<PAGE>
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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 March 31, 1999.
[ ] 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
------------------
(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: (651) 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 May 10, 1999, the registrant had 9,657,284 shares of $.01 par value common
stock issued and outstanding.
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<PAGE>
INTEG INCORPORATED
INDEX
-----
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets as of March 31, 1999 and December 31, 1998 3
Statements of Operations for the three months
ended March 31, 1999 and 1998 and for the period from
April 3, 1990 (inception) through March 31, 1999 4
Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 and for the period from
April 3, 1990 (inception) through March 31, 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 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities (Use of proceeds from public offering) 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE>
Integ Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 9,086,226 $ 11,175,695
Receivables - -
Prepaid expenses 108,757 132,229
-------------- --------------
Total current assets 9,194,983 11,307,924
-------------- --------------
Furniture and equipment 9,543,803 9,538,478
Less accumulated depreciation (2,989,948) (2,715,684)
-------------- --------------
6,553,855 6,822,794
Other assets 20,057 23,883
-------------- --------------
Total assets $ 15,768,895 $ 18,154,601
============== ==============
Liabilities and shareholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 852,810 $ 1,013,581
Current portion of capital lease obligations 112,507 145,761
Current portion of long-term debt 1,402,701 1,251,247
-------------- --------------
Total current liabilities 2,368,018 2,410,589
-------------- --------------
Long-term liabilities:
Capital lease obligations, less current
maturities 6,137 14,178
Long-term debt, less current maturities 2,230,784 2,672,018
-------------- --------------
Total long-term liabilities 2,236,921 2,686,196
-------------- --------------
Shareholders' equity:
Common stock 96,566 95,807
Additional paid-in capital 54,710,855 54,616,721
Deficit accumulated during the development
stage (43,523,593) (41,524,253)
-------------- --------------
11,283,828 13,188,275
Deferred compensation (119,872) (130,459)
-------------- --------------
Total shareholders' equity 11,163,956 13,057,816
-------------- --------------
Total liabilities and shareholders' equity $ 15,768,895 $ 18,154,601
============== ==============
</TABLE>
3
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period from
Three Months Ended April 3, 1990
March 31 (Inception) to
----------------------------- March 31
1999 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Operating expenses:
Research and development $ 792,333 $ 1,705,902 $ 22,334,481
Manufacturing development 589,850 680,272 7,758,126
Clinical and regulatory 149,056 328,168 3,645,878
General and administrative 377,588 498,443 8,893,620
Sales and marketing 22,166 82,456 2,622,621
------------- ------------- --------------
Operating loss (1,930,993) (3,295,241) (45,254,726)
------------- ------------- --------------
Other income (expense):
Interest income 126,586 283,661 4,555,584
Interest expense (195,013) (296,079) (2,696,811)
Other 81 2,775 (127,639)
------------- ------------- --------------
(68,345) (9,643) 1,731,135
------------- ------------- --------------
Net loss for the period and
deficit accumulated during
the development stage $ (1,999,338) $ (3,304,884) $ (43,523,591)
============= ============= ==============
Net loss per share:
Basic and diluted $ (0.21) $ (0.35) $ (14.13)
============= ============= ==============
Weighted average number of
common shares outstanding:
Basic and diluted 9,616,974 9,398,753 3,080,125
============= ============= ==============
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Period from
Three Months Ended April 3, 1990
March 31 (Inception) to
---------------------------- December 31,
1999 1998 1998
---------------------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,999,338) $ (3,304,884) $(43,523,591)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 274,265 256,174 3,026,780
Deferred compensation amortization 10,587 29,804 1,101,307
Amortization of loan commitment fee -- 100,615 250,074
Stock grants in lieu of compensation 94,893 -- 94,893
Loss (gain) on sale of equipment,deposit and
bad debt write-off -- -- 95,645
Value of options and warrants related to debt
financing, lease guarantee, extension of
options and consulting services 3,826 4,626 374,962
Changes in operating assets and liabilities:
Receivables -- -- (28,829)
Prepaid expenses and other assets 23,472 (5,619) 255,997
Accounts payable and accrued expenses (160,774) (168,367) 852,807
------------ ------------ ------------
Net cash used in operating activities (1,753,069) (3,087,651) (37,499,955)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of furniture and equipment (5,325) (169,809) (8,875,352)
Proceeds from sale of furniture and equipment -- -- 47,940
------------ ------------ ------------
Net cash used in investing activities (5,325) (169,809) (8,827,412)
------------ ------------ ------------
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 (41,295) (184,712) (1,457,160)
Payments on capital lease obligations (289,780) (37,623) (823,906)
Proceeds from sale of common stock -- 77,512 26,518,481
------------ ------------ ------------
Cash provided (used) by financing activities (331,075) 610,166 55,413,593
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (2,089,469) (2,647,294) 9,086,226
Cash and cash equivalents at beginning of period 11,175,695 21,776,757 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 9,086,226 $ 19,129,463 $ 9,086,226
============ ============ ============
</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, 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
<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, 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 ability to successfully develop a commercial
product; history of operating losses and expectation of future losses; risks
associated with the corporate alliance; requirement of additional capital prior
to commercial introduction of the LifeGuide System; limited clinical testing
experience; uncertainty of obtaining Food and Drug Administration clearances or
approvals; heightened competition; 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; 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 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 March 31, 1999, the Company has incurred losses totaling
$43.5 million, consisting of $22.3 million of research and development expenses,
$8.9 million of general and administrative expenses, $7.8 million of
manufacturing development expenses and $4.5 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.
Based on the results of a large-scale internal study, the Company announced in
August 1998 that it would be replacing the LifeGuide infrared measurement system
with an alternate proven measurement technology. Furthermore, the Company
announced that it would explore potential corporate alliances that could
expedite this change. As a result of this decision, the Company restructured in
August 1998 to reduce the cash burn rate.
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.
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 complete the LifeGuide System in order to
meet the product specifications and initiate clinical trials.
Results of Operations
Comparison of Three Months Ended March 31, 1999 and 1998
General: The Company's net loss totaled $2.0 million for the three months ended
March 31, 1999, as compared to $3.3 million for the same period in 1998. The
Company expects net losses to continue for the next several years.
Research and development expenses: Research and development expenses decreased
to $792,000 during the three months ended March 31, 1999 from $1,706,000 during
the same period in 1998. This decrease was primarily attributable to decreased
staffing costs ($251,000), decreased pilot plant allocation costs ($279,000),
decreased consulting expenses ($205,000), recruitment costs ($56,000), prototype
expenses ($55,000), lab supply expense ($11,000) as well as a decrease in other
expenses ($57,000).
8
<PAGE>
Manufacturing development expenses: Manufacturing development expenses decreased
to $578,000 during the three months ended March 31, 1999 from $680,000 during
the same period in 1998. The decrease in manufacturing development expenses is
primarily attributable to decreased staffing costs ($42,000), decreased
prototype tooling expenses ($251,000), depreciation expense ($32,000), travel
costs ($22,000), consulting expenses ($16,000) as well as other expenses
($18,000). These decreases were partially offset by a reduction in pilot plant
costs allocated to research and development ($279,000).
Clinical and regulatory expenses: Clinical and regulatory expenses decreased to
$149,000 during the three months ended March 31, 1999 from $328,000 during the
same period in 1998. This decrease is primarily attributable to decreased
staffing costs ($151,000), consulting expenses ($13,000), recruitment costs
($10,000) as well as decreased outside calibration costs ($5,000).
General and administrative expenses: General and administrative expenses
decreased to $378,000 during the three months ended March 31, 1999 from $498,000
during the same period in 1998. This decrease is primarily attributable to
decreased staffing costs ($155,000). This decrease was partially offset by
increases in consulting expenses ($13,000) as well as recruiting expenses
($17,000).
Sales and marketing expenses: Sales and marketing expenses decreased to $22,000
during the three months ended March 31, 1999 from $82,000 during the same period
in 1998. This decrease was entirely the result of decreased staffing costs
($60,000).
Interest income: Interest income decreased to $127,000 during the three month
period ended March 31, 1999, from $284,000 during the same period in 1998. The
decrease resulted from lower average balances of cash and cash equivalents.
Interest expense: Interest expense decreased to $195,000 during the three month
period ended March 31, 1999, from $296,000 during the same period in 1998. The
decrease in interest expense is attributable to payments made on long-term debt
and capital leases. On March 31, 1999, the Company's long term liabilities,
including current portions, were $3,752,129 as compared to $4,496,172 on March
31, 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 March 31, 1999, the Company had cash and cash equivalents
of approximately $9.1 million and working capital of $6.8 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, 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. 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>
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. To date, the
Company has completed the assessment of all of its systems that could be
significantly affected by the Year 2000 Issue. The assessments indicated that
the information systems needed only a minor upgrade to the operating software to
be compliant; the telephone system needed upgrading; and the shipping computer
application needed upgrading.
The Company has completed the remediation phase for its information systems.
Testing and implementation is underway and will be complete by June 30, 1999.
The shipping computer application is complete through testing and
implementation. The remaining issue is the telephone system, which is in the
remediation phase pending the installation of software and hardware upgrades.
The telephone upgrade installation is expected to be completed in August with
testing and full implementation by September 30, 1999.
The Company is in the process of gathering information about the Year 2000
compliance status of its significant suppliers and subcontractors (external
agents). This assessment will be completed during the second quarter. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company. The potential effect on the
Company of non-compliance by external agents has not yet been determined.
The Company will utilize both internal and external resources to reprogram or
replace, test and implement its software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project has not yet been
determined. To date, the Company has incurred approximately $5,000 in expenses
related to the Year 2000 project, and expects to incur, approximately, an
additional $15,000 in 1999 to complete all upgrades. 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. In the event
that the Company does not complete any additional phases, the Company's research
and development and clinical activities would be disrupted and delayed after
January 1, 2000. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company.
The Company currently has no contingency plans in place in the event it does
not complete all phases of its Year 2000 program. The Company plans to evaluate
the status of its efforts in June 1999 to determine whether such a plan is
necessary.
10
<PAGE>
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.
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 $9,035,000
and money market funds
Capital expenditures 2,335,000
Research and development and clinical and regulatory
preparation 8,940,000
Manufacturing scale-up and marketing activities 3,870,000
Working capital and other general corporate purposes 1,920,000
-----------
Total use of proceeds $26,100,000
-----------
Except for officer compensation and relocation payments totaling $1,572,509 in
the aggregate, director compensation totaling $202,500 in the aggregate, and
consulting fees paid to a director totaling $131,625, 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.
11
<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)).
27 Financial Data Schedule.
99.1 Cautionary Statement.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1999.
12
<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: May 14, 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)
13
<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 MARCH 31,
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> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,086,226
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,194,983
<PP&E> 9,543,803
<DEPRECIATION> 2,989,948
<TOTAL-ASSETS> 15,768,895
<CURRENT-LIABILITIES> 2,368,018
<BONDS> 0
0
0
<COMMON> 96,566
<OTHER-SE> 11,067,390
<TOTAL-LIABILITY-AND-EQUITY> 15,768,895
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,930,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,013
<INCOME-PRETAX> (1,999,338)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,999,338)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,999,338)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</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 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. 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.
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 March 31, 1999, the
Company had an accumulated deficit of $43.5 million. Net losses for the years
ended December 31, 1996, 1997 and 1998 were approximately $9,083,432,
$11,564,391 and $11,564,391, 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.
1
<PAGE>
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.
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.
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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. As of the date of this Form 10-Q, the Company has [two] issued United
States patents relating to the methods of drawing an ISF sample from the outer
layers of the skin, and [five] 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 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.
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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 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 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.
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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.
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.
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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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