<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
September 30, 1997
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
TO _____________________
COMMISSION FILE NUMBER: 0-28420
---------
Integ Incorporated
------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Minnesota 41-1670176
--------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
2800 Patton Road, St. Paul, MN 55113
------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Telephone Number: (612) 639-8816
---------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
------ ------
As of November 5, 1997, the registrant had 9,323,657 shares of $.01 par value
common stock issued and outstanding.
===============================================================================
<PAGE>
INTEG INCORPORATED
INDEX
-----
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets as of September 30, 1997 and December 31, 1996 3
Statements of Operations for the three and nine months
ended September 30, 1997 and 1996 and for the period from
April 3, 1990 (inception) through September 30, 1997 4
Statements of Cash Flows for the three and nine months
ended September 30, 1997 and 1996 and for the period from
April 3, 1990 (inception) through September 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 2. Changes in Securities (Use of proceeds from public offering) 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
---------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 25,532,940 $ 33,879,608
Receivables 361 113,254
Prepaid expenses 163,679 157,933
---------------- ----------------
Total current assets 25,696,980 34,150,795
---------------- ----------------
Furniture and equipment 7,645,084 3,701,648
Less accumulated depreciation (1,389,977) (821,476)
---------------- ----------------
6,255,107 2,880,172
Other assets 487,124 684,933
---------------- ----------------
Total assets $ 32,439,211 $ 37,715,900
=============== ===============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 706,058 $ 1,236,348
Current portion of long-term debt and
capital lease obligations 852,735 337,277
---------------- ----------------
Total current liabilities 1,558,793 1,573,625
---------------- ----------------
Long-term debt and capital lease obligations,
less current portion 3,296,382 1,298,484
Shareholders' equity:
Common stock 93,227 92,757
Additional paid-in capital 54,308,260 54,269,333
Deficit accumulated during the
development stage (26,394,584) (18,873,957)
---------------- ----------------
28,006,903 35,488,133
Deferred compensation (422,867) (644,342)
---------------- ----------------
Total shareholders' equity 27,584,036 34,843,791
---------------- ----------------
Total liabilities and shareholders' equity $ 32,439,211 $ 37,715,900
=============== ===============
</TABLE>
3
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
Three Months Ended Nine Months Ended April 3, 1990
September 30 September 30 (Inception) to
------------------------------ -------------------------------- September 30
1997 1996 1997 1996 1997
-------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development $ 1,176,786 $ 1,264,678 $ 3,472,858 $ 3,378,769 $ 14,071,787
Manufacturing development 614,512 359,865 1,753,453 1,060,671 4,237,418
Clinical and regulatory 285,784 235,691 861,554 544,696 2,043,710
General and administrative 506,436 553,848 1,558,530 1,211,465 5,877,100
Sales and marketing 179,675 196,888 628,194 612,313 2,035,662
-------------- -------------- --------------- --------------- ---------------
Operating loss (2,763,193) (2,610,970) (8,274,589) (6,807,914) (28,265,677)
-------------- -------------- --------------- --------------- ---------------
Other income (expense):
Interest income 378,018 491,656 1,217,111 839,408 3,191,799
Interest expense (150,222) (68,482) (463,149) (148,823) (1,320,706)
-------------- -------------- --------------- --------------- ---------------
227,796 423,174 753,962 690,585 1,871,093
-------------- -------------- --------------- --------------- ---------------
Net loss for the period and
deficit accumulated during
the development state $ (2,535,397) $ (2,187,796) $ (7,520,627) $ (6,117,329) $ (26,394,584)
============= ============= ============== ============== ==============
Net loss per share:
Primary ($.27) ($.24) ($.81) ($1.54) ($8.45)
Fully-diluted* ($.27) ($.24) ($.81) ($.78) ($5.45)
Weighted average number of
common shares outstanding:
Primary 9,312,865 9,270,125 9,296,197 3,961,335 3,123,247
Fully-diluted* 9,312,865 9,270,125 9,296,197 7,830,429 4,843,838
</TABLE>
*Assumes conversion of all previously outstanding convertible preferred stock
into common stock during each reporting period prior to July 1, 1996, the
closing date of the company's initial public offering, at which time all
convertible preferred stock was automatically converted into common stock.
4
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
Three Months Ended Nine Months Ended April 3, 1990
September 30 September 30 (Inception) to
------------------------------- ------------------------------- September 30
1997 1996 1997 1996 1997
-------------- ---------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $ (2,535,397) $ (2,187,795) $ (7,520,627) $ (6,117,329) $(26,394,584)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 228,546 110,395 569,305 300,729 1,425,173
Deferred compensation amortization 73,622 150,611 221,475 382,929 924,520
Amortization of loan committment fee - - 77,463 - 250,074
Amortization of options and warrants related
to debt financing, lease guarantee, extension
of options and consulting services 5,750 8,886 17,251 24,621 272,053
(Gain) Loss on sale of equipment and deposit
write-off (537) - (537) - 67,672
Changes in operating assets and liabilities:
Receivables 30,596 (63,758) 85,718 (78,505) (361)
Prepaid expenses and other assets (35,911) 76,559 (6,446) (117,907) (256,415)
Accounts payable and accrued expenses (178,415) 4,615 (530,290) 24,507 706,058
------------------------------ ------------------------------- --------------
Net cash used in operating activities (2,411,746) (1,900,487) (7,086,688) (5,580,955) (23,005,810)
Investing activities:
Purchase of furniture and equipment (930,101) (312,990) (3,936,271) (850,004) (6,974,743)
Proceeds from sale of furniture and equipment 3,750 3,750 46,829
------------------------------ ------------------------------- --------------
Net cash used in investing activities (926,351) (312,990) (3,932,521) (850,004) (6,927,914)
Financing activities:
Proceeds from sale of Convertible
Preferred Stock - - - - 22,789,732
Proceeds from bridge loan debt - - - - 2,900,000
Payments on long-term debt and capital
lease obligations (160,782) (33,739) (362,735) (105,377) (745,785)
Proceeds from sale of Common Stock 18,085 26,133,811 39,397 26,133,811 26,174,564
Proceeds from borrowings under equipment loan 1,246,285 - 2,995,879 926,418 4,348,153
------------------------------ ------------------------------- --------------
Net cash provided by financing activities 1,103,588 26,100,072 2,672,541 26,954,852 55,466,664
------------------------------ ------------------------------- --------------
Increase (decrease) in cash and
cash equivalents (2,234,509) 23,886,595 (8,346,668) 20,523,893 25,532,940
Cash and cash equivalents - beginning
of period 27,767,449 12,401,436 33,879,608 15,764,138 -
------------------------------ ------------------------------- --------------
Cash and cash equivalents - end of period $ 25,532,940 $ 36,288,031 $ 25,532,940 $ 36,288,031 $25,532,940
============== =============== =============== =============== ==============
Supplemental disclosure of cash flow
information
Fixed assets capitalized under capital
leases $ - $ - $ 11,182 $ - $ 763,052
Conversion of $2,900,000 of debt into
Series E Convertible Preferred Stock $ - $ - $ - $ - $ 2,900,000
</TABLE>
5
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying financial statements, which are unaudited except for the
balance sheet as of December 31, 1996, have been prepared in accordance with
instructions to Form 10-Q and do not include all the information and notes
required by Generally Accepted Accounting Principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. These financial statements should be read in conjunction with the
financial statements and accompanying notes from the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996 filed with the Securities and
Exchange Commission.
(2) NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the periods presented. Pursuant to Securities and
Exchange Staff Accounting Bulletin No. 83 (SAB No. 83), shares convertible into
common stock issued by the Company at prices less than the initial public
offering price ($9.50 per share) during the 12 months immediately preceding the
initial public offering, plus stock options and warrants granted at exercise
prices less than the initial public offering price during the same period, have
been included in the determination of shares used in calculating the net loss
per share, using the treasury stock method, as if they were outstanding for all
periods presented prior to the initial public offering.
Fully-diluted net loss per share computed in accordance with Accounting
Principles Board Opinion No. 15 and SAB No. 83 gives effect to the conversion of
all series of convertible preferred stock into common stock during the entirety
of each respective reporting period. The primary net loss per share assumes
conversion of all previously outstanding convertible preferred stock as of July
1, 1996, when such automatic conversion actually took place.
(3) EQUIPMENT LOAN AGREEMENT
During 1996, the Company entered into an equipment loan agreement which provides
for borrowings up to $12.5 million to finance the purchase of equipment and
fixtures including automated manufacturing equipment and tooling. Loans are
paid back monthly over a four year period. The obligation of the lender to make
additional loans expires December 31, 1998. This agreement was amended in
August 1997 to increase the required collateral to $2 for each $1 of future
borrowings that occur prior to a public announcement that the in-house testing
of the Company's LifeGuide System has resulted in performance which should allow
the Company to initiate clinical trials within 90 days. Subsequent to the date
of the above mentioned announcement, the lender will advance additional funds to
the Company so the overall collateral to loan ratio is 1 to 1 and all future
borrowings under the agreement would revert back to the original terms of the
initial loan agreement. The Company has borrowed a total of $4.3 million under
this agreement as of September 30, 1997.
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-Q and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer of the Company, the word or
phrases "believes," "anticipates," "expects," "intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the following: risks
associated with the development of a new technology; dependence on the LifeGuide
System and the uncertainty of market acceptance; history of operating losses and
expectation of future losses; limited clinical testing and sales and marketing
experience; uncertainty of obtaining Food and Drug Administration clearances;
heightened competition and risk of technological obsolescence; risks associated
with the lack of manufacturing capability and dependence on contract
manufacturers and suppliers; risks associated with the company's dependence on
proprietary technology, including those related to adequacy of patent and trade
secret protection; risks associated with retaining key personnel and attracting
additional qualified skilled personnel; and the risks associated with raising
additional funds.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances after the date of such statements. Readers are
urged to carefully review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Such forward-
looking statements are qualified in their entirety by the cautions and risk
factors set forth under "Cautionary Statement" filed as Exhibit 99.1 to this
Form 10-Q.
GENERAL
Integ, a development stage company, was incorporated on April 3, 1990 to develop
the LifeGuide System, a next generation, hand-held glucose monitoring product
for use by people with diabetes that avoids the pain and blood associated with
conventional "finger-stick" technologies. Utilizing the Company's proprietary
interstitial fluid sampling technology, the LifeGuide System will allow people
with diabetes to frequently self-monitor their glucose levels without repeatedly
enduring the pain of lancing their fingers to obtain a blood sample.
From inception through September 30, 1997, the Company has incurred losses
totaling $26.4 million, consisting of $14.1 million of research and development
expenses, $5.9 million of general and administrative expenses and $6.4 million
of other expenses net of interest income. The Company's activities have
consisted primarily of research and product development, product design, and
development of the manufacturing processes and marketing strategies needed for
the introduction of
7
<PAGE>
the LifeGuide System. The Company has generated no revenue and has sustained
significant operating losses each year since inception. The Company expects
such losses to continue for the next several years.
The Company's future success is entirely dependent upon the successful
development, commercialization and market acceptance of the LifeGuide System,
the development of which is ongoing and the complete efficacy of which has not
yet been demonstrated. The Company is currently focused on the research and
development activities necessary to modify the current design in order for the
LifeGuide System to meet the Company's product specifications. During the
quarter ended September 30, 1997, the Company determined that one of the custom
parts in the LifeGuide Meter needed to be modified in order to correct a major
source of error in the system. The new, modified parts should be available by
the end of 1997 at which time new prototype units will be built and tested. In
addition to the engineering effort required to identify and resolve the
remaining design issues in the LifeGuide Meter, the company is pursuing parallel
efforts to prepare the entire LifeGuide System for high volume manufacturing.
Accordingly, expenses in the manufacturing development and clinical and
regulatory areas should increase over the next several quarters.
RESULTS OF OPERATIONS
Comparison of Three and Nine Months Ended September 30, 1997 and 1996
General: The Company's net loss totaled $2,535,397 and $7,520,627 during the
three and nine months ended September 30, 1997, up from $2,187,796 and
$6,117,329 during the same periods in 1996. The Company expects net losses to
continue for the next several years.
Research and development expenses: Research and development expenses decreased
7% to $1,176,786 during the three months ended September 30, 1997 from
$1,264,678 during the same period in 1996. This decrease in research and
development expenses was due primarily to decreases in consulting expenses
($140,000) and the usage of prototype materials ($72,000). The impact of these
expense decreases was partially offset by higher staffing costs ($140,000) and
depreciation ($37,000). For the first nine months of 1997, research and
development expenses increased 3% to $3,472,858, up from $3,378,769 during the
comparable 1996 period. The year-to-date increase in research and development
expenses is primarily related to higher staffing costs ($361,000), which were
partially offset by lower prototype expenses ($152,000) and legal costs
associated with patent filings ($70,000).
Manufacturing development expenses: Manufacturing development expenses
increased 71% to $614,512 during the three months ended September 30, 1997 from
$359,865 during the same period in 1996. The increase in manufacturing
development expenses was due primarily to increases in pre-manufacturing
expenses, consisting of facility costs ($104,000), additional staffing costs
($88,000) and related travel ($31,000) associated with the design of the
Company's automated manufacturing equipment. For the first nine months of 1997,
manufacturing development expenses increased 65% to $1,753,453, up from
$1,060,671 during the comparable 1996 period. The year-to-date increase in
manufacturing development expenses is primarily related to higher staffing costs
($310,000) and increases in facility costs ($278,000), and prototype tooling and
material ($96,000).
Clinical and regulatory expenses: Clinical and regulatory expenses totaled
$285,784 and $861,554 during the three and nine month periods ended September
30, 1997, up from $235,691 and $544,696 during the same periods in 1996. These
increases in clinical and regulatory expenses were due primarily to costs
associated with additional staff that were hired to plan the clinical trials
necessary to
8
<PAGE>
obtain the required regulatory approvals for the LifeGuide System.
General and administrative expenses: General and administrative expenses
decreased 9% to $506,436 during the three months ended September 30, 1997 from
$553,848 during the same period in 1996. For the first nine months of 1997,
general and administrative expenses increased 29% to $1,558,530, up from
$1,211,465 during the comparable 1996 period. The year-to-date increase in
general and administrative expenses is primarily related to various costs
associated with being a publicly traded company ($220,000), higher
compensation costs ($124,000), and higher depreciation ($68,000). The impact
of these expense increases was partially offset by a decrease in consulting
expenses ($63,000).
Sales and marketing expenses: Sales and marketing expenses decreased 9% to
$179,675 during the three months ended September 30, 1997 from $196,888 during
the same period in 1996. For the nine month period ended September 30, 1997,
sales and marketing expenses totaled $628,194, up slightly from $612,313 for the
comparable period in 1996.
Interest Income: Interest income decreased to $378,018 for the three month
period ended September 30, 1997, compared to $491,656 for the comparable 1996
period. The decrease resulted from lower average balances of cash and cash
equivalents. The year-to-date increase in interest income in 1997 resulted
from higher average balances of cash and cash equivalents in 1997 resulting
from the investment of net proceeds totaling approximately $26 million
received in July 1996 from the Company's initial public offering.
Interest expense: Interest expense totaled $150,222 and $463,149 during the
three and nine month periods ended September 30, 1997, up from $68,482 and
$148,823 during the same periods in 1996. The increases in interest expense
resulted from a higher average balance in long-term debt and capital lease
obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations since inception have been funded by net proceeds from
the sale of Common and Preferred Stock totaling approximately $52 million
through September 30, 1997. The Company had cash and cash equivalents of
approximately $25.5 million as of September 30, 1997.
The Company believes that its current cash balances, when combined with the $8.2
million unused portion of its line of credit facility, will be sufficient to
fund its operations until sometime during the second half of 1998. The
Company's future liquidity and capital requirements will depend on numerous
factors, including when or if the performance of the LifeGuide System meets the
required performance specifications, the extent to which the Company's LifeGuide
System gains market acceptance, the timing of regulatory actions regarding the
LifeGuide System, the costs and timing of expansion of sales, marketing and
manufacturing activities, the results of clinical trials and competition. See
Exhibit 99.1 to this Form 10-Q for a more detailed description of the factors
that may affect the Company's future liquidity and capital requirements.
9
<PAGE>
II. OTHER INFORMATION
Item 2: Changes in Securities (Use of proceeds from public offering)
The Company's Registration Statement on Form S-1 (File No. 333-4352), as
amended, was declared effective by the Securities and Exchange Commission on
June 24, 1996. The offering of the Company's Common Stock covered by such
Registration Statement commenced on June 28, 1996. Piper Jaffray Inc. and
Montgomery Securities acted as the managing underwriters ( the
"Representatives") for the offering. A total of 3,450,000 shares of Common
Stock, including 450,000 shares subject to the Representatives' over-allotment
option, were registered at an offering price of $9.50 per share. A total of
3,000,000 shares of Common Stock at an aggregate offering of $28,500,000 were
sold in the offering. Less than all of the securities offered were sold because
the Representatives' over-allotment option to purchase 450,000 shares was not
exercised prior to its expiration.
The expenses incurred for the Company's account in connection with the
issuance and distribution of the securities registered were as follows:
<TABLE>
<CAPTION>
<S> <C>
Underwriting discounts and commissions $1,995,000
Expenses paid to or for the underwriters Finder's fees 0
Finder's fees 0
Other expenses 381,000
----------
Total expenses $2,376,000
----------
</TABLE>
None of such expenses were paid directly or indirectly to (i) directors or
officers of the Company or their affiliates, (ii) persons owning 10% or more of
the Company's equity securities or (iii) affiliates of the Company.
The net offering proceeds to the Company after deducting expenses were
approximately $26.1 million. The Company has used the net offering proceeds in
the approximate amounts set forth below:
<TABLE>
<CAPTION>
<S> <C>
Investment in short-term, interest bearing securities
primarily investment grade commercial paper $25,100,000
Capital expenditures 370,000
Research and development and clinical and regulatory
preparation 340,000
Manufacturing scale-up and marketing activities 180,000
Working capital and other general corporate purposes 110,000
-----------
Total use of proceeds $26,100,000
-----------
</TABLE>
Except for officer compensation and relocation payments totaling $164,996 in the
aggregate, director compensation totaling $10,500 in the aggregate, and
consulting fees paid to a director totaling $10,125, none of such payments were
paid directly or indirectly to (i) officers or directors of the Company or their
affiliates, (ii) persons owning 10% or more of the Company's equity securities
or (iii) affiliates of the Company.
10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed herewith.
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-4352)).
3.2 Amended Bylaws of the Company (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement of Form S-1
(SEC File No. 333-4352)).
11. Statement Re: Computation of Net Loss per Common and Common
Equivalent Share.
27. Financial Data Schedule.
99.1 Cautionary Statement
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEG INCORPORATED
(Registrant)
Date: November 13, 1997 By: /s/ John R. Brintnall
----------------------
John R. Brintnall
Vice President of Finance
(Principal financial and accounting officer
and duly authorized signatory on behalf of
the Registrant)
12
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
11. Statement Re: Computation of Net Loss per Common and Common
Equivalent Share.
27. Financial Data Schedule (Electronically Filed)
99.1 Cautionary Statement
<PAGE>
Exhibit 11
INTEG INCORPORATED
STATEMENT RE: COMPUTATION OF NET LOSS PER
COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Period from
Three Months Ended Nine Months Ended April 3, 1990
September 30 September 30 (Inception) to
------------------------------ ------------------------------ September 30
1997 1996 1997 1996 1997
-------------- --------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Primary Earnings Per Share:
Average shares outstanding 9,312,865 9,270,125 9,296,197 3,411,299 1,804,646
SAB No. 83 shares -
shares convertible into common
stock and stock options and
warrants granted at exercise
prices less than the initial
public offering price during
the 12 months preceding the
initial public offering using
the treasury method - - - 550,036 1,318,601
-------------- -------------- -------------- -------------- ----------------
Total 9,312,865 9,270,125 9,296,197 3,961,335 3,123,247
============== ============== ============== ============== ================
Net loss ($2,535,397) ($2,187,796) ($7,520,627) ($6,117,329) ($26,394,584)
============== ============== ============== ============== ================
Net loss per share ($0.27) ($0.24) ($0.81) ($1.54) ($8.45)
============== ============== ============== ============== ================
Fully-Diluted Earnings Per Share
Average shares outstanding 9,312,865 9,270,125 9,296,197 3,411,299 1,804,646
SAB No. 83 shares - shares
convertible into common stock
and stock options and warrants
granted at exercise prices less
than the initial public offering
price during the 12 months
preceding the initial public
offering using the treasury
method - - - 550,036 1,318,601
Assumed conversion of all
series of convertible
preferred stock - - - 3,869,094 1,720,591
-------------- -------------- -------------- --------------- -----------------
Total 9,312,865 9,270,125 9,296,197 7,830,429 4,843,838
============== ============== ============== ============== ================
Net loss ($2,535,397) ($2,187,796) ($7,520,627) ($6,117,329) ($26,394,584)
============== ============== ============== ============== ================
Net loss per share ($0.27) ($0.24) ($0.81) ($0.78) ($5.45)
============== ============== ============== ============== ================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,532,940
<SECURITIES> 0
<RECEIVABLES> 361
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,696,980
<PP&E> 7,645,084
<DEPRECIATION> 1,389,977
<TOTAL-ASSETS> 32,439,211
<CURRENT-LIABILITIES> 1,558,793
<BONDS> 3,296,382
0
0
<COMMON> 93,227
<OTHER-SE> 27,490,809
<TOTAL-LIABILITY-AND-EQUITY> 32,439,211
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,274,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 463,149
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<PAGE>
EXHIBIT 99.1
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CAUTIONARY STATEMENT
Integ Incorporated ("Integ" or the "Company"), or persons acting on behalf of
the Company, or outside reviewers retained by the Company making statements on
behalf of the Company, or underwriters, from time to time, may make, in writing
or orally, "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995 (the "Act"). This Cautionary Statement is for the
purpose of qualifying for the "safe harbor" provisions of the Act and is
intended to be a readily available written document that contains factors which
could cause results to differ materially from those projected in such forward-
looking statements. These factors are in addition to any other cautionary
statements, written or oral, which may be made or referred to in connection with
any such forward-looking statement.
The following matters, among others, may have a material adverse effect on the
business, financial condition, liquidity, results of operations or prospects,
financial or otherwise, of the Company. Reference to this Cautionary Statement
in the context of a forward-looking statement shall be deemed to be a statement
that any one or more of the following factors may cause actual results to differ
materially from those which might be projected, forecast, estimated or budgeted
by the Company in such forward-looking statement or statements:
DEVELOPMENT OF NEW TECHNOLOGY; DEPENDENCE ON THE LIFEGUIDE SYSTEM; UNCERTAINTY
OF MARKET ACCEPTANCE
The Company's future success is entirely dependent upon the successful
development, commercialization and market acceptance of the LifeGuide System,
the development of which is ongoing and the complete efficacy of which has not
yet been demonstrated. The Company has tested benchtop prototypes and
commercial prototypes of the LifeGuide Meter and the LifeGuide Key. During the
third quarter of 1997, the Company determined that it needed to modify one of
the custom parts of the LifeGuide Meter in order to correct a major source of
error. However, there can be no assurance that additional unforeseen problems
will not occur in research and development, clinical testing, regulatory
submissions and approval, product manufacturing and commercial scale up,
marketing or product distribution. Any such occurrence could materially delay
the commercialization of the LifeGuide System or prevent its market introduction
entirely. Further, even if successfully developed, the commercial success of
the LifeGuide System will depend upon its acceptance as an accurate, reliable
and cost-effective alternative to existing blood glucose monitoring techniques.
The glucose monitoring industry is currently dominated by several companies with
established markets and distribution channels. Because the proposed LifeGuide
System will represent a new practice in the monitoring of glucose levels, the
Company is unable to predict how quickly, if at all, its products will be
accepted by members of the medical community and people with diabetes. There is
no assurance that the Company will ever derive substantial revenues from the
sale of the LifeGuide System.
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HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
The Company has generated no revenue and has sustained significant operating
losses each year since its inception. As of September 30, 1997, the Company had
an accumulated deficit of $26.4 million. The Company expects such losses to
continue for the next several years. The Company may never generate substantial
operating revenue or achieve profitability. The Company's ability to generate
revenue from operations and achieve profitability is dependent upon successful
development, regulatory approval and commercialization of the LifeGuide System
and the Company's successful transition from a development stage company to a
fully operating company.
LIMITED CLINICAL TESTING EXPERIENCE; UNCERTAINTY OF OBTAINING FDA CLEARANCES
Testing of the LifeGuide System has been performed on benchtop prototypes and
commercial prototypes solely by Company personnel under controlled
circumstances. After the Company has completed the design of the LifeGuide
System and demonstrated the efficacy of the product, the Company expects to make
commercial prototypes of the LifeGuide System available for clinical testing by
people with diabetes and to use the data derived from this testing to support a
510(k) notification with the Food and Drug Administration ("FDA") to permit
commercialization of the LifeGuide System, and there can be no assurance that
the LifeGuide System will prove to be accurate and reliable on a consistent
basis. Even if accurate and reliable, there can be no assurance that such
testing will show the Company's product to be safe or effective. There can also
be no assurance that the required FDA clearances will be obtained on a timely
basis or at all. The Company believes and has confirmed with the FDA that the
LifeGuide System will be eligible for a 510(k) clearance from the FDA. Still,
there can be no assurance that the required FDA clearances or approvals will be
obtained on a timely basis or at all. The Company has no experience in
obtaining regulatory approval.
HIGHLY COMPETITIVE MARKETS; RISK OF TECHNOLOGICAL OBSOLESCENCE
The glucose monitoring industry is characterized by continuously evolving
technology and intense competition, and the market is currently dominated by
several companies with established products and distribution channels. In
addition, other companies are attempting to develop minimally- or non-invasive
glucose monitoring products competitive with the proposed LifeGuide System.
There can be no assurance that the Company's competitors and potential
competitors will not succeed in developing or marketing technologies and
products that will be more accepted in the marketplace than the proposed
LifeGuide System or that would render the Company's technology and proposed
device obsolete or noncompetitive. In addition, numerous researchers are
investigating alternative treatments or cures for diabetes. If any of these
efforts are successful in reducing the complications associated with diabetes
and can be cost-effectively provided to people with diabetes, the need for the
Company's products could be mitigated or become entirely nonexistent. Most of
the Company's competitors and potential competitors have substantially greater
capital resources, research and development staffs and facilities than the
Company. In addition, most of the Company's competitors and potential
competitors have substantially greater experience than the Company in research
and new product development, obtaining regulatory approvals and manufacturing
and marketing medical devices. Competition within the glucose monitoring
industry could also result in reductions of the
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prices of the Company's products and the use of purchase incentive programs that
could adversely affect the Company's revenues and profitability.
LACK OF MANUFACTURING CAPABILITY; DEPENDENCE ON CONTRACT MANUFACTURERS AND
SUPPLIERS
The Company's LifeGuide System is still in development. To be successful, the
Company must manufacture the LifeGuide System in compliance with regulatory
requirements, in a timely manner and in sufficient quantities while maintaining
product quality and acceptable manufacturing costs. The LifeGuide Meter will be
manufactured for the Company by an outside vendor from primarily off-the-shelf
components. The LifeGuide Key will be assembled by the Company from components
to be purchased from outside suppliers. The Company ordered the initial
automated manufacturing line for the LifeGuide Key in late 1996 and anticipates
having this line delivered to the Company in 1997. However, one component of
the LifeGuide Meter is available from a single source, as is one component of
the LifeGuide Key. In the event that the Company is unable to obtain either of
these components from their respective suppliers, the Company would be required
to make modifications to its existing LifeGuide System and to obtain alternative
components from alternative suppliers. Any interruption in the supply of either
of these components would have a material adverse effect on the Company's
business, financial condition and results of operation. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance, component
supplies and shortages of personnel. There can be no assurance that the Company
will be able to achieve and maintain product quality and reliability when
producing the LifeGuide System in the quantities required for commercialization,
nor that the Company will be able to assemble and manufacture its products at an
acceptable cost.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to obtain patent
protection for its proposed products and processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. As of the date of this Form 10-Q, the Company has one issued United
States patent relating to the methods of drawing an ISF sample from the outer
layers of the skin, one issued United States patent relating to the geometry of
the LifeGuide Meter and Key, and four additional United States Patent
Applications directed toward various aspects of the technologies underlying the
LifeGuide System. There can be no assurance, however, that any additional
patents will be issued, that the scope of any patent protection granted to the
Company will prevent competitors from introducing products competitive with the
LifeGuide System or that any of the Company's patents will be held valid or
enforceable if subsequently challenged. Patenting medical devices involves
complex legal and factual questions, and there is no consistent policy regarding
the breadth of claims that issue for such technologies. The Company also relies
upon unpatented trade secrets, and no assurance can be given that others will
not independently develop or otherwise acquire unpatented technologies
substantially equivalent to those of the Company. In addition, even if the
patents for which the Company has applied are ultimately issued, other parties
may hold or receive patents that contain claims covering the LifeGuide System
and which may delay or prevent the sale of the LifeGuide System or require
licenses resulting in the payment of fees or royalties by the Company in order
for the Company to carry on its business. There can be no assurance that needed
or potentially useful licenses will be available in the future on acceptable
terms or at all.
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There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation could result in
substantial costs to and a diversion of effort by the Company, but may be
necessary to enforce any patents issued to the Company, protect trade secrets or
know-how owned by the Company, defend the Company against claimed infringement
of the rights of others or determine the scope and validity of the proprietary
rights of others. The Company is not currently a party to any patent or other
litigation. The Company routinely monitors patent issuances by others in its
industry, and as a result became aware in 1996 of a patent that may relate to a
feature of the LifeGuide System. The Company engaged outside patent counsel to
review the patent, and such counsel rendered its opinion to the Company that the
patent is not infringed by the Company's technology. In addition, such counsel
advised the Company that if the patent was challenged, those claims which the
Company believes may apply to the LifeGuide System would be likely to be held
invalid based on the existence of prior art not cited by the patent examiner.
There can be no assurance, however, that the holder of the patent will not
pursue litigation which could be costly to the Company. An adverse
determination in any litigation, including any litigation commenced by the
holder of the patent referred to above, could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from or pay
royalties to third parties or prevent the Company from manufacturing, selling or
using its proposed products, any of which could have a material adverse effect
on the Company's business and prospects.
GOVERNMENT REGULATION; NEED FOR ADDITIONAL GOVERNMENT CLEARANCES
Government regulation in the United States and other countries is a significant
factor in the Company's business. The Company's products will be regulated by
the FDA under a number of statutes including the Federal Food, Drug and Cosmetic
Act, as amended (the "FDC Act"), and the Safe Medical Devices Act of 1990 (the
"SMDA"). Manufacturers of medical devices must comply with applicable
provisions of the FDC Act and the SMDA and certain associated regulations
governing the development, testing, manufacturing, labeling, marketing and
distribution of medical devices and the reporting of certain information
regarding their safety. Both the FDC Act and the SMDA require certain
clearances from the FDA before medical devices, such as the Company's proposed
LifeGuide System, can be marketed.
The Company has not obtained FDA clearance to market the LifeGuide System. The
regulatory process may delay the marketing of new products for lengthy periods,
impose substantial additional costs and provide an advantage to those of the
Company's competitors who have greater financial resources. FDA marketing
clearance regulations depend heavily on administrative interpretation. There
can be no assurance that interpretations made by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the Company.
There can be no assurance that any such clearance will be obtained in a timely
manner, or at all. In addition, even if obtained, FDA clearances are subject to
continual review, and if the FDA believes that the Company is not in compliance
with the FDC Act, the SMDA or their associated regulations, it can institute
proceedings to detain or seize the Company's products, require a recall, enjoin
future violations and assess civil and criminal penalties against the Company,
its directors, officers or employees. The FDA may also withdraw market approval
for the Company's products or require the Company to repair, replace or refund
the cost of any device manufactured or distributed by the Company.
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The FDC Act will regulate the Company's development, quality control and
manufacturing procedures by requiring the Company to demonstrate compliance with
current Good Manufacturing Practices. The FDA monitors compliance with these
requirements by requiring manufacturers to register with the FDA, which subjects
them to periodic FDA inspections of their manufacturing facilities. In order to
ensure compliance with these requirements, the Company will be required to
expend time, resources and effort in the areas of production and quality
control. If violations of the applicable regulations are noted during FDA
inspections, the continued marketing of any products manufactured by the Company
may be halted or adversely affected.
The Company also plans to eventually distribute its products in several foreign
countries. The Company's products will be subject to a wide variety of laws and
regulations in these markets. Generally, the extent and complexity of the
regulation of medical devices is increasing worldwide, with regulations in some
countries already nearly as exhaustive as those applicable in the United States.
This trend may continue and the cost and time required to obtain marketing
approval in any given country may increase. There can be no assurance that any
foreign approvals will be allowed on a timely basis or at all.
LACK OF COMMERCIAL SALES OR MARKETING EXPERIENCE
The Company has no experience in marketing the LifeGuide System and has not yet
entered into any marketing or distribution arrangements for its proposed
LifeGuide System. There can be no assurance that the Company will be able to
build a suitable sales force or enter into satisfactory marketing arrangements
with third parties when commercial potential develops, if ever, or that its
sales and marketing efforts will be successful.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The success of the Company is dependent in large part upon the ability of the
Company to attract and retain key management and operating personnel. Qualified
individuals are in high demand and are often subject to competing offers. In
the future, the Company will need to add additional skilled personnel in the
areas of research and development, sales, marketing and manufacturing. There
can be no assurance that the Company will be able to attract and retain the
qualified personnel needed for its business. The loss of the services of one or
more members of the Company's research, manufacturing or management group or the
inability to hire additional personnel as needed would likely have a material
adverse effect on the Company's business and prospects.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The Company expects that its existing cash will be sufficient to fund the
Company's operations until sometime during the second half of 1998. The Company
may require substantial additional funds to meet its working capital
requirements for a full-scale commercial introduction of its proposed LifeGuide
System. In order to meet its needs beyond this period, the Company may be
required to raise additional funds through public or private financings,
including equity financings. Adequate funds for the Company's operations,
whether from financial markets or from other sources, may not
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be available when needed on terms attractive to the Company or at all.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its programs designed to facilitate the commercial introduction
of the LifeGuide System or prevent such commercial introduction altogether.
UNCERTAINTY OF THIRD PARTY REIMBURSEMENT
Sales of the Company's proposed products in certain markets will be dependent in
part on availability of adequate reimbursement for personal glucose monitoring
products from third-party healthcare payors, such as government and private
insurance plans, health maintenance organizations and preferred provider
organizations. Third party payors are increasingly challenging the pricing of
medical products and services. There can be no assurance that adequate levels
of reimbursement will be available to enable the Company to achieve market
acceptance of the LifeGuide System or maintain price levels sufficient to
realize an appropriate return on its investment in the development or
manufacture of its proposed LifeGuide System. Without adequate support from
third-party payors, the market for the Company's LifeGuide System may be
limited.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The Company faces an inherent business risk of exposure to product liability
claims in the event that an end-user is adversely affected by its prospective
products. The Company currently carries a product liability insurance policy
covering the Company's clinical testing with an aggregate limit of $1.0 million.
Although the Company expects to obtain product liability insurance coverage in
connection with the commercialization of the LifeGuide System, there can be no
assurance that such insurance will be available on commercially reasonable
terms, or at all, or that such insurance, even if obtained, would adequately
cover any product liability claim. A product liability or other claim with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on the business and prospects of the Company.
The foregoing review of factors pursuant to the Act should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of the Act.
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