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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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-22501
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SPECTRUMEDIX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 25-1686354
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2124 Old Gatesburg Road, State College, Pennsylvania 16803
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(Address of principle executive offices)
(814) 867-8600
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(Registrant's telephone number, including area code)
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(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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 3,658,041 shares of Common
Stock, par value $.001 per share, outstanding as of October 20, 1999
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SPECTRUMEDIX CORPORATION
QUARTERLY REPORT
QUARTER ENDED JUNE 30, 1999
CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Balance Sheets - June 30, 1999 and March 31, 1999...................................... 1
Condensed Statements of Operations - Three Months Ended June 30, 1999 and June 30, 1998.......... 2
Condensed Statements of Cash Flows - Three Months Ended June 30, 1999 and June 30, 1998.......... 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....................................................................... 17
Item 2. Changes in Securities and Use of Proceeds............................................... 17
Item 3. Defaults Upon Senior Securities......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders..................................... 17
Item 5. Other Information....................................................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................................ 17-18
(a) Exhibits........................................................................... 17
(b) Reports on Form 8-K................................................................. 18
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SPECTRUMEDIX CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
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June 30, March 31,
1999 1999*
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(unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 10,610 $ 20,318
Accounts receivable, net 35,660 55,319
Inventories 514,890 527,979
Prepaid expenses 8,574 4,582
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TOTAL CURRENT ASSETS 569,734 608,198
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PROPERTY AND EQUIPMENT, net 445,031 463,536
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OTHER ASSETS:
Patent fees 358,568 358,816
License and license options, net 98,092 106,343
Security deposit 8,479 8,479
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TOTAL OTHER ASSETS 465,139 473,638
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TOTAL ASSETS $1,479,904 $1,545,372
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,660,444 $ 2,389,486
Current portion of long-term debt 29,856 29,926
Officer's note 333,198 161,423
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TOTAL CURRENT LIABILITIES 3,023,498 2,580,835
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LONG-TERM DEBT, net of current portion 95,566 103,273
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STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.00115 par value, 2,000,000 shares
authorized, none issued or outstanding
Common stock, $.00115 par value, 23,000,000 shares 4,206 4,059
authorized 3,658,041 and 3,530,214 shares issued and
outstanding, respectively
Additional paid-in capital 10,631,756 10,631,756
Accumulated deficit (12,055,063) (11,512,684)
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Total (1,419,101) (876,869)
Less: Deferred compensation (220,059) (261,867)
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TOTAL STOCKHOLDERS' EQUITY (1,639,160) (1,138,736)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,479,904 $ 1,545,372
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* Derived from audited financial statements
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SPECTRUMEDIX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
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1999 1998
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REVENUES $ 50,367 $ 66,898
COST OF REVENUES 129,457 130,084
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GROSS LOSS (70,090) (63,186)
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OPERATING EXPENSES:
Research and development costs, net 204,617 451,004
General and administrative expenses 246,486 360,752
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TOTAL OPERATING EXPENSES 451,103 811,756
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OPERATING LOSS (530,193) (874,942)
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OTHER INCOME (EXPENSE):
Interest income 96 11,130
Interest expense (12,282) (1,184)
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TOTAL OTHER INCOME (EXPENSE) (12,186) 9,946
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NET LOSS $ (542,379) $ (864,996)
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WEIGHTED AVERAGE NUMBER OF 3,622,534 3,515,214
SHARES OUTSTANDING ========== ==========
BASIC AND DILUTED LOSS PER SHARE $(.15) $(.25)
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SPECTRUMEDIX CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(542,379) $ (864,996)
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Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization 31,699 27,931
Non-cash compensation expense 41,808 99,414
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 19,659 (19,944)
(Increase) decrease in inventories 13,089 (37,297)
(Increase) in other assets (3,992) (26,840)
Increase in accounts payable and accrued expenses 270,958 27,653
(Decrease) in customer deposits - (5,960)
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Total adjustments 373,221 64,957
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NET CASH USED BY OPERATING ACTIVITIES (169,158) (800,039)
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CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchase of equipment (4,249) (28,762)
Increase in Patent fees (446) -
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NET CASH USED BY INVESTING ACTIVITIES (4,695) (28,762)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - others - 12,375
Proceeds from officer's notes 171,922 -
Repayment of notes payable - others (7,777) (2,706)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 164,145 9,669
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,708) (819,132)
CASH AND CASH EQUIVALENTS - beginning of period 20,318 1,680,643
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CASH AND CASH EQUIVALENTS - end of period $ 10,610 $ 861,511
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NON-CASH INVESTMENT AND FINANCING ACTIVITIES:
During the three months ended June 30, 1998, additional paid-in capital and
deferred compensation increased by $735,850 from compensation stock options
issued to non-employees. During the three months ended June 30, 1999, officer's
notes decreased and common stock increased by $147 as a result of the exercise of
stock options to purchase 127,827 common shares at $0.00115 per share
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SPECTRUMEDIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of SpectruMedix
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-QSB. Accordingly, they do not contain all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. 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, 1999, (b) the
results of operations for the three months ended June 30, 1999 and 1998 and
(c) changes in cash flows for the three months ended June 30, 1999 and
1998. For more information, refer to the audited financial statements for
the fiscal year ended March 31, 1999, which were included in the Company's
Annual Report on Form 10-KSB.
Financial results for the interim period ended June 30, 1999 and 1998 may
not be indicative of the financial results for the fiscal year ending March
31, 2000.
NOTE 2 - GENERAL
The Company devotes substantially all of its resources to the development
of high-speed DNA/gene sequencing instrumentation (the "DNA Sequencer"), an
instrument for the acquisition, analysis and management of complex genetic
information. The DNA Sequencer was developed in part from research efforts
conducted at the United States Department of Energy and Ames Laboratories'
Institute for Physical Research and Technology/Iowa State University. The
Company believes DNA sequencing has significant implications for medical,
genetic and forensic science applications.
The Company has available carryforward losses applicable to the reduction
of future Federal income taxes aggregating approximately $11,638,000 at
March 31, 1999 and which expire at various dates through 2014.
NOTE 3 - ECONOMIC DEPENDENCY
To date, all of the Company's revenues have been derived from sales of the
Company's original product lines, which included mass spectrometers,
luminoscopes, electronic components and software. As noted above,
currently, the Company is devoting substantially all of its resources to
the development, commercialization and marketing of the DNA Sequencer.
The Company achieved limited sales of its other product lines and such
sales were materially dependent on a limited number of customers. The
nature of the Company's business was such that during any individual
accounting period it sold its products to a limited number of significant
customers. The Company has not sold any DNA Sequencer units, but such
sales may also be characterized by sales to a limited number of customers
during any individual accounting period.
The Company's DNA Sequencer requires high quality raw materials and
components that the Company purchases from third party suppliers. 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. In particular, both the lasers and
capillaries used in the DNA Sequencer are each purchased from one
manufacturer who only produces a limited number of units. Such
manufacturers may not be able to supply all of the Company's needs. 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.
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NOTE 4 - LEGAL PROCEEDINGS
Rubin Matter
On April 21, 1997, a complaint 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.
NOTE 5 - STOCK OPTIONS
In May 1999, the Company granted options to purchase 28,500 shares of its
common stock to employees under the Company's Stock Incentive Plan (the
"Plan") at an exercise price of $0.0938 per share, the estimated fair value
of the common stock on the date of grant. The options vest in four equal
annual with the first tranche vesting in May 2000. The stock options are
exercisable for a period of ten years from the date of grant.
Additionally, in May 1999, the Company provided to its employees an
opportunity to exchange the options they previously received under the Plan
for new options ("New Options"). The New Options have the same terms as the
options granted under the Plan except that the exercise price has been
changed from $4.60 to $0.0938 per share, the estimated fair value of the
common stock on the date the New Options were granted. In connection with
the exchange, 237,008 New Options were granted.
In May 1999, an officer of the Company exercised stock options to purchase
127,827 shares of the Company's common stock at $0.00115 per share.
NOTE 6 - SUBSEQUENT EVENTS AMENDED LICENSE AGREEMENT AND SUBLICENSE AGREEMENT
Amended License Agreement and Sublicense
Due to the Company's financial condition during fiscal year 1999, it was
not able to make certain required payments under its licensing agreement
with a major university and relating to the DNA Sequencer. On July 30,
1999, the University and the Company entered into an amendment to the
license agreement ("Amended License"), pursuant to which the Company agreed
to pay $500,000 under the Amended License and the university agreed to
waive any defaults for the failure to pay overdue amounts. The parties
agreed to a revised schedule of minimum royalties. Additionally, the
university consented to the grant of a sublicense ("Sublicense") to a
company, and the Company agreed to pay the university a majority of the
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minimum royalties received under the Sublicense for the first three years,
and all of the minimum royalties thereafter. However, in the event
royalties under the Sublicense exceed certain milestone amounts they will
be equally shared with the university. The Company also granted the
university a phantom stock award equal to 150,000 shares of the Company's
common stock, which will have the right to participate in the increase in
value of the Company's common stock between July 30, 1999 and the date of
any sale of the Company. However, in the event the Company consummates one
or more transactions in which it receives net cash proceeds of $25,000,000
or more the Company will be obligated to pay to the university in the same
calendar year and thereafter (i) 100 percent of Sublicense fees up to
$1,000,000 and (ii) 50 percent of Sublicense fees greater than $1,000,000.
In the event the Company fails to make required payments to the university
under the Amended License, the Amended License may be canceled. The
university may then require the Company to grant to the university a non-
exclusive license to any patents, trade secrets and other technology owned
or developed by the Company in connection with its business of
manufacturing, distributing and/or selling DNA sequencing equipment. The
university would be required to pay the Company 50% of all revenues
received by the university in connection with any such license.
Concurrently with entering into the Amended License with the university,
the Company entered into a Sublicense agreement pursuant to which the
Company granted a company (the "Sublicensee") an exclusive sublicense to
use certain patents for the development of DNA sequencing machines using 30
or fewer capillaries using side entry illumination. The Company also
granted the Sublicensee a right of first refusal to sublicense such
technology for use in DNA sequencing machines using more than 30
capillaries. On July 30, 1999, the Sublicensee paid the Company a non-
refundable Sublicense issue fee of $1,000,000, and, commencing with the
twelve-month period beginning August 1, 2001, the Sublicensee agreed to
pay to the Company certain minimum annual royalties. Such minimum
royalties are non-refundable, but are credited against the earned
royalties payable pursuant to the Sublicense agreement.
Series A Preferred Stock
On July 30, 1999, the Company completed the sale and issuance of 2,000
shares of Series A Preferred Stock ("Series A Preferred") at $1,000 per
share, providing gross proceeds of $2,000,000 and net proceeds, after
expenses paid by the Company, of $1,995,000.
At March 31, 1999, the Company had authorized the issuance of 2,000,000
shares of preferred stock, $.00115 par value per share. The Company has
designated 2,000 of such preferred shares as Series A Preferred. The
holders of Series A Preferred are entitled to (i) share in dividends on a
pro-rata basis with common stockholders on an as-converted basis; (ii) a
liquidation preference equal to the sum of the price paid per share and all
declared and unpaid dividends (the "Liquidation Preference"); (iii)
optional redemption by the Company of the Liquidation Preference with
notice of at least 20 days; (iv) vote on all matters on an as converted
basis; and (v) convert to common stock at the Liquidation Preference Amount
multiplied by the shares to be converted divided by the conversion price
(the "Conversion Price") per share. The initial Conversion Price is equal
to $2.50 per share of common stock, and is subject to adjustment in the
event that shares of common stock are issued without consideration or for
consideration per share less than the conversion price.
Consulting Agreement
On July 30, 1999, the Company and the Sublicensee entered into a three-year
consulting agreement pursuant to which the Company will provide consulting
services to the Sublicensee. In connection with such agreement, the
Company received a lump sum fee of $2,000,000.
<PAGE>
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
SpectruMedix Corporation's (the "Company") 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
Quarterly 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, the ability of the Company to market the DNA Sequencer, the
availability of the necessary capital to fund the Company's plans, and the
availability of specialized components necessary to manufacture the DNA
Sequencer, as well as those factors discussed under the heading "Risk Factors"
and elsewhere herein.
Overview
Currently, the Company devotes substantially all of its resources to the
development of high-speed DNA/gene sequencing instrumentation (the "DNA
Sequencer"), an instrument for the acquisition, analysis and management of
complex genetic information. The DNA Sequencer was developed in part from
research efforts conducted at the United States Department of Energy and Ames
Laboratories' Institute for Physical Research and Technology/Iowa State
University ("Ames Laboratories"). The Company believes DNA sequencing has
significant implications for medical, genetic and forensic science applications.
During the period from April 1992 (inception) through June 1992, the Company was
engaged in organizational activities, including negotiating agreements with the
Bankruptcy Court in Harrisburg, Pennsylvania to lease, on a temporary basis, the
assets and facilities of Nuclide Corporation ("Nuclide") and Measurement and
Analytic Systems, Inc. ("MAAS"). In December 1992, via court order, the Company
acquired the assets of Nuclide and MAAS. In April 1993, the Company acquired all
the assets of Lab Data, including an inventory of computer hardware and a
complete line of data acquisition and instrument control software. From June
1992 until mid-1998, the Company devoted substantially all of its resources to
upgrade and improve the Company's line of instrumentation (Mass Spectrometers,
Luminoscopes, etc.), electronic components and software. The Company sold a
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. The Company
was not able to achieve meaningful sales of these products.
Accordingly, the Company has shifted its focus to the commercialization of the
DNA Sequencer, and, as discussed above, currently devotes substantially all of
its resources to the commercialization and marketing of the DNA Sequencer. To
date, the Company has not sold any DNA Sequencer units.
The Company has not been profitable since inception and had an accumulated
deficit of $12,055,063 at June 30, 1999. Successful future operations depend
upon the Company's ability to develop and commercialize its products.
The Company has financed its operations primarily through the private sale and
issuance of equity securities and proceeds from an initial public offering (the
"Public Offering") of equity securities during September 1997. All such funds
have been utilized by the Company and since January 1999 the Company has relied
on cash infusions from its Chief Executive Officer. On July 30, 1999, the
Company restructured its license agreement with Iowa State University Research
Foundation, an affiliate of Ames Laboratories ("ISURF"), for technology used to
develop the DNA Sequencer, and entered into a sublicense agreement relating to
certain of such technology with PE Biosystems ("PE Bio"). In connection with
the sublicense agreement, PE Bio made an investment in the Company and retained
the Company as a consultant.
The aggregate gross proceeds from the sublicense and related agreements with PE
Bio will provide the Company with additional liquidity and allow it to pay
amounts owing under its license agreements, and, the Company
<PAGE>
believes, allow it to meet its current obligations over the next twelve months.
There can be no assurance, however, that such funds will be sufficient. In order
to proceed with the realization of its plans for development and growth, the
Company anticipates that over the next twelve months it will need significant
additional capital to greatly expand its manufacturing capabilities, and launch
a substantial sales and marketing campaign. There can be no assurance, however,
that the Company will be able to obtain such capital on terms acceptable to it.
Results of Operations - Three Months Ended June 30, 1999 and 1998
The Company had total revenues of $50,367 and $66,898 for the three months ended
June 30, 1999 and 1998, respectively. Revenues for both periods reflect sales
of products from product lines other than the DNA Sequencer and the Company is
no longer devoting its resources to the development and marketing of such
products. The decrease in revenues of $16,531, or approximately 25%, was due
primarily to the increased focus of the Company on the commercialization of the
DNA Sequencer, which resulted in the shifting of key personnel from sales and
marketing, and to the lack of a full time sales and marketing staff.
Of the total revenues discussed above, revenues derived from the sale of the
Company's services totaled $14,249 and $17,386 for the three month ended June
30, 1999 and 1998, respectively. The decrease in service revenue of $3,137, or
approximately 18%, was due primarily to the increased focus of the Company on
the commercialization of the DNA Sequencer, which resulted in the shifting of
key personnel from sales and marketing, and to the lack of a full time sales and
marketing staff.
Research and development expenses decreased $246,387 in 1999 to $204,617 from
$451,004 in 1998, due primarily to a significant lack of funds for research and
development projects.
General and administrative expenses were $246,486 and $360,752 during the three
months ended June 30, 1999 and 1998, respectively, a decrease of $114,266, or
approximately 32%. Approximately 63% and 47% of general and administrative
expenses for the three months ended June 30, 1999 and 1998, respectively, were
attributable to payroll, payroll taxes, employee benefits and professional and
consulting services. The decrease was due primarily to a lack of funds to pay
for consultants and retain administrative personnel. The Company's inability to
incur such expenses has materially impacted the Company. In particular, the
Company has not been able to hire a sales force and implement marketing
programs.
Interest expense of $12,282 and $1,184 for the three months ended June 30, 1999
and 1998, respectively, resulted from borrowings. Interest expense increased
primarily as a result of increased borrowings.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through the sale
of equity securities and loans, most of which loans were repaid with the
proceeds from the Company's initial public offering. All of such funds were
expended on the development and commercialization of the Company's products,
primarily its mass spectrometers and luminoscopes. Since January 1999, the
Company has been dependent primarily on funds advanced by its Chief Executive
Officer to meet payroll and expenses, and the Company has failed to make
payments under its license agreements. As a result of its financial condition,
the Company was not able to exercise or renew its option with the University of
California, Berkeley relating to diagnostic kinetics technology.
On July 30, 1999, the Company restructured its license agreement with ISURF for
technology used to develop the Company's DNA Sequencer and entered into a
sublicense agreement relating to certain of such technology with PE Bio. In
connection with the sublicense agreement, PE Bio made an investment in the
Company. PE Bio also retained the Company as a consultant.
The aggregate $5,000,000 in gross proceeds from the sublicense and other
agreements with PE Bio will provide the Company with additional liquidity, allow
it to pay amounts owing under its license agreement with ISURF, complete the
commercialization of the DNA Sequencer and, the Company believes, meet all of
its existing obligations over the next twelve months. There can be no
assurance, however, that such funds will be sufficient. In order to further
develop and expand the business in accordance with its plans, the Company
anticipates that over the
<PAGE>
next twelve months it will need significant additional capital to greatly expand
its manufacturing capabilities, launch a substantial sales and marketing
program, pay various required license and milestone fees, establish third-party
collaborations and pursue additional research and development. 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 rights,
competing technological and market developments, and the ability of the Company
to develop new collaborative and licensing arrangements.
If the Company is unable to obtain the necessary funds, by issuing equity or
debt securities, entering into collaborative agreements or obtaining grants, it
will not be able to complete the commercialization of, and effectively market
and manufacture, its DNA Sequencer and may not be able to continue its
operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for derivative
instruments. The Company does not expect that the adoption of this standard will
have a material effect on the Company.
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 has determined that the software developed by the Company in support
of the instrumentation sold by the Company is year 2000 compliant. The Company
has not determined if all the components produced by third parties and used in
the Company's products are year 2000 compliant. The Company has requested its
vendors to certify that the products purchased by the Company from such vendors
are year 2000 compliant, but not all the vendors have responded to the Company's
request. If the vendors of such components can not certify to the Company that
such components are year 2000 compliant, the Company will have to locate other
suppliers.
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. The Company is developing contingency plans in the
event that certain of its vendors, suppliers of collaborative partners are not
year 2000 compliant. Such contingency plans include locating additional
suppliers and modifying systems. Certain of the Company's suppliers produce
highly specialized instrumentation and it may prove difficult to locate
alternate suppliers.
Any year 2000 compliance problems of 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.
<PAGE>
RISK FACTORS
The Company has incurred losses since its inception, requires significant
amounts of additional capital and may not be able to continue as a going
concern. The Company has incurred operating losses since its inception in 1992.
At June 30, 1999, the Company had an accumulated deficit of $12,055,063. The
Company's current revenues from operations are limited and are not sufficient to
fund its operating expenses. The Company needs to successfully develop and
commercialize the DNA Sequencer to reach profitability. No assurance can be
given that the Company will be able to accomplish 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. The Company has used the proceeds of its initial
public offering (the "Public Offering") and since January 1999 through July
1999, the Company has been dependent upon cash advances from its Chief Executive
Officer to fund its operations. While the Company's most immediate liquidity
concerns may have been alleviated by the agreements with ISURF and PE Bio, the
Company will require significant additional capital to achieve its business
plans. As a result of its liquidity problems, the Company must rely 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."
The Company is in the 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. The Company will require additional
capital, above the amounts received from PE Bio, to commercialize and market the
DNA Sequencer and pursue other research and development activities. 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.
The Company has failed to pay royalty fees under existing licenses. The
Company's DNA Sequencer was developed in part from research efforts conducted at
Ames Laboratories. The Company entered into a world-wide exclusive licensing
agreement with ISURF, which agreement was restructured as a result of the
Company's failure to make timely payments under the agreement. If the Company
continues to fail to make payments under the license agreement, such agreement
may be terminated and the Company will not be able to market the DNA Sequencer.
In February 1999, an option held by the Company to license technology in the
field of diagnostic kinetics expired unexercised because the Company did not
have the funds available to pay amounts to the licensor. If the Company fails to
pay license fees to ISURF it may lose the right to market the DNA Sequencer.
The ability of the Company to protect its technology through patents and other
proprietary rights is uncertain. 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 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
<PAGE>
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.
The science and technology of the Company's products is rapidly evolving and
substantial further research and development is required. 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. 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.
The Company's new technologies are untested on a commercial scale and may not be
accepted by the market. The production of the DNA Sequencer, 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, 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.
The Company has only limited manufacturing capabilities. The Company maintains
limited manufacturing facilities and will need to expand such facilities to
effectively manufacture its products on a profitable basis. The expansion of the
Company's manufacturing facilities and capabilities will subject the Company to
numerous risks,
<PAGE>
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.
The Company is dependent upon third party suppliers for components and raw
materials. The Company's existing and proposed products require high quality
components and raw materials which the Company currently purchases and will
continue to purchase from third-party suppliers. 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.
In particular, both the lasers and capillaries used in the DNA Sequencer are
each purchased from one manufacturer who only produces a limited number of
units. Such manufacturers may not be able to supply all of the Company's needs.
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.
The Company's lack of working capital may adversely impact its relationship with
its suppliers, creditors and customers. Since inception, the Company has been
characterized by inadequate capitalization. Accordingly, the Company's lack of
working capital has at times prevented the Company from making timely payments
to suppliers 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.
A significant portion of the Company's sales come from a limited number of
customers. Approximately 51% and 42% of the Company's net sales for the years
ended March 31, 1999 and 1998, respectively, were derived from sales to the
Company's top three customers. During the fiscal year ended March 31, 1999,
product sales to each of the three top customers amounted to approximately 24%,
15%, and 12%, respectively. During the fiscal year ended March 31, 1998,
product sales to each of the four top customers amounted to approximately 15%,
14%, 13% and12%, respectively. Certain customers may not necessarily purchase
instrumentation from the Company on a regular basis. 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.
Currently, the only customer for the DNA Sequencer is PE Bio. Except for a
license of technology to PE Bio, the Company has not sold any DNA Sequencers or
related technology and the Company does not have a sufficient marketing staff
and manufacturing capacity to properly develop the DNA Sequencer. PE Bio may
terminate the license agreement at any time.
<PAGE>
The Company must continually upgrade its products and introduce new technologies
in order to compete. 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 Company is dependent upon its key employees and must recruit 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 on other members of its scientific and management
staff. Dr. Adlerstein is the only executive officer of the 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. Due to the financial condition, the Company has had
difficulty attracting and retaining the personnel necessary for its operations.
Dr. Adlerstein is a substantial stockholder of the Company, holding
approximately 21%, of the outstanding shares. The Company has entered into an
employment agreement with Dr. Adlerstein. The loss or unavailability of the
services of Dr. Adlerstein 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.
Bernard Sonnenschein, the Company's former Secretary and Treasurer, resigned in
January 1999. As a result, Dr. Adlerstein and other personnel have had to
handle responsibilities previously assigned to Mr. Sonnenschein, including,
without limitation, preparation of the Company's financial statements. Due to
the Company's continuing liquidity difficulties, the Company has been unable to
hire a replacement for Mr. Sonnenschein, nor has the Company been able to hire
marketing professionals.
The Company is actively seeking and must retain a chief financial officer. In
addition, the Company is also seeking to expand its board of directors to at
least three members.
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.
The Company's products are heavily regulated. 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
<PAGE>
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.
The Company's products may be subject to recall. 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.
The Company is controlled by its management and current stockholders and there
are no independent directors. The Company's current management owns
approximately 21% 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 to a vote of the stockholders
of the Company. The Company currently has only one director, Dr. Adlerstein ,
the Chief Executive Officer and a principal stockholder of the Company.
Accordingly, he is in a position to control the actions and decisions of the
Board of Directors. Although the Company is seeking to expand its Board of
Directors to at least three members, there can be no assurance that it will be
able to do so.
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 has determined that the
software developed by the Company in support of the instrumentation sold by the
Company is year 2000 compliant. The Company has not determined if the all the
components produced by third parties and used in the Company's products are year
2000 compliant. If the vendors of such components can not certify to the
Company that such components are year 2000 compliant, the Company will have to
locate other suppliers. 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.
The Company's stock price may be volatile. There can be no assurance that an
active trading market for the Company's Common Stock or redeemable warrants to
purchase shares of Common Stock (the "Redeemable Warrants") will be sustained in
the future. In fact, there have been extended periods during which there has
been limited trading in the Company's Common Stock and the Redeemable Warrants.
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.
The Company has not paid 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.
<PAGE>
A significant number of shares of capital stock recently have become eligible
for sale and any sale may adversely affect the price of the Company's Common
Stock. 1,512,647 shares of the Company's outstanding shares of Common Stock
were subject to a 24-month restriction against transfer, which expired on
September 16, 1999. 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.
An additional 660,498 shares of Common Stock of the Company held by people and
institutions who provided financing to the Company prior to its initial public
offering became available for resale in September and October 1998.
A significant number of shares of Common Stock are subject to outstanding
options and warrants. At June 30, 1999, there were outstanding warrants to
purchase an aggregate of 100,000 shares of Common Stock at an exercise price of
$1.00 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 and warrants
to purchase an aggregate of 173,915 shares of Common Stock at an exercise price
of $2.88 per share, stock options to purchase an aggregate of 265,508 shares of
Common Stock at an exercise price of $0.0938 per share, warrants to purchase an
aggregate of 1,200,600 at $7.50 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 100,000 shares of Common Stock
at an exercise price of $10.00 per share, warrants to purchase 322,000 Units (as
defined below) 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 were subject to
a 24-month lock-up restriction, which expired on September 16, 1999. In
addition, on July 30, 1999, the Company issued 2,000 shares of its Series A
Preferred Stock which are convertible into 800,000 shares of common stock. The
exercise of such outstanding options and warrants will dilute the percentage
ownership of the Company's 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.
In May 1999, Dr. Adlerstein exercised an option to purchase 127,827 shares of
Common Stock.
Holders of the Company's redeemable warrants may only exercise such warrants if
a current prospectus is available. 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 under applicable 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.
The Company has the right to redeem certain 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
<PAGE>
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.
The Company has the right to issue preferred stock, which may have 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 may be 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. 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.
There can be no assurance that there will be a public trading market for the
Company's securities. 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 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 Company's securities may be unable to resell the securities at or near their
purchase 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."
Certain restrictions may be imposed upon the Company's Common Stock so long as
it trades below $5.00 per share. 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."
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
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Robert M. Rubin v. SpectruMedix Corporation et. al. On April 21, 1997, a
complaint 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.
Other than the foregoing, the Company is not a party to any other material
legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
- ------- -----------------------------------------
(a) Change in Securities. None.
--- --------------------
(b) Use of Proceeds.
--- ---------------
On July 30, 1999, PE Bio, the Company's sublicensee for technology
relating to the DNA Sequencer, purchased 2,000 shares of the Company's Series A
Preferred Stock ("Series A Preferred") at $1,000 per share, providing gross
proceeds of $2,000,000 and net proceeds, after expenses paid by the Company, of
$1,995,000.
The Company used a portion of the proceeds from the sale of the Series A
Preferred to pay amounts payable to ISURF pursuant to the amended license
agreement. The balance of the proceeds have and will be devoted to the
commercialization, marketing and manufacture of the DNA Sequencer.
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:
Exhibit No.
-------------
27 Financial Data Schedule.
<PAGE>
(b) Reports on Form 8-K.
--- -------------------
No Current Reports on Form 8-K were filed with the Commission during
the quarter ended June 30, 1999.
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: November 4, 1999 By: /s/ Joseph K. Adlerstein
-------------------------
Joseph K. Adlerstein
President, Chief Executive Officer and
Chairman of the Board (Principal Executive and
Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule.
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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<NAME> SPECTRUMEDIX
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<COMMON> 4,059
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