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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 June 30, 1999.
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[_] 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
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Integ Incorporated
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(Exact name of registrant as specified in its charter)
Minnesota 41-1670176
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(State of Incorporation) (I.R.S. Employer Identification No.)
2800 Patton Road, St. Paul, MN 55113
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(Address of principal executive offices) (Zip Code)
Telephone Number: (651) 639-8816
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(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 ______
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As of August 9, 1999, the registrant had 9,657,784 shares of $.01 par value
common stock issued and outstanding.
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INTEG INCORPORATED
INDEX
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PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Balance Sheets as of June 30, 1999 and December 31, 1998 3
Statements of Operations for the three and six months
ended June 30, 1999 and 1998 and for the period from
April 3, 1990 (inception) through June 30, 1999 4
Statements of Cash Flows for the three and six months
ended June 30, 1999 and 1998 and for the period from
April 3, 1990 (inception) through June 30, 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities (Use of proceeds from public offering) 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
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Integ Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
--------------- ---------------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 6,042,625 $ 11,175,695
Prepaid expenses 213,507 132,229
--------------- ---------------
Total current assets 6,256,132 11,307,924
--------------- ---------------
Furniture and equipment 9,548,952 9,538,478
Less accumulated depreciation (3,261,939) (2,715,684)
--------------- ---------------
6,287,013 6,822,794
Other assets 14,955 23,883
--------------- ---------------
Total assets $ 12,558,101 $ 18,154,601
=============== ===============
Liabilities and shareholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 662,798 $ 1,013,581
Current portion of capital lease obligations 75,745 145,761
Current portion of long-term debt 1,388,950 1,251,247
--------------- ---------------
Total current liabilities 2,127,493 2,410,589
--------------- ---------------
Long-term liabilities:
Capital lease obligations, less current portion 630 14,178
Long-term debt, less current portion 1,939,919 2,672,018
--------------- ---------------
Total long-term liabilities 1,940,549 2,686,196
--------------- ---------------
Shareholders' equity:
Common Stock 96,578 95,807
Additional paid-in capital 54,711,805 54,616,721
Deficit accumulated during the development stage (46,209,038) (41,524,253)
--------------- ---------------
8,599,345 13,188,275
Deferred compensation (109,285) (130,459)
--------------- ---------------
Total shareholders' equity 8,490,059 13,057,816
--------------- ---------------
Total liabilities and shareholders' equity $ 12,558,101 $ 18,154,601
=============== ===============
</TABLE>
3
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Integ Incorporated
(A Development Stage Company)
Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Period from
April 3, 1990
Three Months Ended Six Months Ended (Inception) to
June 30 June 30 June 30
--------------------------- ---------------------------
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development $ 586,255 $ 1,597,242 $ 1,378,588 $ 3,303,144 $ 22,920,736
Manufacturing development 495,732 602,899 1,085,581 1,283,171 8,253,857
Clinical and regulatory 81,156 295,030 230,212 623,198 3,727,034
General and administrative 1,429,134 552,861 1,806,723 1,051,304 10,322,755
Sales and marketing 7,807 259,892 29,973 342,348 2,630,428
------------ ------------ ------------ ------------ --------------
Operating loss (2,600,084) (3,307,924) (4,531,077) (6,603,165) (47,854,810)
------------ ------------ ------------ ------------ --------------
Other income (expense):
Interest income 95,371 241,849 221,957 525,510 4,650,955
Interest expense (180,490) (309,531) (375,503) (605,610) (2,877,301)
Other (net) (241) 91,873 (160) 94,648 (127,880)
------------ ------------ ------------ ------------ --------------
(85,360) 24,191 (153,705) 14,548 1,645,775
------------ ------------ ------------ ------------ --------------
Net loss for the period and
deficit accumulated during
the development stage $ (2,685,444) $ (3,283,733) $ (4,684,782) $ (6,588,617) $ (46,209,035)
============ ============ ============ ============ ==============
Net loss per share:
Basic and diluted ($0.28) ($0.35) ($0.49) ($0.70) ($14.19)
============ ============ ============ ============ ==============
Weighted average number of
common shares outstanding:
Basic and diluted 9,657,290 9,462,297 9,637,243 9,430,701 3,257,448
============ ============ ============ ============ ==============
</TABLE>
4
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
April 3, 1990
Three Months Ended Six Months Ended (Inception) to
June 30 June 30 June 30
--------------------------- ---------------------------
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $ (2,685,445) $ (3,293,733) $ (4,684,783) $ (6,598,617) $ (46,209,036)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 274,264 269,264 548,529 525,438 3,301,044
Deferred compensation amortization 10,587 22,423 21,174 52,227 1,111,894
Amortization of loan committment fee - 96,207 - 196,822 250,074
Stock grants in lieu of compensation 94,893 94,893
Loss (gain) on sale of equipment and
deposit write-off (901) - (901) - 94,744
Value of options and warrants related to debt
financing, lease guarantee, extension of
options and consulting services 3,826 4,586 7,652 9,212 378,788
Changes in operating assets and liabilities:
Receivables - - - - (28,829)
Prepaid expenses and other assets (104,750) 23,465 (81,278) 17,846 151,247
Accounts payable and accrued expenses (188,736) 158,584 (349,510) (9,783) 664,071
------------ ------------ ------------ ------------ -------------
Net cash used in operating activities (2,691,155) (2,719,204) (4,444,225) (5,806,855) (40,191,111)
------------ ------------ ------------ ------------ -------------
Investing activities:
Purchase of furniture and equipment (10,022) (992,042) (15,347) (1,161,851) (8,885,374)
Proceeds from sale of furniture and equipment 3,500 - 3,500 - 51,440
------------ ------------ ------------ ------------ -------------
Net cash used in investing activities (6,522) (992,042) (11,847) (1,161,851) (8,833,934)
------------ ------------ ------------ ------------ -------------
Financing activities:
Proceeds from sale of Convertible Preferred Stock - - - - 22,789,732
Proceeds from bridge loan debt - - - - 2,900,000
Proceeds from borrowings under loan agreement - - - 754,989 5,486,446
Payments on long-term debt (304,616) (198,250) (594,396) (382,962) (2,010,261)
Payments on capital lease obligations (42,269) (38,258) (83,564) (75,881) (617,690)
Proceeds from sale of Common Stock 962 4,687 962 82,199 26,519,443
------------ ------------ ------------ ------------ -------------
Net cash provided by financing activities (345,923) (231,821) (676,998) 378,345 55,067,670
------------ ------------ ------------ ------------ -------------
(Decrease) increase in cash and cash equivalents (3,043,601) (3,943,067) (5,133,070) (6,590,361) 6,042,625
Cash and cash equivalents at beginning of period 9,086,226 19,129,463 11,175,695 21,776,757 -
------------ ------------ ------------ ------------ -------------
Cash and cash equivalents at end of period $ 6,042,625 $ 15,186,396 $ 6,042,625 $ 15,186,396 $ 6,042,625
============ ============ ============ ============ =============
</TABLE>
5
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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, 1998, 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 for the year ended December 31, 1998 filed with the Securities and
Exchange Commission.
(2) Net Loss Per Share
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during the periods presented. In 1997, the Financial
Accounting Standards Board issued Statement No. 128, Earnings per Share.
Statement 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements.
(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 expired December 31, 1998. The Company borrowed a total of
$5.5 million under the agreement.
6
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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 as
defined in the Private Securities Litigation Reform Act of 1995. 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, the words 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, which is still under development; uncertainty of market acceptance;
risks associated with the Company's history of operating losses and expectation
of future losses; risks associated with the corporate alliance; risks associated
with accumulated deficit; limited clinical testing experience; uncertainty of
obtaining Food and Drug Administration clearances or approvals; heightened
competition; risk of technological obsolescence; risks associated with the lack
of manufacturing capability and dependence on 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; risks
associated with future capital requirements; and the risks associated with
product liability and limited insurance coverage.
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
Quarterly Report on Form 10-Q.
General
Integ, a development stage company, was incorporated on April 3, 1990 to develop
the LifeGuide(TM) 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.
7
<PAGE>
From inception through June 30, 1999, the Company has incurred losses totaling
$46.2 million, consisting of $22.9 million of research and development expenses,
$10.3 million of general and administrative expenses, $8.2 million of
manufacturing development expenses and $4.8 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
equipment and processes and marketing strategies needed for the introduction of
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 announced in September 1998 that it had engaged U.S. Bancorp Piper
Jaffray to explore potential corporate alliances.
On April 5, 1999 the Company announced that it had entered into a strategic
alliance with Amira Medical to jointly develop a new generation of home glucose
monitoring tests utilizing interstitial fluid (ISF). Under the alliance,
products to be developed will combine Integ's ISF collection technology with the
Amira's glucose measurement technologies. Both companies will contribute
resources to the products' development, which will be manufactured by the
Company and commercialized by Amira.
As part of the strategic alliance agreement, the Company will have the option at
a future date, to merge with Amira, subject to certain conditions. The complete
terms of the agreement are available as an exhibit to the Integ Current Report
on Form 8-K filed with the Securities and Exchange Commission on April 9, 1999.
As part of the strategic alliance the Company and Amira have established a joint
product development plan. This plan involves four product platform phases:
feasibility, calibration, clinical and commercial. The Company has completed the
feasibility phase of the plan, where it demonstrated the ability to measure ISF
glucose using the Amira AtLast(TM) system in a non-integrated fashion. The
Company is currently in the calibration phase of the joint development plan.
The Company has established a new budget in support of this joint development
plan, which takes into account the contributions that Amira is making toward
completion of LifeGuide product development. This budget became effective June
1, 1999.
The Company's future success is dependent upon the successful development of the
LifeGuide System, the development of which is ongoing and the complete efficacy
of which has not yet been demonstrated, and upon its ability to exercise its
option to merge with Amira. The Company is currently focused on the research
and development activities necessary to complete the LifeGuide System in order
to meet the product specifications and initiate clinical trials.
Results of Operations
Comparison of Three and Six Months Ended June 30, 1999 and 1998
General: The Company's net loss totaled $2.7 million and $4.7 million for the
three and six months ended June 30, 1999, as compared to $3.3 million and $6.6
million for the same periods in 1998. The company's net loss for the 1st
quarter ended March 31, 1999 was $2.0 million. The Company incurred a one-time
special charge of $1,075,000 during the second quarter associated with the
formation of the strategic alliance with Amira. The Company expects net losses
to continue for the next several years.
8
<PAGE>
Research and development expenses: Research and development expenses decreased
to $586,000 during the three months ended June 30, 1999 from $1,597,000 during
the same period in 1998. This decrease was primarily attributable to decreased
staffing costs ($266,000), the elimination of the allocation of pilot plant
costs from manufacturing development ($239,000), decreased consulting expenses
($400,000), decreased severance expenses ($96,000), prototype expenses ($30,000)
as well as lab supply expense ($15,000). These decreases were partially offset
by an increase patent legal expense of ($35,000). For the first six months of
1999 expenses decreased to $1,379,000 from $3,303,000 during the same period in
1998. This decrease was primarily attributable to decreased staffing costs
($504,000), the elimination of the allocation of pilot plant costs allocated
from manufacturing development ($520,000), decreased consulting expenses
($639,000), severance expenses ($96,000), prototype expenses ($85,000),
recruitment expense ($51,000), lab supply expense ($27,000) as well as a
decrease in other expenses of ($34,000). These decreases were partially offset
by an increase patent legal expense of ($31,000).
Manufacturing development expenses: Manufacturing development expenses
decreased to $496,000 during the three months ended June 30, 1999 from $603,000
during the same period in 1998. The decrease in manufacturing development
expenses is primarily attributable to decreased staffing costs ($57,000),
prototype tooling expenses ($149,000), severance expense ($78,000), training and
development expense ($29,000) as well as a decrease in other expenses of
($34,000). These decreases were partially offset by the elimination of the
allocation of pilot plant costs to research and development ($240,000). For the
first six months of 1999 expenses decreased to $1,086,000 from $1,283,000 for
the same period in 1998. The decrease in manufacturing development expenses is
primarily attributable to decreased staffing costs ($97,000), decreased
prototype tooling expenses ($397,000), severance expense ($78,000), training and
development expense ($29,000), travel expense ($32,000) as well as a decrease in
other expenses of ($84,000). These decreases were partially offset by the
elimination of the allocation of pilot plant costs to research and development
($520,000).
Clinical and regulatory expenses: Clinical and regulatory expenses decreased to
$81,000 during the three months ended June 30, 1999 from $295,000 during the
same period in 1998. This decrease is primarily attributable to decreased
staffing costs ($137,000), severance expense ($39,000) as well as decreased
other expenses ($38,000). For the first six months of 1999 expenses decreased to
$230,000 from $623,000 for the same period in 1998. The decrease is primarily
attributable to decreased staffing costs ($288,000), severance expense
($39,000), consulting expenses ($19,000), recruitment expenses ($10,000) as well
as other expenses of ($37,000).
General and administrative expenses: General and administrative expenses
increased to $1,429,000 during the three months ended June 30, 1999 from
$553,000 during the same period in 1998. The increase is primarily attributable
to a one-time special charge of $1,075,000 associated with the formation of the
strategic alliance with Amira. This increase was partially offset by decreases
in staffing costs ($107,000), recruitment expenses ($33,000), depreciation
expense ($35,000), director fees and expenses ($18,000) as well as other
expenses ($6,000). For the first six months ended June 30, 1999 expenses
increased to $1,807,000 from $1,051,000 for the same period in 1998. The
increase is primarily attributable to a one-time special charge of $1,075,000
associated with the formation of the strategic alliance with Amira and an
increase in consulting expenses ($16,000). The increase was partially offset by
decreases in staffing costs ($262,000) as well as recruitment expenses
($73,000).
9
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Sales and marketing expenses: Sales and marketing expenses decreased to $8,000
during the three months ended June 30, 1999 from $260,000 during the same period
in 1998. This decrease is primarily attributable to decreased staffing costs
($33,000), severance costs ($173,000), consulting costs ($23,000) as well as
other expenses ($23,000). For the first six months ended June 30, 1999 expenses
decreased to $30,000 from $342,000 for the same period in 1998. This decrease
is primarily attributable to decreased staffing costs ($80,000), severance costs
($173,000), consulting costs ($36,000) as well as other expenses ($23,000).
Interest income: Interest income decreased to $95,000 and $222,000 during the
three and six month periods ended June 30, 1999, from $242,000 and $526,000
during the same period in 1998. The decrease resulted from lower average
balances of cash and cash equivalents.
Interest expense: Interest expense decreased to $180,000 and $376,000 during
the three and six month periods ended June 30, 1999, from $310,000 and $606,000
during the same period in 1998. The decrease in interest expense is
attributable to payments made on long-term debt and capital leases. On June 30,
1999, the Company's long term liabilities, including current portions, were
$3,405,000 as compared to $4,260,000 on June 30, 1998.
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 and
proceeds from borrowing under an equipment loan agreement totaling approximately
$5.5 million. As of June 30, 1999, the Company had cash and cash equivalents of
approximately $6.0 million and working capital of $4.1 million.
The Company believes that its current cash balances will be sufficient to fund
its operations until sometime in mid 2000. The Company's future liquidity and
capital requirements will depend on numerous factors, including the success of
its strategic alliance with Amira and the Company's ability to exercise its
option to merge with subsidiary of Amira, 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, manufacturing activities, the
results of clinical trials and competition.
As part of the strategic alliance with Amira, the Company agreed that it would
not take any actions outside the ordinary course of business which would result
in a liability or an obligation to make payments, and would not issue any debt
or debt securities without Amira's consent, and that the amount of any of these
types of liabilities would be deducted from the consideration payable by Amira
in connection with the merger of Integ with a subsidiary of Amira. Integ also
agreed that it would not incur any liabilities or obligations to make payments
in excess of $1,000,000 in the ordinary course of business without Amira's
consent. The Company cannot predict whether these agreements will adversely
affect its ability to meet its future liquidity and capital requirements.
See Exhibit 99.1 to this Form 10-Q for the quarter ended June 30, 1999 for a
more detailed description of the factors that may affect the Company's future
liquidity and capital requirements.
10
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General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and non-IT Systems
The Year 2000 Issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. The
assessment of all of its systems that could be significantly affected by the
Year 2000 Issue is complete.
The remediation phase has one item yet to complete. The telephone system
upgrade installation is expected to be completed in August 1999. Final testing
and full implementation for all systems will be completed by September 30, 1999.
The Company has also completed the gathering of information about the Year
2000 compliance status of its significant suppliers and subcontractors (external
agents). No significant issues with any of the suppliers have been identified.
The Company has been utilizing both internal and external resources to
reprogram or replace, test and implement its systems and equipment for Year 2000
modifications. The Company has incurred approximately $10,000 in expenses
related to the Year 2000 project, and the total cost to complete all upgrades
will not exceed $20,000. All Year 2000 related expenses are being funded
through operations.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of its Year 2000 program. However, in
the event that the Company does not complete all phases, the critical activities
will not be disrupted or delayed after January 1, 2000.
The Company currently has no contingency plans in place in the event it
does not complete the remaining phases of its Year 2000 program. The Company has
evaluated the status of its Year 2000 remediation efforts and has determined
that no contingency plans are needed because of the completion or actions on all
critical systems.
11
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has no derivative financial instruments or derivative commodity
instruments in its cash and cash equivalents investments. The Company's cash
and cash equivalents are invested in highly liquid vehicles, including money
market accounts and high-grade commercial paper as guided by the company's
investment policy. As a result of the Company's investment policy, a decrease
in the interest rate earned would not be material to the Company's results. All
of the Company's transactions are conducted in US dollars. Accordingly, the
Company is not exposed to foreign currency risk.
Part II. OTHER INFORMATION
Item 2: Changes in Securities (Use of proceeds from public offering)
The net offering proceeds to the Company from its initial public offering in
1996, after deducting expenses, were approximately $26.1 million. The Company
has used the net offering proceeds to the Company for the following purposes in
the approximate amounts set forth below:
Investment in short-term, interest bearing securities;
primarily investment grade commercial paper $ 6,013,000
and money market funds
Capital expenditures 2,340,000
Research and development and clinical and regulatory
preparation 9,607,000
Manufacturing scale-up and marketing activities 4,366,000
Working capital and other general corporate purposes 3,774,000
-----------
Total use of proceeds $26,100,000
-----------
Except for officer compensation and relocation payments totaling $1,672,399 in
the aggregate, director compensation totaling $231,500 in the aggregate, and
consulting fees paid to a director totaling $151,875, 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.
Item 4: Submission of Matters to a Vote of Security Holders
On June 17, 1999, the Company held a regular meeting of its shareholders, at
which the shareholders voted on the following matters:
12
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1. To elect Robert S. Nickoloff and Winston R. Wallin to the Board of
Directors of the Company to serve for three year terms that will expire at
the Company's annual shareholder meeting in 2002. The vote on this
resolution was as follows:
Robert S. Nickoloff: 8,838,453 For; 0 Against; 70,568 Abstain
--------- - ------
Winston R. Wallin: 8,838,253 For; 0 Against; 70,768 Abstain
--------- - ------
The terms of the following directors also continued after the meeting:
Frank B. Bennett, Robert R. Momsen and Walter L. Sembrowich, Ph.D. (terms
expiring at the Company's annual shareholder meeting in 2001) and Mark B.
Knudson, Ph.D. and Susan L. Critzer (terms expiring at the Company's annual
shareholder meeting in 2000).
2. To ratify the appointment of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending December 31, 1999. The vote on this
resolution was as follows:
8,840,836 For; 34,485 Against; 33,700 Abstain; 0 Broker non-vote
--------- ------ ------ -
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)).
10.1 Development and License Agreement, dated as of April 2,
1999, by and between the Company and Amira Medical
(incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated April
2,1999)
10.2 Option Agreement, dated as of April 2, 1999, by and
between the Company and Amira Medical (incorporated by
reference to Exhibit 10.2 of the Company's Current
Report on Form 8-K dated April 2, 1999.
27 Financial Data Schedule.
99.1 Cautionary Statement.
(b) A current report on Form 8-K dated April 2, 1999 was filed during
this quarter reporting the strategic alliance between the Company
and Amira Medical.
13
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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: August 13, 1999 By: /s/ Susan L. Critzer
--------------------
Susan L. Critzer
President and Chief Executive Officer
Interim Chief Financial Officer
(principal executive officer, principal
financial and accounting officer)
14
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27. Financial Data Schedule (Electronically Filed).
99.1 Cautionary Statement.
<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 MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,042,625
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,756,132
<PP&E> 9,548,952
<DEPRECIATION> 3,261,939
<TOTAL-ASSETS> 12,558,101
<CURRENT-LIABILITIES> 2,127,493
<BONDS> 0
0
0
<COMMON> 96,578
<OTHER-SE> 8,393,481
<TOTAL-LIABILITY-AND-EQUITY> 12,558,101
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,600,084
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180,490
<INCOME-PRETAX> (2,685,444)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,685,444)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,685,444)
<EPS-BASIC> (.28)
<EPS-DILUTED> (.28)
</TABLE>
<PAGE>
Exhibit 99.1
------------
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(TM) System;
Uncertainty of Market Acceptance
The Company's future success is dependent upon the success of its alliance
with Amira Medical, and the successful development, of the LifeGuide(TM) System,
which is ongoing and the complete efficacy of which has not yet been
demonstrated. The Company has tested benchtop prototypes of the LifeGuide
Meter and the LifeGuide Key. There can be no assurance that unforeseen problems
will not occur in research and development, clinical testing, regulatory
submissions and clearance or 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 June 30, 1999, the
Company had an accumulated deficit of $46.2 million. Net losses for the years
ended December 31, 1996, 1997 and 1998 were approximately $9,083,432,
$11,564,391 and $11,085,905, respectively, and the Company expects such losses
to continue through 2000 and to increase at least through the end of 1999. The
Company may never generate substantial operating revenue or achieve
profitability.
Corporate Alliance
The Company announced on April 5, 1999 that it formed a strategic alliance
with Amira Medical to jointly develop a new generation of home glucose
monitoring tests utilizing interstitial fluid (ISF). In connection with this
strategic alliance, the Company is subject to risks associated with integrating
its operations and personnel with Amira, which could result in a potential
disruption to the business of the Company and potential diversion of management
time and attentions. The Company agreed to use the application of its ISF
sampling technology in the field of glucose measurement exclusively in
connection with the strategic alliance. There can be no assurance that any
glucose measurement products or technologies of Amira will be effectively
assimilated into or integrated with the Company's ISF sampling technology. If
the strategic alliance were not successful, the Company's ability to continue
its existence or identify suitable business alliances or opportunities or
business combinations with another third party would be limited.
Limited Clinical Testing Experience; Uncertainty of Obtaining FDA Clearance or
Approval
Testing of the LifeGuide System has been performed on benchtop prototypes
and hand-held prototypes solely by Company personnel under controlled
circumstances. The Company expects to make commercial prototypes of the
LifeGuide System available for clinical testing by people with diabetes as soon
as the integration with Amira's glucose measurement technology is complete, and
to use the data derived from this testing to support either a 510(k)
notification or Premarket Approval application (PMA) with the Food and Drug
Administration ("FDA") to permit commercialization of the LifeGuide System in
the United States. There can be no assurance that the Company will not
encounter problems in clinical testing which will cause delays in the
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 LifeGuide System 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 FDA will not require a PMA or 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.
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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. Many of the Company's potential
competitors have already entered into distribution and marketing agreements with
major marketing partners. Competition within the glucose monitoring industry
could also result in reductions of the 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 Suppliers
The Company's LifeGuide System is still in development and the Company has
not yet created or manufactured a commercial prototype of its device. 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
Key will be assembled by the Company from components to be purchased from
outside suppliers. 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 install and qualify
subsequent commercial productions lines on a timely basis or at all. There also
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 commercial operations or within a period that will
permit the Company to introduce its products in a timely fashion, or 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. The Company pursues a policy of seeking patent protection for each of
the areas of invention embodied in the LifeGuide System. The Company has four
issued United States patents relating to the method of drawing an ISF sample
from the outer layers of the skin, as well as three related US patents. The
company has several pending United States patent applications
3
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directed toward various aspects of the technologies underlying the LifeGuide
System. The Company has also filed two corresponding PCT foreign patent
applications related to its sampling methods, in order to seek similar patent
protection outside the United States. The first of these has received a
favorable PCT option and has been filed in Europe and three non-European
countries. The European application has been granted and is being filed in
selected member states. 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 which issue pertaining to 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.
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 issuance by others in
its industry. There can be no assurance that third parties will not pursue
litigation that could be costly to the Company. An adverse determination in any
litigation 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 Clearance or Approval
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"), the Safe Medical Devices Act of
1990 (the "SMDA"), and the FDA Modernization Act (the "FDAMA"). Manufacturers
of medical devices must comply with applicable provisions of the FDC Act, the
SMDA, the FDAMA 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. The FDC Act,
the SMDA, and the FDAMA require authorization from the FDA before medical
devices, such as the Company's proposed LifeGuide System, can be marketed.
The Company has not obtained FDA clearance or approval 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
4
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have greater financial resources. FDA marketing clearance and approval
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 the required clearance or approval will be obtained in a
timely manner, or at all. In addition, even if obtained, FDA clearance and
approval decisions are subject to continual review, and if the FDA believes that
the Company is not in compliance with the FDC Act, the SMDA, the FDAMA, 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 clearance or 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.
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 as implemented through the Quality System
Regulation. 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.
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 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
additional 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.
5
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Future Capital Requirements; No Assurance Future Capital Will Be Available
At its current rate of spending, the Company's existing cash will be
sufficient to fund the Company's operations through approximately the first half
of 2000. The Company will require substantial additional funds to meet its
working capital requirements for a full-scale commercial introduction of its
proposed LifeGuide System. Under the strategic alliance with Amira, the Company
will receive a fixed percentage over cost of its LifeGuide Key. Amira will also
fund any additional equipment and tooling required to produce the LifeGuide
System. There can be no assurance that Amira will order sufficient quantities
of the LifeGuide Key in order for the Company to meet its operating expenses and
other needs. In order to meet its needs beyond the first half of 2000, 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 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.
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.
6
