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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 0-22179
SPECTRX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2029543
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6025A UNITY DRIVE
NORCROSS, GEORGIA 30071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(770) 242-8723
(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 such
requirements for the past 90 days.
YES [X] NO [ ]
The number of issued and outstanding shares of the Registrant's Common
Stock, $0.001 par value, as of September 30, 1997, was 7,736,984.
<PAGE> 2
SPECTRX, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION.............................................................3
ITEM 1. FINANCIAL STATEMENTS......................................................3
CONSOLIDATED BALANCE SHEETS -
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 ..........................3
CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997.............4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997......................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................8
PART II. OTHER INFORMATION................................................................26
ITEM 2. CHANGES IN SECURITIES....................................................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................26
SIGNATURES................................................................................26
EXHIBIT INDEX.............................................................................28
</TABLE>
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1997
1996 (unaudited)
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents 4,721 14,670
Accounts Receivable 1 52
Other Current Assets 90 236
------ -------
Total Current Assets 4,812 14,958
PROPERTY & EQUIPMENT, net of accumulated depreciation of $274 and
$424 in 1996 and 1997 respectively 596 918
------ -------
OTHER ASSETS, NET
Other Assets 126 225
Due from related parties 412 434
------ -------
Total Other Assets 538 659
------ -------
TOTAL ASSETS 5,946 16,535
====== =======
LIABILITIES & STOCKHOLDERS (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts Payable 557 625
Accrued Liabilities 385 735
------ -------
Total Current Liabilities 942 1,360
CONVERTIBLE NOTE 250 250
------ -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A conv. preferred stock, $0.001 par value; 3,560,000 shares
authorized, 3,103,784 shares issued and outstanding in 1996 3 0
Series B conv. preferred stock, $0.001 par value; 1,375,000 shares
authorized, 1,272,051 shares issued and outstanding in 1996 1 0
Series C conv. preferred stock, $0.001 par value; 500,000 shares
authorized, 500,000 shares issued and outstanding in 1996 1 0
Common Stock, $0.001 par value; 15,000,000 shares authorized,
1,531,702 shares issued and outstanding in 1996 and 7,736,984
issued and outstanding in 1997 2 8
Warrants 173 0
Additional paid-in-capital 11,330 25,349
Deferred compensation (286) (229)
Accumulated deficit (6,422) (10,155)
Notes Rec. from officers (48) (48)
------ -------
Total Stockholders' equity 4,754 14,925
------ -------
TOTAL LIABILITIES & EQUITY 5,946 16,535
====== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
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SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS NINE MONTHS (OCTOBER 27,
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1992 TO
SEPTEMBER 30,
1996 1997 1996 1997 1997)
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
REVENUE $ 50 $ 125 $ 50 $ 401 $ 2,154
EXPENSES
Cost of revenues
Research & development 439 519 1,224 1,807 6,318
Sales & marketing 44 191 164 479 1,168
General & administrative 413 845 895 2,087 5,003
------- ------- ------- ------- --------
Total 896 1,555 2,283 4,373 12,489
------- ------- ------- ------- --------
Operating loss (846) (1,430) (2,233) (3,972) (10,335)
OTHER INCOME (11) (189) (16) (277) (499)
INTEREST EXPENSE 41 31 85 38 319
------- ------- ------- ------- --------
NET LOSS $ (876) $(1,272) $(2,302) $(3,733) $(10,155)
======= ======= ======= ======= ========
Pro Forma Net Loss Per Common And
Common Equivalent Shares $ (0.29) $ (0.17) $ (0.75) $ (0.82)
======= ======= ======= =======
Weighted Average Common And
Common Equivalent Shares
Outstanding (3,069) (7,388) (3,069) (4,544)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
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SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED PERIOD FROM INCEPTION
SEPTEMBER 30, (OCTOBER 27, 1992)
1996 1997 TO SEPTEMBER 30, 1997
------- -------- ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .......................................... $(2,302) $ (3,733) $(10,155)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................ 130 192 588
Amortization of debt discount ................ 66 -- 138
Issuance of stock in settlement of dispute ... 14 -- 14
Amortization of deferred compensation ........ 2 57 75
Changes in assets and liabilities:
Accounts receivable ......................... 173 (51) (52)
Other assets ................................ (20) (251) (349)
Due from related parties .................... -- (22) (434)
Accounts payable ............................ 82 68 625
Accrued liabilities ......................... 16 350 867
Deferred revenue ............................ 300 -- --
------- -------- --------
Total adjustments ........................... 763 343 1,472
Net cash used in operating activities .... (1,539) (3,390) (8,683)
------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment .... (113) (472) (1,342)
Additions to purchase technology ............... (75) (36) (241)
------- -------- --------
Net cash used in investing activities .... (188) (508) (1,583)
------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock (net of issuance costs) -- 13,153 13,155
Issuance of Series A preferred stock (net
of issuance costs) ........................... -- -- 1,838
Issuance of Series B preferred stock (net
of issuance costs) ........................... 3,439 -- 3,505
Issuance of Series C preferred stock (net
of issuance costs) ........................... -- -- 2,753
Issuance of stock warrants ..................... 18 -- 35
Exercise of stock warrants ..................... -- 694 718
Issuance of convertible subordinate
promissory notes ............................. 1,232 -- 2,932
------- -------- --------
Net cash provided by financing
activities ............................ 4,689 13,847 24,936
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................... 2,962 9,949 14,670
CASH AND CASH EQUIVALENTS, beginning of period .... 107 4,721 --
------- -------- --------
CASH AND CASH EQUIVALENTS, end of period .......... $ 3,069 $ 14,670 $ 14,670
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES..............
Conversion of subordinated promissory notes
to preferred stock............................ $ 1,360 $ -- $ 2,814
Conversion of preferred stock to common stock... $ -- $ 5 $ 5
Stock issued for subscription receivable........ $ -- $ -- $ 48
Warrants issued in connection with convertible
subordinated notes............................ $ -- $ -- $ 173
Issuance of common stock for purchased technology $ 35 $ -- $ 35
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
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SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by the company without audit. These statements reflect all adjustments,
all of which are of a normal, recurring nature, which are, in the opinion of
management, necessary to present fairly the consolidated financial position as
of September 30, 1997, the consolidated results of operations for the three and
nine months ended September 30, 1996 and 1997, and the consolidated cash flows
for the nine months ended September 30, 1996 and 1997. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The accounting policies of the Company continue unchanged from December
31, 1996. The Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the December 31, 1996 financial
statements and notes thereto included in the Company's Prospectus dated July 1,
1997.
The results of operations for the three and nine months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full fiscal year.
2. NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock and dilutive common stock equivalent shares ("CSEs")
issuable upon the conversion of convertible preferred stock (using the
if-converted method) and stock options and warrants (using the treasury stock
method). Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and CSEs issued at prices below the expected
public offering price during the 12-month period prior to an initial public
offering are included in the calculation as if they were outstanding for all
periods presented prior to the offering, regardless of whether they are
dilutive, and were outstanding in prior periods.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Shares," which specifies the computation, presentation, and
disclosure requirements for earnings per share. The Company is required to adopt
the provisions of SFAS No. 128 for the year ending December 31, 1997. Earlier
application is not permitted; however, upon adoption the Company will be
required to restate previously reported annual and interim loss per share in
accordance with provisions of SFAS No. 128. Based on a preliminary evaluation,
the Company does not believe that the adoption of SFAS No. 128 will have a
material impact on the computation or manner of presentation of its loss per
share as currently or previously presented under Accounting Principles Board
Opinion No. 15.
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3. INITIAL PUBLIC OFFERING
On July 7, 1997, the Company successfully completed its initial public
offering of common stock. The Company sold 2,160,000 shares of common stock
including an underwriters over-allotment of 160,000 shares, at an initial public
offering price of $7.00. The total proceeds of the initial public offering, net
of underwriting discounts and offering expenses, were approximately $13.2
million. In connection with the offering, all outstanding shares of Preferred
Stock converted into 3,482,762 shares of Common Stock and warrants to purchase
559,984 shares of Common Stock were exercised for proceeds of $694,000.
-7-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report which express "belief", "anticipation" or
"expectation" as well as other statements which are not historical fact are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or
anticipated results, including those set forth under "Risk Factors" in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in or incorporated by reference into this report. The
following discussion should be read in conjunction with the Company's Financial
Statements and Notes thereto included elsewhere in this report.
OVERVIEW
SpectRx was incorporated on October 27, 1992, and since that date has
raised capital through the sale of preferred stock, issuance of debt securities
and funding from collaborative arrangements. Following its initial funding in
early 1993, the Company immediately began research and development activities
with the objective of commercializing less invasive diagnostic screening and
monitoring products. As part of its business strategy, the Company has
selectively established arrangements with leading medical device companies for
the development, commercialization and introduction of its products. Since
inception, the Company has entered into collaborative arrangements with Abbott
Laboratories ("Abbott"), Boehringer Mannheim Corporation ("Boehringer Mannheim")
and Healthdyne Technologies, Inc. ("Healthdyne") for its glucose monitoring,
diabetes screening and infant jaundice products, respectively. In December 1996,
the Company sublicensed certain technology to and acquired a 64.8% interest in
FluorRx, Inc., a Delaware corporation formed for the purpose of developing and
commercializing technology related to fluorescence spectroscopy.
The Company has a limited operating history upon which its prospects can
be evaluated. Such prospects must be considered in light of the substantial
risks, expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. The Company has experienced
operating losses since its inception, and, as of September 30, 1997, the Company
had an accumulated deficit of approximately $10.2 million. To date, the Company
has engaged primarily in research and development efforts, and a number of the
Company's key management and technical personnel have only recently joined the
Company. The Company has never generated revenues from product sales and does
not have experience in manufacturing, marketing or selling its products. There
can be no assurance that the Company's development efforts will result in
commercially viable products, that the Company will be successful in introducing
its products, or that required regulatory clearances or approvals will be
obtained in a timely manner, or at all. There can be no assurance that the
Company's products will ever gain market acceptance or that the Company will
ever generate revenues or achieve profitability. The development and
commercialization of its products will require substantial development,
regulatory, sales and marketing, manufacturing and other
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<PAGE> 9
expenditures. The Company expects its operating losses to continue through 1999
as it continues to expend substantial resources to complete development of its
products, obtain regulatory clearances or approvals, build its marketing, sales,
manufacturing and finance organizations and conduct further research and
development.
Substantially all of the Company's revenues and profits are expected to be
derived from royalties and manufacturing profits that the Company will receive
from Abbott, Boehringer Mannheim and Healthdyne resulting from sales of its
glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing profits for the
Company. In addition, the Company's profit margins are not likely to increase
over time because the Company's royalty rates and manufacturing profit rates are
predetermined.
In addition, it is common practice in the glucose monitoring device
industry for manufacturers to sell their glucose monitoring devices at
substantial discounts to their list prices or to offer customers rebates on
sales of their products. Manufacturers offer such discounts or rebates to expand
the use of their products and thus increase the market for the disposable assay
strips they sell for use with their products. Because Abbott may, pursuant to
its collaborative arrangement with the Company, determine the prices at which it
sells the Company's glucose monitoring devices, it may choose to adopt this
marketing strategy. If Abbott adopts this marketing strategy and discounts the
prices at which it sells the Company's glucose monitoring devices, the royalties
earned by the Company in respect of such sales will decline. There can be no
assurance that, if this strategy is adopted, royalties earned by the Company on
sales of the disposable cartridges to be used in connection with its glucose
monitoring device will be equal to or greater than the royalties the Company
would have earned had its glucose monitoring devices not been sold at a
discount. This possible reduction in royalties on sales of the Company's glucose
monitoring devices could have a material adverse effect upon the Company's
business, financial condition and results of operations.
The Company has entered into collaborative arrangements with Abbott,
Boehringer Mannheim and Healthdyne. The agreements evidencing these
collaborative arrangements grant a substantial amount of discretion to each
collaborative partner. If one or more of the Company's collaborative partners
were to terminate its arrangement with the Company, the Company would either
need to reach agreement with a replacement collaborative partner or undertake at
its own expense the activities handled by its collaborative partner prior to
such termination, which would require the Company to develop expertise it does
not currently possess, would significantly increase the Company's capital
requirements and would limit the programs the Company could pursue. The Company
would likely encounter significant delays in introducing its products and the
development, manufacture and sale of its products would be adversely affected by
the absence of such collaborative arrangements. The termination of any of the
Company's collaborative arrangements would have a material adverse effect on the
Company's business, financial condition and results of operations.
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RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
General. Net losses increased to approximately $1.3 million during the
three months ended September 30, 1997 from approximately $880,000 during the
same period in 1996 due to an increase in research and development expenses and
general and administrative expenses. The increase in revenue to $125,000 in the
three months ended September 30, 1997 versus $50,000 in the same period in 1996
is a result of having reached a development milestone on the Company's infant
jaundice product in the third quarter of 1997 and the receipt of a license
payment by the Company's 65% owned subsidiary FlourRx. The Company expects
similarly net losses to continue.
Research and development expenses. Research and development expenses
increased to approximately $520,000 during the three months ended September 30,
1997 from approximately $440,000 during the same period in 1996. The increase in
research and development expenses was primarily due to increases in
compensation, benefit and employee recruiting costs and, to a lesser extent,
increases in consulting expenses, patent legal fees and the cost of prototype
materials purchased. The Company expects research and development expenses to
increase in the future as it begins clinical trials for its products.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $190,000 during the three months ended September 30, 1997 from
approximately $40,000 during the same period in 1996. The increase was due
primarily to building a marketing organization for the Company's infant jaundice
product. Sales and marketing expenses are expected to increase in the future as
the Company begins to market this product.
General and administrative expenses. General and administrative expenses
increased to approximately $850,000 during the three months ended September 30,
1997 from approximately $410,000 during the same period in 1996. The increase in
general and administrative expenses was due to increases in compensation and
facility costs as well as general and administrative expenses at the company's
subsidiary FlourRx. General and administrative expenses are expected to increase
in the future as a result of overhead costs associated with research and
development activities and, to a lesser extent, expenses associated with being a
public company.
Net interest expense and other income. Net interest and other income
increased to $150,000 during the three months ended September 30, 1997 from an
expense of $30,000 during the same period in 1996. This increase results from
the redemption of convertible notes which were outstanding during the first
quarter of 1996 and from an increase in interest received on cash balances
received from the initial public offering.
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COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
General. Net losses increased to approximately $3.7 million during the
nine months ended September 30, 1997 from approximately $2.3 million during the
same period in 1996 due to an increase in research and development expenses,
marketing expenses and general and administrative expenses.
Research and development expenses. Research and development expenses
increased to approximately $1.8 million during the nine months ended September
30, 1997 from approximately $1.2 million during the same period in 1996. The
increase in research and development expenses was primarily due to increases in
compensation, benefit and employee recruiting costs and, to a lesser extent,
increases in consulting expenses, patent legal fees and the cost of prototype
materials purchased.
Sales and marketing expenses. Sales and marketing expenses increased to
$480,000 during the nine months ended September 30, 1997 from $160,000 during
the same period in 1996. The increase was due primarily to compensation and
recruiting costs, product design costs and expenses related to building a
marketing organization for the Company's infant jaundice product.
General and administrative expenses. General and administrative expenses
increased to approximately $2.1 million during the nine months ended September
30, 1997 from approximately $900,000 during the same period in 1996. The
increase in general and administrative expense was due to increases in
compensation and facility costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private sales of its debt and equity securities. From October 27, 1992
(inception) through September 30,1997, the Company received approximately $24.9
million in net proceeds from sales of its debt and equity securities. At
September 30, 1997, the Company had cash of approximately $14.7 million and
working capital of approximately $13.6 million. The Company completed an initial
public offering of its common stock on July 7, 1997 which resulted in net
proceeds received by the Company, before expenses related to the transaction, of
approximately $14.0 million. The Company currently invests its excess cash
balances primarily in short-term, investment-grade, interest-bearing obligations
until such funds are utilized in operations. Substantial capital will be
required to develop the Company's products, including completing product testing
and clinical trials, obtaining all required United States and foreign regulatory
approvals and clearances, commencing and scaling up manufacturing and marketing
its products. Any failure of the Company's collaborative partners to fund its
development expenditures would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional
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collaborative relationships or other arrangements. The Company believes that its
existing capital resources will be sufficient to satisfy its funding
requirements for at least the next 21 months, but may not be sufficient to
fund the Company's operations to the point of commercial introduction of its
glucose monitoring product.
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information presented in this report. This report contains forward
looking statements that involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the forward
looking statements. Factors that might cause such differences include, but are
not limited to, the following risk factors.
Early Stage of Development; No Assurance of Successful Product Development
To date, the Company has only tested prototypes of its products. Because
the Company's research and clinical development programs are at an early stage,
substantial additional research and development and clinical trials will be
necessary before commercial prototypes of the Company's products are produced.
The Company could encounter unforeseen problems in the development of its
products such as delays in conducting clinical trials, delays in the supply of
key components or delays in overcoming technical hurdles. There can be no
assurance that the Company will be able to successfully address the problems
that may arise during the development and commercialization process. In
addition, there can be no assurance that any of the Company's products will be
successfully developed, proven safe and efficacious in clinical trials, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third-party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. If any of the Company's development programs are not successfully
completed, required regulatory approvals or clearances are not obtained, or
products for which approvals or clearances are obtained are not commercially
successful, the Company's business, financial condition and results of
operations would be materially adversely affected.
The Company's business is subject to the risks inherent in the development
of new products using new technologies and approaches. There can be no assurance
that unforeseen problems will not develop with these technologies or
applications, that the Company will be able to successfully address
technological challenges it encounters in its research and development programs
or that commercially feasible products will ultimately be developed by the
Company.
Nasdaq National Market New Listing Requirements
On August 22, 1997 the Securities and Exchange Commission approved changes
to the Nasdaq National Market listing requirements proposed by the National
Association of Securities Dealers. These changes are applied retroactively to
the Company, and the Company does not currently meet the requirements because it
does not satisfy any one of the alternative requirements of
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<PAGE> 13
net tangible assets of $18 million, market capitalization of $75 million or
pre-tax income of $1 million. The Company has a hearing before a Nasdaq review
panel on November 13, 1997 to seek a waiver to the new listing requirements.
Unless the Company receives such a waiver, its stock will no longer be traded on
the Nasdaq National Market, but rather would be traded on the Nasdaq SmallCap
Market. If traded on the Nasdaq SmallCap Market, the Company's stock may be
subject to reduced liquidity and reduced analyst coverage, the Company's ability
to raise capital in the future may be inhibited and the Company's business,
financial condition and results of operations could be materially adversely
affected.
Dependence on Collaborative Arrangements
The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing and commercialization of its products depends
upon the Company's ability to selectively enter into and maintain collaborative
arrangements with leading medical device companies. The Company has entered into
collaborative arrangements with (i) Abbott under which Abbott is primarily
responsible for undertaking or funding the development, clinical testing,
regulatory approval process, manufacture and sale of the Company's glucose
monitoring product, (ii) Boehringer Mannheim under which Boehringer Mannheim is
primarily responsible for undertaking or funding the development, clinical
testing, regulatory approval process and sale of the Company's diabetes
screening product, and (iii) Healthdyne under which Healthdyne is primarily
responsible for undertaking or funding the development, clinical testing,
regulatory approval process and sale of the Company's infant jaundice product in
the United States and Canada. The agreements evidencing these collaborative
arrangements grant a substantial amount of discretion to each of Abbott,
Boehringer Mannheim and Healthdyne. For example, each of these collaborative
partners may terminate their respective collaborative arrangements with the
Company effective upon the expiration of certain notice periods. In addition,
the obligation of each of the Company's collaborative partners to fund or
undertake the development, clinical testing, regulatory approval process,
marketing, distribution and/or sale of the products covered by their respective
collaborative arrangements with the Company is, to a large extent, dependent
upon the satisfaction of certain goals or "milestones" by certain specified
dates, some of which are outside the Company's control. To the extent that the
obligations of the Company's collaborative partners to fund or undertake all or
certain of the foregoing activities are not contingent upon the satisfaction of
certain goals or milestones, the collaborative partners nevertheless retain a
significant degree of discretion regarding the timing of these activities and
the amount and quality of financial, personnel and other resources that they
devote to these activities. Furthermore, there can be no assurance that disputes
will not arise between the Company and one or more of its collaborative partners
regarding their respective rights and obligations under the collaborative
arrangements. Finally, there can be no assurance that one or more of the
Company's collaborative partners will not be unable, due to financial,
regulatory or other reasons, to satisfy its obligations under its collaborative
arrangement with the Company or will not intentionally or unintentionally breach
its obligations under the arrangement.
There can be no assurance that one or more of the Company's collaborative
partners will not, for competitive reasons, support, directly or indirectly, a
company or product that competes with the
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<PAGE> 14
Company's product that is the subject of its collaborative arrangement with the
Company. Furthermore, any dispute between the Company and one of its
collaborative partners might require the Company to initiate or defend expensive
litigation or arbitration proceedings.
Any termination of any collaborative arrangement by one of the Company's
collaborative partners, any inability of a collaborative partner to fund or
otherwise satisfy its obligations under its collaborative arrangements with the
Company and any significant dispute with, or breach of a contractual commitment
by, a collaborative partner, would likely require the Company to seek and reach
agreement with another collaborative partner or to assume, to the extent
possible and at its own expense, all the responsibilities being undertaken by
this collaborative partner. There can be no assurance that the Company would be
able to reach agreement with a replacement collaborative partner. If the Company
were not able to find a replacement collaborative partner, there can be no
assurance that the Company would be able to perform or fund the activities for
which such collaborative partner is currently responsible. Even if the Company
were able to perform and fund these activities, the Company's capital
requirements would increase substantially. In addition, the further development
and the clinical testing, regulatory approval process, marketing, distribution
and sale of the product covered by such collaborative arrangement would be
significantly delayed.
In May 1997, Roche Holding, Ltd. announced it would acquire Corange, Ltd.,
which is the parent company of Boehringer Mannheim, GmbH., the parent company of
Boehringer Mannheim. There can be no assurance that a change in control of
Boehringer Mannheim will not adversely affect the Company's collaborative
arrangement with Boehringer Mannheim.
Any of the foregoing circumstances could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Limited Operating History; History of Losses and Expectations of Future Losses
The Company has a limited operating history upon which its prospects can
be evaluated. Such prospects must be considered in light of the substantial
risks, expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. The Company has experienced
operating losses since its inception, and, as of September 30, 1997, the Company
had an accumulated deficit of approximately $10.2 million. To date, the Company
has engaged primarily in research and development efforts, and a number of the
Company's key management and technical personnel have only recently joined the
Company. The Company has never generated revenues from product sales and does
not have experience in manufacturing, marketing or selling its products. There
can be no assurance that the Company's development efforts will result in
commercially viable products, that the Company will be successful in introducing
its products, or that required regulatory clearances or approvals will be
obtained in a timely manner, or at all. There can be no assurance that the
Company's products will ever gain market acceptance or that the Company will
ever generate revenues or achieve profitability. The development and
commercialization of its products will require substantial development,
regulatory, sales and marketing, manufacturing and other
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expenditures. The Company expects its operating losses to continue through 1999
as it continues to expend substantial resources to complete development of its
products, obtain regulatory clearances or approvals, build its marketing, sales,
manufacturing and finance organizations and conduct further research and
development.
Government Regulations; No Assurance of Regulatory Approvals
The design, manufacturing, labeling, distribution and marketing of the
Company's products will be subject to extensive and rigorous government
regulation in the United States and certain other countries where the process of
obtaining and maintaining required regulatory clearance or approvals is lengthy,
expensive and uncertain. In order for the Company to market its products in the
United States, the Company must obtain clearance or approval from the United
States Food and Drug Administration ("FDA"). The Company intends to seek
clearance to market each of its products through a 510(k) premarket notification
supported by clinical data. Although no 510(k) premarket notification has been
filed with the FDA for clearance to market any of the Company's products, the
Company expects 510(k) premarket notifications for clearance to market its
infant jaundice product, its diabetes screening product and its glucose
monitoring product to be filed in 1997, 1998 and 1999, respectively. There can
be no assurance that any such notifications will be filed in accordance with
this schedule, that the FDA will act favorably or quickly on such 510(k)
submissions, or that significant difficulties and costs will not be encountered
during efforts to obtain FDA clearance or approval. Specifically, the FDA may
request additional data or require additional clinical studies be conducted to
obtain 510(k) clearance for one or more of the Company's products. In addition,
there can be no assurance that the FDA will not require the submission of a
premarket approval ("PMA") application to obtain FDA approval to market one or
more of the Company's products. The PMA process is more rigorous and lengthier
than the 510(k) clearance process and can take several years from initial filing
and require the submission of extensive supporting data and clinical
information. In addition, there can be no assurance that the FDA will not impose
strict labeling or other requirements as a condition of its 510(k) clearance or
PMA, any of which could limit the Company's ability to market its products.
Further, if the Company wishes to modify a product after FDA clearance of a
510(k) premarket notification or approval of a PMA application, including
changes in indications or other modifications that could affect safety and
efficacy, additional clearances or approvals will be required from the FDA. Any
request by the FDA for additional data or any requirement by the FDA that the
Company conduct additional clinical studies or submit to the more rigorous and
lengthier PMA process could result in a significant delay in bringing the
Company's products to market and substantial additional research and other
expenditures by the Company. Similarly, any labeling or other conditions or
restrictions imposed by the FDA on the marketing of the Company's products could
hinder the Company's ability to effectively market its products. Any of the
foregoing actions by the FDA could delay or prevent altogether the Company's
ability to market and distribute its products and could have a material adverse
effect on the Company's business, financial condition and results of operations.
In order for the Company to market its products under development in
Europe and certain other foreign jurisdictions, the Company and its distributors
and agents must obtain required
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<PAGE> 16
regulatory registrations or approvals and otherwise comply with extensive
regulations regarding safety, efficacy and quality in those jurisdictions.
Specifically, certain foreign regulatory bodies have adopted various regulations
governing product standards, packaging requirements, labeling requirements,
import restrictions, tariff regulations, duties and tax requirements. These
regulations vary from country to country. In order to commence sales in Europe,
the Company will be required to obtain ISO 9001 certifications and after
mid-1998, the Company will be prohibited from selling its products in Europe
until such time as the Company receives CE mark certification, which is an
international symbol of quality and compliance with applicable European medical
device directives. There can be no assurance that the Company will be successful
in obtaining ISO 9001 or CE mark certification. Failure to receive ISO 9001 or
CE mark certification or other foreign regulatory approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will obtain
any other required regulatory registrations or approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining such regulatory registrations or approvals. Delays in obtaining any
registrations or approvals required to market the Company's products, failure to
receive these registrations or approvals, or future loss of previously obtained
registrations or approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company and its collaborative partners will be required to adhere to
applicable FDA regulations regarding Good Manufacturing Practice ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be strictly enforced in the United States through
periodic inspections by state and federal agencies, including the FDA, and in
foreign jurisdictions by comparable agencies. Failure to comply with applicable
regulatory requirements could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals previously
obtained and criminal prosecution. The restriction, suspension or revocation of
regulatory approvals or any other failure to comply with regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Clinical Chemistry Branch of the FDA's Division of Clinical Laboratory
Devices (the "Branch") has traditionally been the reviewing branch for
blood-based personal glucose monitoring products. The Clinical Chemistry and
Clinical Toxicology Devices Panel (the "Panel") is an external advisory panel
that provides advice to the Branch regarding devices that are reviewed by the
Branch. The Panel met on March 20-21, 1997 to discuss invasive and non-invasive
self-monitoring blood glucose devices. The Panel submitted comments to the
Branch suggesting revisions of existing guidelines relating to the laboratory
and clinical testing of blood glucose devices. The Branch may take the Panel's
comments into consideration in determining whether to revise the existing
guidelines. To date, there has been no change in the existing 510(k) guidance
document for blood glucose monitoring devices. There can be no assurance that
the Panel's comments will not result in a FDA policy or change in FDA policy
that is materially adverse to the Company's regulatory position.
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The Company will rely upon Abbott and Boehringer Mannheim to obtain United
States and foreign regulatory approvals and clearances for its glucose
monitoring and diabetes screening products, respectively, and if such approvals
or clearances are obtained the Company will rely upon these collaborative
partners to maintain them in full force and effect and to otherwise remain in
compliance with all applicable United States and foreign regulatory
restrictions. The inability or failure of such third parties to comply with the
varying regulations or the imposition of new regulations would materially
adversely effect the Company's business, financial condition and results of
operations.
Dependence on Licensed Patent Applications and Proprietary Technology
SpectRx's success depends in large part upon its ability to establish and
maintain the proprietary nature of its technology through the patent process and
to license from others patents and patent applications necessary to develop its
products. The Company has licensed from Non-Invasive Monitoring Company, Inc.
("Nimco") one granted patent and know-how related to its glucose monitoring
product, jointly applied with Altea Technologies, Inc. ("Altea") for a U.S.
patent and an international patent related to this device and has licensed this
granted patent and these patent applications to Abbott pursuant to the parties'
collaborative arrangements. SpectRx has license agreements with Georgia Tech
Research Corporation ("GTRC") that give the Company the right to use two patents
related to its diabetes screening product, and the Company has licensed this
proprietary technology to Boehringer Mannheim pursuant to the Company's
collaborative arrangement with Boehringer Mannheim. The Company has license
agreements with the University of Texas M.D. Anderson Cancer Center ("M.D.
Anderson") that give SpectRx access to one patent related to the Company's
infant jaundice product, and the Company has applied for two patents related to
this product. SpectRx has licensed the one patent and two patent applications to
Healthdyne pursuant to its collaborative arrangement with that company. In
addition, SpectRx has licensed from Joseph Lakowicz, Ph.D. of the University of
Maryland several granted patents and patent applications related to fluorescence
spectroscopy that it intends to use in its research and development efforts.
There can be no assurance that one or more of the patents held directly by
the Company or licensed by the Company from third parties, including the
disposable components to be used in connection with its glucose monitoring and
infant jaundice products, or processes used in the manufacture of the Company's
products, will not be successfully challenged, invalidated or circumvented or
that the Company will otherwise be able to rely on such patents for any reason.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that prevent, limit
or interfere with the Company's ability to make, use and sell its products
either in the United States or in foreign markets. If any of the Company's
patents are successfully challenged, invalidated or circumvented or the
Company's right or ability to manufacture its products were to be proscribed or
limited, the Company's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon the Company's business, financial condition and results of
operations.
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The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Certain companies in
the medical device industry have instituted intellectual property litigation,
including patent infringement actions, for legitimate and, in certain cases,
competitive reasons. In addition, the United States Patent and Trademark Office
("USPTO") may institute litigation or interference proceedings. There can be no
assurance that the Company will not become subject to patent infringement claims
or litigation or interference proceedings instituted by the USPTO to determine
the priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. Any litigation or interference proceedings
brought against, initiated by or otherwise involving the Company may require the
Company to incur substantial legal and other fees and expenses and may require
some of the Company's employees to devote all or a substantial portion of their
time to the prosecution or defense of such litigation or proceedings. An adverse
determination in litigation or interference proceedings to which the Company may
become a party, including any litigation that may arise against the Company,
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties or prevent the Company from
selling its products in certain markets, or at all. Although patent and
intellectual property disputes regarding medical devices are often settled
through licensing or similar arrangements, there can be no assurance that the
Company would be able to reach a satisfactory settlement of such a dispute that
would allow it to license necessary patents or other intellectual property. Even
if such a settlement were reached, the settlement process may be expensive and
time consuming and the terms of the settlement may require the Company to pay
substantial royalties. An adverse determination in a judicial or administrative
proceeding or the failure to obtain a necessary license could prevent the
Company from manufacturing and selling its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements. There can be no
assurance that such confidentiality or proprietary information agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known to or be
independently developed by competitors.
Fixed Royalty Rates and Manufacturing Profits
Substantially all of the Company's revenues and profits are expected to be
derived from royalties and manufacturing profits that the Company will receive
from Abbott, Boehringer Mannheim and Healthdyne resulting from sales of its
glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing
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<PAGE> 19
profits for the Company. In addition, the Company's profit margins are not
likely to increase over time because the Company's royalty rates and
manufacturing profit rates are predetermined.
In addition, it is common practice in the glucose monitoring device
industry for manufacturers to sell their glucose monitoring devices at
substantial discounts to their list prices or to offer customers rebates on
sales of their products. Manufacturers offer such discounts or rebates to expand
the use of their products and thus increase the market for the disposable assay
strips they sell for use with their products. Because Abbott may, pursuant to
its collaborative arrangement with the Company, determine the prices at which it
sells the Company's glucose monitoring devices, it may choose to adopt this
marketing strategy. If Abbott adopts this marketing strategy and discounts the
prices at which it sells the Company's glucose monitoring devices, the royalties
earned by the Company in respect of such sales will decline. There can be no
assurance that, if this strategy is adopted, royalties earned by the Company on
sales of the disposable cartridges to be used in connection with its glucose
monitoring device will be equal to or greater than the royalties the Company
would have earned had its glucose monitoring devices not been sold at a
discount. This possible reduction in royalties on sales of the Company's glucose
monitoring devices could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Uncertainty of Market Acceptance
The Company's products are based upon new methods of glucose monitoring,
diabetes screening and infant jaundice monitoring and screening, and there can
be no assurance that any of these products will gain market acceptance.
Physicians and individuals will not recommend or use the Company's products
unless they determine, based on experience, clinical data, relative cost, and
other factors, that these products are an attractive alternative to current
blood-based tests that have a long history of safe and effective use. To date,
the Company's products have been utilized by only a limited number of subjects,
and no independent studies regarding the Company's products have been published.
The lack of any such independent studies may have an adverse effect on the
Company's ability to successfully market its products. In addition, purchase
decisions for products like the Company's diabetes screening and infant jaundice
products are greatly influenced by health care administrators who are subject to
increasing pressures to reduce costs. Failure of the Company's products to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.
Intense Competition
The medical device industry in general, and the markets for glucose
monitoring and diabetes screening devices and processes in particular, are
intensely competitive. If successful in its product development, the Company
will compete with other providers of personal glucose monitors, diabetes
screening tests and infant jaundice products. A number of competitors, including
Johnson & Johnson, Inc. (which owns Lifescan, Inc.), Boehringer Mannheim, Bayer
AG (which owns Miles Laboratories, Inc.) and Abbott (which owns MediSense Inc.),
are currently marketing traditional glucose monitors. These monitors are widely
accepted in the health care industry and have a long
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<PAGE> 20
history of accurate and effective use. Furthermore, a number of companies have
announced that they are developing products that permit non-invasive and less
invasive glucose monitoring. Accordingly, competition in this area is expected
to increase.
Many of the Company's competitors have substantially greater financial,
research, technical, manufacturing, marketing and distribution resources than
the Company and have greater name recognition and lengthier operating histories
in the health care industry. There can be no assurance that the Company will be
able to effectively compete against these and other competitors. In addition,
there can be no assurance that the Company's glucose monitoring, diabetes
screening or infant jaundice products will replace any currently used devices or
systems, which have long histories of safe and effective use. Furthermore, there
can be no assurance that the Company's competitors will not succeed in
developing, either before or after the development and commercialization of the
Company's products, devices and technologies that permit more efficient, less
expensive non-invasive and less invasive glucose monitoring, diabetes screening
and infant jaundice monitoring. It is also possible that one or more
pharmaceutical or other health care companies will develop therapeutic drugs,
treatments or other products that will substantially reduce the prevalence of
diabetes or infant jaundice or otherwise render the Company's products obsolete.
Such competition could have a material adverse effect on the Company's business,
financial condition and results of operation.
In addition, there can be no assurance that one or more of the Company's
collaborative partners will not, for competitive reasons, reduce its support of
its collaborative arrangement with the Company or support, directly or
indirectly, a company or product that competes with the Company's product that
is the subject of the collaborative arrangement.
No Manufacturing Experience; Dependence on Sole Sources of Supply
To date, the Company's manufacturing activities have consisted only of
building certain prototype devices. If the Company successfully develops its
diabetes screening and infant jaundice products and, together with Boehringer
Mannheim and Healthdyne, obtains FDA clearance and other regulatory approvals to
market these products, the Company will undertake to manufacture these products.
The Company has no experience manufacturing such products in the volumes that
would be necessary for the Company to achieve significant commercial sales.
There can be no assurance that the Company will be able to establish and
maintain reliable, full scale manufacturing of these products at commercially
reasonable costs. Although the Company has leased space that it plans to use to
manufacture its products, it may encounter various problems in establishing and
maintaining its manufacturing operations, resulting in inefficiencies and
delays. Specifically, companies often encounter difficulties in scaling up
production, including problems involving production yield, quality control and
assurance, and shortages of qualified personnel. In addition, the Company's
manufacturing facilities will be subject to GMP regulations, including possible
preapproval inspection, international quality standards and other regulatory
requirements. Difficulties encountered by the Company in manufacturing scale-up
or failure by the Company to implement and maintain its manufacturing facilities
in accordance with GMP regulations, international quality
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<PAGE> 21
standards or other regulatory requirements could result in a delay or
termination of production, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The microspectrometer and disposable calibration element, components of
the Company's infant jaundice product, and the blue light module and calibration
element, components of the Company's diabetes screening product, are each
available from only one supplier and these products would require a major
redesign in order to incorporate a substitute component. Certain other
components of the infant jaundice and diabetes screening products are currently
obtained from only one supplier, but have readily available substitute
components that can be incorporated in the applicable product with minimal
design modifications. If the Company's products require a PMA, the inclusion of
substitute components could require the Company to qualify the new supplier with
the appropriate government regulatory authorities. Alternatively, if the
Company's products qualify for a 510(k) premarket notification, the substitute
components need only meet the Company's product specifications. Any significant
problem experienced by one of the Company's sole source suppliers may result in
a delay or interruption in the supply of components to the Company until such
supplier cures the problem or an alternative source of the component is located
and qualified. Any delay or interruption would likely lead to a delay or
interruption in the Company's manufacturing operations, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
No Marketing and Sales Experience
If the Company, together with Healthdyne, successfully develops the
Company's infant jaundice product and obtains, in countries other than the
United States and Canada, necessary regulatory approvals and clearances to
market this product, the Company will be responsible for marketing this product
in these countries. The Company has no experience in marketing or selling
medical device products and only has a three person marketing and sales staff.
In order to successfully market and sell its infant jaundice product outside the
United States and Canada, the Company must either develop a marketing and sales
force or enter into arrangements with third parties to market and sell this
product. There can be no assurance that the Company will be able to successfully
develop a marketing and sales force or that it will be able to enter into
marketing and sales agreements with third parties on acceptable terms, if at
all. If the Company develops its own marketing and sales capabilities, it will
compete with other companies that have experienced and well-funded marketing and
sales operations. If the Company enters into a marketing arrangement with a
third party for the marketing and sale of its infant jaundice product outside
the United States and Canada, any revenues to be received by the Company from
this product will be dependent on this third party, and the Company will likely
be required to pay a sales commission or similar amount to this party.
Furthermore, the Company is currently dependent on the efforts of Abbott and
Boehringer Mannheim for any revenues to be received from its glucose monitoring
and diabetes screening products, respectively. There can be no assurance that
the efforts of these third parties for the marketing and sale of the Company's
products will be successful.
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Product Liability Risk; Limited Insurance Coverage
The development, manufacture and sale of medical products entail
significant risks of product liability claims. The Company currently has no
product liability insurance coverage beyond that provided by its general
liability insurance. Accordingly, there can be no assurance that the Company is
adequately protected from any liabilities, including any adverse judgments or
settlements, it might incur in connection with the development, clinical
testing, manufacture and sale of its products. In addition, product liability
insurance is expensive and may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company that results in an adverse judgment against or
settlement by the Company in excess of any insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Need for Additional Capital; Uncertainty of Access to Capital
Substantial capital will be required to develop the Company's products,
including completing product testing and clinical trials, obtaining all required
United States and foreign regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing its products. Pursuant to the Company's
collaborative arrangements with Abbott, Boehringer Mannheim and Healthdyne,
these collaborative partners will either directly undertake these activities or
will fund a substantial portion of these expenditures. The obligations of the
Company's collaborative partners to fund the Company's capital expenditures is
largely discretionary and depends on a number of factors, including the
Company's ability to meet certain milestones in the development and testing of
its products. There can be no assurance that the Company will meet such
milestones or that the Company's collaborative partners will continue to fund
the Company's capital expenditures. Any failure of the Company's collaborative
partners to fund its capital expenditures would have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional collaborative relationships or
other arrangements. The Company believes that its existing capital resources
will be sufficient to satisfy its funding requirements for at least the next __
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of its glucose monitoring product. There can be no
assurance that any required additional funding, if needed, will be available on
terms attractive to the Company, or at all, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants.
Uncertainty of Third-Party Reimbursement
In the United States and elsewhere, sales of medical products are
dependent, in part, on the ability of consumers of these products to obtain
reimbursement for all or a portion of their cost from
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<PAGE> 23
third-party payors, such as government and private insurance plans. Third-party
payors are increasingly challenging the prices charged for medical products and
services. If the Company succeeds in bringing one or more products to market,
there can be no assurance that these products will be considered cost effective
and that reimbursement to the consumer will be available or sufficient to allow
the Company to sell its products on a competitive basis.
Need to Attract and Retain Key Employees
The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of certain
key scientific, technical, managerial and finance personnel, and its ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel. The officers listed in the Executive Officers and
Directors table comprise the Company's key personnel. The Chief Financial
Officer and the Vice President, Operations joined the Company within the last 12
months. None of these key employees has an employment contract with the Company
nor are any of these employees covered by key person or similar insurance. In
addition, if the Company, together with its collaborative partners, is able to
successfully develop and commercialize the Company's products, the Company will
need to hire additional scientific, technical, managerial and finance personnel.
The Company faces intense competition for qualified personnel in these areas,
many of whom are often subject to competing employment offers, and there can be
no assurance that the Company will be able to attract and retain such personnel.
The loss of key personnel or inability to hire and retain additional qualified
personnel in the future could have a material adverse effect on the Company's
business, financial condition and results of operations.
Control by Directors, Executive Officers and Affiliated Entities
The Company's directors, executive officers and entities affiliated with
them will, in the aggregate, beneficially own approximately 46% of the Company's
outstanding Common Stock following the completion of this offering. These
stockholders, acting together, would be able to control substantially all
matters requiring approval by the stockholders of the Company, including the
election of directors and the approval of mergers and other business combination
transactions.
Potential Volatility of Stock Price
The stock markets have experienced extreme price and volume fluctuations
that have substantially affected small capitalization medical technology
companies, resulting in changes in the market prices of the stocks of many such
companies that may not have been directly related to their operating
performance. Such broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In addition, the market price of the Common
Stock may be highly volatile. Factors such as variations in the Company's
financial results, changes in the Company's collaborative arrangements, comments
by security analysts, announcements of technological innovations or new products
by the Company or its competitors, changing government regulations
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<PAGE> 24
and developments with respect to FDA submissions, patents and proprietary
rights, or litigation may have a material adverse effect on the market price of
the Common Stock.
Potential Adverse Effect of Shares Eligible for Future Sale
The number of shares of Common Stock available for sale in the public
market is limited by lock-up agreements under which the Company (subject to
certain exceptions) and all directors, executive officers and certain other
stockholders of the Company that beneficially own or have dispositive power over
substantially all of the shares of Common Stock outstanding prior to the
Company's initial public offering, including Common Stock issued upon the
closing of the initial public offering upon conversion of the Company's
Preferred Stock, have agreed not to issue (in the case of the Company), sell or
otherwise dispose of any of their shares for a period of 180 days following the
initial public offering, without the prior written consent of Hambrecht & Quist
LLC. However, Hambrecht & Quist LLC may, in its sole discretion, permit the sale
or other disposition of all or any portion of the securities subject to such
lock-up agreements prior to the expiration of this 180 day period. If Hambrecht
& Quist LLC were to release any securities from the prohibitions on sales and
other dispositions imposed by these lock-up agreements, up to 5,077,007 shares
of Common Stock, including 363,602 shares issuable upon exercise of currently
outstanding vested options, may be eligible for immediate sale. Hambrecht &
Quist LLC retains the right at any time and without notice to release from the
scope of the lock-up restrictions all or any portion of the securities currently
subject to such restrictions. The release of any securities from such
prohibitions and the subsequent sale of such shares may have an adverse effect
on the ability of the Company to raise capital and could adversely affect the
market price of the Company's Common Stock.
Anti-Takeover Effect of Certain Charter and Bylaw Provisions on Price of Common
Stock
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting and specify procedures
for director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings. Certain provisions of Delaware law
applicable to the Company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholders for a period of three years unless certain conditions are met,
could also delay or make more difficult a merger, tender offer or proxy contest
involving the Company. The possible issuance of Preferred Stock, the procedures
required for director nominations and stockholder proposals and Delaware law
could have the effect of delaying, deferring or preventing a change in control
of the Company, including without limitation, discouraging a proxy contest or
making more difficult the acquisition of a substantial block of the Company's
Common Stock. These provisions could also limit the price that investors might
be willing to pay in the future for shares of the Company's Common Stock.
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Lack of Dividends
The Company has not paid any dividends and does not anticipate paying any
dividends in the foreseeable future.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 7, 1997, as a result of the Company's initial public offering, all
outstanding shares of the Company's Series A Preferred Stock were converted into
2,474,150 shares of unregistered Common Stock without payment of additional
consideration, all outstanding shares of the Company's Series B Preferred Stock
were converted into 908,621 shares of unregistered Common Stock without payment
of additional consideration and all outstanding shares of the Company's Series C
Preferred Stock were converted into 357,143 shares of unregistered Common Stock
without payment of additional consideration.
Also on such date, the Company issued 360,000 shares of Series A Preferred
Stock that immediately converted into 257,152 shares of unregistered Common
Stock (included above in the description of Series A Preferred Stock conversion)
upon exercise of warrants for an aggregate exercise price of approximately
$360,000, 295,974 shares of unregistered Common Stock upon exercise of warrants
for an aggregate exercise price of approximately $331,478.40 and 6,858 shares of
unregistered Common Stock upon the net exercise of a warrant.
The Common Stock issued upon conversion of the Preferred Stock and upon
the net exercise of the warrant was exempt from registration under the
Securities Act of 1933, as amended (the "Act") pursuant to Section 3(a)(9)
thereof, as securities exchanged by an issuer with existing security holders.
The cash exercise of warrants were exempt from registration under the Act
pursuant to Section 4(2) thereof, as transactions not involving any public
offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying Index to Exhibits are filed as
part hereof, or incorporated by reference into, this Report.
(b) Reports on Form 8-K
The Registrant filed no Current Reports on Form 8-K during the quarter
ended September 30, 1997.
-26-
<PAGE> 27
SIGNATURE
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, in Norcross, Georgia.
SPECTRX, INC.
Date: November 11, 1997 By: /S/ THOMAS H. MULLER, JR.
-------------------------------
Thomas H. Muller, Jr.
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
-27-
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1(2) Certificate of Incorporation of the Company, as amended, as currently in
effect.
3.2(1) Bylaws of the Company.
4.1(1) Specimen Common Stock Certificate.
10.1(1) 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.2(1) 1995 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.3(1) Series A Preferred Stock Purchase Agreement, dated February 5,
1993, between the Company and certain investors.
10.4(1) Note and Warrant Purchase Agreement, dated November 6, 1995 and
April 15, 1996, between the Registrant and certain investors.
10.5(1) Series B Preferred Stock Purchase Agreement, dated August 30,
1996, between the Company and certain investors.
10.6(1) Series C Preferred Stock Purchase Agreement, dated October 21,
1996, between the Company and Abbott Laboratories (included in
Exhibit 10.23).
10.7(1) Stock Purchase Agreement, dated June 30, 1994, between Mark A. Samuels
and the Company.
10.8(1) Stock Purchase Agreement, dated June 30, 1994, between Keith D. Ignotz
and the Company.
10.9(1) Assignment and Bill of Sale, dated February 29, 1996, between LAO and
the Company.
10.10(1) Security Agreement, dated October 31, 1996, between Mark A. Samuels and
the Company.
10.11(1) Security Agreement, dated October 31, 1996, between Keith D. Ignotz and
the Company.
10.12A(1)+ License Agreement, dated May 7, 1991, between GTRC and LAO.
10.12B(1) Agreement for Purchase and Sale of Technology, Sale, dated January 16,
1993, between LAO and the Company.
10.12C(1) First Amendment to License Agreement, dated October 19, 1993,
between GTRC and the Company.
10.13(1) Clinical Research Study Agreement, dated July 22, 1993, between Emory
University and the Company.
10.14A(1)+ Development and License Agreement, dated December 2, 1994,
between Boehringer Mannheim Corporation and the Company.
10.14B(1)+ Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and the Company.
10.15(1) Sponsored Research Agreement, No. SR95-006, dated May 3, 1995,
between University of Texas, M.D. Anderson Cancer Center and the
Company.
</TABLE>
-28-
<PAGE> 29
<TABLE>
<S> <C>
10.16(1) Sole Commercial Patent License Agreement, dated May 4, 1995, between
Martin Marietta Energy Systems, Inc. and the Company.
10.17(1) Joint Development Agreement, dated July 10, 1995, between Teijin and the
Company.
10.18A(1) License Agreement, dated November 22, 1995, between Joseph R.
Lakowicz, Ph.D. and the Company.
10.18B(1) Amendment of License Agreement, dated November 28, 1995, between
Joseph R. Lakowicz, Ph.D. and the Company.
10.18C(1) Second Amendment to License Agreement, dated March 26, 1997, between
Joseph R. Lakowicz, Ph.D. and the Company.
10.19(1) License and Joint Development Agreement, dated March 1, 1996, between
NonInvasive-Monitoring Company, Inc., Altea Technologies, Inc. and the
Company.
10.20(1)+ Patent License Agreement, dated March 12, 1996, between the
Board of Regents of the University of Texas System, M.D.
Anderson and the Company.
10.21(1)+ Purchasing and Licensing Agreement, dated June 19, 1996, between
Healthdyne and the Company.
10.22(1) Research Services Agreement, dated September 3, 1996, between Sisters of
Providence in Oregon doing business as the Oregon Medical Laser Center,
Providence St. Vincent Medical Center and the Company.
10.23(1)+ Research and Development and License Agreement, dated October
10, 1996, between Abbott Laboratories and the Company.
10.24(1) Lease, dated September 21, 1993, between National Life Insurance
Company d/b/a Plaza 85 Business Park and the Company, together with
amendments 1, 2 and 3 thereto and Tenant Estoppel Certificate, dated
September 20, 1994.
11.1 Calculation of earnings per share.
27.1 Financial Data Schedule.
</TABLE>
- ----------------------
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 333-22429) filed February 27, 1997,
and amended on April 24, 1997, June 11, 1997, and June 30, 1997, which
Registration Statement became effective June 30, 1997.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for quarterly period ended June 30, 1997
filed August 12, 1997.
+ Confidential treatment granted for portions of these agreements.
-29-
<PAGE> 1
SpectRx, Inc. EXHIBIT 11.1
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1997 1996 1997
---- ---- ---- ----
Primary and Fully Diluted
Pro Forma Net Loss (876) (1,272) (2,302) (3,733)
Weighted average Common Stock
outstanding during the period 1,532 7,288 1,532 3,486
Cheap stock(1) 1,537 99 1,537 1,058
----- ------ ------ ------
Total 3,069 7,388 3,069 4,544
===== ====== ====== ======
Per Share Amount (0.29) (0.17) (0.75) (0.82)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,670
<SECURITIES> 0
<RECEIVABLES> 52
<ALLOWANCES> 0
<INVENTORY> 87
<CURRENT-ASSETS> 14,958
<PP&E> 1,342
<DEPRECIATION> 424
<TOTAL-ASSETS> 16,535
<CURRENT-LIABILITIES> 1,360
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 14,917
<TOTAL-LIABILITY-AND-EQUITY> 16,535
<SALES> 401
<TOTAL-REVENUES> 401
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,373
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> (3,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,733)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> (0.82)
</TABLE>
