FDA regulation. There can be no assurance that the Company
will be able to obtain FDA clearance for commercial marketing of its products.
Even if FDA clearance is received, government regulation may have an adverse
impact on the timing and cost of new product introductions, may interfere with
the marketing of existing products and may require the recall of products from
customer locations.
The Company is subject to a variety of United States and foreign
government regulations related to the discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in its manufacturing process. The failure
by the Company to comply with present or future environmental regulations could
result in fines, suspension of production or cessation of operations. Such
regulations could also require the Company to acquire equipment or to incur
other substantial expenses to comply with environmental regulations. If
substantial additional expenses were incurred by the Company, product costs
could significantly increase, thus materially and adversely affecting the
Company's results of operations. Additionally, the Company is subject to a
variety of government regulations relating to its operations, such as
environmental, labor and export control regulations. While the Company believes
it has obtained all permits necessary to conduct its business, the failure to
comply with present and future regulations could result in fines being imposed
on the Company or suspension or cessation of operations. Any failure by the
Company to control the use of, or adequately restrict the discharge of,
hazardous substances could subject the Company to future liabilities, and could
have a material adverse effect on the Company's business and results of
operations.
Product Recalls and Liability. Products such as those sold by the
Company may be subject to recall for unforeseen reasons. In addition, certain
projected applications of the Company's products entail the risk of product
liability claims. The Company performs extensive testing of its products at each
stage of their design to minimize the risk of recall or product liability
claims. A recall or product liability claim could materially adversely affect
the Company's operation and reputation. The Company does not maintain any
insurance related to recalls or product liability and, accordingly, a product
recall of the Company's principal products or successful product liability
claims against the Company would have a material adverse effect on the Company.
Control by Management and Current Stockholders; No Independent
Directors. The Company's current management owns approximately 36% of the
outstanding shares of Common Stock. Management may, therefore, have the ability
to elect a majority of the directors of the Company and to control the outcome
of all issues submitted
13
<PAGE> 16
to a vote of the stockholders of the Company. The Company currently has only two
directors, Dr. Adlerstein and Mr. Sonnenschein, both of whom are insiders and
principal stockholders. Accordingly, such individuals are in a position to
control the actions and decisions of the Board of Directors
Year 2000 Compliance. The Company is in the process of assessing the
impact of year 2000 on its operations and systems, including those of its
suppliers and collaborators and other third parties. Management is in the
process of formalizing its assessment procedures and developing a plan to
address identified issues, if any. To date, the Company has evaluated its
financial and accounting systems and believes that these systems are not and
will not be materially affected by the year 2000. The Company does not yet know
the extent, if any, of the impact of the year 2000 on its other systems and
equipment or those of third parties with which the Company does business. There
can be no assurance that third parties, such as suppliers, clinical research
organizations and collaborative parties, are using systems that are year 2000
compliant or will address any year 2000 issues in a timely fashion, or at all.
Any year 2000 compliance problems of either the Company, its suppliers, its
clinical research organizations, or its collaborative partners could have a
material adverse effect on the Company's business, operating results and
financial conditions.
Possible Volatility of Stock Price. There can be no assurance that an
active trading market for the Common Stock or Redeemable Warrants will be
sustained in the future. The market price of the shares of Common Stock and the
Redeemable Warrants, like that of many other small cap and emerging technology
companies, is likely to be highly volatile.
Absence of Dividends. The Company has not paid any cash dividends on the
Common Stock since inception and does not intend to pay any dividends to its
stockholders in the foreseeable future. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business.
Shares Eligible for Future Sale May Adversely Affect the Market.
2,173,100 shares of the Company's outstanding shares of Common Stock are
"restricted securities." All of such restricted securities are available for
sale pursuant to Rule 144 as described below commencing December 15, 1997,
100,438, 560,015 and 1,512,647 of which are subject to a 13-month, 12-month and
24-month, respectively, restriction against transfer, each commencing September
16, 1997. The officers and directors of the Company, who own an aggregate of
1,227,393 of the 2,173,100 above-referenced shares have agreed not to sell,
assign or transfer any securities of the Company owned by them until September
16, 1999 without the prior consent of Patterson Travis, Inc., the underwriter of
the Public Offering (the "Underwriter"). Rule 144 provides, in essence, that a
person holding "restricted securities" for a period of one year may sell only an
amount every three months equal to the greater of (a) one percent of the
Company's issued and outstanding shares or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
"restricted securities" which a person who is not an affiliate of the Company
may sell is not so limited, since non-affiliates may sell without volume
limitation their shares held for two years if there is adequate current public
information available concerning the Company. In such an event, "restricted
securities" would be eligible for sale to the public at an earlier date. The
sale in the public market of such shares of Common Stock may adversely affect
prevailing market prices of the Common Stock.
Effect of Outstanding Options and Warrants. At June 30, 1998, there were
outstanding stock options to purchase an aggregate of 127,827 shares of Common
Stock at an exercise price of $0.00115 per share, warrants to purchase an
aggregate of 100,000 shares of Common Stock at an exercise price of $1.00 per
share, stock options and warrants to purchase an aggregate of 247,829 shares of
Common Stock at an exercise price of $2.88 per share, stock options to purchase
an aggregate of 207,836 shares of Common Stock at an exercise price of $4.60 per
share, stock options to purchase an aggregate of 35,000 shares of Common Stock
at an exercise price of $5.00 per share, stock options to purchase an aggregate
of 25,000 shares of Common Stock at an exercise price of $6.00 per share, stock
options to purchase an aggregate of 68,000 shares of Common Stock at an exercise
price of $6.25 per share, stock options to purchase an aggregate of 100,000
shares of Common Stock at an exercise price of $9.125 per share, warrants to
purchase 322,000 Units at an exercise price of $5.75 per Unit and warrants to
purchase 104,400 Units at an exercise price of $9.49 per Unit. Of the foregoing,
warrants and options to purchase 534,578 shares of Common Stock are subject to a
24-month lock-up restriction, the warrants to purchase 322,000 Units are subject
to a 12-month lock-up restriction, and up 174,000 shares issued or to be issued
to one stockholder are subject to a 13-month lock-up restriction. Each of the
foregoing lock-up restriction periods commenced on September 16, 1997. The
exercise of such outstanding options and warrants will dilute the percentage
ownership of the Company's
14
<PAGE> 17
stockholders, and any sales in the public market of shares of Common Stock
underlying such securities may adversely affect prevailing market prices for the
Common Stock. Moreover, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holders of such
outstanding securities can be expected to exercise their respective rights
therein at a time when the Company would, in all likelihood, be able to obtain
any needed capital on terms more favorable to the Company than those provided in
such securities.
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. The Company will be able to issue shares of its Common
Stock upon exercise of the Redeemable Warrants only if there is then a current
prospectus relating to such Common Stock and only if such Common Stock is
qualified for sale or exempt from qualification underapplicable state securities
laws of the jurisdictions in which the various holders of the Redeemable
Warrants reside. The Company has undertaken and intends to file and keep current
a prospectus which will permit the purchase and sale of the Common Stock
underlying the Redeemable Warrants, but there can be no assurance that the
Company will be able to do so. Although the Company intends to seek to qualify
for sale the shares of Common Stock underlying the Redeemable Warrants in those
states in which the securities are to be offered, no assurance can be given that
such qualification will occur. The Redeemable Warrants may be deprived of any
value and the market for the Redeemable Warrants may be limited if a current
prospectus covering the Common Stock issuable upon the exercise of the
Redeemable Warrants is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Redeemable Warrants then reside.
Potential Adverse Effect of Redemption of Redeemable Warrants. The
Redeemable Warrants may be redeemed by the Company at a redemption price of $.01
per Redeemable Warrant upon 30 days written notice given at any time after
September 16, 1998 in the event that the market price of the Common Stock equals
or exceeds $10.00 per share. "Market price" shall mean: (i) the average closing
sale price of the Common Stock, for any 10 consecutive trading days within a
period of 30 consecutive trading days ending within five days of the date of
notice of redemption, as reported on the National Association of Securities
Dealers, Inc. ("NASD") Automated Quotation System or the NASD Electronic
Bulletin Board or (ii) the average of the last reported sales price of the
Common Stock for the 10 consecutive business days ending within five days of the
date of notice of redemption, on the primary exchange on which the Common Stock
is traded, if traded on a national securities exchange. Notice of redemption of
the Redeemable Warrants could force the holders to exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so, to sell the Redeemable Warrants at the current market price when
they might otherwise wish to hold the Redeemable Warrants, or to accept the
redemption price which would be substantially less than the market value of the
Redeemable Warrants at the time of redemption.
Preferred Stock; Possible Anti-Takeover Effects. The Company's
Certificate of Incorporation, as amended, authorizes the Board of Directors to
issue up to 2,000,000 shares of preferred stock, par value $0.00115 per share.
The preferred stock may be issued in one or more series, the terms of which
maybe determined at the time of issuance by the Board of Directors, without
further action by stockholders, and may include voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion and redemption rights, and sinking fund provisions.
No preferred stock is currently outstanding, and the Company has no present
plans for the issuance of any preferred stock. The Company has agreed not to
issue any shares of preferred stock without the Underwriter's consent until
September 16, 1999. However, the issuance of any such preferred stock could
materially adversely affect the rights of holders of Common Stock and,
therefore, could reduce the value of the Common Stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
the Company's ability to merge with, or sell its assets to, a third party. The
ability of the Board of Directors to issue preferred stock could discourage,
delay, or prevent a takeover of the Company, thereby preserving control of the
Company by the current stockholders.
No Assurance of Public Trading Market. Prior to the Public Offering,
there was no established trading market for the Units, Common Stock and
Redeemable Warrants and there is no assurance that a regular trading market for
such securities on The Nasdaq Stock Market, or any other exchange, will be
sustained in the future. Although the Company's securities are included on the
OTC Bulletin Board, there can be no assurance that a regular trading market for
the securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are
15
<PAGE> 18
those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain and purchasers of
the Units may be unable to resell the securities offered hereby at or near their
original offering price or at any price. In the event the securities are not
included on the OTC Bulletin Board, quotes for the securities may be included in
the "pink sheets" for the over-the-counter market. See "___`Penny Stock'
Regulations May Impose Certain Restrictions on Marketability of Securities."
"Penny Stock" Regulations May Impose Certain Restrictions On
Marketability Of Securities. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define "penny stock" to be
any equity security that is not traded on a national securities exchange or
Nasdaq and that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. If the
Company's securities that are currently included on the OTC Bulletin Board are
trading at less than $5.00 per security at any time, the Company's securities
may become subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors(generally, such investors have assets in
excess of $1,000,000 or an individual annual income exceeding $200,000, or,
together with the investor's spouse, a joint income of $300,000). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require, among other things, the delivery, prior to the transaction, of a
risk disclosure document mandated by the Commission relating to the penny stock
market and the risks associated therewith. The broker-dealer must also disclose
the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
penny stock rules may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of stockholders to sell the
Company's securities in the secondary market. See "-- No Assurance of Public
Trading Market."
16
<PAGE> 19
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Use of Proceeds.
(a) Change in Securities. None.
(b) Use of Proceeds.
The effective date of the Registration Statement (File No.
333-6650) for which this Statement is made is September 16, 1997. The Company
has been assigned a CUSIP number of 84763K. The offering to which this statement
relates (the "Offering") commenced on September 17, 1997, did not terminate
before any securities were sold and, as of the date hereof, has not terminated.
The managing underwriter of the Offering was Patterson Travis, Inc. Pursuant to
the Offering, the Company registered (i) Common Stock, classified as an "equity"
security, (ii) Units, classified as "other" securities and (iii) Redeemable
Warrants, also classified as "other" securities. Each Unit consists of one share
of Common Stock and one Redeemable Warrant to purchase one additional share of
Common Stock. The Redeemable Warrants are exercisable at a price per share of
$7.50 for a period of four years commencing September 16, 1998 and are subject
to redemption by the Company at a redemption price of $0.01 per Redeemable
Warrant upon 30 days' written notice given at any time after September 16, 1998
in the event that the market price of the Common Stock equals or exceeds $10.00
per share.
The Company registered and sold 1,200,600 Units for an aggregate
price of $6,903,450. In connection with the Offering, the issuer allowed
underwriting discounts and commissions of $690,345 and incurred aggregate
expenses of $1,001,398, broken down as follows: a non-accountable expense
allowance of $207,104, a consulting fee in the amount of $100,000 and offering
expenses of $694,294. Net offering proceeds to the Company after deducting
expenses were $5,211,707. Of the net proceeds, approximately $120,000 has been
used to pay professional fees, approximately $1,620,000 has been used to repay
indebtedness, including approximately $75,000 of indebtedness to officers and
directors of the Company, and approximately $580,000 has been used towards
repayment of accounts payable. The remaining proceeds are to be allocated as set
forth in the prospectus (the "Prospectus") included in the Registration
Statement. This use of proceeds does not represent a material change in the use
of proceeds described in the Prospectus
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following documents are referenced or included in this
report:
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed with the Commission
during the quarter ended June 30, 1998.
17
<PAGE> 20
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed in its
behalf by the undersigned thereunto duly authorized.
SPECTRUMEDIX CORPORATION
DATED: August 13, 1998 By: /s/ JOSEPH K. ADLERSTEIN
-----------------------------------
Joseph K. Adlerstein
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
DATED: August 13, 1998 By: /s/ BERNARD SONNENSCHEIN
-----------------------------------
Bernard Sonnenschein
Treasurer, Secretary and Director
(Principal Financial and
Accounting Officer)
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AND UNAUDITED CONDENSED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 861,511
<SECURITIES> 0
<RECEIVABLES> 32,750
<ALLOWANCES> 0
<INVENTORY> 418,690
<CURRENT-ASSETS> 1,342,575
<PP&E> 413,886
<DEPRECIATION> 114,087
<TOTAL-ASSETS> 2,054,537
<CURRENT-LIABILITIES> 1,169,571
<BONDS> 0
0
0
<COMMON> 4,042
<OTHER-SE> 846,335
<TOTAL-LIABILITY-AND-EQUITY> 2,054,537
<SALES> 66,898
<TOTAL-REVENUES> 66,898
<CGS> 130,084
<TOTAL-COSTS> 811,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,184
<INCOME-PRETAX> (864,996)
<INCOME-TAX> 0
<INCOME-CONTINUING> (864,996)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (864,996)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
